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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2021

OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-38604

Focus Financial Partners Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

47-4780811

(State or Other Jurisdiction
of Incorporation or Organization)

(I.R.S. Employer
Identification No.)

875 Third Avenue, 28th Floor

New York, NY

10022

(Address of Principal Executive Offices)

(Zip Code)

(646519-2456

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Class A common stock, par value
$0.01 per share

FOCS

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No 

As of November 1, 2021, the registrant had 60,333,968 shares of Class A common stock and 12,338,777 shares of Class B common stock outstanding.

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2021

    

Page No.

PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements

2

Unaudited condensed consolidated balance sheets

2

Unaudited condensed consolidated statements of operations

3

Unaudited condensed consolidated statements of comprehensive income (loss)

4

Unaudited condensed consolidated statements of cash flows

5

Unaudited condensed consolidated statements of changes in equity

6

Notes to unaudited condensed consolidated financial statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

47

Item 4.

Controls and Procedures

48

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

48

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 6.

Exhibits

50

SIGNATURES

50

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated balance sheets

(In thousands, except share and per share amounts)

    

December 31, 

    

September 30, 

2020

2021

ASSETS

 

  

 

  

Cash and cash equivalents

$

65,858

$

642,207

Accounts receivable less allowances of $2,178 at 2020 and $2,644 at 2021

 

169,220

 

189,201

Prepaid expenses and other assets

 

65,581

 

130,883

Fixed assets—net

 

49,209

 

45,625

Operating lease assets

229,748

226,036

Debt financing costs—net

 

6,950

 

4,928

Deferred tax assets—net

107,289

237,042

Goodwill

 

1,255,559

 

1,429,196

Other intangible assets—net

 

1,113,467

 

1,183,248

TOTAL ASSETS

$

3,062,881

$

4,088,366

LIABILITIES AND EQUITY

 

  

LIABILITIES

 

  

Accounts payable

$

9,634

$

11,714

Accrued expenses

 

53,862

 

89,410

Due to affiliates

 

66,428

 

89,139

Deferred revenue

 

9,190

 

12,372

Other liabilities

 

222,911

 

292,306

Operating lease liabilities

253,295

253,191

Borrowings under credit facilities (stated value of $1,507,622 and $2,263,477 at December 31, 2020 and September 30, 2021, respectively)

 

1,507,119

 

2,250,321

Tax receivable agreements obligations

81,563

188,612

TOTAL LIABILITIES

 

2,204,002

 

3,187,065

COMMITMENTS AND CONTINGENCIES (Note 12)

 

  

EQUITY

Class A common stock, par value $0.01, 500,000,000 shares authorized; 51,158,712 and 60,315,341 shares issued and outstanding at December 31, 2020 and September 30, 2021, respectively

512

603

Class B common stock, par value $0.01, 500,000,000 shares authorized; 20,661,595 and 12,338,777 shares issued and outstanding at December 31, 2020 and September 30, 2021, respectively

207

123

Additional paid-in capital

526,664

659,541

Retained earnings

14,583

17,465

Accumulated other comprehensive loss

(2,167)

(2,677)

Total shareholders' equity

539,799

675,055

Non-controlling interest

319,080

226,246

Total equity

858,879

901,301

TOTAL LIABILITIES AND EQUITY

$

3,062,881

$

4,088,366

See notes to unaudited condensed consolidated financial statements

2

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of operations

(In thousands, except share and per share amounts)

For the three months ended

For the nine months ended

September 30, 

September 30, 

    

2020

    

2021

    

2020

    

2021

REVENUES:

  

  

  

  

Wealth management fees

$

311,805

$

433,967

$

925,527

$

1,213,782

Other

 

19,678

 

20,568

 

56,119

 

60,283

 

Total revenues

 

331,483

 

454,535

 

981,646

 

1,274,065

 

OPERATING EXPENSES:

 

 

 

 

 

Compensation and related expenses

 

114,702

 

144,249

 

346,460

 

424,337

 

Management fees

 

86,414

 

127,166

 

247,094

 

345,443

 

Selling, general and administrative

 

57,437

 

75,637

 

172,784

 

208,481

 

Intangible amortization

 

37,024

 

46,055

 

108,759

 

133,041

 

Non-cash changes in fair value of estimated contingent consideration

 

14,280

 

36,243

 

(621)

 

96,241

 

Depreciation and other amortization

 

3,120

 

3,622

 

9,131

 

10,835

 

Total operating expenses

 

312,977

 

432,972

 

883,607

 

1,218,378

 

INCOME FROM OPERATIONS

 

18,506

 

21,563

 

98,039

 

55,687

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

Interest income

 

61

 

206

 

412

 

310

 

Interest expense

 

(8,903)

 

(16,543)

 

(32,546)

 

(37,893)

 

Amortization of debt financing costs

 

(709)

 

(1,102)

 

(2,200)

 

(2,856)

 

Loss on extinguishment of borrowings

 

 

 

(6,094)

 

 

Other income (expense)—net

 

(657)

 

312

 

25

 

(219)

 

Income from equity method investments

51

91

167

514

Total other expense—net

 

(10,157)

 

(17,036)

 

(40,236)

 

(40,144)

 

INCOME BEFORE INCOME TAX

 

8,349

4,527

 

57,803

 

15,543

 

INCOME TAX EXPENSE

 

4,405

2,678

 

16,512

 

6,038

 

NET INCOME

3,944

1,849

41,291

9,505

Non-controlling interest

(2,302)

(1,200)

(16,844)

(6,623)

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS

$

1,642

$

649

$

24,447

$

2,882

Income per share of Class A common stock:

Basic

$

0.03

$

0.01

$

0.51

$

0.05

Diluted

$

0.03

$

0.01

$

0.51

$

0.05

Weighted average shares of Class A common stock outstanding:

Basic

48,683,580

59,940,166

47,991,831

55,978,639

Diluted

48,810,328

60,438,510

48,040,014

56,447,070

See notes to unaudited condensed consolidated financial statements

3

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of comprehensive income (loss)

(In thousands)

For the three months ended

For the nine months ended

 

September 30, 

September 30, 

    

2020

    

2021

    

2020

    

2021

 

Net income

$

3,944

$

1,849

$

41,291

$

9,505

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

3,103

 

(5,057)

 

316

 

(5,876)

Unrealized gain (loss) on interest rate swaps designated as cash flow hedges

(981)

432

(9,308)

5,937

Comprehensive income (loss)

6,066

(2,776)

32,299

9,566

Less: Comprehensive income (loss) attributable to non-controlling interest

(3,219)

14

(13,864)

(7,194)

Comprehensive income (loss) attributable to common shareholders

$

2,847

$

(2,762)

$

18,435

$

2,372

See notes to unaudited condensed consolidated financial statements

4

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)

For the nine months ended

September 30, 

    

2020

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

41,291

$

9,505

Adjustments to reconcile net income to net cash provided by operating activities—net of effect of acquisitions:

 

 

  

Intangible amortization

 

108,759

 

133,041

Depreciation and other amortization

 

9,131

 

10,835

Amortization of debt financing costs

 

2,200

 

2,856

Non-cash equity compensation expense

 

15,588

 

24,569

Non-cash changes in fair value of estimated contingent consideration

 

(621)

 

96,241

Income from equity method investments

 

(167)

 

(514)

Distributions received from equity method investments

 

145

 

773

Deferred taxes and other non-cash items

 

4,148

 

(570)

Loss on extinguishment of borrowings

 

6,094

 

Changes in cash resulting from changes in operating assets and liabilities:

 

 

  

Accounts receivable

 

(25,716)

 

(22,247)

Prepaid expenses and other assets

 

(4,168)

 

(17,731)

Accounts payable

 

110

 

1,974

Accrued expenses

 

20,294

 

35,382

Due to affiliates

 

(11,749)

 

22,715

Other liabilities

 

(28,761)

 

(61,181)

Deferred revenue

 

1,889

 

2,200

Net cash provided by operating activities

 

138,467

 

237,848

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Cash paid for acquisitions and contingent consideration—net of cash acquired

 

(69,467)

 

(286,803)

Purchase of fixed assets

 

(12,691)

 

(6,560)

Investment and other, net

 

 

(17,232)

Net cash used in investing activities

 

(82,158)

 

(310,595)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Borrowings under credit facilities

 

305,000

 

1,169,500

Repayments of borrowings under credit facilities

 

(323,674)

 

(419,145)

Proceeds from issuance of common stock, net

25,767

Payments in connection with unit redemption, net

(25,767)

Payments in connection with tax receivable agreements

(4,423)

Contingent consideration paid

 

(45,069)

 

(67,735)

Payments of debt financing costs

 

(634)

 

(8,282)

Proceeds from exercise of stock options

1,559

6,186

Payments on finance lease obligations

(109)

(46)

Distributions for unitholders

 

(15,765)

 

(26,391)

Net cash provided by (used in) financing activities

 

(78,692)

 

649,664

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

(140)

 

(568)

CHANGE IN CASH AND CASH EQUIVALENTS

 

(22,523)

 

576,349

CASH AND CASH EQUIVALENTS:

 

  

 

  

Beginning of period

 

65,178

 

65,858

End of period

$

42,655

$

642,207

See Note 13 for supplemental cash flow disclosure

See notes to unaudited condensed consolidated financial statements

5

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in equity

Three months ended September 30, 2020 and 2021

(In thousands, except share amounts)

Accumulated

 

Class A

Class B

Additional

Other

Total

Common Stock

Common Stock

Paid-In

Retained

Comprehensive

Shareholders’

Non-controlling

    

Shares

    

Amount

    

Shares

    

Amount

    

 Capital

    

Earnings

    

Loss

    

Equity

    

Interest

    

Total  Equity

Balance at July 1, 2020

48,091,707

$

481

21,496,103

$

215

$

503,209

$

9,343

$

(8,516)

$

504,732

$

326,478

$

831,210

Net income

1,642

1,642

2,302

3,944

Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights

600,722

6

(600,722)

(6)

20,370

20,370

20,370

Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights

1,858,136

19

62,991

63,010

63,010

Exercise of stock options

43,807

1,392

1,392

1,392

Change in non-controlling interest allocation

(53,865)

(53,865)

(32,019)

(85,884)

Non-cash equity compensation expenses

1,207

1,207

1,207

Currency translation adjustment-net of tax

1,823

1,823

1,280

3,103

Unrealized loss on interest rate swaps designated as cash flow hedges-net of tax

(618)

(618)

(363)

(981)

Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions

1,315

1,315

1,315

Balance at September 30, 2020

50,594,372

$

506

20,895,381

$

209

$

536,619

$

10,985

$

(7,311)

$

541,008

$

297,678

$

838,686

Balance at July 1, 2021

59,792,889

598

12,692,740

127

650,421

16,816

734

$

668,696

$

230,389

$

899,085

Net income

649

649

1,200

1,849

Issuance of units in connection with an acquisition and contingent consideration

64,706

Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights

418,669

4

(418,669)

(4)

21,901

21,901

21,901

Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights

34,898

1,825

1,825

1,825

Exercise of stock options

68,885

1

2,168

2,169

2,169

Change in non-controlling interest allocation

(18,833)

(18,833)

(4,129)

(22,962)

Non-cash equity compensation expenses

1,569

1,569

1,569

Currency translation adjustment-net of tax

(3,735)

(3,735)

(1,322)

(5,057)

Unrealized gain on interest rate swaps designated as cash flow hedges-net of tax

324

324

108

432

Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions

490

490

490

Balance at September 30, 2021

60,315,341

$

603

12,338,777

$

123

$

659,541

$

17,465

$

(2,677)

$

675,055

$

226,246

$

901,301

See notes to unaudited condensed consolidated financial statements

6

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in equity

Nine months ended September 30, 2020 and 2021

(In thousands, except share amounts)

Accumulated

Class A

Class B

Additional

Retained

Other

Total

Common Stock

Common Stock

Paid-In

Earnings

Comprehensive

Shareholders’

Non-controlling

    

Shares

    

Amount

    

Shares

    

Amount

    

 Capital

    

(Deficit)

    

Loss

    

Equity

    

Interest

    

Total Equity

Balance at January 1, 2020

47,421,315

$

474

22,075,749

$

221

$

498,186

$

(13,462)

$

(1,299)

$

484,120

$

319,850

$

803,970

Net income

24,447

24,447

16,844

41,291

Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights

1,180,368

12

(1,180,368)

(12)

33,736

33,736

33,736

Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights

1,943,838

20

64,793

64,813

64,813

Forfeiture of unvested Class A common stock

(834)

(27)

(27)

(27)

Exercise of stock options

49,685

1,559

1,559

1,559

Change in non-controlling interest allocation

(65,993)

(65,993)

(36,036)

(102,029)

Non-cash equity compensation expenses

3,397

3,397

3,397

Currency translation adjustment-net of tax

13

13

303

316

Unrealized loss on interest rate swaps designated as cash flow hedges-net of tax

(6,025)

(6,025)

(3,283)

(9,308)

Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions

968

968

968

Balance at September 30, 2020

50,594,372

$

506

20,895,381

$

209

$

536,619

$

10,985

$

(7,311)