SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| FOCUS FINANCIAL PARTNERS INC. |
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| By: | /s/ RUEDIGER ADOLF |
| | Ruediger Adolf |
| | Chairman and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| | |
Date: February 25, 202016, 2023 | | |
| By: | /s/ JAMES SHANAHAN |
| | James Shanahan |
| | Chief Financial Officer |
| | (Principal Financial Officer and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
Signature |
| Title |
| Date |
Signature
| | Title
| | Date
|
| | | | |
/s/ RUEDIGER ADOLF | | Chief Executive Officer and Chairman (Principal Executive Officer) | | February 25, 202016, 2023 |
Ruediger Adolf | | | | |
| | | | |
/s/ JAMES SHANAHAN | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | February 25, 202016, 2023 |
James Shanahan | | | | |
| | | | |
/s/ JAMES D. CAREY | | Director | | February 25, 202016, 2023 |
James D. Carey | | | | |
| | | | |
/s/ JOSEPH FELICIANI JR. | | Director | | February 25, 202016, 2023 |
Joseph Feliciani Jr. | | | | |
| | | | |
/s/ NOAH GOTTDIENER
| | Director
| | February 25, 2020
|
Noah Gottdiener
| | |
| | | | |
/s/ CHRISTOPHER J. HARRINGTON
| | Director
| | February 25, 2020
|
Christopher J. Harrington
| |
| | | | |
/s/ RAJINI SUNDAR KODIALAM | | Director | | February 25, 202016, 2023 |
Rajini Sundar Kodialam | | | | |
| | | | |
/s/ DEBORAH D. MCWHINNEYGEORGE S. LEMIEUX | | Director | | February 25, 202016, 2023 |
Deborah D. McWhinneyGeorge S. LeMieux
| | | | |
| | | | |
/s/GREG S. MORGANROTH, MD | | Director | | February 16, 2023 |
Greg S. Morganroth, MD | | | | |
| | | | |
/s/ FAYEZ S. MUHTADIE | | Director | | February 25, 202016, 2023 |
Fayez S. Muhtadie | | | | |
/s/ ELIZABETH R. NEUHOFF | | Director | | February 16, 2023 |
Elizabeth R. Neuhoff | | | | |
INDEX TO FINANCIAL STATEMENTS
FOCUS FINANCIAL PARTNERS INC.
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Consolidated Financial Statements as of December 31, 20182021 and 20192022 and for the Years Ended December 31, 2017, 20182020, 2021 and 20192022 | | |
Report of independent registered public accounting firm (PCAOB ID: 34) | | F-2 |
Balance sheets as of December 31, 20182021 and 20192022 | | F-5 |
Statements of operations for the years ended December 31, 2017, 20182020, 2021 and 20192022 | | F-6 |
Statements of comprehensive lossincome for the years ended December 31, 2017, 20182020, 2021 and 20192022 | | F-7 |
Statements of cash flows for the years ended December 31, 2017, 20182020, 2021 and 20192022 | | F-8 |
Statements of members’ deficit/shareholders’ equity for the years ended December 31, 2017, 20182020, 2021 and 20192022 | | F-9 |
Notes to consolidated financial statements | | F-10 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersShareholders and the Board of Directors of Focus Financial Partners Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Focus Financial Partners Inc. and subsidiaries (the "Company") as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive loss,income, cash flows and members’ deficit/shareholders' equity, for each of the three years in the period ended December 31, 2019,2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2020,16, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-periodcurrent period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill and Other Intangible Assets Valuation pertaining to current year acquisitions — Refer to Notes 2, 54 and 65 to the financial statements
Critical Audit Matter Description
The Company acquires businesses throughout the year in transactions which qualify as business acquisitions pursuant to relevant accounting literature.acquisitions. The Company may also separately purchasespurchase customer relationships and other intangible assets in asset acquisitions that do not qualify as business acquisitions pursuant to relevant accounting literature.
acquisitions.
The purchase price associated with each business acquisition consists of cash, may include equity, and the right of the seller to receive contingent consideration. The purchase price is allocated across the estimated fair value of tangible assets acquired, liabilities assumed and the fair value of intangible assets, with the excess purchase price allocated to goodwill.
The fair value of other intangible assets and the calculation of goodwill involves significant management judgment in estimating projections, forecasting growth rates used to produce financial projections for the acquired entities, and the selection of unobservable inputs and other assumptions. The inputs used in establishing the fair value of other intangible assets are in most cases unobservable and reflect the Company’s own judgments about the assumptions market participants would use in pricing the asset.
Auditing the fair value of other intangible assets and the calculation of goodwill involves a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists for certain acquisitions, when performing audit procedures to evaluate the reasonableness of management’s forecasts of future growth rates and the selection of the unobservable inputs used in the models.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the purchase price allocation for business acquisitions occurring during the year included the following, utilizing fair value specialists for certain procedures and transactions:
| 1. | We tested the design, implementation and operating effectiveness of controls over the purchase price allocation, including understanding management’s processes and controls over the valuation of other intangible assets and the underlying assumptions used for estimating the fair value of assets acquired and liabilities assumed. |
| 2. | We evaluated management’s policies and methodology for establishing the fair values used in the purchase price allocations and the prospective financial information, including testing the completeness and accuracy of underlying data. |
| 3. | We evaluated the reasonableness of the unobservable inputs, and other key judgments made by management to determine the reasonableness of the fair value of the other intangible assets and the calculation of goodwill. |
| 4. | We evaluated the reasonableness of management’s revenue and operating margin forecasts by comparing the forecasts to: |
1.We tested the effectiveness of controls over the purchase price allocation, including understanding management’s processes and management’s controls over the valuation of other intangible assets and the underlying assumptions used for estimating the fair value of assets acquired and liabilities assumed.
2.We evaluated management’s policies and methodology for establishing the fair values used in the purchase price allocations and the prospective financial information, including testing the completeness and accuracy of underlying data.
3.We evaluated the reasonableness of the unobservable inputs, and other key judgments made by management to determine the reasonableness of the fair value of the other intangible assets and goodwill.
4.We evaluated the reasonableness of management’s revenue and operating margin forecasts by comparing the forecasts to:
· Actual historical revenues and operating margins of the target partner firmacquired entity
· Internal communications to management and the Board of Directors
· Forecasted information included in Company press releases, analyst and industry reports for the Company, market trends, and certain of its guideline companies.
| 5. | We evaluated the future revenue growth rates used by the Company to determine forecasted revenues and operating margins, by comparing them to industry benchmarks and data, as well as evaluated the relevance and reliability of third-party market data points used to develop the future revenue growth rates. |
| 6. | We evaluated the reasonableness of management’s assumptions through independent analysis using publicly available market data for comparable entities and comparison to industry benchmark and data. |
| 7. | We engaged internal fair value specialists (IFVS) from Deloitte Transactions and Business Analytics LLP to test valuation methodology and challenge the key valuation assumptions on selected acquisitions. |
5.We evaluated the future revenue growth rates used by the Company to determine forecasted revenues and operating margins, by comparing them to industry benchmarks and data, as well as evaluated the relevance and reliability of third-party market data points used to develop the future revenue growth rates.
6.We evaluated the reasonableness of management’s assumptions through independent analysis using publicly available market data for comparable entities and comparison to industry benchmark and data.
Contingent Consideration Valuation — Refer to Notes 2, 54 and 87 to the financial statements
Critical Audit Matter Description
The purchase price associated with acquisitions consistconsists of cash, and may include equity, and/or the right of the seller to receiveand contingent consideration. For business acquisitions, the Company recognizes the fair value of estimated contingent consideration at the acquisition date as part of purchase price allocation. Contingent consideration is paid upon the passage of time and the satisfaction of specified financial performance targets. The performance targets are typically tied to the partner firm’sacquired entity’s revenues or earnings. The estimated contingent consideration is remeasured to fair value at each reporting date until the contingency
is resolved. Any changes in fair value are recognized each reporting period in non-cash changes in fair value of estimated contingent consideration. In determining fair value of the estimated contingent consideration, the acquired business'sbusiness’s future performance is estimated using financial projections for the acquired businesses. The
Company uses the Monte Carlo Simulation Model to determine the fair value of the Company's estimated contingent consideration given the non-linear nature of the arrangements.
The fair value of the estimated contingent consideration involves significant management judgment in forecasting growth rates used to produce financial projections for the acquired businesses and selecting unobservable inputs and other assumptions used in the Monte Carlo Simulation.Simulation Model.
We identified the valuation of estimated contingent consideration at acquisition and the remeasurement thereafter as a critical audit matter because of the significant estimates and assumptions management makes related to the unobservable inputs and financial projections. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists for certain acquisitions and year-end estimates, when performing audit procedures to evaluate the reasonableness of the financial projections and the selection of the unobservable inputs used in the Monte Carlo Simulation.Simulation Model.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation of contingent consideration included the following, utilizing fair value specialists for certain procedures and transactions:
| 1. | We tested the design, implementation and operating effectiveness of controls over the valuation of contingent consideration including understanding management processes and controls in forecasting future revenues and operating margins as well as those over the estimation process for inputs used in the Monte Carlo Simulation Model. |
| 2. | We evaluated management’s policies and methodology for establishing the valuation of estimated contingent consideration. |
| 3. | We evaluated the reasonableness of the unobservable inputs, and other key judgments made by management as well as independently running the Monte Carlo Simulations to calculate an independent estimate of fair value on acquisitions that were selected for testing by the specialists. We compared the results of our estimate of fair value of the contingent consideration liabilities to the Company’s fair value estimate. |
| 4. | We evaluated the reasonableness of management’s revenue and operating margin forecasts of the acquired businesses by comparing the forecasts to: |
1.We tested the effectiveness of controls over the valuation of contingent consideration including understanding management processes and controls in forecasting future revenues and operating margins as well as those over the estimation process for inputs used in the Monte Carlo Simulation.
2.We evaluated management’s policies and methodology for establishing the valuation of estimated contingent consideration.
3.We evaluated the reasonableness of the unobservable inputs, and other key judgments made by management as well as independently running the Monte Carlo Simulations to calculate an independent estimate of fair value. We compared the results of our estimate of fair value of the contingent consideration liabilities to the Company’s fair value estimate.
4.We evaluated the reasonableness of management’s revenue and operating margin forecasts of the acquired businesses by comparing the forecasts to:
· Actual historical revenues and operating margins
· Internal communications to management and the Board of Directors
· Performing sensitivity analysis and evaluating potential effect of changes in certain assumptions.
5.We evaluated management’s ability to accurately estimate fair value by comparing management’s historical estimates to subsequent results.
6.We evaluated the reasonableness of management’s assumptions through independent analysis using publicly available market data for comparable entities and comparison to industry benchmark and data.
| 5. | We evaluated management’s ability to accurately estimate fair value by comparing management’s historical estimates to subsequent results. |
| 6. | We evaluated the reasonableness of management’s assumptions through independent analysis using publicly available market data for comparable entities and comparison to industry benchmarks and data. |
| 7. | We engaged internal fair value specialists (IFVS) from Deloitte Transactions and Business Analytics LLP to test valuation methodology and challenge the key valuation assumptions on selected acquisitions. |
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 25, 202016, 2023
We have served as the Company'sCompany’s auditor since 2008.
FOCUS FINANCIAL PARTNERS INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 20182021 AND DECEMBER 31, 20192022
(In thousands, except share and per share amounts)
| | | | | | |
| | 2018 | | 2019 |
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 33,213 | | $ | 65,178 |
Accounts receivable less allowances of $576 at 2018 and $684 at 2019 | | | 98,596 | | | 129,337 |
Prepaid expenses and other assets | | | 76,150 | | | 58,581 |
Fixed assets—net | | | 24,780 | | | 41,634 |
Operating lease assets | | | — | | | 180,114 |
Debt financing costs—net | | | 12,340 | | | 9,645 |
Deferred tax assets—net | | | 70,009 | | | 75,453 |
Goodwill | | | 860,495 | | | 1,090,231 |
Other intangible assets—net | | | 762,195 | | | 1,003,456 |
TOTAL ASSETS | | $ | 1,937,778 | | $ | 2,653,629 |
LIABILITIES AND EQUITY | | | | | | |
LIABILITIES | | | | | | |
Accounts payable | | $ | 8,935 | | $ | 8,077 |
Accrued expenses | | | 36,252 | | | 41,442 |
Due to affiliates | | | 39,621 | | | 58,600 |
Deferred revenue | | | 6,215 | | | 7,839 |
Other liabilities | | | 158,497 | | | 215,878 |
Operating lease liabilities | | | — | | | 196,425 |
Borrowings under credit facilities (stated value of $838,985 and $1,279,188 at December 31, 2018 and December 31, 2019, respectively) | | | 836,582 | | | 1,272,999 |
Tax receivable agreements obligations | | | 39,156 | | | 48,399 |
TOTAL LIABILITIES | | | 1,125,258 | | | 1,849,659 |
COMMITMENTS AND CONTINGENCIES (Note 14) | | | | | | |
EQUITY | | | | | | |
Class A common stock, par value $0.01, 500,000,000 shares authorized; 46,265,903 and 47,421,315 shares issued and outstanding at December 31, 2018 and December 31, 2019, respectively | | | 462 | | | 474 |
Class B common stock, par value $0.01, 500,000,000 shares authorized; 22,823,272 and 22,075,749 shares issued and outstanding at December 31, 2018 and December 31, 2019, respectively | | | 228 | | | 221 |
Additional paid-in capital | | | 471,386 | | | 498,186 |
Accumulated deficit | | | (590) | | | (13,462) |
Accumulated other comprehensive loss | | | (1,824) | | | (1,299) |
Total shareholders' equity | | | 469,662 | | | 484,120 |
Non-controlling interest | | | 342,858 | | | 319,850 |
Total equity | | | 812,520 | | | 803,970 |
TOTAL LIABILITIES AND EQUITY | | $ | 1,937,778 | | $ | 2,653,629 |
| | | | | | |
| | 2021 | | 2022 |
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 310,684 | | $ | 139,973 |
Accounts receivable less allowances of $3,255 at 2021 and $3,862 at 2022 | | | 198,827 | | | 217,219 |
Prepaid expenses and other assets | | | 123,826 | | | 151,356 |
Fixed assets—net | | | 47,199 | | | 54,748 |
Operating lease assets | | | 249,850 | | | 258,697 |
Debt financing costs—net | | | 4,254 | | | 7,590 |
Deferred tax assets—net | | | 267,332 | | | 230,130 |
Goodwill | | | 1,925,315 | | | 2,167,917 |
Other intangible assets—net | | | 1,581,719 | | | 1,639,124 |
TOTAL ASSETS | | $ | 4,709,006 | | $ | 4,866,754 |
LIABILITIES AND EQUITY | | | | | | |
LIABILITIES | | | | | | |
Accounts payable | | $ | 11,580 | | $ | 12,213 |
Accrued expenses | | | 72,572 | | | 80,679 |
Due to affiliates | | | 105,722 | | | 70,974 |
Deferred revenue | | | 10,932 | | | 10,726 |
Contingent consideration and other liabilities | | | 468,284 | | | 335,033 |
Deferred tax liabilities | | | 31,973 | | | 29,579 |
Operating lease liabilities | | | 277,324 | | | 288,895 |
Borrowings under credit facilities (stated value of $2,407,302 and $2,563,970 at December 31, 2021 and December 31, 2022, respectively) | | | 2,393,669 | | | 2,510,749 |
Tax receivable agreements obligations | | | 219,542 | | | 224,611 |
TOTAL LIABILITIES | | | 3,591,598 | | | 3,563,459 |
COMMITMENTS AND CONTINGENCIES (Note 14) | | | | | | |
EQUITY | | | | | | |
Class A common stock, par value $0.01, 500,000,000 shares authorized; 65,320,124 and 65,929,644 shares issued and outstanding at December 31, 2021 and December 31, 2022, respectively | | | 653 | | | 659 |
Class B common stock, par value $0.01, 500,000,000 shares authorized; 11,439,019 and 11,827,321 shares issued and outstanding at December 31, 2021 and December 31, 2022, respectively | | | 114 | | | 118 |
Additional paid-in capital | | | 841,753 | | | 918,044 |
Retained earnings | | | 24,995 | | | 116,779 |
Accumulated other comprehensive income | | | 3,029 | | | 18,318 |
Total shareholders' equity | | | 870,544 | | | 1,053,918 |
Non-controlling interest | | | 246,864 | | | 249,377 |
Total equity | | | 1,117,408 | | | 1,303,295 |
TOTAL LIABILITIES AND EQUITY | | $ | 4,709,006 | | $ | 4,866,754 |
See notes to consolidated financial statements
FOCUS FINANCIAL PARTNERS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 20192020, 2021 and 2022
(In thousands, except share and per share amounts)
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | 2017 | | 2018 | | 2019 |
REVENUES: | | | | | | | | | |
Wealth management fees | | $ | 617,124 | | $ | 853,033 | | $ | 1,149,655 |
Other | | | 45,763 | | | 57,847 | | | 68,686 |
Total revenues | | | 662,887 | | | 910,880 | | | 1,218,341 |
OPERATING EXPENSES: | | | | | | | | | |
Compensation and related expenses | | | 265,555 | | | 358,084 | | | 431,465 |
Management fees | | | 163,617 | | | 232,703 | | | 304,701 |
Selling, general and administrative | | | 134,615 | | | 170,270 | | | 232,911 |
Management contract buyout | | | — | | | — | | | 1,428 |
Intangible amortization | | | 64,367 | | | 90,381 | | | 130,718 |
Non-cash changes in fair value of estimated contingent consideration | | | 22,294 | | | 6,638 | | | 38,797 |
Depreciation and other amortization | | | 6,686 | | | 8,370 | | | 10,675 |
Total operating expenses | | | 657,134 | | | 866,446 | | | 1,150,695 |
INCOME FROM OPERATIONS | | | 5,753 | | | 44,434 | | | 67,646 |
OTHER INCOME (EXPENSE): | | | | | | | | | |
Interest income | | | 222 | | | 1,266 | | | 1,164 |
Interest expense | | | (41,861) | | | (56,448) | | | (58,291) |
Amortization of debt financing costs | | | (4,084) | | | (3,498) | | | (3,452) |
Gain on sale of investment | | | — | | | 5,509 | | | — |
Loss on extinguishment of borrowings | | | (8,106) | | | (21,071) | | | — |
Other (expense) income—net | | | (3,191) | | | (2,350) | | | (1,049) |
Income from equity method investments | | | 1,407 | | | 521 | | | 755 |
Impairment of equity method investment | | | — | | | — | | | (11,749) |
Total other expense—net | | | (55,613) | | | (76,071) | | | (72,622) |
LOSS BEFORE INCOME TAX | | | (49,860) | | | (31,637) | | | (4,976) |
INCOME TAX EXPENSE (BENEFIT) | | | (1,501) | | | 9,450 | | | 7,049 |
NET LOSS | | $ | (48,359) | | $ | (41,087) | | $ | (12,025) |
Non-controlling interest | | | | | | 40,497 | | | (847) |
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | | | | | $ | (590) | | $ | (12,872) |
Loss per share of Class A common stock: | | | | | | | | | |
Basic | | | | | $ | (0.01) | | $ | (0.28) |
Diluted | | | | | $ | (0.01) | | $ | (0.28) |
Weighted average shares of Class A common stock outstanding: | | | | | | | | | |
Basic | | | | | | 43,122,782 | | | 46,792,389 |
Diluted | | | | | | 43,122,782 | | | 46,792,389 |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
REVENUES: | | | | | | | | | |
Wealth management fees | | $ | 1,286,130 | | $ | 1,717,365 | | $ | 2,056,328 |
Other | | | 75,189 | | | 80,586 | | | 86,993 |
Total revenues | | | 1,361,319 | | | 1,797,951 | | | 2,143,321 |
OPERATING EXPENSES: | | | | | | | | | |
Compensation and related expenses | | | 476,208 | | | 591,121 | | | 729,891 |
Management fees | | | 349,475 | | | 491,433 | | | 530,329 |
Selling, general and administrative | | | 236,377 | | | 297,636 | | | 376,417 |
Intangible amortization | | | 147,783 | | | 187,848 | | | 261,842 |
Non-cash changes in fair value of estimated contingent consideration | | | 19,197 | | | 112,416 | | | (64,747) |
Depreciation and other amortization | | | 12,451 | | | 14,625 | | | 15,281 |
Total operating expenses | | | 1,241,491 | | | 1,695,079 | | | 1,849,013 |
INCOME FROM OPERATIONS | | | 119,828 | | | 102,872 | | | 294,308 |
OTHER INCOME (EXPENSE): | | | | | | | | | |
Interest income | | | 453 | | | 422 | | | 791 |
Interest expense | | | (41,658) | | | (55,001) | | | (99,887) |
Amortization of debt financing costs | | | (2,909) | | | (3,958) | | | (3,999) |
Loss on extinguishment of borrowings | | | (6,094) | | | — | | | (1,807) |
Other expense—net | | | (214) | | | (337) | | | (11,370) |
Income from equity method investments | | | 219 | | | 524 | | | 319 |
Total other expense—net | | | (50,203) | | | (58,350) | | | (115,953) |
INCOME BEFORE INCOME TAX | | | 69,625 | | | 44,522 | | | 178,355 |
INCOME TAX EXPENSE | | | 20,660 | | | 20,082 | | | 53,077 |
NET INCOME | | $ | 48,965 | | $ | 24,440 | | $ | 125,278 |
Non-controlling interest | | | (20,920) | | | (14,028) | | | (33,494) |
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | | $ | 28,045 | | $ | 10,412 | | $ | 91,784 |
Income per share of Class A common stock: | | | | | | | | | |
Basic | | $ | 0.58 | | $ | 0.18 | | $ | 1.40 |
Diluted | | $ | 0.57 | | $ | 0.18 | | $ | 1.39 |
Weighted average shares of Class A common stock outstanding: | | | | | | | | | |
Basic | | | 48,678,584 | | | 57,317,477 | | | 65,552,592 |
Diluted | | | 48,796,613 | | | 57,831,151 | | | 65,810,215 |
See notes to consolidated financial statements
FOCUS FINANCIAL PARTNERS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 20192020, 2021 and 2022
(In thousands)
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | 2017 | | 2018 | | 2019 |
Net loss | | $ | (48,359) | | $ | (41,087) | | $ | (12,025) |
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Foreign currency translation adjustments | | | 2,470 | | | (4,509) | | | 768 |
Comprehensive loss | | $ | (45,889) | | $ | (45,596) | | $ | (11,257) |
Less: Comprehensive (income) loss attributable to noncontrolling interest | | | | | | 43,182 | | | (1,090) |
Comprehensive loss attributable to common shareholders | | | | | $ | (2,414) | | $ | (12,347) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
Net income | | $ | 48,965 | | $ | 24,440 | | $ | 125,278 |
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Foreign currency translation adjustments | | | 7,555 | | | (5,332) | | | (10,255) |
Unrealized gain (loss) on interest rate swaps designated as cash flow hedges | | | (8,596) | | | 13,212 | | | 30,145 |
Comprehensive income | | $ | 47,924 | | $ | 32,320 | | $ | 145,168 |
Less: Comprehensive income attributable to noncontrolling interest | | | (20,747) | | | (16,712) | | | (38,095) |
Comprehensive income attributable to common shareholders | | $ | 27,177 | | $ | 15,608 | | $ | 107,073 |
See notes to consolidated financial statements
FOCUS FINANCIAL PARTNERS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 20192020, 2021 and 2022
(In thousands)
| | | | | | | | | |
| | 2017 | | 2018 | | 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net loss | | $ | (48,359) | | $ | (41,087) | | $ | (12,025) |
Adjustments to reconcile net loss to net cash provided by operating activities—net of effect of acquisitions: | | | | | | | | | |
Intangible amortization | | | 64,367 | | | 90,381 | | | 130,718 |
Depreciation and other amortization | | | 6,686 | | | 8,370 | | | 10,675 |
Amortization of debt financing costs | | | 4,084 | | | 3,498 | | | 3,452 |
Non-cash equity compensation expense | | | 34,879 | | | 44,468 | | | 18,329 |
Non-cash changes in fair value of estimated contingent consideration | | | 22,294 | | | 6,638 | | | 38,797 |
Income from equity method investments | | | (1,407) | | | (521) | | | (755) |
Impairment of equity method investment | | | — | | | — | | | 11,749 |
Distributions received from equity method investments | | | 984 | | | 1,118 | | | 751 |
Deferred taxes and other non-cash items | | | (3,960) | | | 6,655 | | | 3,555 |
Loss on extinguishment of borrowings | | | 8,106 | | | 19,001 | | | — |
Changes in cash resulting from changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | | (30,209) | | | (23,747) | | | (29,562) |
Prepaid expenses and other assets | | | 9,889 | | | (10,401) | | | 3,796 |
Accounts payable | | | (1,210) | | | 2,341 | | | (1,172) |
Accrued expenses | | | (4,671) | | | 4,302 | | | 8,276 |
Due to affiliates | | | 9,700 | | | 6,706 | | | 18,989 |
Other liabilities | | | (3,686) | | | (10,322) | | | (10,487) |
Deferred revenue | | | 1,603 | | | (1,481) | | | (312) |
Net cash provided by operating activities | | | 69,090 | | | 105,919 | | | 194,774 |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Cash paid for acquisitions and contingent consideration—net of cash acquired | | | (365,698) | | | (413,044) | | | (532,513) |
Purchase of fixed assets | | | (10,518) | | | (9,106) | | | (25,472) |
Investment and other | | | (500) | | | (24,300) | | | 1,530 |
Net cash used in investing activities | | | (376,716) | | | (446,450) | | | (556,455) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Borrowings under credit facilities | | | 1,181,936 | | | 300,000 | | | 969,125 |
Repayments of borrowings under credit facilities | | | (641,987) | | | (461,026) | | | (529,796) |
Proceeds from issuance of common stock, net | | | — | | | 565,160 | | | — |
Proceeds from issuance of convertible preferred units, net | | | 643,272 | | | — | | | — |
Payments of preferred dividends | | | (3,063) | | | — | | | — |
Payments in connection with unit redemption, net | | | (795,894) | | | (61,539) | | | — |
Contingent consideration paid | | | (6,224) | | | (12,554) | | | (22,040) |
Payments of debt financing costs | | | (32,612) | | | (4,612) | | | (3,743) |
Proceeds from exercise of stock options | | | — | | | — | | | 838 |
Payments on finance lease obligations | | | (271) | | | (198) | | | (176) |
Distributions for unitholders | | | (2,754) | | | (2,744) | | | (20,641) |
Net cash provided by financing activities | | | 342,403 | | | 322,487 | | | 393,567 |
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | | | 170 | | | (198) | | | 79 |
CHANGE IN CASH AND CASH EQUIVALENTS | | | 34,947 | | | (18,242) | | | 31,965 |
CASH AND CASH EQUIVALENTS: | | | | | | | | | |
Beginning of period | | | 16,508 | | | 51,455 | | | 33,213 |
End of period | | $ | 51,455 | | $ | 33,213 | | $ | 65,178 |
| | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net income | | $ | 48,965 | | $ | 24,440 | | $ | 125,278 |
Adjustments to reconcile net income to net cash provided by operating activities—net of effect of acquisitions: | | | | | | | | | |
Intangible amortization | | | 147,783 | | | 187,848 | | | 261,842 |
Depreciation and other amortization | | | 12,451 | | | 14,625 | | | 15,281 |
Amortization of debt financing costs | | | 2,909 | | | 3,958 | | | 3,999 |
Non-cash equity compensation expense | | | 22,285 | | | 31,602 | | | 30,453 |
Non-cash changes in fair value of estimated contingent consideration | | | 19,197 | | | 112,416 | | | (64,747) |
Income from equity method investments | | | (219) | | | (524) | | | (319) |
Distributions received from equity method investments | | | 231 | | | 1,143 | | | 1,396 |
Deferred taxes and other non-cash items | | | 2,618 | | | (8,568) | | | 32,243 |
Loss on extinguishment of borrowings | | | 6,094 | | | — | | | 1,807 |
Changes in cash resulting from changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | | (37,913) | | | (32,006) | | | (16,778) |
Prepaid expenses and other assets | | | 74 | | | 2,103 | | | (245) |
Accounts payable | | | 606 | | | 486 | | | (82) |
Accrued expenses | | | 10,876 | | | 14,444 | | | 10,445 |
Due to affiliates | | | 7,650 | | | 38,831 | | | (35,060) |
Contingent consideration and other liabilities | | | (29,683) | | | (77,423) | | | (74,765) |
Deferred revenue | | | (2,563) | | | 543 | | | (2,149) |
Net cash provided by operating activities | | | 211,361 | | | 313,918 | | | 288,599 |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Cash paid for acquisitions and contingent consideration—net of cash acquired | | | (348,674) | | | (979,062) | | | (461,522) |
Purchase of fixed assets | | | (19,349) | | | (11,018) | | | (21,017) |
Investments and other, net | | | (4,950) | | | (17,232) | | | 7,358 |
Net cash used in investing activities | | | (372,973) | | | (1,007,312) | | | (475,181) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Borrowings under credit facilities | | | 555,000 | | | 1,318,375 | | | 1,998,900 |
Repayments of borrowings under credit facilities | | | (326,566) | | | (425,320) | | | (1,873,332) |
Proceeds from issuance of common stock, net | | | — | | | 219,636 | | | — |
Payments in connection with unit redemption, net | | | — | | | (57,735) | | | — |
Payments in connection with tax receivable agreements | | | — | | | (4,423) | | | (3,856) |
Contingent consideration paid | | | (49,891) | | | (78,092) | | | (62,025) |
Payments of deferred cash consideration | | | — | | | — | | | (1,484) |
Payments of debt financing costs | | | (634) | | | (8,282) | | | (19,072) |
Proceeds from exercise of stock options | | | 6,912 | | | 8,350 | | | 1,158 |
Equity awards withholding | | | (386) | | | (1,343) | | | (685) |
Other | | | (147) | | | (58) | | | 372 |
Distributions for unitholders | | | (22,457) | | | (32,311) | | | (22,984) |
Net cash provided by financing activities | | | 161,831 | | | 938,797 | | | 16,992 |
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | | | 461 | | | (577) | | | (1,121) |
CHANGE IN CASH AND CASH EQUIVALENTS | | | 680 | | | 244,826 | | | (170,711) |
CASH AND CASH EQUIVALENTS: | | | | | | | | | |
Beginning of period | | | 65,178 | | | 65,858 | | | 310,684 |
End of period | | $ | 65,858 | | $ | 310,684 | | $ | 139,973 |
See Note 17 for Supplemental Cash Flow Disclosure
See notes to consolidated financial statements
FOCUS FINANCIAL PARTNERS INC.
CONSOLIDATED STATEMENTS OF MEMBERS’ DEFICIT/SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | | | Members’ | | | | | | |
| | Class A | | Class B | | Additional | | Accumulated | | Other | | | | | Deficit/ | | Non- | | | |
| | Common Stock | | Common Stock | | Paid-In | | Earnings | | Comprehensive | | Common | | Shareholders' | | controlling | | Total |
| | Shares | | Amount | | Shares | | Amount | | Capital | | (Deficit) | | Income (Loss) | | Units | | Equity | | Interest | | Equity |
MEMBERS' DEFICIT—January 1, 2017 | | — | | $ | — | | | — | | $ | — | | $ | — | | $ | (405,526) | | $ | (10,739) | | $ | 154,382 | | $ | (261,883) | | | — | | $ | (261,883) |
Net loss | | — | | | — | | | — | | | — | | | — | | | (48,359) | | | — | | | — | | | (48,359) | | | — | | | (48,359) |
Issuance of restricted common units in connection with acquisitions and contingent consideration | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 27,125 | | | 27,125 | | | — | | | 27,125 |
Accretion of senior preferred units return | | — | | | — | | | — | | | — | | | (788) | | | (5,461) | | | — | | | — | | | (6,249) | | | — | | | (6,249) |
Accretion of senior preferred units to estimated redemption value | | — | | | — | | | — | | | — | | | (2,207) | | | (15,256) | | | — | | | — | | | (17,463) | | | — | | | (17,463) |
Accretion of junior preferred units return | | — | | | — | | | — | | | — | | | (85) | | | (587) | | | — | | | — | | | (672) | | | — | | | (672) |
Accretion of junior preferred units to estimated redemption value | | — | | | — | | | — | | | — | | | (1,068) | | | (7,384) | | | — | | | — | | | (8,452) | | | — | | | (8,452) |
Issuance of convertible preferred units, redemption, retirement and recapitalization of units, net | | — | | | — | | | — | | | — | | | — | | | (320,739) | | | — | | | (177,160) | | | (497,899) | | | — | | | (497,899) |
Non-cash equity compensation expense—net of related forfeitures, related to restricted common and incentive units | | — | | | — | | | — | | | — | | | 34,879 | | | — | | | — | | | — | | | 34,879 | | | — | | | 34,879 |
Currency translation adjustment—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | 2,470 | | | — | | | 2,470 | | | — | | | 2,470 |
Distributions for unitholders | | — | | | — | | | — | | | — | | | — | | | (2,158) | | | — | | | — | | | (2,158) | | | — | | | (2,158) |
MEMBERS’ DEFICIT—December 31, 2017 | | — | | $ | — | | | — | | $ | — | | $ | 30,731 | | $ | (805,470) | | $ | (8,269) | | $ | 4,347 | | $ | (778,661) | | $ | — | | $ | (778,661) |
Net loss | | — | | | — | | | — | | | — | | | — | | | (47,821) | | | — | | | — | | | (47,821) | | | — | | | (47,821) |
Issuance of restricted common units in connection with acquisitions and contingent consideration | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 40,389 | | | 40,389 | | | — | | | 40,389 |
Non-cash equity compensation expense | | — | | | — | | | — | | | — | | | 24,987 | | | — | | | — | | | — | | | 24,987 | | | — | | | 24,987 |
Currency translation adjustment—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (1,398) | | | — | | | (1,398) | | | — | | | (1,398) |
Retirement of treasury stock | | — | | | — | | | — | | | — | | | (2,067) | | | — | | | — | | | (842) | | | (2,909) | | | — | | | (2,909) |
Distributions for unitholders | | — | | | — | | | — | | | — | | | — | | | (2,224) | | | — | | | — | | | (2,224) | | | — | | | (2,224) |
Reorganization of equity structure—July 30, 2018 | | 23,881,002 | | | 239 | | | 22,499,665 | | | 225 | | | (271,307) | | | 855,515 | | | 9,667 | | | (43,894) | | | 550,445 | | | 258,670 | | | 809,115 |
Balance post-reorganization | | 23,881,002 | | | 239 | | | 22,499,665 | | | 225 | | | (217,656) | | | — | | | — | | | — | | | (217,192) | | | 258,670 | | | 41,478 |
Net loss | | — | | | — | | | — | | | — | | | — | | | (590) | | | — | | | — | | | (590) | | | 7,324 | | | 6,734 |
Issuance of common stock | | 18,648,649 | | | 186 | | | — | | | — | | | 564,974 | | | — | | | — | | | — | | | 565,160 | | | — | | | 565,160 |
Issuance of common stock in connection with acquisitions and contingent consideration | | 3,736,252 | | | 37 | | | 323,607 | | | 3 | | | 112,424 | | | — | | | — | | | — | | | 112,464 | | | — | | | 112,464 |
Change in non-controlling interest allocation | | — | | | — | | | — | | | — | | | (56,222) | | | — | | | — | | | — | | | (56,222) | | | 78,151 | | | 21,929 |
Non-cash equity compensation expenses | | — | | | — | | | — | | | — | | | 5,412 | | | — | | | — | | | — | | | 5,412 | | | — | | | 5,412 |
Currency translation adjustment—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (1,824) | | | — | | | (1,824) | | | (1,287) | | | (3,111) |
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | | — | | | — | | | — | | | — | | | 62,454 | | | — | | | — | | | — | | | 62,454 | | | — | | | 62,454 |
SHAREHOLDERS' EQUITY—December 31, 2018 | | 46,265,903 | | $ | 462 | | | 22,823,272 | | $ | 228 | | $ | 471,386 | | $ | (590) | | $ | (1,824) | | $ | — | | $ | 469,662 | | $ | 342,858 | | $ | 812,520 |
Net loss | | — | | | — | | | — | | | — | | | — | | | (12,872) | | | — | | | — | | | (12,872) | | | 847 | | | (12,025) |
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights | | 747,523 | | | 8 | | | (747,523) | | | (7) | | | 22,279 | | | — | | | — | | | — | | | 22,280 | | | — | | | 22,280 |
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights | | 394,814 | | | 4 | | | — | | | — | | | 11,963 | | | — | | | — | | | — | | | 11,967 | | | — | | | 11,967 |
Forfeiture of unvested Class A common stock | | (12,500) | | | — | | | — | | | — | | | (412) | | | — | | | — | | | — | | | (412) | | | — | | | (412) |
Exercise of stock options | | 25,575 | | | — | | | — | | | — | | | 838 | | | — | | | — | | | — | | | 838 | | | — | | | 838 |
Change in non-controlling interest allocation | | — | | | — | | | — | | | — | | | (10,895) | | | — | | | — | | | — | | | (10,895) | | | (24,098) | | | (34,993) |
Non-cash equity compensation expenses | | — | | | — | | | — | | | — | | | 3,490 | | | — | | | — | | | — | | | 3,490 | | | — | | | 3,490 |
Currency translation adjustment—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | 525 | | | — | | | 525 | | | 243 | | | 768 |
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | | — | | | — | | | — | | | — | | | (463) | | | — | | | — | | | — | | | (463) | | | — | | | (463) |
SHAREHOLDERS' EQUITY—December 31, 2019 | | 47,421,315 | | $ | 474 | | | 22,075,749 | | $ | 221 | | $ | 498,186 | | $ | (13,462) | | $ | (1,299) | | $ | — | | $ | 484,120 | | $ | 319,850 | | $ | 803,970 |
See notes to consolidated financial statements
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 20192020, 2021 and 2022
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | |
| | Class A | | Class B | | Additional | | Retained | | Other | | Total | | Non- | | | |
| | Common Stock | | Common Stock | | Paid-In | | Earnings | | Comprehensive | | Shareholders' | | controlling | | Total |
| | Shares | | Amount | | Shares | | Amount | | Capital | | (Deficit) | | Income (Loss) | | Equity | | Interest | | 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 | | — | | | — | | | — | | | — | | | — | | | 28,045 | | | — | | | 28,045 | | | 20,920 | | | 48,965 |
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights | | 1,414,154 | | | 14 | | | (1,414,154) | | | (14) | | | 43,235 | | | — | | | — | | | 43,235 | | | — | | | 43,235 |
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights | | 2,058,146 | | | 21 | | | — | | | — | | | 69,436 | | | — | | | — | | | 69,457 | | | — | | | 69,457 |
Forfeiture of unvested Class A common stock | | (834) | | | — | | | — | | | — | | | (27) | | | — | | | — | | | (27) | | | — | | | (27) |
Exercise of stock options | | 251,913 | | | 2 | | | — | | | — | | | 7,799 | | | — | | | — | | | 7,801 | | | — | | | 7,801 |
Restricted stock units vesting and related withholdings | | 14,018 | | | 1 | | | — | | | — | | | (387) | | | — | | | — | | | (386) | | | — | | | (386) |
Change in non-controlling interest allocation | | — | | | — | | | — | | | — | | | (96,443) | | | — | | | — | | | (96,443) | | | (21,517) | | | (117,960) |
Non-cash equity compensation expenses | | — | | | — | | | — | | | — | | | 4,798 | | | — | | | — | | | 4,798 | | | — | | | 4,798 |
Currency translation adjustment—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | 4,689 | | | 4,689 | | | 2,866 | | | 7,555 |
Unrealized loss on interest rate swaps designated as cash flow hedges—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (5,557) | | | (5,557) | | | (3,039) | | | (8,596) |
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | | — | | | — | | | — | | | — | | | 67 | | | — | | | — | | | 67 | | | — | | | 67 |
Balance at—December 31, 2020 | | 51,158,712 | | $ | 512 | | | 20,661,595 | | $ | 207 | | $ | 526,664 | | $ | 14,583 | | $ | (2,167) | | $ | 539,799 | | $ | 319,080 | | $ | 858,879 |
Net income | | — | | | — | | | — | | | — | | | — | | | 10,412 | | | — | | | 10,412 | | | 14,028 | | | 24,440 |
Issuance of common stock in connection with acquisitions and contingent consideration | | 58,657 | | | 1 | | | 614,362 | | | 5 | | | 3,514 | | | — | | | — | | | 3,520 | | | — | | | 3,520 |
Issuance (cancellation) of common stock in connection with offerings, net | | 10,114,939 | | | 100 | | | (6,306,301) | | | (63) | | | 511,691 | | | — | | | — | | | 511,728 | | | — | | | 511,728 |
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights | | 3,542,853 | | | 35 | | | (3,542,853) | | | (35) | | | 194,410 | | | — | | | — | | | 194,410 | | | — | | | 194,410 |
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights | | 185,563 | | | 2 | | | — | | | — | | | 9,398 | | | — | | | — | | | 9,400 | | | — | | | 9,400 |
Exercise of stock options | | 235,684 | | | 3 | | | — | | | — | | | 7,458 | | | — | | | — | | | 7,461 | | | — | | | 7,461 |
Restricted stock units vesting and related withholdings | | 23,716 | | | — | | | — | | | — | | | (971) | | | — | | | — | | | (971) | | | — | | | (971) |
Restricted common units vesting | | — | | | — | | | 12,216 | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Change in non-controlling interest allocation | | — | | | — | | | — | | | — | | | (434,901) | | | — | | | — | | | (434,901) | | | (88,928) | | | (523,829) |
Non-cash equity compensation expenses | | — | | | — | | | — | | | — | | | 6,036 | | | — | | | — | | | 6,036 | | | — | | | 6,036 |
Currency translation adjustment—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (4,175) | | | (4,175) | | | (1,157) | | | (5,332) |
Unrealized gain on interest rate swaps designated as cash flow hedges—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | 9,371 | | | 9,371 | | | 3,841 | | | 13,212 |
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | | — | | | — | | | — | | | — | | | 18,454 | | | — | | | — | | | 18,454 | | | — | | | 18,454 |
Balance at—December 31, 2021 | | 65,320,124 | | $ | 653 | | | 11,439,019 | | $ | 114 | | $ | 841,753 | | $ | 24,995 | | $ | 3,029 | | $ | 870,544 | | $ | 246,864 | | $ | 1,117,408 |
Net income | | — | | | — | | | — | | | — | | | — | | | 91,784 | | | — | | | 91,784 | | | 33,494 | | | 125,278 |
Issuance of common stock in connection with acquisitions and contingent consideration | | — | | | — | | | 839,184 | | | 9 | | | — | | | — | | | — | | | 9 | | | — | | | 9 |
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights | | 488,258 | | | 5 | | | (488,258) | | | (5) | | | 19,657 | | | — | | | — | | | 19,657 | | | — | | | 19,657 |
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights | | 43,720 | | | 1 | | | — | | | — | | | 1,734 | | | — | | | — | | | 1,735 | | | — | | | 1,735 |
Exercise of stock options | | 42,076 | | | — | | | — | | | — | | | 1,158 | | | — | | | — | | | 1,158 | | | — | | | 1,158 |
Restricted stock units vesting and related withholdings | | 35,466 | | | — | | | — | | | — | | | (763) | | | — | | | — | | | (763) | | | — | | | (763) |
Restricted common units vesting | | — | | | — | | | 37,376 | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Change in non-controlling interest allocation | | — | | | — | | | — | | | — | | | 53,127 | | | — | | | — | | | 53,127 | | | (35,582) | | | 17,545 |
Non-cash equity compensation expenses | | — | | | — | | | — | | | — | | | 8,726 | | | — | | | — | | | 8,726 | | | — | | | 8,726 |
Currency translation adjustment—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (8,336) | | | (8,336) | | | (1,919) | | | (10,255) |
Unrealized gain on interest rate swaps designated as cash flow hedges—net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | 23,625 | | | 23,625 | | | 6,520 | | | 30,145 |
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | | — | | | — | | | — | | | — | | | (7,348) | | | — | | | — | | | (7,348) | | | — | | | (7,348) |
Balance at—December 31, 2022 | | 65,929,644 | | $ | 659 | | | 11,827,321 | | $ | 118 | | $ | 918,044 | | $ | 116,779 | | $ | 18,318 | | $ | 1,053,918 | | $ | 249,377 | | $ | 1,303,295 |
See notes to consolidated financial statements
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
1. GENERAL
Organization
Focus Financial Partners Inc. (“Focus Inc.”) is a holding company that was formed as a Delaware corporation on July 29, 2015 for2015. Focus Inc. is the sole purpose of completing its initial public offering (the "IPO") and related reorganization transactions (the "Reorganization Transactions") in order to carry on the businessmanaging member of Focus Financial Partners, LLC and its subsidiaries (“Focus LLC”). On July 30, 2018, Focus Inc. became the managing member of Focus LLC and operates and controls the businesses and affairs of Focus LLC.
Focus LLC is a Delaware limited liability company that was formed in November 2004. Focus LLC’s subsidiaries commenced revenue generating and acquisition activities in January 2006. Focus LLC’s activities wereare governed by its Third Amended and Restated Operating Agreement, as amended, through July 30, 2018 and then its Fourth Amended and Restated Operating Agreement, as amended (the “Operating Agreement”), effective on July 30, 2018..
The consolidated financial statements for periods prior to July 30, 2018 reflect the historical results of operations and financial position of Focus LLC. The consolidated financial statements for periods after July 30, 2018 reflect the results of operations and financial position of Focus Financial Partners Inc. and its subsidiaries (the “Company”).
Business
The Company is in the business of acquiring and overseeing independent fiduciary wealth management and related businesses. The Company typically acquires 100% of the net assets or equity of the wealth management businesses on terms that are generally consistent for each acquisition. To determine the acquisition price, the Company first estimates the operating cash flow of the business to be acquired based on current and projected levels of revenue and expense.expenses. For this purpose, the Company defines operating cash flow as cash revenue of the business, less cash expenses, other than compensation and benefits to the selling entrepreneurs or individuals who typically become principals of the management entities discussed below. The Company refers to the estimated operating cash flow earnings before partner compensation as target earnings (“Target Earnings”). The acquisition price is a multiple of a portion of the Target Earnings, referred to as base earnings (“Base Earnings”).
At the date of each of the respective acquisitions, the Company typically enters into a management agreement (“Management Agreement”) with a management company (“Management Company”) that is owned substantially by the selling principals of the acquired businesses. The Management Company earns management fees to manage the daily operations of the acquired business. The terms of the Management Agreements are generally six years with automatic renewals for consecutive one-year terms, unless terminated by either the Management Company or the Company. Under the Management Agreement, the Management Company is entitled to management fees typically consisting of all future earnings of the acquired business in excess of the Base Earnings up to Target Earnings, plus a percentage of any earnings in excess of Target Earnings. The Company, through its respective operating subsidiary, retains a cumulative preferred position in the Base Earnings. To the extent earnings of an acquired business in any year are less than the Base Earnings, in the following year the Company, through its respective operating subsidiary, is entitled to receive the Base Earnings together with the prior years’ shortfall before any management fees are earned by the Management Company. Since each Management Company is neither acquired nor consolidated, management fees are included in the Company’s consolidated statements of operations as operating expenses. Estimated management fees due are included in due to affiliates in the accompanying consolidated balance sheets.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
include the accounts of the Company and its subsidiaries.The Company consolidates Focus LLC and its subsidiaries'subsidiaries’ financial statements and records the interests in Focus LLC consisting of common units, restricted common units and the common unit equivalent of incentive units of Focus LLC that the Company does not own as non-controlling interests, see Note 4. Non-controlling interests were measured initially at the proportionate share of Focus LLC's identifiable net assets at the date of the IPO.3. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
LossIncome Per Share
LossIncome per share is computed in accordance with Accounting Standards Codification ("ASC"(“ASC”) Topic 260, Earnings Per Share. Basic lossincome per share is computed by dividing the net lossincome attributable to common shareholders by the weighted average number of shares outstanding for that period. Diluted lossincome per share is calculated by dividing the net lossincome attributable to common shareholders by the diluted weighted average shares outstanding for that period. Diluted loss per share includes the determinants of the basic loss per share and, in addition, if the effect is dilutive, reflects the dilutive effectnumber of shares of Class A common stock related tooutstanding during the Company's share based compensation plans, with no adjustments to net loss attributable tosame periods plus the effect, if any, of the potentially dilutive shares of the Company’s Class A common shareholders for dilutive potentialstock from stock options, unvested Class A common shares.stock, restricted stock units and Focus LLC common units, including contingently issuable Focus LLC common units, if any, restricted common units, and incentive units as calculated using the treasury stock method.
Revenue Recognition
Wealth Management Fees
The Company recognizes revenue from wealth management fees, which are primarily comprisedcomposed of fees earned for advising on the assets of clients, financial and tax planning fees, consulting fees, tax return preparation fees, fees for family office services, and fees for wealth management and operational support services provided to third-party wealth management firms. Client arrangements may contain one of the services or multiple services, resulting in either a single or multiple performance obligations within the same client arrangement, each of which are separately identifiable and priced, and accounted for as the related services are provided and consumed over time. Fees are primarily based either on a contractual percentage of the client’s assets based on the market value of the client’s assets on the predetermined billing date, a flat fee, an hourly rate based on predetermined billing rates or a combination of such fees and are billed either in advance or arrears on a monthly, quarterly, or semiannual basis and such fees earnedbasis. Revenue is recognized over the respective service period based on time elapsed or hours expended, as the case may be, which is deemed to be the most faithful depiction of the transfer of services are performedas clients benefit from services over time.the respective period. Revenue for wealth management and operational support services provided to third-partythird party wealth management firms is presented net since these services are performed in an agent capacity. Client agreements typically do not have a specified term and may be terminated at any time by either party subject to the respective termination and notification provisions in each agreement.
A majority of the Company’s wealth management fees are correlated to the markets, and therefore are considered variable consideration. The Company’s market-correlated fees are dependent on the market and, thus, are susceptible to factors outside the Company’s control. Therefore, at inception of the contractual service period for fees which are based on the market values at the end of the service period, the Company cannot conclude that it is probable that a reversal in the cumulative revenue recognized would not occur if the estimate was included in the transaction price at that time. However, at each quarterly reporting date, the Company updates its estimate of the transaction price as the
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
market uncertainty is typically resolved. The Company can then reasonably conclude that a reversal of the variable consideration will not occur for those services already provided.
Wealth management fees are recorded when: (i) an arrangement with a client has been identified; (ii) the performance obligations have been identified; (iii) the fee or other transaction price has been determined; (iv) the fee or other transaction price has been allocated to each performance obligation;obligation based on standalone fee rates; and (v) the Company has satisfied the applicable performance obligation.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Other
Other revenue includes fees earned for recordkeeping and administration services provided to employee benefit plans as well as commissions and distribution fees and outsourced services. Client arrangements may contain a single or multiple performance obligations, each of which are separately identifiable and accounted for as the related services are provided and consumed over time. Recordkeeping and administration and outsourced services revenue, in accordance with the same five criteria above, are recognized over the period in which services are provided. Commissions and distribution fees are recognized when earned.
The Company disaggregates revenue based on the above two categories. The Company does not allocate revenue by the type of service provided in connection with providing holistic wealth management client services. The Company generally manages its business based on the operating results of the enterprise taken as a whole, not by geographic region. The following table disaggregates the revenues based on the location of the partner firm legal entities that generate the revenues, and therefore may not be reflective of the geography in which clients are located, for the years ended December 31, 2017, 20182020, 2021 and 2019:2022:
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | 2017 | | 2018 | | 2019 |
Domestic revenue | | $ | 643,077 | | $ | 889,166 | | $ | 1,170,169 |
International revenue | | | 19,810 | | | 21,714 | | | 48,172 |
Total revenue | | $ | 662,887 | | $ | 910,880 | | $ | 1,218,341 |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
Domestic revenue | | $ | 1,291,630 | | $ | 1,691,345 | | $ | 2,016,845 |
International revenue | | | 69,689 | | | 106,606 | | | 126,476 |
Total revenue | | $ | 1,361,319 | | $ | 1,797,951 | | $ | 2,143,321 |
International revenue consists of revenue generated by partner firm legal entities primarily in Australia, Canada, Switzerland, the United Kingdom Canada and Australia.in other non-US jurisdictions.
Deferred Revenue
Fees collected in advance are deferred and recognized in revenue over the period earned with the unrecognized portion of fees collected in advance recorded as deferred revenue in the accompanying consolidated balance sheets.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at their net realizable value. Allowances for uncollectible accounts are maintained for estimated losses resulting from the inability of customers to make required payments. In determining
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
these estimates, historical write-offs, the aging of the receivables and other factors, such as overall economic conditions, are considered.
Fixed Assets
Fixed assets are initially recorded at cost and are depreciated using the straight-line method over their estimated useful lives. The estimated useful lives for fixed assets, primarily consisting of computers, equipment, andfurniture and furniture and fixtures, are generally between three to seven years. Leasehold improvements are amortized over the shorter of their
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
estimated economic useful lives or the terms of the leases. The costs of improvements that extend the life of a fixed asset are capitalized, while the costs of repairs and maintenance are expensed as incurred.
The Company capitalizes costs related to computer software obtained or developed for internal use. Costs incurred in the application development phase are capitalized and amortized over their useful lives, which are generally three to five years.
Debt Financing Costs
Direct costs incurred with obtaining debt financing are capitalized or recorded as a reduction of the underlying debt. The costs are amortized over the respective term of the underlying debt and are included in amortization of debt financing costs in the accompanying consolidated statements of operations.
Business Acquisitions
Business acquisitions are accounted for in accordance with ASC Topic 805: Business Combinations. Business acquisitions are accounted for by allocating the purchase price consideration to the fair value of assets acquired and liabilities assumed. The purchase price allocations are based upon preliminary valuations, and the Company’s estimates and assumptions are subject to change within the measurement period as valuations are finalized. Any change in the estimated fair value of the net assets, prior to the finalization of the more detailed analyses, but not to exceed one year from the dates of acquisition, will change the amount of the purchase price allocations. Goodwill is recognized as the excess of the purchase price consideration over the fair value of net assets of the business acquired. All transaction costs are expensed as incurred.
The Company has incorporated contingent consideration, or earn out provisions, into the structure of its business acquisitions. These arrangements may result in the payment of additional purchase price consideration to the sellers based on the growth of certain financial thresholds for periods following the closing of the respective acquisition. The additional purchase price consideration is payable in the form of cash and, in some cases, equity.
The Company recognizes the fair value of estimated contingent consideration at the acquisition date as part of the consideration transferred in exchange for the acquired business. The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. Any changes in fair value are recognized each reporting period in non-cash changes in fair value of estimated contingent consideration in the accompanying consolidated statements of operations.
The results of the acquired businesses have been included in the Company’s consolidated financial statements from the respective dates of acquisition.
Equity Method Investments
The Company applies the equity method of accounting is applied to investments where the Company has the ability to exercise significant influence over operating and financial matters. EquityDuring the years ended December 2021 and 2022, the Company acquired minority equity interests in wealth management firms for $1,632 and $5,232 in cash that are accounted for using the equity method of accounting.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
The Company records other equity investments that do not have readily determinable fair values at cost less impairment, if any, plus or minus changes resulting from observable price changes. Investments are periodically reviewed for impairment.
During the year ended December 31, 2021, the Company invested $18,000 in a publicly traded mutual fund that was sold during the year ended December 31, 2022. Unrealized and realized gains and losses are recognized in other expense-net in the consolidated statements of operations.
The Company’s equity method investments are included in prepaid expenses and other assets in the consolidated balance sheets.
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill is deemed to have an indefinite useful life and is not amortized. Intangible and other long-lived assets are amortized over their respective estimated useful lives. The Company has no indefinite-lived intangible assets.
Goodwill is tested annually for impairment as of October 1, or more frequently if events and circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A two-step impairment test is performed on goodwill. In the first step, theThe Company compares the fair value of the reporting unit to
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
the carrying value of the net assets of the reporting unit. The fair value of the reporting unit is determined using a market approach. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit in the first step, no further testingconsideration is performed.necessary. If the carrying value exceeds the fair value of the reporting unit, in the first step, then the Company performswould record an impairment charge for the second step ofamount that the impairment test to determinecarrying value exceeds the implied fair value of goodwill and compares the implied fair value of goodwill to the carrying value of goodwill to determine the extent of the impairment, if any.
In March 2018, the Company modified the manner in which it assesses goodwill for impairment. The Company determined for the purpose of its annual goodwill impairment test that its reporting units should be aggregated into one reporting unit. The Company’s determination was based on the Company’s reporting units having similar economic and business characteristics, and the services performed by the reporting units are wealth management related and that the reporting units are subject to a similar regulatory framework. The Company believes that the resulting change in accounting principle related to the reporting unit utilized in the annual goodwill impairment test did not delay, accelerate or avoid an impairment charge. The Company determined that the change in accounting principle related to the reporting unit used in the Company’s annual impairment test is appropriate based on the nature of the Company’s business. The change would not have had an impact on the results of the Company’s impairment test for 2017.
Intangible assets and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the asset might be impaired or that the estimated useful life should be changed prospectively. If impairment indicators are present, the recoverability of these assets is measured by a comparison of the carrying amount of the asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is determined using a discounted cash flow approach.
Fair Value of Financial Instruments
The carrying amounts of substantially all of the Company’s financial assets and liabilities are considered to approximate their fair values because of their short-term nature. The carrying amount of revolverFirst Lien Revolver borrowings (as defined below) and First Lien Term Loan A borrowings (as defined below) under the Credit Facility (as defined below) approximates fair value, as the debt bears interest at selected short-term variable market rates. The Company measures the implied fair value of its First Lien Term Loan B (as defined below) and interest rate swap agreements using trading levels and the relevant interest rate forward curves obtained from a third-party service provider;providers; accordingly, these borrowingsthey are classified within Level 2 of the valuation hierarchy. The fair value of the Company’s investment in a mutual fund was determined using quoted market prices within Level 1 of the valuation hierarchy. See Note 87 for further information regarding the Company’s fair value measurements.
Income TaxesDerivatives
The Company uses derivative instruments for purposes other than trading. Derivative instruments are accounted for in accordance with ASC Topic No. 815, Derivatives and Hedging, which requires that all derivative instruments be recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that qualify
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
as hedges and have been designated as part of a hedging relationship for accounting purposes do not impact earnings until the hedged item is recognized in earnings. The Company uses interest rate swaps to manage its mix of fixed and floating rate debt. These instruments have been designated as cash flow hedges at inception and are measured for effectiveness both at inception and on an ongoing basis.
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London InterBank Offered Rate (“LIBOR”) or another rate that is expected to be discontinued. The Company applied the provisions of ASU No. 2020-04 in connection with the IPONovember 2022 amendment to the Credit Facility and Reorganization Transactions, related modification of its derivative contracts (See Notes 8 and 9).
Income Taxes
Focus Inc. becameis a holding company whose most significant asset is a membership interest in Focus LLC, and, as a result,LLC. Focus Inc. becameis subject to U.S. federal, state and local income taxes on Focus Inc.'s’s allocable portion of taxable income from Focus LLC. Focus LLC is treated as a partnership for U.S. federal income tax purposes. Accordingly, Focus LLC is generally not and has not been subject to U.S. federal and certain state income taxes at the entity level, although it has been subject to the New York City Unincorporated Business Tax and certain of its subsidiaries have been subject to U.S. federal and certain state and local or foreign income taxes. Instead, for U.S. federal and certain state income tax purposes, the income, deductions, losses and credits of Focus LLC are passed through to its unitholders, which after the IPO includesincluding Focus Inc. Focus LLC has historically made tax distribution payments in accordance with its Third Amended and Restated Operating Agreement, which was replaced by the Operating Agreement on July 30, 2018, and Focus Inc. intends to cause Focus LLC to continue to makemakes tax distribution payments to the extent of available cash, in accordance with the Operating Agreement. Focus Inc.Agreement. The Company files income tax returns with the U.S. federal government as well as various state and local jurisdictions.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
The asset and liability method is applied for deferred income taxes. Deferred tax assets and liabilities are recognized on a net basis for each tax paying component for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. Valuation allowances, if any, are recorded to reduce the deferred tax assets to an amount that is more likely than not to be realized.
The Company reviews and evaluates tax positions in its major tax jurisdictions and determines whether or not there are uncertain tax positions that require financial statement recognition. Based on this review, no reserves for uncertain tax positions were recorded at December 31, 20182021 and 2019.2022.
Segment Reporting
Management has determined that the Company operates in one operating segment, as a wealth management focused organization, which is consistent with its structure and how the Company manages the business. The Company’s acquired businesses have similar economic and business characteristics. The services provided are wealth management related and the Company'sCompany’s businesses are subject to a similar regulatory framework. Furthermore, the Company’s Chief Operating Decision Maker, which is the Company’s Chief Executive Officer, monitors and reviews financial information at a consolidated level for assessing operating results and the allocation of resources.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
Translation of Non-U.S. Currency Amounts
Assets and liabilities of non-U.S. subsidiaries and equity method investments that have a foreign currency as their functional currency are re-measured to U.S. dollars at year-end exchange rates, and revenues and expenses are re-measured at average rates of exchange prevailing during the year. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss). Gains or losses resulting from foreign currency transactions are included in other (expense) income—expense—net in the consolidated statements of operations.
Consolidation Considerations
ASC Topic 810, Consolidations, requires an entity to perform a qualitative analysis to determine whether its variable interests give it a controlling financial interest in a variable interest entity (“VIE”). Under the standard, an enterprise has a controlling financial interest when it has (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. An enterprise that holds a controlling financial interest is deemed to be the primary beneficiary and is required to consolidate the VIE.
The Company’s subsidiaries have Management Agreements with the respective Management Company, which causes these Company subsidiaries to be VIEs. The Company has assessed whether or not it is the primary beneficiary for these subsidiaries and has concluded that it is the primary beneficiary. Accordingly, the results of these subsidiaries have been consolidated.
Certain of the Company’s subsidiaries have variable interests in certain investment funds that are deemed voting interest entities. Due to substantive kick-out rights possessed by the limited partners of these funds, the Company does not consolidate the investment funds.
From time to time, the Company enters into option agreements with wealth management businesses (the “Optionee”). In exchange for payment of an option premium, the option agreement allows the Company, at its sole discretion, to acquire the Optionee at a predetermined time and at a predetermined purchase price formula. If the
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Company chooses to exercise its option to acquire the Optionee, the acquisition and the corresponding Management Agreement would be executed in accordance with the Company’s typical acquisition structure as discussed in Note 1. If the Company chooses not to exercise the option, the option premium would be recorded as a loss on investment in the consolidated statements of operations in the period that the option expires. Option premiums paid by the Company of $4,300 and $0 are included in prepaid expenses and other assets in the consolidated balance sheets as of December 31, 2018 and 2019, respectively. The Company has determined that the respective option agreements with the Optionees qualify the Optionees as VIEs. The Company has determined that it is not the primary beneficiary of the Optionees and does not consolidate the results of the Optionees. An option premium of $2,000 was paid by the Company to a Singapore based wealth management firm during the year ended December 31, 2022 and is included in prepaid expenses and other assets in the consolidated balance sheets as of December 31, 2022. There were no option premiums as of December 31, 2021.
Stock Based Compensation Costs
Compensation cost for unitFocus LLC incentive units and Focus Inc. stock basedoption awards is measured based on the fair value of the unit and stock based awards determined by the Black-Scholes option pricing modelor the Monte Carlo Simulation Model on the date that the unit and stock based awards are granted or modified, and is adjusted for the estimated number of awards that are expected to be forfeited. Compensation cost for unvested Class A common stock and restricted stock units, areas well as Focus LLC restricted common units, is measured based on the market value of the Company’s Class A common stockon the date that the awards are grantedand is adjusted for the estimated number of awards that are expected to be forfeited. The compensation cost is recognized on a straight-line basis over the requisite service period. Non-cash equity compensation expense, associated with employees and non-employees, including principals in the management companies, is included in compensation and related expenses in the consolidated statements of operations. The Company estimates forfeitures at the time of the respective grant and revises those estimates in subsequent periods if actual forfeitures differ materially from those
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
estimates. The Company uses historical data to estimate forfeitures and records non-cash equity compensation expense only for those awards that are expected to vest.
Leases
The Company leases office space in various locations under noncancelable lease agreements.agreements with various expiration dates. The Company determines if a contract contains a lease at inception. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Many of these lease agreements provide for tenant improvement allowances, rent increases, and/or rent-free periods. RentOperating lease expense is recognized on a straight-line basis commencing with the possession date of the property, which is typically the earlier of the lease commencement date or the date when the Company takes possession of the property. Rent expense isOperating lease costs are included in selling, general and administrative expenses in the consolidated statements of operations.
In February 2016,Lease assets and liabilities are recognized at the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02, as amended, requires lesseespresent value of the future lease payments at the lease commencement date. The interest rate used to put mostdetermine the present value of the future lease payments is an estimated incremental borrowing rate, because the interest rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on their balance sheets but recognizea collateralized basis with similar terms and payments, and in economic environments where the expenses in their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize aleased asset is located. We generally use the base, non-cancelable, lease liability forterm when determining the obligation to makelease assets and liabilities. Lease assets also include any prepaid lease payments and a rightlease incentives. Leases with an initial term of use asset for12 months or less, which are immaterial to the right to use the underlying asset for the lease term. ASU No. 2016-02 was effective for the Company for interim and annual periods beginning January 1, 2019. The Company adopted ASU No. 2016-02 effective January 1, 2019 using a modified retrospective method and therefore hasconsolidated financial statements, are not restated comparative periods. The Company elected to use the package of practical expedients to assist in the transition, which includes not reassessing the identification and classification of leases, among other things. Based on the portfolio of leases as of January 1, 2019, the Company recognized approximately $144,000 of lease liabilities and $134,000 of right of use assets (which reflects the reclassification of previous deferred rent balances into the right of use asset as required under the transition guidance)recorded on the balance sheet, primarily related to operatingsheet. The Company has a limited number of finance leases for real estate. There was nowhich are not material impact to the consolidated statement of operations and comprehensive loss or consolidated statement of cash flows as a result of adoption of this new guidance. Refer to Note 13 for further information regarding leases.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment,” which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019 and will be applied prospectively, early adoption is permitted. ASU No. 2017-04 is not expected to have a material effect on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, "Improvements to Nonemployee Share-Based Payment Accounting," which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU No. 2018-07 was effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU No. 2018-07 on January 1, 2019 did not have a material effect on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently evaluating the impacts of the provisions of ASU No. 2019-12 on the Company's consolidated financial statements.
3. IPO, REORGANIZATION TRANSACTIONS AND USE OF PROCEEDS
Initial Public Offering
On July 30, 2018, the Company completed its IPO of 18,648,649 shares of its Class A common stock, par value $0.01 per share, including 2,432,432 shares of Class A common stock sold in connection with the full exercise of the option to purchase additional shares granted to the underwriters, at a price to the public of $33.00 per share. The shares began trading on the NASDAQ Global Select Market on July 26, 2018 under the ticker symbol “FOCS.”
Reorganization Transactions
In connection with the IPO, Focus LLC completed the Reorganization Transactions. The equity interests in Focus LLC at the date of the IPO consisted of convertible preferred units (the “Convertible Preferred Units”), common units and incentive units, each incentive unit having a hurdle amount similar to the exercise price of a stock option. The owners of Focus LLC units immediately prior to the IPO (“Existing Owners”) primarily included (i) affiliates of Focus LLC’s private equity investors (“Private Equity Investors”), (ii) members of management of Focus LLC, (iii) current and former principals of independent fiduciary wealth management and related businesses acquired by Focus LLC and (iv) current and former employees of Focus LLC.
The following steps were implemented in connection with the Reorganization Transactions:
| ·
| | Focus LLC purchased, utilizing existing working capital, all common units held by Existing Owners who were non-accredited investors, as defined by Rule 501 of Regulation D, at a purchase price per unit equal to 1.25 times the IPO price of $33.00 per share (“Gross IPO Price”). Focus LLC accelerated the vesting of
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
all unvested incentive units held by Existing Owners who were non-accredited investors and converted the incentive units of each such holder into a number of common units equal to (i) the number of such incentive units times the Gross IPO Price, minus the aggregate hurdle amount of such incentive units, divided by (ii) the Gross IPO Price (the “Appropriate Conversion Number”). Focus LLC then purchased all common units issued upon such conversion at a purchase price per unit equal to 1.25 times the Gross IPO Price. Focus LLC paid a total of $26,001 to Existing Owners who were non-accredited investors.
|
| ·
| | Existing Owners who were accredited investors and held fewer than 85,000 common units and incentive units in the aggregate are referred to as “Mandatorily Exchanging Owners.” Focus LLC converted all vested and unvested incentive units of Mandatorily Exchanging Owners into the Appropriate Conversion Number of vested and unvested common units, respectively. Mandatorily Exchanging Owners were given an election to sell up to 100% of their vested common units (after giving effect to such conversion) to the Company at the Gross IPO Price less the underwriting discount (the “Net IPO Price”), subject to cut‑backs depending on the proceeds available from the IPO. The vested and unvested common units of a Mandatorily Exchanging Owner not sold were exchanged for an equal number of shares of vested Class A common stock and unvested Class A common stock of the Company. Mandatorily Exchanging Owners of vested common units issued upon conversion of vested incentive units and not sold received (i) vested non‑compensatory stock options of the Company to purchase a number of shares of Class A common stock of the Company equal to (A) the number of vested incentive units that were converted into such vested common units minus (B) the number of shares of vested Class A common stock issued in such exchange and (ii) cash in an amount equal to 65% of the fair market value of such non‑compensatory stock options. Mandatorily Exchanging Owners of unvested common units issued upon conversion of unvested incentive units and not sold received unvested compensatory stock options of the Company to purchase a number of shares of Class A common stock of the Company equal to (i) the number of unvested incentive units that were converted into such unvested common units minus (ii) the number of shares of unvested Class A common stock issued in such exchange.
|
| ·
| | Existing Owners who were accredited investors and held 85,000 or more common units and incentive units in the aggregate were given an election to sell up to 100% of their vested common units and vested incentive units (after conversion into the Appropriate Conversion Number of common units) to the Company at the Net IPO Price, subject to cut-backs depending on the proceeds available from the IPO. These Existing Owners were also given an election to exchange all or a portion of their remaining common units and incentive units for vested and unvested Class A common stock of the Company. These Existing Owners continue to hold their common units and incentive units of Focus LLC remaining after any such sale or exchange.
|
| ·
| | All outstanding Convertible Preferred Units were converted into common units on a one-for-one basis. The common units held by certain affiliates of the Company’s private equity investors were distributed to their owners, some of which were entities treated as corporations for U.S. federal income tax purposes, which are referred to as “blockers.” Each blocker then merged with a separate newly formed subsidiary of Focus Inc., with the blocker as the surviving entity. Each owner of each blocker received consideration in the merger equal to one share of Class A common stock for each common unit held. Certain of the common units not held by blockers were exchanged for shares of Class A common stock of the Company.
|
Existing Owners who hold common units of Focus LLC after the Reorganization Transactions ("continuing owners") received shares of Class B common stock of the Company. Shares of Class B common stock do not entitle their holders to any economic rights. Holders of Class A common stock and Class B common stock of the Company vote together as a single class on all matters presented to the shareholders of the Company for their vote or approval, except as otherwise required by applicable law. Each share of Class B common stock entitles its holder to one vote.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
In connection with the Reorganization Transactions, the Company issued an aggregate of 23,881,002 shares of Class A common stock, non-compensatory stock options to purchase an aggregate of 386,832 shares of Class A common stock, compensatory stock options to purchase an aggregate of 348,577 shares of Class A common stock and an aggregate of 22,499,665 shares of Class B common stock. Due to certain post-closing adjustments, the Company cancelled 240,457 shares of Class A common stock and issued 240,457 shares of Class B common stock effective as of the closing date of the IPO.
Use of Proceeds
The Company received $565,160 of net proceeds from the sale of the Class A common stock in the IPO including $74,651 in connection with the full exercise of the option to purchase additional shares granted to the underwriters. The Company used $11,137 of the net proceeds to pay Mandatorily Exchanging Owners who elected to sell their units of Focus LLC and $24,400 to pay other Existing Owners who elected to sell their units of Focus LLC. The Company contributed $529,623 of the net proceeds from the IPO to Focus LLC in exchange for 17,583,947 common units of Focus LLC. Focus LLC used $392,535 of such contribution to reduce indebtedness under its Credit Facility (as defined below). The remaining $137,088 of such contribution was used by Focus LLC for acquisitions and general corporate business purposes.
4. NON-CONTROLLING INTERESTS AND LOSSINCOME PER SHARE
Historical loss per share information is not applicable for reporting periods prior to the consummation of the IPO. Net loss attributable to common shareholders is the net loss recorded by the Company based on its interest in Focus LLC during the respective period after the IPO.
The calculation of controlling and non-controlling interest is as follows as of December 31, 20182021 and 2019:2022:
| | | | | | |
| | 2021 | | | 2022 | |
Focus LLC common units | | 11,439,019 | | | 11,827,321 | |
Focus LLC restricted common units | | 193,625 | | | 296,548 | |
Common unit equivalents of outstanding vested and unvested Focus LLC incentive units(1) | | 8,996,789 | | | 5,196,288 | |
Total common units, restricted common units and common unit equivalents attributable to non-controlling interest | | 20,629,433 | | | 17,320,157 | |
Total common units, restricted common units and common unit equivalents of incentive units outstanding | | 85,949,557 | | | 83,249,801 | |
Non-controlling interest allocation | | 24.0 | % | | 20.8 | % |
Company’s interest in Focus LLC | | 76.0 | % | | 79.2 | % |
| | | | | | |
| | 2018 | | | 2019 | |
Focus LLC common units held by continuing owners | | 22,823,272 | | | 22,075,749 | |
Common unit equivalents of outstanding vested and unvested incentive units held by continuing owners(1) | | 5,139,653 | | | 5,731,995 | |
Total common units and common unit equivalents attributable to non-controlling interest | | 27,962,925 | | | 27,807,744 | |
Total common units and common unit equivalents of incentive units outstanding | | 74,228,828 | | | 75,229,059 | |
Non-controlling interest allocation | | 37.7 | % | | 37.0 | % |
Company’s interest in Focus LLC | | 62.3 | % | | 63.0 | % |
(1) | (1)
| | Focus LLC common units issuable upon conversion of 18,597,47416,146,524 and 19,754,45016,602,886 (see Note 10) vested and unvested Focus LLC incentive units outstanding as of December 31, 20182021 and 2019,2022, respectively, were calculated using the common unit equivalent of vested and unvested Focus LLC incentive units based on the closing price of the Company’s Class A common stock on the last trading day of the period. |
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 20192020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
The below table contains a reconciliation of net loss to net loss attributable to common shareholders for the years ended December 31, 2018 and 2019:
| | | | | | | |
| | 2018 | | 2019 | |
Net loss | | $ | (41,087) | | $ | (12,025) | |
Net loss attributable to members of Focus LLC (for the respective period through the IPO) | | | 47,821 | | | — | |
Non-controlling interest subsequent to the IPO | | | (7,324) | | | (847) | |
Net loss attributable to common shareholders | | $ | (590) | | $ | (12,872) | |
The calculation of basic and diluted loss per share is described below:
Basic lossincome per share is calculated utilizing net lossincome attributable to common shareholders divided by the weighted average number of shares of Class A common stock outstanding during the same period:period. The calculation of basic income per share for the years ended December 31, 2020, 2021 and 2022 is as follows:
| | | | | | | | |
| | Period July 30, | | | | | |
| | 2018 through | | | Year Ended | |
| | December 31, 2018 | | | December 31, 2019 | |
Basic loss per share: | | | | | | | | |
Net loss attributable to common shareholders | | $ | (590) | | | $ | (12,872) | |
Weighted average shares of Class A common stock outstanding | | | 43,122,782 | | | | 46,792,389 | |
Basic loss per share | | $ | (0.01) | | | $ | (0.28) | |
| | | | | | | | | | |
| | 2020 | | 2021 | | 2022 | |
Basic income per share: | | | | | | | | | | |
Net income attributable to common shareholders | | $ | 28,045 | | $ | 10,412 | | $ | 91,784 | |
Weighted average shares of Class A common stock outstanding | | | 48,678,584 | | | 57,317,477 | | | 65,552,592 | |
Basic income per share | | $ | 0.58 | | $ | 0.18 | | $ | 1.40 | |
Diluted lossincome per share is calculated utilizing net lossincome attributable to common shareholders divided by the weighted average number of shares of Class A common stock outstanding during the same periodperiods plus the effect, if any, of the potentially dilutive shares of the Company’s Class A common stock from stock options, unvested Class A common stock andCommon Stock, restricted stock units and Focus LLC common units, including contingently issuable Focus LLC common units, if any, restricted common units and incentive units as calculated using the treasury stock method.
| | | | | | |
| | Period July 30, | | |
| | 2018 through | | Year Ended |
| | December 31, 2018 | | December 31, 2019 |
Diluted loss per share: | | | | | | |
Net loss attributable to common shareholders | | $ | (590) | | $ | (12,872) |
Weighted average shares of Class A common stock outstanding | | | 43,122,782 | | | 46,792,389 |
Effect of dilutive stock options | | | — | | | — |
Effect of dilutive unvested Class A common stock and restricted stock units | | | — | | | — |
Total | | | 43,122,782 | | | 46,792,389 |
Diluted loss per share | | $ | (0.01) | | $ | (0.28) |
Diluted loss The calculation of diluted income per share for the period July 30, 2018 throughyears ended December 31, 2018 excludes incremental shares of 52,555 related to time-based stock options2020, 2021 and incremental shares of 49,994 related to unvested Class A common stock, since the effect would be antidilutive. 2022 is as follows:
| | | | | | | | | | |
| | 2020 | | 2021 | | 2022 | |
Diluted income per share: | | | | | | | | | | |
Net income attributable to common shareholders | | $ | 28,045 | | $ | 10,412 | | $ | 91,784 | |
Weighted average shares of Class A common stock outstanding | | | 48,678,584 | | | 57,317,477 | | | 65,552,592 | |
Effect of dilutive stock options | | | 77,302 | | | 461,306 | | | 235,187 | |
Effect of dilutive unvested Class A common stock | | | 23,822 | | | — | | | — | |
Effect of dilutive restricted stock units | | | 16,905 | | | 52,368 | | | 22,436 | |
Total | | | 48,796,613 | | | 57,831,151 | | | 65,810,215 | |
Diluted income per share | | $ | 0.57 | | $ | 0.18 | | $ | 1.39 | |
Diluted lossincome per share for the period July 30, 2018 throughyears ended December 31, 2018 also2020, 2021 and 2022 excludes shares related to 155,000 market-based stock options and Focus LLC incentive units, as modified, that vest on the fifthsixth anniversary of the pricing of the IPO ifCompany’s initial public offering (“IPO”) with vesting based on the highest volume weighted average per share price for any ninety calendarninety-calendar day period within such five year period immediately following(“90-day VWAP”) prior to the pricinganniversary, with 0% vesting if the highest 90-day VWAP is $80.00 or less and 100% vesting if the highest 90-day VWAP is $110.00 or more, with linear interpolation in between (see Note 10). These market-based stock options and Focus LLC incentive units will also vest upon a change of control linearly based on the IPO reaches at least $100.share price used in the transaction with 100% vesting if the price used is $110.00, 0% vesting if the price used is equal to or less than $33.00, and linear interopolation in between, except as governed by the employment agreements entered into with the Company’s executive officers. Such market-based and other criteria were not met at December 31, 2018.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Diluted loss per share forduring the yearyears ended December 31, 2019 excludes incremental shares of 373 related to time-based stock options2020, 2021 and incremental shares of 20,055 related to unvested Class A common stock and restricted stock units, since the effect would be antidilutive. Diluted loss per share for the year ended December 31, 2019 also excludes shares related to 155,000 market-based stock options that vest on the fifth anniversary of the pricing of the IPO if the volume weighted average per share price for any ninety calendar day period within such five year period immediately following the pricing of the IPO reaches at least $100. Such market-based criteria were not met at December 31, 2019.2022.
Focus LLC common units and vested incentive units may be exchanged for Class A common stock, subject to certain limitations (see Note 10). SuchIn computing the dilutive effect, if any, that the exchange would have on net income per share, net income attributable to Class A common shareholders would be adjusted due to the elimination of the non-controlling interests (including any associated tax impact). For the years ended December 31, 2020, 2021 and 2022, such exchange is not reflected in diluted lossincome per share as the assumed exchange is not dilutive.
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5.FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
4. ACQUISITIONS
Business Acquisitions
The purchase price associated with business acquisitions and the allocation thereof during the years ended December 31, 2017, 20182020, 2021 and 2019,2022, is summarized as follows:
| | | | | | | | | |
| | 2017 | | 2018 | | 2019 |
Number of business acquisitions closed | | | 23 | | | 19 | | | 31 |
Consideration: | | | | | | | | | |
Cash and option premium | | $ | 362,524 | | $ | 408,478 | | $ | 507,498 |
Cash due subsequent to closing at net present value and estimated working capital adjustment | | | 188 | | | 39,134 | | | 4,341 |
Fair market value of Focus LLC common units issued | | | 64,728 | | | 51,456 | | | — |
Fair market value of Class A common stock issued | | | — | | | 112,461 | | | — |
Fair market value of estimated contingent consideration | | | 37,551 | | | 42,086 | | | 82,781 |
Total consideration | | $ | 464,991 | | $ | 653,615 | | $ | 594,620 |
Allocation of purchase price: | | | | | | | | | |
Total tangible assets | | $ | 6,095 | | $ | 14,817 | | $ | 50,761 |
Total liabilities assumed | | | (12,273) | | | (34,411) | | | (53,394) |
Customer relationships | | | 244,289 | | | 294,785 | | | 349,447 |
Management contracts | | | 27,890 | | | 30,080 | | | 17,284 |
Goodwill | | | 198,546 | | | 347,496 | | | 229,799 |
Other acquired intangibles | | | 444 | | | 848 | | | 723 |
Total allocated consideration | | $ | 464,991 | | $ | 653,615 | | $ | 594,620 |
| | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
Number of business acquisitions closed | | | 21 | | | 36 | | | 18 |
Consideration: | | | | | | | | | |
Cash due at closing | | $ | 327,722 | | $ | 983,240 | | $ | 450,943 |
Estimated working capital adjustments and other | | | (174) | | | (577) | | | 1,127 |
Cash due subsequent to closing at net present value | | | — | | | 86,778 | | | 9,611 |
Fair market value of Focus LLC common units issued | | | — | | | 23,118 | | | 28,992 |
Fair market value of Class A common stock issued | | | — | | | 3,515 | | | — |
Fair market value of estimated contingent consideration | | | 46,918 | | | 212,074 | | | 56,604 |
Total consideration | | $ | 374,466 | | $ | 1,308,148 | | $ | 547,277 |
Allocation of purchase price: | | | | | | | | | |
Total tangible assets | | $ | 21,216 | | $ | 61,854 | | $ | 29,991 |
Total liabilities assumed | | | (31,680) | | | (83,444) | | | (32,551) |
Customer relationships | | | 215,686 | | | 616,283 | | | 287,172 |
Management contracts | | | 7,774 | | | 33,350 | | | 11,414 |
Goodwill | | | 160,341 | | | 677,195 | | | 249,677 |
Other acquired intangibles | | | 1,129 | | | 2,910 | | | 1,574 |
Total allocated consideration | | $ | 374,466 | | $ | 1,308,148 | | $ | 547,277 |
Management believes approximately $508,547$461,746 of tax goodwill and intangibles related to 2019 business acquisitions completed during the year ended December 31, 2022 will be deductible for tax purposes.purposes over a 15 year period. Additional tax goodwill may be deductible when estimated contingent consideration is earned and paid.
A portion of the cash due at closing for one of the Company’s 2021 business acquisitions was placed in escrow for the satisfaction of certain indemnifications and other related items, if any.
The accompanying consolidated statement of operations for the year ended December 31, 20192022 includes revenue and income from operations for business acquisitions that are new subsidiary partner firms from the date they were acquired of $85,025$29,883 and $7,999,$3,140, respectively.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Asset Acquisitions
The Company also separately purchases customer relationships and other intangible assets. These purchases are accounted for as asset acquisitions as they do not qualify as business acquisitions pursuant to ASC Topic 805, Business Combinations. The Company completed four, two six and threesix asset acquisitions during the years ended December 31, 2017, 20182020, 2021 and 2019,2022, respectively. Total purchase consideration for asset acquisitions during the year ended December 31, 2017 was $0. Total purchase consideration, inclusive of transaction costs, for asset acquisitions during the year ended December 31, 20182020 was $4,577$26,159 in cash and installment payments.cash. Total purchase consideration inclusive of transaction costs, for the asset acquisitions during the year ended December 31, 20192021 was $850$3,041 in cash. Total purchase consideration for the asset acquisitions during the year ended December 31, 2022 was $9,718 in cash and cash due subsequent to closing of $3,000. Certain asset acquisitions include contingent consideration provisions. The Company records the contingent consideration as additional purchase consideration when the outcome of the contingency is determinable. During the years ended
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
December 31, 2017, 20182020, 2021 and 2019,2022, the Company paid $7,713, $2,007$2,451, $4,577 and $3,452,$9,071, respectively, of additional purchase price consideration related to asset acquisitions.
Intangible assets acquired in asset acquisitions for the years ended December 31, 2017, 20182020, 2021 and 20192022 were as follows:
| | | | | | | | | |
| | 2017 | | 2018 | | 2019 |
Customer relationships | | $ | — | | $ | 4,352 | | $ | 808 |
Management contracts | | | — | | | — | | | 12 |
Other acquired intangibles | | | — | | | 225 | | | 30 |
Total | | $ | — | | $ | 4,577 | | $ | 850 |
| | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
Customer relationships | | $ | 24,851 | | $ | 2,916 | | $ | 12,297 |
Other acquired intangibles | | | 1,308 | | | 125 | | | 495 |
Total | | $ | 26,159 | | $ | 3,041 | | $ | 12,792 |
The weighted-average useful life of intangibles acquired during the years ended December 31, 2017, 20182020, 2021 and 20192022 through business acquisitions and asset acquisitions are as follows:
| | | | | | |
| | | | | | |
| | 2017 | | 2018 | | 2019 |
Management contracts | | 19 | | 20 | | 18 |
Customer relationships | | 10 | | 10 | | 9 |
Other acquired intangibles | | 5 | | 5 | | 5 |
Weighted-average useful life of all intangibles acquired | | 11 | | 11 | | 9 |
| | | | | | |
| | | | | | |
| | 2020 | | 2021 | | 2022 |
Management contracts | | 18 | | 14 | | 7 |
Customer relationships | | 9 | | 9 | | 9 |
Other acquired intangibles | | 5 | | 5 | | 5 |
Weighted-average useful life of all intangibles acquired | | 9 | | 9 | | 9 |
In June 2018, the Company purchased a minority equity interest in a technology firm in the United States for approximately $20,000 in cash that is accounted for using the cost method of accounting. This cost method investment is included in prepaid expenses and other assets in the consolidated balance sheet as of December 31, 2018 and 2019.
From January 1, 2020,2023 to February 25, 2020,16, 2023, the Company completed wealth management business acquisitions for cash consideration of $46,041,$28,771 at closing, deferred cash consideration of $2,366, plus contingent consideration.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
6.5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the change in the goodwill balances for the years ended December 31, 2017, 20182020, 2021 and 2019:2022:
| | | | | | | | | |
| | 2017 | | 2018 | | 2019 |
Balance beginning of period: | | | | | | | | | |
Goodwill | | $ | 339,129 | | $ | 538,113 | | $ | 883,119 |
Cumulative impairment losses | | | (22,624) | | | (22,624) | | | (22,624) |
| | | 316,505 | | | 515,489 | | | 860,495 |
Goodwill acquired | | | 198,546 | | | 347,496 | | | 229,799 |
Other | | | 438 | | | (2,490) | | | (63) |
| | | 198,984 | | | 345,006 | | | 229,736 |
Balance end of period: | | | | | | | | | |
Goodwill | | | 538,113 | | | 883,119 | | | 1,112,855 |
Cumulative impairment losses | | | (22,624) | | | (22,624) | | | (22,624) |
| | $ | 515,489 | | $ | 860,495 | | $ | 1,090,231 |
| | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
Balance beginning of period: | | | | | | | | | |
Goodwill | | $ | 1,112,855 | | $ | 1,278,183 | | $ | 1,947,939 |
Cumulative impairment losses | | | (22,624) | | | (22,624) | | | (22,624) |
| | | 1,090,231 | | | 1,255,559 | | | 1,925,315 |
Goodwill acquired | | | 160,341 | | | 677,195 | | | 249,677 |
Other | | | 4,987 | | | (7,439) | | | (7,075) |
| | | 165,328 | | | 669,756 | | | 242,602 |
Balance end of period: | | | | | | | | | |
Goodwill | | | 1,278,183 | | | 1,947,939 | | | 2,190,541 |
Cumulative impairment losses | | | (22,624) | | | (22,624) | | | (22,624) |
| | $ | 1,255,559 | | $ | 1,925,315 | | $ | 2,167,917 |
There were no goodwill impairment losses during the years ended December 31, 2017, 20182020, 2021 and 2019.2022.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
The following table summarizes the amortizing acquired intangible assets at December 31, 2021:
| | | | | | | | | |
| | Gross Carry | | Accumulated | | Net Book |
| | Amount | | Amortization | | Value |
Customer relationships | | $ | 2,228,461 | | $ | (787,016) | | $ | 1,441,445 |
Management contracts | | | 191,578 | | | (57,153) | | | 134,425 |
Other acquired intangibles | | | 10,911 | | | (5,062) | | | 5,849 |
Total | | $ | 2,430,950 | | $ | (849,231) | | $ | 1,581,719 |
The following table summarizes the amortizing acquired intangible assets at December 31, 2018:2022:
| | | | | | | | | | |
| | Gross Carry | | Accumulated | | Net Book | |
| | Amount | | Amortization | | Value | |
| | | | | | | | | | |
| | | Gross Carry | | Accumulated | | Net Book |
| | | Amount | | Amortization | | Value |
Customer relationships | | $ | 1,008,186 | | $ | (349,125) | | $ | 659,061 | | $ | 2,530,062 | | $ | (1,029,197) | | $ | 1,500,865 |
Management contracts | | | 133,112 | | | (31,911) | | | 101,201 | | | 202,479 | | | (70,624) | | | 131,855 |
Other acquired intangibles | | | 4,402 | | | (2,469) | | | 1,933 | | | 13,416 | | | (7,012) | | | 6,404 |
Total | | $ | 1,145,700 | | $ | (383,505) | | $ | 762,195 | | $ | 2,745,957 | | $ | (1,106,833) | | $ | 1,639,124 |
The following table summarizes the amortizing acquired intangible assets at December 31, 2019:
| | | | | | | | | |
| | Gross Carry | | Accumulated | | Net Book |
| | Amount | | Amortization | | Value |
Customer relationships | | $ | 1,362,104 | | $ | (471,361) | | $ | 890,743 |
Management contracts | | | 150,464 | | | (39,888) | | | 110,576 |
Other acquired intangibles | | | 5,157 | | | (3,020) | | | 2,137 |
Total | | $ | 1,517,725 | | $ | (514,269) | | $ | 1,003,456 |
Management contracts and other acquired intangibles are amortized on a straight-line basis over their estimated useful lives ranging from 2 to 20 years. Customer relationships are amortized on a straight-line basis over their estimated useful lives of 4 to 10 years.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Estimated amortization expense for each of the next five years is as follows:
| | | |
Years Ending December 31, | | Amount |
2020 | | $ | 139,474 |
2021 | | | 136,573 |
2022 | | | 131,532 |
2023 | | | 123,734 |
2024 | | | 111,253 |
| | | |
Years Ending December 31, | | Amount |
2023 | | $ | 270,828 |
2024 | | | 254,749 |
2025 | | | 241,575 |
2026 | | | 217,115 |
2027 | | | 181,401 |
7.6. FIXED ASSETS
Fixed assets consist of the following at December 31, 20182021 and 2019:
| | | | | | |
| | 2018 | | 2019 |
Computers, software development and equipment | | $ | 31,172 | | $ | 34,462 |
Leasehold improvements | | | 20,710 | | | 36,699 |
Furniture and fixtures | | | 12,405 | | | 16,805 |
Subtotal | | | 64,287 | | | 87,966 |
Less accumulated depreciation and amortization | | | (39,507) | | | (46,332) |
Total | | $ | 24,780 | | $ | 41,634 |
2022:
| | | | | | |
| | 2021 | | 2022 |
Leasehold improvements | | $ | 46,252 | | $ | 51,926 |
Computers, software development and equipment | | | 39,074 | | | 44,612 |
Furniture and fixtures | | | 20,834 | | | 24,689 |
Subtotal | | | 106,160 | | | 121,227 |
Less accumulated depreciation and amortization | | | (58,961) | | | (66,479) |
Total | | $ | 47,199 | | $ | 54,748 |
8.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
7. FAIR VALUE MEASUREMENTS
ASC Topic 820, Fair Value Measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1—Unadjusted price quotations in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Significant unobservable inputs that are not corroborated by market data.
First Lien Term Loan B
The implied fair value of the Company’s First Lien Term Loan B (as defined below) based on Level 2 inputs is as follows as of December 31, 20182021 and 2019:
| | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2019 |
| | Stated | | Fair | | Stated | | Fair |
| | Value | | Value | | Value | | Value |
First Lien Term Loan | | $ | 798,985 | | $ | 773,018 | | $ | 1,139,188 | | $ | 1,146,307 |
2022:
| | | | | | | | | | | | |
| | 2021 | | 2022 |
| | Stated | | Fair | | Stated | | Fair |
| | Value | | Value | | Value | | Value |
First Lien Term Loan B - Tranche A | | $ | 1,610,928 | | $ | 1,598,846 | | $ | 1,755,600 | | $ | 1,735,850 |
First Lien Term Loan B - Tranche B | | | 796,374 | | | 792,392 | | | 788,370 | | | 772,603 |
TableAt December 31, 2021 and 2022, the fair value of Contentsthe Company’s $850,000 notional amount interest rate swap agreements was $5,810 and $44,219, respectively, which are included in prepaid expenses and other assets in the accompanying consolidated balance sheets. The fair value was based on Level 2 inputs which included the relevant interest rate forward curves.
FOCUS FINANCIAL PARTNERS INC.Business acquisitions
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
For business acquisitions, the Company recognizes the fair value of goodwill and other acquired intangible assets, and estimated contingent consideration at the acquisition date as part of purchase price. This fair value measurement is based on unobservable (Level(Level 3) inputs.
At December 31, 2021 and 2022, deferred cash consideration in connection with business acquisitions of $114,156 and $122,079, respectively, are included in contingent consideration and other liabilities in the consolidated balance sheets at present value. At December 31, 2022, amounts due are as follows: $19,357 in 2023, $21,947 in 2024, $8,157 in 2025, $0 in 2026, $4,748 in 2027, $0 in 2028 and $67,870 in 2029.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
The following table represents changes in the fair value of estimated contingent consideration for business acquisitions for the years ended December 31, 20182021 and 2019:2022:
| | | | | | |
| | 2018 | | 2019 |
Balance at January 1, | | $ | 76,677 | | $ | 98,905 |
Additions to estimated contingent consideration | | | 42,086 | | | 82,781 |
Payments of contingent consideration | | | (26,237) | | | (36,862) |
Non-cash changes in fair value of estimated contingent consideration | | | 6,638 | | | 38,797 |
Other | | | (259) | | | (53) |
Balance at December 31, | | $ | 98,905 | | $ | 183,568 |
| | | | | | |
| | 2021 | | 2022 |
Balance at January 1, | | $ | 169,670 | | $ | 350,027 |
Additions to estimated contingent consideration | | | 212,074 | | | 56,604 |
Assumed estimated contingent consideration obligation | | | — | | | 12,637 |
Payments of contingent consideration | | | (143,107) | | | (148,638) |
Non-cash changes in fair value of estimated contingent consideration | | | 112,416 | | | (64,747) |
Other | | | (1,026) | | | (1,575) |
Balance at December 31, | | $ | 350,027 | | $ | 204,308 |
Estimated contingent consideration is included in contingent consideration and other liabilities in the accompanying consolidated balance sheets.
During the year ended December 31, 2018,2021, the Company paid $23,816$131,827 in cash and issued $2,421 of restricted$11,280 in Focus LLC common units as contingent consideration associated with business acquisitions. During the the year ended December 31, 2019,2022, the Company paid $36,862$138,940 in cash and issued $9,698 in Focus LLC common units as contingent consideration associated with business acquisitions
During the years ended December 31, 2021 and 2022, the Company paid cash of $4,577 and $9,071, respectively, as contingent consideration associated with asset acquisitions. These amounts are included in cash paid for acquisitions and contingent consideration—net of cash acquired in investing activities in the consolidated statement of cash flows.
In determining fair value of the estimated contingent consideration, the acquired business’s future performance is estimated using financial projections for the acquired businesses.business. These financial projections, as well as alternative scenarios of financial performance, are measured against the performance targets specified in each respective acquisition agreement. In addition, discount rates are established based on the cost of debt and the cost of equity. The Company uses the Monte Carlo Simulation Model to determine the fair value of the Company’s estimated contingent consideration.
The significant unobservable inputs used in the fair value measurement of the Company’s estimated contingent consideration isare the forecasted growth rates over the measurement period and discount rates. Significant increases or decreases in the Company’s forecasted growth rates over the measurement period or discount rates would result in a higher or lower fair value measurement.
Inputs used in the fair value measurement of estimated contingent consideration at December 31, 20182021 and 20192022 are summarized below:
| | | | | | | | |
| | Quantitative Information About Level 3 | |
| | Fair Value Measurements | |
Fair Value at | | Valuation | | Unobservable | | | |
December 31, 2018 | | Techniques | | Inputs | | Ranges | |
$ | 98,905 | | Monte Carlo Simulation Model | | Forecasted growth rates | | (16.2)% - 18.7 | % |
| | | | | Discount rates | | 12% - 18 | % |
| | | | | | | | | |
| | Quantitative Information About Level 3 | | |
| | Fair Value Measurements | | |
| | | | | | | | | |
| | | | Quantitative Information About Level 3 | |
| | | | Fair Value Measurements | |
Fair Value at | Fair Value at | | Valuation | | Unobservable | | | | Fair Value at | | Valuation | | Unobservable | | | |
December 31, 2019 | | Techniques | | Inputs | | Ranges | | |
December 31, 2021 | | December 31, 2021 | | Techniques | | Inputs | | Ranges | |
$ | 183,568 | | Monte Carlo Simulation Model | | Forecasted growth rates | | (10.7)% - 51.1 | % | 350,027 | | Monte Carlo Simulation Model | | Forecasted growth rates | | 0.7% - 20.1 | % |
| | | | | Discount rates | | 11% - 17 | % | |
| | | | | | Discount rates | | 9.0% - 15.0 | % |
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 20192020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
| | | | | | | | |
| | Quantitative Information About Level 3 | |
| | Fair Value Measurements | |
Fair Value at | | Valuation | | Unobservable | | | |
December 31, 2022 | | Techniques | | Inputs | | Ranges | |
$ | 204,308 | | Monte Carlo Simulation Model | | Forecasted growth rates | | (7.8)% - 32.4 | % |
| | | | | Discount rates | | 13.0% - 19.0 | % |
9.8.CREDIT FACILITY
In July 2019, Focus LLC expanded its first lien term loan (the “First Lien Term Loan”) by $350,000 and incurred $3,743 in debt financing costs. The debt was issued at a discount of 0.25% or $875 which is being amortized to interest expense over the remaining term of the First Lien Term Loan.
As of December 31, 2019,2022, Focus LLC’s credit facility (the “Credit Facility”) consisted of a $1,153,000 $2,543,970 first lien term loan B (the “First Lien Term Loan B”), consisting of a $1,755,600 tranche A (“First Lien Term Loan B - Tranche A”) and $788,370 tranche B (“First Lien Term Loan B - Tranche B”), a $240,000 delayed draw first lien term loan A (the “First Lien Term Loan A”), and a $650,000first lien revolving credit facility (the “First Lien Revolver”).
In April 2022, Focus LLC amended the First Lien Revolver to extend the maturity date to June 2024 and change the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”).
In November 2022, Focus LLC amended the Credit Facility to, among other things, (i) repay the then existing $1,598,408 First Lien Term Loan B - Tranche A and issue $1,760,000 stated value First Lien Term Loan B - Tranche A with a maturity date of June 2028, (ii) change the First Lien Term Loan B - Tranche B benchmark interest rate from LIBOR to SOFR, (iii) issue $240,000 delayed draw First Lien Term Loan A with a maturity date of November 2027 and (iv) change the maturity date of the First Lien Revolver to November 2027.
The First Lien Term Loan has a maturity date of July 2024 and requires quarterly installment repayments of $2,891, as amended in July 2019. As of December 31, 2019, the First Lien Term Loan boreB - Tranche A bears interest (at Focus LLC’s option) at: (i) the London InterBank Offered Rate (“LIBOR”)SOFR plus a margin of 2.50%3.25% with a 0.50% SOFR floor or (ii) the lender’s Base Rate (as defined in the Credit Facility) plus a margin of 1.50%2.25%. In January 2020, Focus LLC amended its The First Lien Term Loan B - Tranche A requires quarterly installment repayments of $4,400 and has a maturity date of June 2028. The refinanced debt was issued at a discount of 1.75% or $30,800 which is being amortized to reduce its interest rateexpense over the term of the First Lien Term Loan B - Tranche A. The First Lien Term Loan B - Tranche A also requires a prepayment penalty of 1%, of the then outstanding principal amount of the First Lien Term Loan B - Tranche A if repaid prior to LIBORMay 2023.
The First Lien Term Loan B - Tranche B bears interest (at Focus LLC’s option) at: (i) SOFR plus a margin of 2.50% with a 0.50% SOFR floor or (ii) the lender’s Base Rate plus a margin of 1.50%. The First Lien Term Loan B - Tranche B requires quarterly installment repayments of $2,001 and has a maturity date of June 2028.
The First Lien Term Loan A bears interest (at Focus LLC’s option) at: (i) SOFR plus a margin of 2.50% with a 0.50% SOFR floor or (ii) the lender’s Base Rate plus a margin of 1.50%. The First Lien Term Loan A has a nine month delayed draw feature, which expires in August 2023. The delayed draw feature has a ticking fee with respect to the undrawn commitments with (i) no fee from 0-60 days from the closing date, (ii) 50% of the interest rate margin for the First Lien Term Loan A from 61-120 days of the closing date and (iii) 100% of the interest rate margin for the First Lien Term Loan A after 121 days of the closing date. The First Lien Term Loan A, when drawn, will be issued at a discount of 1.50% which will be amortized to interest expense over the remaining term from the date that it is drawn. When drawn, the First Lien Term Loan A will require quarterly installment repayments equal to 0.25% in 2023, 0.50% in 2024 and 2025, 1.25% in 2026 and 1.875% in 2027. In December 2022, $20,000 was borrowed under the First Lien Term Loan A at a discount of $300 with quarterly installment repayments of $50. The First Lien Term Loan A has a maturity date of November 2027.
As amended, the First Lien Revolver bears interest (at Focus LLC’s option) at SOFR plus a margin of 2.25% with step downs to 2.00% and 1.75% or the lender’s Base Rate plus a margin of 1.00%.
The First Lien Revolver has a maturity date of July 2023. Up to $30,000 of the First Lien Revolver is available for the issuance of letters of credit, subject to certain limitations. The First Lien Revolver bears interest at LIBOR plus a margin of 2.00%1.25% with step downs to 1.75%, 1.50%1.00% and 1.25% or the lender’s Base Rate plus a margin
0.75%, based on achievement of a specified First Lien Leverage Ratio. The First Lien Revolver unused commitment fee is 0.50% with step downs to 0.375% and 0.25% based on achievement of a specified First Lien Leverage Ratio. Up to $30,000 of the First Lien Revolver is available for the issuance of letters of credit, subject to certain limitations. The First Lien Revolver has a maturity date of November 2027.
Focus LLC’s obligations under the Credit Facility are collateralized by the majority of Focus LLC’s assets. The Credit Facility contains various customary covenants, including, but not limited to: (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring certain property and (v) declaring dividends or making other restricted payments.
Focus LLC is required to maintain a First Lien Leverage Ratio (as defined in the Credit Facility) of not more than 6.25:1.00 as of the last day of each fiscal quarter. At December 31, 2019,2022, Focus LLC's First Lien Leverage Ratio was 4.00:4.19:1.00, which satisfied the maximum ratio of 6.25:1.00. First Lien Leverage Ratio means the ratio of amounts outstanding under the First Lien Term Loan and First Lien RevolverCredit Facility plus other outstanding debt obligations secured by a lien on the assets of Focus LLC (excluding letters of credit other than unpaid drawings thereunder) minus unrestricted cash and cash equivalents to Consolidated EBITDA (as defined in the Credit Facility). Consolidated EBITDA for purposes of the Credit Facility was $303,319$578,396 at December 31, 2019.2022. Focus LLC is also subject on an annual basis to contingent principal payments based on an excess cash flow calculation (as defined in the Credit Facility) for any fiscal year if the First Lien Leverage Ratio exceeds 3.75:1.00. No contingent principal payments were required to be made in 2019.during the years ended December 31, 2021 and 2022. Based on the excess cash flow calculation for the year ended December 31, 2019,2022, no contingent principal payments are required to be made during the year ending December 31, 2023.
In connection with the April 2022 and November 2022 amendments, Focus LLC paid $1,111 and $17,961, respectively, in 2020.debt financing costs and recognized a loss on extinguishment of borrowings of $1,807 in connection with the November 2022 amendment.
The Company defers and amortizes its debt financing costs and original issue discounts over the respective terms of the First Lien Term Loan and First Lien Revolver.borrowings. The debt financing costs related to the First Lien Term Loan B and First Lien Term Loan A are recorded as a reduction of the carrying amountamounts of the First Lien Term Loanrespective borrowings in the consolidated balance sheets. The debt financing costs related to the First Lien Revolver are recorded in debt financing costs-net in the consolidated balance sheets.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
The following is a reconciliation of principal amounts outstanding under the Credit Facility to borrowings under the Credit Facility recorded in the consolidated balance sheets at December 31, 20182021 and 2019:2022:
| | | | | | |
| | 2018 | | 2019 |
First Lien Term Loan | | $ | 798,985 | | $ | 1,139,188 |
First Lien Revolver | | | 40,000 | | | 140,000 |
Unamortized debt financing costs | | | (2,403) | | | (5,389) |
Unamortized discount | | | — | | | (800) |
Total | | $ | 836,582 | | $ | 1,272,999 |
| | | | | | |
| | 2021 | | 2022 |
First Lien Term Loan B - Tranche A | | $ | 1,610,928 | | $ | 1,755,600 |
First Lien Term Loan B - Tranche B | | | 796,374 | | | 788,370 |
First Lien Term Loan A | | | — | | | 20,000 |
First Lien Revolver | | | — | | | — |
Unamortized debt financing costs | | | (7,523) | | | (17,750) |
Unamortized discount | | | (6,110) | | | (35,471) |
Total | | $ | 2,393,669 | | $ | 2,510,749 |
At December 31, 20182021 and 2019,2022, unamortized debt financing costs associated with the First Lien Revolver of $12,340$4,254 and $9,645,$7,590, respectively, were recorded in debt financing costs-net in the consolidated balance sheets.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
In connection with January 2021 and July 2021 amendments to its First Lien Term Loan B Focus LLC paid $8,282 in debt financing costs.
For the years ended December 31, 2021 and 2022, weighted-average interest rates for borrowings were approximately 6% for the year ended December 31, 20183% and 5% for the year ended December 31, 2019.4%, respectively.
As of December 31, 20182021 and 2019,2022, the First Lien Revolver available unused commitment line was $605,793$642,085 and $502,962$639,997 respectively.
As of December 31, 20182021 and 2019,2022, Focus LLC was contingently obligated for letters of credit in the amount of $4,207$7,915 and $7,038,$10,003, respectively, each bearing interest at an annual rate of approximately 1% and 2%, respectively..
9. DERIVATIVES
In connection with a January 2018the November 2022 amendment to the First Lien Term Loan to reduceCredit Facility, the Company terminated its three then existing interest rate swaps, with notional amounts of $400,000, $250,000 and $200,000, which provided the repaymentCompany pay interest to the counterparty each month at a rate of 0.713%, 0.537% and 0.5315%, respectively, and receive interest from each of the $207,000 Second Lien Term Loan in July 2018,counterparties each month at the 1 month LIBOR rate, subject to a 0.0% floor (the “LIBOR Swaps”), and entered into the SOFR Swaps (as defined below) with the same notional amounts.
At December 31, 2022, the Company recognized an aggregate losshas three floating to fixed interest rate swap agreements with notional amounts of $400,000, $250,000 and $200,000, the terms of which provide that the Company pay interest to the counterparty each month at a rate of 0.619%, 0.447% and 0.440%, respectively, and receive interest from each of the counterparties each month at the 1 month USD Term SOFR rate, subject to a 0.50% floor (the "SOFR Swaps").
The interest rate swaps effectively fix the variable interest rate applicable to the first $850,000 of the Company’s variable interest rate borrowings outstanding. The Company designated these swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on extinguishmentthis portion of borrowings of $21,071 during the year endedits borrowings.
At December 31, 2018.2021, the fair value of the LIBOR Swaps was $5,810, and at December 31, 2022, the fair value of the SOFR Swaps was $44,219. These amounts are included in prepaid expenses and other assets in the accompanying consolidated balance sheets. The interest rate swaps continue to be effective hedges, and as such, the offsetting adjustment to the fair value is recorded in accumulated other comprehensive income (loss), net of tax of $1,194 and $9,458 at December 31, 2021 and 2022, respectively.
10. EQUITY
The following is a summary of the capital stock of the Company:
Class A Common Stock
Voting Rights
Holders of shares of the Company'sCompany’s Class A common stock are entitled to one vote per share held of record on all matters to be voted upon by the shareholders. The holders of Class A common stock do not have cumulative voting rights in the election of directors.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
Dividend Rights
Holders of shares of the Company’s Class A common stock are entitled to ratably receive dividends when and if declared by the Company’s Board of Directors (the “Board”) out of funds legally available for that purpose, subject to any statutory or contractual restrictions on the payment of dividends and to any prior rights and preferences that may be applicable to any outstanding preferred stock.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Liquidation Rights
Upon the Company’s liquidation, dissolution, distribution of assets or other winding up, the holders of Class A common stock are entitled to receive ratably the assets available for distribution to the shareholders after payment of liabilities and the liquidation preference of any of the Company'sCompany’s outstanding shares of preferred stock.
Other Matters
The shares of the Company'sCompany’s Class A common stock have no preemptive or conversion rights and are not subject to further calls or assessment by the Company. There are no redemption or sinking fund provisions applicable to the Class A common stock. All outstanding shares of the Company’s Class A common stock are fully paid and non‑assessable.non-assessable.
Class B Common Stock
Voting Rights
Holders of shares of the Company’s Class B common stock are entitled to one vote per share held of record on all matters to be voted upon by the shareholders. Holders of shares of the Company’s Class A common stock and Class B common stock vote together as a single class on all matters presented to the Company’s shareholders for their vote or approval, except the amendment of certain provisions of the Company’s certificate of incorporation that would alter or change the powers, preferences or special rights of the Class B common stock so as to affect them adversely must be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a single class, or as otherwise required by applicable law.
Dividend and Liquidation Rights
Holders of the Company’s Class B common stock do not have any right to receive dividends, unless the dividend consists of shares of the Company’s Class B common stock or of rights, options, warrants or other securities convertible or exercisable into or exchangeable for shares of Class B common stock paid proportionally with respect to each outstanding share of our Class B common stock and a dividend consisting of shares of Class A common stock or of rights, options, warrants or other securities convertible or exercisable into or exchangeable for shares of Class A common stock on equivalent terms is simultaneously paid to the holders of Class A common stock. Holders of the Company’s Class B common stock do not have any right to receive a distribution upon a liquidation, dissolution or winding up of the Company.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Preferred Stock
The Company’s certificate of incorporation authorizes the Board, subject to any limitations prescribed by law, without further shareholder approval, to establish and to issue from time to time one or more classes or series of preferred stock, par value $0.01 per share, covering up to an aggregate of 500,000,000 shares of preferred stock. Each class or series of preferred stock will cover the number of shares and will have the powers, preferences, rights,
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
qualifications, limitations and restrictions determined by the Board, which may include, among others, dividend rights, liquidation preferences, voting rights, conversion rights, preemptive rights and redemption rights. Except as provided by law or in a preferred stock designation, the holders of preferred stock will not be entitled to vote at or receive notice of any meeting of shareholders.
Other
In February 2022, Focus LLC issued 187,795 common units and Focus Inc. issued a corresponding number of shares of Class B common stock in connection with a contingent consideration payment.
In April 2022, Focus LLC issued 512,290 common units and Focus Inc. issued a corresponding number of shares of Class B common stock in connection with an acquisition.
In November 2022, Focus LLC issued 139,099 common units and Focus Inc. issued a corresponding number of shares of Class B common stock in connection with an acquisition.
2018 Omnibus Incentive Plan
On July 30, 2018, the Board adopted the Focus Financial Partners Inc. 2018 Omnibus Incentive Plan (the “Omnibus Plan”) for the employees, consultants and the directors of the Company and its affiliates who perform services for it. The Omnibus Plan provides for potential grants of the following awards with respect to shares of the Company’s Class A common stock, to the extent applicable: (i) incentive stock options qualified as such under U.S. federal income tax laws; (ii) non-qualified stock options or any other form of stock options; (iii) restricted stock awards; (iv) phantom stock awards; (v) restricted stock units; (vi) bonus stock; (vii) performance awards; (viii) annual cash incentive awards; (ix) any of the foregoing award types (other than incentive stock options) as awards related to Focus LLC’s units; and (x) incentive units in Focus LLC.
The maximum aggregate number of shares of the Company'sCompany’s Class A common stock that may be issued pursuant to awards under the Omnibus Plan shall not exceed 6,000,000 shares (including such number of Focus LLC'sLLC’s units or other securities which can be exchanged or converted into shares of Class A common stock). The reserve pool is subject to adjustment due to recapitalization or reorganization, or related to forfeitures or the expiration of awards, as provided under the Omnibus Plan. If the shares or units subject to any award are not issued or transferred, or cease to be issuable or transferable for any reason, including (but not exclusively) because shares or units are withheld or surrendered in payment of taxes or any exercise or purchase price relating to an award or because an award is forfeited, terminated, expires unexercised, is settled in cash or is otherwise terminated without a delivery of shares or units, those shares or units will again be available for issue, transfer or exercise pursuant to awards under the Omnibus Plan to the extent allowable by law. The Omnibus Plan also contains a provision that will add an additional number of shares of Class A common stock equal to the lesser of (a) 3,000,000 shares, (b) 5% of the outstanding (vested and unvested) shares of Class A common stock and Focus LLC units on the last day of the previous year, and (c) an amount determined by the Board, each year between 2019 and 2028.
In connection with the IPO and Reorganization Transactions described in Note 3, the Company granted: (i) fully vested non-compensatory stock options to purchase an aggregate of 386,832 shares of Class A common stock, (ii) compensatory stock options to purchase an aggregate of 348,577 shares of Class A common stock which vest in three equal installments on December 31, 2018, 2019 and 2020, (iii) 178,608 shares of unvested Class A common stock valued at $33.00 per share which vest in three equal installments on December 31, 2018, 2019 and 2020 and (iv) market-based stock options to purchase an aggregate of 155,000 shares of Class A common stock that vest on the fifth anniversary of the pricing of the IPO if the volume weighted average per share price for any ninety calendar day period within such five year period immediately following the pricing of the IPO reaches at least $100.
Stock options granted subsequent to the IPO during the year ended December 31, 2018 and 2019 generally vest ratably over a four-year period.
Restricted stock units granted during the year ended December 31, 2019 vest ratably over a four-year period.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 20192020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
Stock Options
The following table provides information relating to the status of, and changes in, the Company'sCompany’s stock options granted during years ended December 31, 20182020, 2021 and 2019:2022:
| | | | | |
| | Stock | | Weighted Average |
| | Options | | Exercise Price |
Outstanding—January 1, 2020 | | 1,832,966 | | $ | 30.42 |
Granted | | 286,081 | | | 44.71 |
Exercised | | (251,913) | | | 30.97 |
Forfeited | | (21,817) | | | 29.27 |
Outstanding—December 31, 2020 | | 1,845,317 | | | 32.57 |
Vested—December 31, 2020 | | 785,257 | | | 31.36 |
Granted | | 357,141 | | | 58.50 |
Exercised | | (235,684) | | | 31.65 |
Forfeited | | (34,906) | | | 32.65 |
Outstanding—December 31, 2021 | | 1,931,868 | | | 37.47 |
Vested—December 31, 2021 | | 852,579 | | | 31.56 |
Granted | | 686,130 | | | 44.82 |
Exercised | | (42,076) | | | 27.54 |
Forfeited | | (114,605) | | | 47.27 |
Outstanding—December 31, 2022 | | 2,461,317 | | | 39.24 |
Vested—December 31, 2022 | | 1,172,105 | | | 33.53 |
| | | | | |
| | Stock | | Weighted Average |
| | Options | | Exercise Price |
Outstanding—January 1, 2018 | | — | | $ | — |
Granted | | 1,401,276 | | | 31.34 |
Exercised | | — | | | — |
Forfeited | | — | | | — |
Outstanding—December 31, 2018 | | 1,401,276 | | | 31.34 |
Vested—December 31, 2018 | | 503,014 | | | 33.00 |
Granted | | 558,021 | | | 28.19 |
Exercised | | (25,575) | | | 32.75 |
Forfeited | | (100,756) | | | 30.31 |
Outstanding—December 31, 2019 | | 1,832,966 | | | 30.42 |
Vested—December 31, 2019 | | 698,805 | | | 32.01 |
F-29
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
For the purpose of calculating equity-based compensation expense for time-based stock option awards, the grant date fair value was determined using the Black-Scholes model with the following weighted average assumptions for the years ended December 31, 20182020, 2021 and 2019:2022:
| | | | | | | | | |
| | 2018 | | | 2019 | | |
| | | | | | | | | | | | |
| | 2020 | | | 2021 | | | 2022 | |
Expected term | | | 7.3 | years | | | 6.2 | years | | 6.3 | years | | | 6.3 | years | | | 6.3 | years |
Expected stock price volatility | | | 32 | % | | | 29 | % | | 34 | % | | | 34 | % | | | 34 | % |
Risk-free interest rate | | | 2.81 | % | | | 1.76 | % | | 0.54 | % | | | 1.29 | % | | | 2.78 | % |
Expected dividend yield | | | — | % | | | — | % | | — | % | | | — | % | | | — | % |
Weighted average grant date fair value | | $ | 12.56 | | | $ | 9.03 | | $ | 15.37 | | | $ | 20.89 | | | $ | 17.27 | |
For the purpose of calculating equity-based compensation expense for market condition-based awards granted during the year ended December 31, 2018,Time-based stock options generally vest ratably over a four-year period commencing on the grant date fair value was determined throughdate.
In connection with the applicationIPO, the Company granted market-based stock options to purchase an aggregate of 155,000 shares of Class A common stock that would have vested on the fifth anniversary of the Monte Carlo Simulation ModelIPO if the 90-day VWAP within such five year period immediately following the IPO reaches at least $100. In March 2022, these stock options were modified whereby the stock options will vest in July 2024, the sixth anniversary of the pricing of the Company’s IPO, with vesting based on the highest 90-day VWAP prior to the anniversary, with 0% vesting if the highest 90-day VWAP is $80.00 or less and 100% vesting if the highest 90-day VWAP is $110.00 or more, with linear interpolation in between. The vested stock options can only be exercised in accordance with the following weighted average assumptions:
| | | | |
Expected term | | | 5.0 | years |
Expected unit price volatility | | | 30 | % |
Risk-free interest rate | | | 2.78 | % |
Expected dividend yield | | | — | % |
Weighted average grant date fair value | | $ | 3.97 | |
schedule: (i) a total of 25% of the vested stock options may be exercised on and following the date of vesting, (ii) an additional 25% (for a total of 50%) of the vested stock options may be exercised on and following the first anniversary of the date of vesting in July 2025, and (iii) an additional 50% (for a total of 100%) of the vested stock options may be exercised on and following the second anniversary of the date of vesting in July 2026. These market-based stock options will also vest upon a change of control linearly based on the share price used in the transaction with 100% vesting if the price used is $110.00, 0% vesting if the price used is equal to or less than $33.00, and linear interopolation in between. In connection with the modification, the Company will recognize incremental non-cash equity compensation expense of $518, less any forfeitures, from the modification date through July 2026.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Restricted stock units
The following table provides information relating to the status of, and changes in, the Company's unvested Class A common stock during the years ended December 31, 2018 and 2019:
| | | | | |
| | | | Weighted |
| | | | Average |
| | Unvested Class A | | Grant Date |
| | Common Stock | | Fair Value |
| | | | | |
Outstanding—January 1, 2018 | | — | | $ | — |
Granted | | 178,608 | | | 33.00 |
Forfeited | | — | | | — |
Vested | | (59,530) | | | 33.00 |
Outstanding—December 31, 2018 | | 119,078 | | | 33.00 |
Granted | | — | | | — |
Forfeited | | (12,500) | | | 33.00 |
Vested | | (53,285) | | | 33.00 |
Outstanding—December 31, 2019 | | 53,293 | | | 33.00 |
The following table provides information relating to the status of, and changes in, the Company'sCompany’s restricted stock units granted during the year ended December 31, 2019:2020, 2021 and 2022:
| | | | | | |
| | | | Weighted | |
| | | | Average | |
| | | | Grant Date | |
| | Restricted Stock Units | | Fair Value | |
| | | | | | |
Outstanding—January 1, 2019 | | — | | $ | — | |
| | | | | | |
| | | | | Weighted |
| | | Restricted | | Average |
| | | Stock | | Grant Date |
| | | Units | | Fair Value |
Outstanding—January 1, 2020 | | | 98,061 | | $ | 27.90 |
Granted | | 98,061 | | | 27.90 | | 73,310 | | | 44.71 |
Forfeited | | — | | | — | | (7,707) | | | 27.90 |
Vested | | — | | | — | | (22,569) | | | 27.90 |
Outstanding—December 31, 2019 | | 98,061 | | | 27.90 | |
Outstanding—December 31, 2020 | | | 141,095 | | | 36.63 |
Granted | | | 92,420 | | | 58.46 |
Forfeited | | | (6,954) | | | 34.46 |
Vested | | | (38,805) | | | 35.53 |
Outstanding—December 31, 2021 | | | 187,756 | | | 47.69 |
Granted | | | 138,708 | | | 37.59 |
Forfeited | | | (17,245) | | | 46.49 |
Vested | | | (56,500) | | | 44.16 |
Outstanding—December 31, 2022 | | | 252,719 | | | 43.02 |
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The Company recognized $7,725 of non-cash equity compensation expense in relation toFOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
Restricted stock options and unvested Class A common stock duringunits generally vest ratably over a four-year period commencing on the year ended December 31, 2018 inclusive of a one-time non-cash equity compensation expense of $4,504 in connection with the IPO and Reorganization Transactions.grant date.
The Company recognized $4,247$5,485, $6,036 and $8,727 of non-cash equity compensation expense in relation to stock options, unvested Class A common stock and restricted stock units during the yearyears ended December 31, 2019.2020, 2021 and 2022, respectively.
Total unrecognized expense, adjusted for estimated forfeitures, related to unvested stock options at December 31, 20192022 was $8,911$17,078 and is expected to be recognized over a weighted-average period of 3.23.1 years.
Total unrecognized expense, adjusted for estimated forfeitures, related to unvested Class A common stock at December 31, 2019 was $1,621, and is expected to be recognized over a period of 1.0 year.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Total unrecognized expense, adjusted for estimated forfeitures, related to restricted stock units at December 31, 20192022 was $2,569,$10,252, and is expected to be recognized over a period of 4.03.2 years.
Focus LLC Common Units
As of December 31, 2019,2022, Focus LLC had 22,075,74911,827,321 common units that had a corresponding share of the Company'sCompany’s Class B common stock outstanding.
Each common unit holder, restricted common unit holder and incentive unitholder of Focus LLC (other than the Company), subject to certain limitations, has the right to cause Focus LLC to redeem all or a portion of their vested common units and vested incentive units (“Exchange Right”). Upon an exercise of an Exchange Right with respect to vested incentive units, such incentive units will first be converted into a number of common units that takes into account the then‑currentthen-current value of the common units and such incentive units’ aggregate hurdle amount. Upon an exercise of an Exchange Right with respect to vested common units, and immediately after the conversion of vested incentive units into common units, Focus LLC will acquire each tendered common unit for, at its election, (i) one share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions, or (ii) an equivalent amount of cash. In addition, in connection with any redemption of vested common units (other than common units received upon a conversion of incentive units as described in this paragraph), the corresponding shares of Class B common stock will be cancelled. Alternatively, upon the exercise of any Exchange Right, the Company (instead of Focus LLC) will have the right to acquire each tendered common unit (and corresponding share of Class B common stock, as applicable) from the exchanging unitholder for, at its election, (i) one share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions, or (ii) an equivalent amount of cash. The Exchange Rights are subject to certain limitations and restrictions intended to ensure that Focus LLC will continue to be treated as a partnership for U.S. federal income tax purposes.
In March 2019,2022, the Company issued an aggregate of 403,71226,956 shares of Class A common stock and retired 254,44125,000 shares of Class B common stock and 217,7304,250 incentive units in Focus LLC and acquired 403,71226,956 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.
In June 2019,May 2022, the Company issued an aggregate of 423,98580,000 shares of Class A common stock and retired 260,38580,000 shares of Class B common stock and 248,142 incentive units in Focus LLC and acquired 423,985 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC
In September 2019, the Company issued an aggregate of 150,681 shares of Class A common stock and retired 109,781 shares of Class B common stock and 81,673 incentive units in Focus LLC and acquired 150,68180,000 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.
In December 2019,August 2022, the Company issued an aggregate of 163,959396,731 shares of Class A common stock and retired 122,916381,573 shares of Class B common stock and 70,57236,357 incentive units in Focus LLC and acquired 163,959396,731 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
In November 2022, the yearCompany issued an aggregate of 28,291 shares of Class A common stock and retired 1,685 shares of Class B common stock and 71,176 incentive units in Focus LLC and acquired 28,291 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.
Focus LLC Restricted Common Units
The following table provides information relating to the changes in Focus LLC restricted common units during the years ended December 31, 2017 Focus LLC recorded $263 of non-cash equity compensation expense for certain2020, 2021 and 2022:
| | | | | |
| | | | Weighted |
| | Restricted | | Average |
| | Common | | Grant Date |
| | Units | | Fair Value |
Outstanding—January 1, 2020 | | — | | $ | — |
Granted | | 73,276 | | | 44.71 |
Outstanding—December 31, 2020 | | 73,276 | | | 44.71 |
Granted | | 140,258 | | | 58.50 |
Forfeited | | (1,902) | | | 44.71 |
Vested | | (18,007) | | | 44.71 |
Outstanding—December 31, 2021 | | 193,625 | | | 54.70 |
Granted | | 157,057 | | | 37.59 |
Vested | | (54,134) | | | 53.91 |
Outstanding—December 31, 2022 | | 296,548 | | | 45.78 |
Restricted common units that met time-based vesting criteria.generally vest ratably over a four-year period commencing on the grant date.
Focus LLC Incentive Units
Focus LLC’s Operating Agreement provides for the granting of incentive units. Grants are designed as profits interests, which entitle a holder to receive distributions in excess of a specific hurdle amount, subject to the provisions of Focus LLC’s Operating Agreement. Incentive unit vesting provisions are either time-based or market-based.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 20192020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
The following table provides information relating to the status of, and changes in, Focus LLC incentive units granted during the years ended December 31, 2020, 2021 and 2022:
| | | | | |
| | | | Weighted Average |
| | Incentive Units | | Hurdle Price |
| | | | | |
Outstanding—January 1, 2020 | | 19,754,450 | | $ | 21.59 |
Granted | | 855,006 | | | 44.21 |
Forfeited | | (3,153,308) | | | 12.51 |
Forfeited | | (221,651) | | | 24.67 |
Outstanding—December 31, 2020 | | 17,234,497 | | | 24.34 |
Vested—December 31, 2020 | | 8,509,652 | | | 18.31 |
Granted | | 692,277 | | | 57.85 |
Exchanged | | (1,580,792) | | | 17.65 |
Forfeited | | (199,458) | | | 23.22 |
Outstanding—December 31, 2021 | | 16,146,524 | | | 26.44 |
Vested—December 31, 2021 | | 9,804,757 | | | 20.44 |
Granted | | 568,145 | | | 38.17 |
Exchanged | | (111,783) | | | 24.93 |
Outstanding—December 31, 2022 | | 16,602,886 | | | 26.86 |
Vested—December 31, 2022 | | 11,021,925 | | | 22.15 |
The Company uses the Black-Scholes option-pricing model to determine the fair value of time-based incentive units. The determination of the fair value using the Black-Scholes option-pricing model is affected by the Company’s estimated common unit price, as well as by assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected unit price volatility over the term of the incentive unit, expected term, risk-free interest rates and expected dividend yield.
The estimated grant-date fair values of the 2017, 20182020, 2021 and 20192022 time-based incentive unit grants were calculated based on the following weighted-average assumptions:
| | | | | | | | | | | | |
| | 2017 | | | 2018 | | | 2019 | |
Expected term | | | 4.0 | | years | | 4.0 | | years | | 4.0 | years |
Expected unit price volatility | | | 37 | | % | | 31 | | % | | 29 | % |
Risk-free interest rate | | | 1.79 | | % | | 2.53 | | % | | 1.64 | % |
Expected dividend yield | | | — | | % | | — | | % | | — | % |
Weighted average grant date fair value | | $ | 6.64 | | | $ | 7.71 | | | $ | 7.15 | |
| | | | | | | | | | | | |
| | 2020 | | �� | 2021 | | | 2022 | |
Expected term | | | 5.0 | | years | | 5.0 | | years | | 5.0 | years |
Expected unit price volatility | | | 35 | | % | | 34 | | % | | 36 | % |
Risk-free interest rate | | | 0.39 | | % | | 1.19 | | % | | 3.58 | % |
Expected dividend yield | | | — | | % | | — | | % | | — | % |
Weighted average grant date fair value | | $ | 13.72 | | | $ | 18.35 | | | $ | 14.30 | |
Incentive units generally vest ratably over a four-year period commencing on the grant date.
In connection with the IPO, and Reorganization Transactions described in Note 3, Focus LLC (i) granted 3,845,000 market-based incentive units with a hurdle rate of $33.00 that vestwould have vested on the fifth anniversary of the pricing of the IPO if the average per share price for any ninety calendar day period90-day VWAP within such five year period immediately following the pricing of the IPO reaches at least $100, (ii) amended, effective on$100. In March 2022, these incentive units were modified whereby the incentive units will vest in July 2024, the sixth anniversary of the pricing of the Company’s IPO, 3,000,000with vesting based on the highest 90-day VWAP prior to the anniversary, with 0% vesting if the highest 90-day VWAP is $80.00 or less and 100% vesting if the highest 90-day VWAP is $110.00 or more, with linear interpolation in between. The vested incentive units can only be exchanged for Class A common stock in accordance with the following schedule: (i) a hurdle ratetotal of $21.00 such that25% of the vested incentive units may be exchanged on and following the date of vesting, (ii) an additional 25% (for a total of 50%) of the vested incentive units may be exchanged on and following the first fifty percentanniversary of the date of vesting
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
in July 2025, and (iii) an additional 50% (for a total of 100%) of the vested incentive units may be exchanged on and following the second anniversary of the date of vesting in July 2026. These market-based incentive units will also vest upon a change of control linearly based on the share price used in the transaction with 100% vesting if the price used is $110.00, 0% vesting if the price used is equal to or less than $33.00, and linear interopolation in between, except as governed by the employment agreements entered into with the Company’s executive officers. In connection with the modification, the Company will recognize incremental non-cash equity compensation expense of $10,144, less any forfeitures, from the modification date through July 2024, the sixth anniversary of the IPO.
In February 2021, the compensation committee of the Company applied its discretion to provide for a new measurement period for 1,162,500 incentive units of certain officers of the Company. As a result of the modification, 896,230 units were vested based on the weighted average price per share is at least $35.00 for the first ninetyseven days following the pricing of the IPO. Following that ninety day period, all incentive units that remain unvested will be eligible prior to vestFebruary 23, 2021, with vesting calculated based on the three year anniversary of the IPO if the weighted average per sharesame stock price for the ninety day period immediately precedinghurdles that were to apply on the third anniversary of the IPO is:IPO. This vesting criteria provided that if the specified weighted average price per share was: (i) less than $42.00,$42.00, then no remaining unvestednone of such incentive units willwould vest; (ii) greater than $63.00, then all remaining unvested of such incentive units will become vested;would vest; and (iii) if between $42.00 and $63.00, then (x) fifty percent of the remaining unvestedsuch incentive units willwould vest and (y) the remaining fifty percent of the remaining unvested incentive units willwould vest linearly based on where the price falls within the range of $42.00 and $63.00. The remaining 266,270 units that did not vest during the February measurement period, and 337,500 units held by individuals other than certain officers, that were not modified, were eligible to vest pursuant to the same criteria but using the weighted average price per share for the ninety day period immediately preceding the third anniversary of the Company’s Class A common stock forIPO. In July 2021, the ninety days following the pricingthird anniversary of the Company’s IPO, exceeded186,545 of the $35.00 threshold, accordingly, the first fifty percent or 1,500,000 incentive266,270 units vested and 79,725 were forfeited pursuant to the vesting criteria, and 236,449 of the 337,500 units vested and 101,051 were forfeited pursuant to the vesting criteria.
In connection with the modification that resulted in October 2018.
For the purposevesting of calculating equity-based896,230 units, the Company recognized additional non-cash equity compensation expense for these market condition-based incentive units, the grant date fair valueof $6,439 during the year ended December 31, 2018 was determined through2021. In connection with the applicationmodification of the Monte Carlo Simulation Model withvesting terms of the following weighted average assumptions:
| | | | |
Expected term
| | | 4.1
| years
|
Expected unit price volatility
| | | 30
| %
|
Risk-free interest rate
| | | 2.74
| %
|
Expected dividend yield
| | | —
| %
|
Weighted average grant date fair value
| | $
| 5.05 | |
The266,270 incentive units, the Company has recorded $10,247, $36,743 and $14,082 ofrecognized incremental non-cash equity compensation expense for incentive unitsof $1,544 during the years ended December 31, 2017, 2018 and 2019, respectively.
Non-cash equity compensation expense for the year ended December 31, 2017 includes non-cash equity compensation expense related to time and performance based incentive units that were vested in connection with the issuance of Convertible Preferred Units as described below.2021.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 20192020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
Incentive units outstanding and vested at December 31, 2022 were as follows:
Non-cash
| | | | |
| | Number | | Vested Incentive |
Hurdle Rates | | Outstanding | | Units |
$1.42 | | 421 | | 421 |
5.50 | | 798 | | 798 |
6.00 | | 386 | | 386 |
7.00 | | 1,081 | | 1,081 |
9.00 | | 708,107 | | 708,107 |
11.00 | | 813,001 | | 813,001 |
12.00 | | 513,043 | | 513,043 |
13.00 | | 540,000 | | 540,000 |
14.00 | | 10,098 | | 10,098 |
16.00 | | 45,191 | | 45,191 |
17.00 | | 20,000 | | 20,000 |
19.00 | | 527,928 | | 527,928 |
21.00 | | 3,017,692 | | 3,017,692 |
22.00 | | 796,417 | | 796,417 |
23.00 | | 524,828 | | 524,828 |
26.26 | | 12,500 | | 6,250 |
27.00 | | 12,484 | | 12,484 |
27.90 | | 1,890,440 | | 1,395,592 |
28.50 | | 1,424,225 | | 1,424,225 |
30.48 | | 30,000 | | 20,000 |
33.00 | | 3,617,500 | | 7,500 |
36.64 | | 30,000 | | 30,000 |
37.59 | | 508,145 | | — |
43.07 | | 60,000 | | — |
43.50 | | 30,000 | | 30,000 |
44.71 | | 806,324 | | 406,279 |
58.50 | | 662,277 | | 170,604 |
| | 16,602,886 | | 11,021,925 |
The Company has recorded $16,800, $25,566 and $21,726 of non-cash equity compensation expense for incentive units and restricted common units during the yearyears ended December 31, 2018 includes one-time non-cash equity compensation2020, 2021 and 2022, respectively.
Total unrecognized expense, of $14,756adjusted for estimated forfeitures, related to certain time-based incentive units that were modified and vested or exchanged for Focus LLCrestricted common units in connection with the IPOat December 31, 2022, was $13,113 and Reorganization Transactions described in Note 3.is expected to be recognized over a weighted-average period of 3.3 years.
Total unrecognized expense, adjusted for estimated forfeitures, related to unvested incentive units at December 31, 2019,2022, was $44,693$27,427 and is expected to be recognized over a weighted-average period of 3.12.5 years.
The following table provides information relating to the status of, and changes in, Focus LLC incentive units granted during the years ended December 31, 2017, 2018 and 2019:
| | | | | |
| | | | Weighted Average |
| | Incentive Units | | Hurdle Price |
| | | | | |
Outstanding—January 1, 2017 | | 12,234,283 | | $ | 10.97 |
Granted | | 6,193,042 | | | 21.30 |
Forfeited | | (392,375) | | | 16.50 |
Redeemed | | (2,805,911) | | | 8.25 |
Outstanding—December 31, 2017 | | 15,229,039 | | | 15.53 |
Vested—December 31, 2017 | | 8,237,146 | | | 11.22 |
| | | | | |
Outstanding—January 1, 2018 | | 15,229,039 | | | 15.53 |
Granted | | 6,426,715 | | | 30.73 |
Forfeited | | (311,625) | | | 22.26 |
Redeemed | | (2,746,655) | | | 15.79 |
Outstanding—December 31, 2018 | | 18,597,474 | | | 20.63 |
Vested—December 31, 2018 | | 9,910,399 | | | 14.19 |
| | | | | |
Outstanding—January 1, 2019 | | 18,597,474 | | | 20.63 |
Granted | | 2,106,131 | | | 28.01 |
Exchanged | | (618,117) | | | 11.24 |
Forfeited | | (331,038) | | | 27.80 |
Outstanding—December 31, 2019 | | 19,754,450 | | | 21.59 |
Vested—December 31, 2019 | | 10,288,263 | | | 15.37 |
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
Incentive units outstanding and vested at December 31, 2019 were as follows:
| | | | |
| | Number | | Vested Incentive |
Hurdle Rates | | Outstanding | | Units |
$1.42 | | 175,421 | | 175,421 |
5.50 | | 97,798 | | 97,798 |
6.00 | | 56,702 | | 56,702 |
7.00 | | 482,545 | | 482,545 |
9.00 | | 1,984,779 | | 1,984,779 |
11.00 | | 1,148,023 | | 1,148,023 |
12.00 | | 520,000 | | 520,000 |
13.00 | | 831,416 | | 831,416 |
14.00 | | 56,205 | | 56,205 |
16.00 | | 168,552 | | 168,552 |
17.00 | | 80,000 | | 72,500 |
19.00 | | 865,633 | | 859,383 |
21.00 | | 3,975,500 | | 2,475,500 |
22.00 | | 1,289,667 | | 657,960 |
23.00 | | 524,828 | | 262,414 |
26.26 | | 25,000 | | — |
27.00 | | 29,484 | | 7,371 |
27.90 | | 2,051,131 | | — |
28.50 | | 1,646,766 | | 411,694 |
33.00 | | 3,715,000 | | 20,000 |
36.64 | | 30,000 | | — |
| | 19,754,450 | | 10,288,263 |
Focus LLC Convertible Preferred Units
In July 2017, pursuant to a series of transactions and a tender offer, investors acquired 30,918,280 of the Company’s Convertible Preferred Units at a price of $21 per unit for $649,284. Such funds, together with a portion of the proceeds from the Credit Facility, were used primarily to create cash liquidity for existing holders of the Company’s then outstanding senior preferred units, junior preferred units, common units and incentive units. In connection with the transactions, accrued preferred return of $44,815 related to the senior preferred units and junior preferred units was converted, redeemed or recapitalized and $3,063 of accrued preferred return was paid in cash. The Convertible Preferred Units were recorded at $21 per unit, their fair value on the effective date of the transactions, net of transaction expenses of $2,012.
The investors acquired the senior preferred units and junior preferred units from certain of Focus LLC’s existing preferred unitholders for $207,014, net of transaction expenses, and from Focus LLC for $442,270. Through a tender offer, Focus LLC subsequently retired 17,195,412 senior preferred units, 10,332,956 junior preferred units, 6,521,720 common units, and 2,767,911 incentive units. The price per unit paid for senior preferred units, junior preferred units and common units was $21 per unit reduced by an allocation of transaction expenses of $15,500 (borne by the selling unitholders). The price per unit paid for incentive units was $21 per unit reduced by an allocation of transaction expenses of $15,500 (borne by the selling unitholders) and the applicable hurdle rate of the incentive units. The Company accounted for the units acquired in the tender offer as a repurchase and retirement of the respective units with the difference between the cash paid and the carrying amount of the respective units, if any, recorded in
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
accumulated deficit. Senior preferred units of 2,380,952 and junior preferred units of 58,495 that were not tendered by the investors were recapitalized as 2,439,447 of Convertible Preferred Units.
In connection with the issuance of the Convertible Preferred Units, the Company recognized additional non-cash equity compensation expense of $24,369 related to certain common units and incentive units that were modified or contractually vested as a result of the transactions.
The Company incurred certain legal, audit, tax and other professional fee costs in connection with the planned initial public offering that were initially capitalized. As a result of the Convertible Preferred Unit transaction, the planned initial public offering was delayed. Accordingly, the Company expensed $9,840 of costs initially capitalized in connection with the planned initial public offering in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2017.
In connection with the Reorganization Transactions described in Note 3, on July 30, 2018, outstanding Convertible Preferred Units were converted into common units on a one-for-one basis.
Cash compensation expense
In connection with the payment of cash of 25% in excess of the Gross IPO Price to Existing Owners who were not accredited investors and the payment of cash of 65% of the fair market value of non-compensatory stock options to Mandatorily Exchanging Owners in the Reorganization Transactions described in Note 3, the Company recognized a one-time cash compensation expense of $5,926 during the year ended December 31, 2018.
11. INCOME TAXES
In connection with the IPO and Reorganization Transactions, Focus Inc. became a holding company whose most significant asset is a membership interest in Focus LLC, and, as a result, Focus Inc. became subject to U.S. federal, state and local income taxes on Focus Inc.’s allocable portion of taxable income from Focus LLC. Focus LLC is treated as a partnership for U.S. federal income tax purposes. Accordingly, Focus LLC is generally not and has not been subject to U.S. federal and certain state income taxes at the entity level, although it has been subject to the New York City Unincorporated Business Tax, and certain of its subsidiaries have been subject to U.S. federal, state and local or foreign income taxes. Instead, for U.S. federal and certain state income tax purposes, the income, deductions, losses and credits of Focus LLC are passed through to its unitholders, which after the IPO includes Focus Inc. Focus LLC has historically made tax distribution payments in accordance with its Third Amended and Restated Operating Agreement, which was replaced by the Operating Agreement on July 30, 2018, and Focus Inc. intends to cause Focus LLC to continue to make tax distribution payments, to the extent of available cash, in accordance with the Operating Agreement.
For tax years beginning on or after January 1, 2018, Focus LLC is subject to partnership audit rules enacted as part of the Bipartisan Budget Act of 2015 (the "Centralized Partnership Audit Regime"). Under the Centralized Partnership Audit Regime, any IRS audit of Focus LLC would be conducted at the partnership level and, if the IRS determines an adjustment, the default rule is that Focus LLC would pay an "imputed underpayment" including interest and penalties, if applicable. Focus LLC may instead elect to make a "push-out" election, in which case the partners for the year that is under audit would be required to take into account the adjustments on their own personal income tax returns. Our partnership agreement provides that if Focus LLC receives an imputed underpayment, a "push-out" election may be made. Any payments that the Company ultimately makes on behalf of its current partners will be reflected as a distribution, rather than tax expense, at the time that such distribution is declared.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. Among other things, the Tax Act reduced the U.S. federal corporate income tax rate from a maximum rate of 35%, to a rate of 21%, effective January
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
1, 2018. The change in the U.S. federal corporate income tax rate resulted in the remeasurement of certain of the Company's deferred tax assets and liabilities during the year ended December 31, 2017, based on the reduction in the tax rate at which they are expected to reverse. Such remeasurement resulted in an income tax benefit of $2,653 for the year ended December 31, 2017.
Income tax expense for year ended December 31, 20192022 is primarily related to U.S. federal, state and local income taxes imposed on Focus Inc.'s’s allocable portion of taxable income from Focus LLC. The allocable portion of
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, $5,924 of deferred tax liabilities were recorded as other liabilities in the consolidated balance sheets. At December 31, 2019, $12,848 of deferred tax liabilities were recorded as other liabilities in the consolidated balance sheets.2020, 2021 and 2022
(In thousands, except unit data, share and per share amounts)
A reconciliation of the differences between the U.S. federal statutory tax rate and the effective tax rate for the years ended December 31, 2017, 20182020, 2021 and 20192022 is as follows:
| | | | | | | |
| | 2017 | | 2018 | | 2019 | |
U.S. federal statutory tax rate | | 35.0 | % | 21.0 | % | 21.0 | % |
Income passed through to individual members | | (36.8) | | (31.9) | | (11.3) | |
Foreign income taxes | | (1.0) | | (6.2) | | (31.0) | |
Non-cash equity compensation expense | | — | | (5.8) | | (41.8) | |
Impairment of equity method investment | | — | | — | | (31.0) | |
Other non-deductible expenses | | (0.3) | | (1.6) | | (19.2) | |
Valuation allowance | | 1.6 | | 0.1 | | — | |
State and local income taxes, net of U.S. federal tax benefit | | (0.7) | | (6.1) | | (32.6) | |
Remeasurement of deferred taxes | | 5.3 | | — | | — | |
Other | | (0.1) | | 0.6 | | 4.2 | |
Effective income tax rate | | 3.0 | % | (29.9) | % | (141.7) | % |
| | | | | | | |
| | 2020 | | 2021 | | 2022 | |
U.S. federal statutory tax rate | | 21.0 | % | 21.0 | % | 21.0 | % |
Income passed through to individual members | | (7.6) | | (6.1) | | (4.7) | |
Foreign income taxes | | 3.6 | | 9.2 | | 2.5 | |
Non-cash equity compensation expense | | 3.5 | | 7.7 | | 1.8 | |
Non-cash changes in fair value of estimated contingent consideration | | — | | — | | (1.5) | |
Other non-deductible expenses | | 0.9 | | 2.7 | | 0.3 | |
State and local income taxes, net of U.S. federal tax benefit | | 7.0 | | 8.1 | | 6.6 | |
Valuation allowance | | — | | — | | 3.6 | |
Other | | 1.3 | | 2.5 | | 0.2 | |
Effective income tax rate | | 29.7 | % | 45.1 | % | 29.8 | % |
At December 31, 2019,2022, the Company had approximately $620$25,185 of U.S. federal net operating loss carryforwards. At December 31, 2022, the Company had $24,053 of business interest carryforwards. These net operating loss carryforwards and a comparable amount of state net operating losses generated from the same losses and deductions. U.S. federal net operating lossesbusiness interest carryforwards have an indefinite carryforward period. Certain state net operating losses expire in various years between 2023 and 2038, while certain state net operating losses have an indefinite carryforward period. In addition, at December 31, 2019, a corporate subsidiary of Focus LLC had U.S. federal net operating loss carryforwards of $1,344 which will begin to expire in 2033.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Based on this assessment, noDue to the uncertainty regarding the Company’s ability to utilize certain deferred tax assets in the future, the Company provided a valuation allowances were recordedallowance of $6,494 at December 31, 2018 and 2019, respectively.
Table2022 against certain of Contents
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
its deferred tax assets, which more than likely will not be realized.
The Company files tax returns in U.S. federal, local and state jurisdictions and certain of the Company’s subsidiaries file income tax returns in foreign jurisdictions. The Company is no longer subject to income tax examinations for years prior to 2016.2019. In addition, open tax years related to local, state and foreign jurisdictions remain subject to examination, but are not considered material to the Company’s consolidated financial position, results of operations or cash flows. The Company is not aware of any tax position for which it is reasonably possible that the total amount of unrecognized benefits will change materially in the next 12 months.
12. TAX RECEIVABLE AGREEMENTS
In connection with the Reorganization TransactionsIPO and the closing ofreorganization transactions that occurred in connection with the IPO, Focus Inc. entered into two Tax Receivable Agreements ( the "Tax Receivable Agreements"):tax receivable agreements: one with certain entities affiliated with the Private Equity Investorsprivate equity investors of Focus LLC and the other with certain other continuing and former owners of Focus LLC. In March 2020, Focus Inc. entered into an additional tax receivable agreement (the three agreements, collectively, the “Tax Receivable Agreements”) for tax receivable agreement holders that join Focus LLC as members after the closing of the IPO (the parties to the two agreementsTax Receivable Agreements, collectively, the “TRA holders”Holders”). New Focus LLC owners in the future may also become party to this additional Tax Receivable Agreement. The agreementsTax Receivable Agreements generally provide for the payment by the CompanyFocus Inc. to each TRA holder of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the CompanyFocus Inc. actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in connection with the Reorganization Transactionsreorganization transactions that occurred in connection with the IPO and in periods after the IPO or after entering into the Tax Receivable Agreements, as applicable, as a result of certain increases in tax bases and certain tax benefits attributable to imputed interest. The CompanyFocus Inc. will retain the benefit of the remaining 15% of these cash savings.
Table of the Reorganization TransactionsContents
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and the exchange of certain units of Focus LLC, Focus Inc.2022
(In thousands, except unit data, share and per share amounts)
The Company had a liability of $39,156$219,542 and $48,399$224,611 relating to its obligations under the Tax Receivable Agreements as of December 31, 20182021 and 2019,2022, respectively. The Company does not expect anyDuring the years ended December 31, 2021 and 2022, payments to betotaling $4,423 and $3,856, respectively, were made under the Tax Receivable Agreements inAgreements. In February 2023, payments totaling $9,598 were made under the next twelve months.Tax Receivable Agreements.
13. LEASES
The Company rents office spacefuture minimum lease payments under operating leases with various expiration dates. The Company determines if a contract contains a lease at inception. Leases with an initial termin place as of 12 months or less, which are immaterial to the consolidated financial statements, are not recorded on the balance sheet. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recorded on a straight-line basis over the lease term. The Company has a limited number of finance leases which are not material to the consolidated financial statements.December 31, 2022 were as follows:
Operating lease costs are recorded within selling, general and administrative expenses. The implicit discount rates used to determine the present value of the Company’s leases are not readily determinable. Therefore, an incremental borrowing rate is used which is estimated based on the Company’s cost of borrowing for the relevant terms of each lease.
| | | |
Year ending December 31, | | Amount |
2023 | | $ | 60,113 |
2024 | | | 56,357 |
2025 | | | 49,917 |
2026 | | | 43,387 |
2027 | | | 37,541 |
2028 and thereafter | | | 99,413 |
| | | 346,728 |
Less: present value discount | | | (57,833) |
Operating lease liabilities at December 31, 2022 | | $ | 288,895 |
The weighted average discount rate used to determine the Company’s operating lease liabilities was approximately 6.6%5% at December 31, 2019.2021 and 2022. The weighted average remaining lease term at December 31, 20192021 and 2022 was 7.4approximately seven years.
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FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
(In thousands, except unit data, share and per share amounts)
The future minimum lease payments under operating leases in place as of December 31, 2019 were as follows:
| | | |
Year ending December 31, | | Amount |
2020 | | $ | 45,006 |
2021 | | | 38,484 |
2022 | | | 32,583 |
2023 | | | 27,957 |
2024 | | | 24,505 |
2025 and thereafter | | | 85,043 |
| | | 253,578 |
Less: present value discount | | | (57,153) |
Operating lease liabilities at December 31, 2019 | | $ | 196,425 |
Other information pertaining to leases for the years ended December 31, 2021 and 2022 consists of the following:
| | | | |
| | Year Ended | |
| | December 31, 2019 | |
| | | | | | | |
| | | 2021 | | 2022 |
Operating lease costs included in selling, general and administrative expenses | | $ | 44,213 | | $ | 74,340 | | $ | 61,057 |
Operating cash flows from operating leases | | | 41,333 | | | 73,481 | | | 59,090 |
Operating lease assets obtained in exchange for operating lease obligations | | | 68,891 | | | 61,750 | | | 72,012 |
In accordance with ASC 840 future minimum lease payments under operating leases in place at December 31, 2018 were as follows:
| | | |
Year Ending December 31, | | Amount |
2019 | | $ | 35,426 |
2020 | | | 31,695 |
2021 | | | 24,813 |
2022 | | | 20,906 |
2023 | | | 16,743 |
2024 and thereafter | | | 50,045 |
Total minimum lease payments | | $ | 179,628 |
14. COMMITMENTS AND CONTINGENCIES
Credit Risk
The Company’s broker‑dealerbroker-dealer subsidiaries clear all transactions through clearing brokers on a fully disclosed basis. Pursuant to the terms of the agreements between the Company’s broker‑dealerbroker-dealer subsidiaries and their clearing brokers, the clearing brokers have the right to charge the Company’s broker‑dealerbroker-dealer subsidiaries for losses that result from a counterparty’s failure to fulfill its contractual obligations. This right applies to all trades executed through its clearing brokers, and therefore, the Company believes there is no maximum amount assignable to the right of the