UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the Quarterly Period Ended
OR
Commission File No.
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
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FOCUS FINANCIAL PARTNERS INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2023
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated balance sheets
(In thousands, except share and per share amounts)
| December 31, |
| June 30, | |||
2022 | 2023 | |||||
ASSETS |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable less allowances of $ |
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Prepaid expenses and other assets |
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Fixed assets—net |
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Operating lease assets | | | ||||
Debt financing costs—net |
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Deferred tax assets—net | | | ||||
Goodwill |
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Other intangible assets—net |
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TOTAL ASSETS | $ | | $ | | ||
LIABILITIES AND EQUITY |
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LIABILITIES |
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Accounts payable | $ | | $ | | ||
Accrued expenses |
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Due to affiliates |
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Deferred revenue |
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Contingent consideration and other liabilities |
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Deferred tax liabilities | | | ||||
Operating lease liabilities | | | ||||
Borrowings under credit facilities (stated value of $ |
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Tax receivable agreements obligations | | | ||||
TOTAL LIABILITIES |
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COMMITMENTS AND CONTINGENCIES (Note 12) |
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EQUITY | ||||||
Class A common stock, par value $ | | | ||||
Class B common stock, par value $ | | | ||||
Additional paid-in capital | | | ||||
Retained earnings | | | ||||
Accumulated other comprehensive income | | | ||||
Total shareholders' equity | | | ||||
Non-controlling interest | | | ||||
Total equity | | | ||||
TOTAL LIABILITIES AND EQUITY | $ | | $ | |
See notes to unaudited condensed consolidated financial statements
2
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of operations
(In thousands, except share and per share amounts)
For the three months ended | For the six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2023 |
| 2022 |
| 2023 | ||||||
REVENUES: |
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Wealth management fees | $ | | $ | | $ | | $ | | |||||
Other |
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Total revenues |
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OPERATING EXPENSES: |
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Compensation and related expenses |
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Management fees |
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Selling, general and administrative |
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Intangible amortization |
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Non-cash changes in fair value of estimated contingent consideration |
| ( |
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Depreciation and other amortization |
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Total operating expenses |
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INCOME FROM OPERATIONS |
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OTHER INCOME (EXPENSE): |
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Interest income |
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Interest expense |
| ( |
| ( |
| ( |
| ( |
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Amortization of debt financing costs |
| ( |
| ( |
| ( |
| ( |
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Other expense—net |
| ( |
| ( |
| ( |
| ( |
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Income from equity method investments | | | | | |||||||||
Total other expense—net |
| ( |
| ( |
| ( |
| ( |
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INCOME (LOSS) BEFORE INCOME TAX |
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INCOME TAX EXPENSE (BENEFIT) |
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NET INCOME | | | | | |||||||||
Non-controlling interest | ( | | ( | ||||||||||
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | | $ | | $ | | $ | | |||||
Income (loss) per share of Class A common stock: | |||||||||||||
Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | ( | $ | | $ | ( | |||||
Weighted average shares of Class A common stock outstanding: | |||||||||||||
Basic | | | | | |||||||||
Diluted | | | | |
See notes to unaudited condensed consolidated financial statements
3
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of comprehensive income
(In thousands)
For the three months ended | For the six months ended |
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June 30, | June 30, | ||||||||||||
| 2022 |
| 2023 |
| 2022 |
| 2023 |
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Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive income, net of tax: |
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Foreign currency translation adjustments |
| ( |
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Unrealized gain (loss) on interest rate swaps designated as cash flow hedges | | | | ( | |||||||||
Comprehensive income | | | | | |||||||||
Less: Comprehensive (income) loss attributable to non-controlling interest | ( | | ( | | |||||||||
Comprehensive income attributable to common shareholders | $ | | $ | | $ | | $ | |
See notes to unaudited condensed consolidated financial statements
4
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of cash flows
(In thousands)
For the six months ended | ||||||
June 30, | ||||||
| 2022 |
| 2023 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities—net of effect of acquisitions: |
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Intangible amortization |
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Depreciation and other amortization |
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Amortization of debt financing costs |
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Non-cash equity compensation expense |
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Non-cash changes in fair value of estimated contingent consideration |
| ( |
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Income from equity method investments |
| ( |
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Distributions received from equity method investments |
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Deferred taxes and other non-cash items |
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Changes in cash resulting from changes in operating assets and liabilities: |
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Accounts receivable |
| ( |
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Prepaid expenses and other assets |
| ( |
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Accounts payable |
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Accrued expenses |
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Due to affiliates |
| ( |
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Contingent consideration and other liabilities |
| ( |
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Deferred revenue |
| ( |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Cash paid for acquisitions and contingent consideration—net of cash acquired |
| ( |
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Purchase of fixed assets |
| ( |
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Investments |
| ( |
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Net cash used in investing activities |
| ( |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings under credit facilities |
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Repayments of borrowings under credit facilities |
| ( |
| ( | ||
Payments in connection with tax receivable agreements | ( | ( | ||||
Contingent consideration paid |
| ( |
| ( | ||
Payments of deferred cash consideration | — | ( | ||||
Payments of debt financing costs |
| ( |
| — | ||
Proceeds from exercise of stock options | | | ||||
Equity awards withholding | — | ( | ||||
Distributions for unitholders | ( | ( | ||||
Other | | — | ||||
Net cash provided by financing activities |
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EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
| ( |
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CHANGE IN CASH AND CASH EQUIVALENTS |
| ( |
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CASH AND CASH EQUIVALENTS: |
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Beginning of period |
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End of period | $ | | $ | |
See Note 13 for supplemental cash flow disclosure
See notes to unaudited condensed consolidated financial statements
5
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of changes in equity
Three months ended June 30, 2022 and 2023
(In thousands, except share amounts)
Accumulated | |||||||||||||||||||||||||||||
Class A | Class B | Additional | Other | Total | |||||||||||||||||||||||||
Common Stock | Common Stock | Paid-In | Retained | Comprehensive | Shareholders’ | Non-controlling | |||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income |
| Equity |
| Interest |
| Total Equity | ||||||||||
Balance at April 1, 2022 | | $ | | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||
Net income | — | — | — | — | — | | — | | | | |||||||||||||||||||
Issuance of units in connection with an acquisition | — | — | | | — | — | — | | — | | |||||||||||||||||||
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights | | | ( | ( | | — | — | | — | | |||||||||||||||||||
Change in non-controlling interest allocation | — | — | — | — | | — | — | | ( | | |||||||||||||||||||
Non-cash equity compensation expenses | — | — | — | — | | — | — | | — | | |||||||||||||||||||
Currency translation adjustment-net of tax | — | — | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||
Unrealized gain on interest rate swaps designated as cash flow hedges-net of tax | — | — | — | — | — | — | | | | | |||||||||||||||||||
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||
Balance at June 30, 2022 | | $ | | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||
Balance at April 1, 2023 | | $ | | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||
Net income | — | — | — | — | — | | — | | ( | | |||||||||||||||||||
Exercise of stock options | | — | — | — | | — | — | | — | | |||||||||||||||||||
Change in non-controlling interest allocation | — | — | — | — | | — | — | | | | |||||||||||||||||||
Non-cash equity compensation expenses | — | — | — | — | | — | — | | — | | |||||||||||||||||||
Currency translation adjustment-net of tax | — | — | — | — | — | — | | | | | |||||||||||||||||||
Unrealized gain on interest rate swaps designated as cash flow hedges-net of tax | — | — | — | — | — | — | | | | | |||||||||||||||||||
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||
Balance at June 30, 2023 | | $ | | | $ | | $ | | $ | | $ | | $ | | $ | | $ | |
See notes to unaudited condensed consolidated financial statements
6
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of changes in equity
Six months ended June 30, 2022 and 2023
(In thousands, except share amounts)
Accumulated |
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Class A | Class B | Additional | Other | Total | |||||||||||||||||||||||||
Common Stock | Common Stock | Paid-In | Retained | Comprehensive | Shareholders’ | Non-controlling | |||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income |
| Equity |
| Interest |
| Total Equity | ||||||||||
Balance at January 1, 2022 | | $ | | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||
Net income | — | — | — | — | — | | — | | | | |||||||||||||||||||
Issuance of units in connection with an acquisition and contingent consideration | — | — | | | — | — | — | | — | | |||||||||||||||||||
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights | | | ( | ( | | — | — | | — | | |||||||||||||||||||
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights | | — | — | — | | — | — | | — | | |||||||||||||||||||
Exercise of stock options | | — | — | — | | — | — | | — | | |||||||||||||||||||
Change in non-controlling interest allocation | — | — | — | — | | — | — | | ( | | |||||||||||||||||||
Non-cash equity compensation expenses | — | — | — | — | | — | — | | — | | |||||||||||||||||||
Currency translation adjustment-net of tax | — | — | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||
Unrealized gain on interest rate swaps designated as cash flow hedges-net of tax | — | — | — | — | — | — | | | | | |||||||||||||||||||
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||
Balance at June 30, 2022 | | $ | | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||
Balance at January 1, 2023 | | | | | | | | $ | | $ | | $ | | ||||||||||||||||
Net income | — | — | — | — | — | | — | | ( | | |||||||||||||||||||
Issuance of units in connection with an acquisition | — | — | | | — | — | — | | — | | |||||||||||||||||||
Exercise of stock options | | | — | — | | — | — | | — | | |||||||||||||||||||
Change in non-controlling interest allocation | — | — | — | — | ( | — | — | ( | | | |||||||||||||||||||
Non-cash equity compensation expenses | — | — | — | — | | — | — | | — | | |||||||||||||||||||
Currency translation adjustment-net of tax | — | — | — | — | — | — | | | | | |||||||||||||||||||
Unrealized loss on interest rate swaps designated as cash flow hedges-net of tax | — | — | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||
Balance at June 30, 2023 | | $ | | | $ | | $ | | $ | | $ | | $ | | $ | | $ | |
See notes to unaudited condensed consolidated financial statements
7
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements
(In thousands, except unit data, share and per share amounts)
1. GENERAL
Organization and Business— Focus Financial Partners Inc. (“Focus Inc.”) was formed as a Delaware corporation on July 29, 2015. Focus Inc. is the managing member of Focus Financial Partners, LLC (“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 are governed by its Fourth Amended and Restated Operating Agreement (the “Operating Agreement”). Focus LLC is in the business of acquiring and overseeing independent fiduciary wealth management and related businesses.
The unaudited condensed consolidated financial statements reflect the results of operations and financial position of Focus Inc. and its subsidiaries (the “Company”).
Recent Developments - Agreement and Plan of Merger— On February 27, 2023, Focus Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Focus Inc., Focus LLC and Ferdinand FFP Acquisition, LLC, a Delaware limited liability company (“Parent”) that is affiliated with Clayton, Dubilier & Rice, LLC (“CD&R”) and Stone Point Capital LLC (“Stone Point”) and certain other entities affiliated with Parent, pursuant to which Focus Inc. is to be acquired by affiliates of CD&R in an all-cash transaction (the “Merger”). Affiliates of Stone Point will retain a portion of their investment in Focus Inc. and provide new equity financing as part of the Merger. Subject to the terms and conditions of the Merger Agreement, each share of the Company’s Class A common stock will receive $
At a Special Meeting held on July 14, 2023, the shareholders of the Company, including a majority in voting power of the outstanding shares of common stock held by Unaffiliated Stockholders (as defined in the Merger Agreement), adopted and approved the Merger Agreement. Completion of the Merger is subject to other customary closing conditions. The Merger is expected to close in the third quarter of 2023. However, the Company cannot assure completion of the Merger by any particular date, if at all or that, if completed, it will be completed on the terms set forth in the Merger Agreement.
Merger-related expenses, which are included in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations, were $
2. SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes
8
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for fair presentation have been included. The unaudited condensed consolidated financial statements include the accounts of Focus Inc. and its majority and wholly owned subsidiaries. Focus Inc. consolidates Focus LLC and its 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 Focus Inc. does not own as non-controlling interests (see Note 3). Intercompany transactions and balances have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 16, 2023.
Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
Use of Estimates—The preparation of the unaudited condensed 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.
Revenue
The Company disaggregates revenue by wealth management fees and other. 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.
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2023 |
| 2022 |
| 2023 | ||||||
Domestic revenue | $ | | $ | | $ | | $ | | |||||
International revenue |
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Total revenue | $ | | $ | | $ | | $ | |
International revenue consists of revenue generated by partner firm legal entities in Australia, Canada, Switzerland, the United Kingdom and in other non-US jurisdictions.
Recent Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a significant effect on our consolidated financial statements.
9
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
3. NON-CONTROLLING INTEREST AND INCOME (LOSS) PER SHARE
The calculation of controlling and non-controlling interest is as follows as of June 30, 2022 and 2023:
| 2022 | 2023 | ||||
Focus LLC common units |
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Focus LLC restricted common units | | | ||||
Common unit equivalents of outstanding vested and unvested Focus LLC incentive units(1) | | | ||||
Total common units, restricted common units and common unit equivalents attributable to non-controlling interest | | | ||||
Total common units, restricted common units and common unit equivalents of incentive units outstanding | | | ||||
Non-controlling interest allocation | | % | | % | ||
Company’s interest in Focus LLC | | % | | % |
(1) | Focus LLC common units issuable upon conversion of |
Basic income per share is calculated utilizing net income attributable to common shareholders divided by the weighted average number of shares of Class A common stock outstanding during the same periods. The calculation of basic income per share is as follows:
Three Months Ended | Six Months Ended | ||||||||||||
| June 30, | June 30, | |||||||||||
2022 |
| 2023 |
| 2022 |
| 2023 | |||||||
Net income attributable to common shareholders | $ | | $ | | $ | | $ | | |||||
Weighted average shares of Class A common stock outstanding |
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Basic income per share | $ | | $ | | $ | | $ | |
Diluted income (loss) per share is calculated utilizing net income (loss) attributable to common shareholders divided by the weighted average number of shares of Class A common stock outstanding during the same periods plus the effect, if any, of the potentially dilutive shares of the Company’s Class A common stock from stock options, restricted stock units and Focus LLC common units, including contingently issuable
10
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
Focus LLC common units, if any, restricted common units and incentive units as calculated using the treasury stock method:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2023 |
| 2022 |
| 2023 | |||||
Net income attributable to common shareholders | $ | | $ | | $ | | $ | | ||||
Add: Dilutive effect of non-controlling interests related to Focus LLC common, restricted common and incentive units | — | ( | — | ( | ||||||||
Total | | ( | | ( | ||||||||
Weighted average shares of Class A common stock outstanding |
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Effect of dilutive stock options | | | | | ||||||||
Effect of dilutive restricted stock units | | | | | ||||||||
Effect of dilutive non-controlling interests related to Focus LLC common, restricted common and incentive units | — | | — | | ||||||||
Total |
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Diluted income (loss) per share | $ | | $ | ( | $ | | $ | ( |
Diluted income (loss) per share for the three and six months ended June 30, 2022 and 2023 excludes shares related to market-based stock options and Focus LLC incentive units, as modified, that vest on the sixth anniversary of the pricing of the Company’s initial public offering (“IPO”) with vesting based on the highest volume weighted average per share price for any ninety-calendar day period (“90-day VWAP”) prior to the anniversary, with
Focus LLC common, restricted common and incentive units may be exchanged for Class A common stock, subject to certain limitations (see Note 9). In computing the dilutive effect, if any, that the exchange would have on net income (loss) per share, net income (loss) 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 three and six months ended June 30, 2022, such exchange is not reflected in diluted net income (loss) per share as the assumed exchange is not dilutive.
11
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
4. ACQUISITIONS
Business Acquisitions
Business acquisitions are accounted for in accordance with FASB Accounting Standards Codification (“ASC”) Topic 805: Business Combinations.
The Company has incorporated contingent consideration, or earn out provisions, into the structure of its acquisitions. The Company recognizes the fair value of estimated contingent consideration at the acquisition date as part of the consideration transferred in the exchange. The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. The purchase price associated with business acquisitions and the allocation thereof during the six months ended June 30, 2023 is as follows:
| 2023 | ||
Number of business acquisitions closed |
| | |
Consideration: | |||
Cash due at closing | $ | | |
Cash due subsequent to closing at net present value and working capital adjustment | | ||
Fair market value of Focus LLC common units issued at closing | | ||
Fair market value of estimated contingent consideration | | ||
Total consideration | $ | | |
Allocation of purchase price: | |||
Total tangible assets | $ | | |
Total liabilities assumed | ( | ||
Customer relationships | | ||
Management contracts | | ||
Investment management agreements | | ||
Goodwill | | ||
Other acquired intangibles | | ||
Total allocated consideration | $ | |
Management believes approximately $
The accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2023 includes revenue and income from operations for
12
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
The weighted-average useful lives of intangible assets acquired during the six months ended June 30, 2023 are as follows:
| Number of years | |
Customer relationships | ||
Management contracts | ||
Investment management agreements | ||
Other acquired intangibles | ||
Weighted-average useful life of all intangibles acquired |
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the change in the goodwill balances for the year ended December 31, 2022 and the six months ended June 30, 2023:
| December 31, |
| June 30, | |||
2022 | 2023 | |||||
Balance beginning of period: | ||||||
Goodwill | $ | | $ | | ||
Cumulative impairment losses |
| ( | ( | |||
| | |||||
Goodwill acquired |
| | | |||
Other |
| ( | | |||
| | | ||||
Balance end of period: | ||||||
Goodwill |
| | | |||
Cumulative impairment losses |
| ( | ( | |||
$ | | $ | |
The following table summarizes the identifiable intangible assets at December 31, 2022:
Gross Carry | Accumulated | Net Book | |||||||
| Amount |
| Amortization |
| Value | ||||
Customer relationships | $ | | $ | ( | $ | | |||
Management contracts |
| |
| ( |
| | |||
Other acquired intangibles |
| |
| ( |
| | |||
Total | $ | | $ | ( | $ | |
13
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
The following table summarizes the identifiable intangible assets at June 30, 2023:
| Gross Carry |
| Accumulated |
| Net Book | ||||
Amount | Amortization | Value | |||||||
Customer relationships | $ | | $ | ( | $ | | |||
Management contracts |
| | ( | | |||||
Investment management agreements | | ( | | ||||||
Other acquired intangibles | | ( | | ||||||
Total | $ | | $ | ( | $ | | |||
6. 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 Loans
The implied fair value of the Company’s First Lien Term Loans (as defined below) based on Level 2 inputs at December 31, 2022 and June 30, 2023 are as follows:
December 31, 2022 | June 30, 2023 | |||||||||||
| Stated |
| Fair |
| Stated |
| Fair | |||||
Value | Value | Value | Value | |||||||||
First Lien Term Loan B - Tranche A | $ | | $ | | $ | | $ | | ||||
First Lien Term Loan B - Tranche B |
| |
| |
| |
| |
The stated value of the Company’s First Lien Term Loan A approximated the fair value as of December 31, 2022 and June 30, 2023 based on its variable interest rates.
14
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
Derivatives
At December 31, 2022 and June 30, 2023, the aggregate fair value of the Company’s $
Business acquisitions
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 3) inputs.
At December 31, 2022 and June 30, 2023, deferred cash consideration in connection with business acquisitions of $
The following table represents changes in the fair value of estimated contingent consideration for business acquisitions for the year ended December 31, 2022 and the six months ended June 30, 2023:
Balance at January 1, 2022 |
| $ | |
Additions to estimated contingent consideration | | ||
Assumed estimated contingent consideration obligation | | ||
Payments of contingent consideration | ( | ||
Non-cash changes in fair value of estimated contingent consideration | ( | ||
Other | ( | ||
Balance at December 31, 2022 | $ | | |
Additions to estimated contingent consideration | | ||
Payments of contingent consideration | ( | ||
Non-cash changes in fair value of estimated contingent consideration | | ||
Other | | ||
Balance at June 30, 2023 | $ | |
Estimated contingent consideration is included in contingent consideration and other liabilities in the accompanying unaudited condensed consolidated balance sheets.
During the year ended December 31, 2022, the Company paid $
During the six months ended June 30, 2022 and 2023, the Company paid cash of $
15
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
paid for acquisitions and contingent consideration—net of cash acquired in investing activities in the unaudited condensed consolidated statement of cash flows.
In determining fair value of the estimated contingent consideration, the acquired business’ future performance is estimated using financial projections for the acquired 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 are 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, 2022 and June 30, 2023 are summarized below:
Quantitative Information About Level 3 |
| |||||||
Fair Value Measurements |
| |||||||
Fair Value at |
| Valuation |
| Unobservable |
|
| ||
December 31, 2022 | Techniques | Inputs | Ranges |
| ||||
$ | | Monte Carlo Simulation Model | Forecasted growth rates | ( | % | |||
Discount rates | % |
Quantitative Information About Level 3 |
| |||||||
Fair Value Measurements |
| |||||||
Fair Value at |
| Valuation |
| Unobservable |
|
| ||
June 30, 2023 | Techniques | Inputs | Ranges |
| ||||
$ | | Monte Carlo Simulation Model | Forecasted growth rates | ( | % | |||
Discount rates | % |
7. CREDIT FACILITY
As of June 30, 2023, Focus LLC’s credit facility (the “Credit Facility”) comprised of a $
The First Lien Term Loan B - Tranche A bears interest (at Focus LLC’s option) at: (i) SOFR plus a margin of
The First Lien Term Loan B - Tranche B bears interest (at Focus LLC’s option) at: (i) SOFR plus a margin of
16
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
The First Lien Term Loan A bears interest (at Focus LLC’s option) at: (i) SOFR plus a margin of
The First Lien Revolver bears interest (at Focus LLC’s option) at SOFR plus a margin of
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
The Company defers and amortizes its debt financing costs and unamortized discount over the respective terms of the 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 amounts of the respective borrowings in the unaudited condensed consolidated balance sheets. The debt financing costs related to the First Lien Revolver are recorded in debt financing costs-net in the unaudited condensed consolidated balance sheets.
17
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(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 unaudited condensed consolidated balance sheets at December 31, 2022 and June 30, 2023:
| December 31, |
| June 30, | |||
2022 | 2023 | |||||
First Lien Term Loan B - Tranche A | $ | | $ | | ||
First Lien Term Loan B - Tranche B | | | ||||
First Lien Term Loan A | | | ||||
First Lien Revolver | — | — | ||||
Unamortized debt financing costs |
| ( |
| ( | ||
Unamortized discount |
| ( |
| ( | ||
Total | $ | | $ | |
At December 31, 2022 and June 30, 2023, unamortized debt financing costs associated with the First Lien Revolver of $
Weighted-average interest rates for outstanding borrowings were approximately
As of December 31, 2022 and June 30, 2023, the First Lien Revolver available unused commitment line was $
As of December 31, 2022 and June 30, 2023, Focus LLC was contingently obligated for letters of credit in the amount of $
8. DERIVATIVES
At June 30, 2023, the Company had
At June 30, 2023, the Company also had
The Company designated its swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on this portion of its borrowings.
At December 31, 2022 and June 30, 2023, the aggregate fair value of the SOFR Swaps and SOFR Forward Swaps was $
18
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
the accompanying unaudited condensed consolidated balance sheets. The SOFR Swaps and SOFR Forward Swaps continue to be effective hedges, and as such, the offsetting adjustment to the fair value is recorded in accumulated other comprehensive income, net of tax of $
9. EQUITY
Exchange rights
Each Focus LLC common unit, together with a corresponding share of Focus Inc.’s Class B common stock, and Focus LLC incentive unit (after conversion into a number of Focus LLC common units taking into account the then-current value of the common units and such incentive unit’s aggregate hurdle amount) is exchangeable, pursuant to the terms and subject to the conditions set forth in the Operating Agreement, for one share of Focus Inc.’s Class A common stock, or, if either Focus Inc. or Focus LLC so elects, cash.
Other
In March 2023, Focus LLC issued
Stock Options and Restricted Stock Units
The following table provides information relating to the changes in the Company’s stock options during the six months ended June 30, 2023:
|
| Weighted | |||
Average | |||||
Stock | Exercise | ||||
Options | Price | ||||
Outstanding—January 1, 2023 |
| | $ | | |
Exercised | ( | | |||
Forfeited |
| ( |
| | |
Outstanding—June 30, 2023 | | ||||
Vested—June 30, 2023 | |
The Company uses the Black-Scholes option-pricing model to determine the fair value of time-based stock options. The determination of the fair value using the Black-Scholes option-pricing model is affected by the price of Focus Inc.’s Class A common stock, 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 stock option, expected term, risk-free interest rates and expected dividend yield.
19
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
The following table provides information relating to the changes in the Company’s restricted stock units during the six months ended June 30, 2023:
Weighted | |||||
Restricted | Average | ||||
Stock | Grant Date | ||||
| Units |
| Fair Value | ||
Outstanding—January 1, 2023 |
| $ | |||
Forfeited | ( | ||||
Outstanding—June 30, 2023 | |
In connection with the IPO, the Company granted market-based stock options to purchase an aggregate of
The Company recognized $
The Company recognized $
Focus LLC Restricted Common Units and Focus LLC Incentive Units
The following table provides information relating to the changes in Focus LLC restricted common units during the six months ended June 30, 2023:
|
| Weighted | |||
Restricted | Average | ||||
Common | Grant Date | ||||
Units | Fair Value | ||||
Outstanding—January 1, 2023 |
| | $ | | |
Forfeited |
| ( | | ||
Outstanding—June 30, 2023 |
| |
| |
20
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
The following table provides information relating to the changes in Focus LLC incentive units during the six months ended June 30, 2023:
|
| Weighted | |||
Average | |||||
Incentive | Hurdle | ||||
Units | Price | ||||
Outstanding—January 1, 2023 |
| $ | | ||
Forfeited |
| ( | | ||
Outstanding—June 30, 2023 |
| |
| | |
Vested—June 30, 2023 |
| |
| |
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.
21
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
Incentive units outstanding and vested at June 30, 2023 were as follows:
| Number |
| Vested | |
Hurdle Rates | Outstanding | Units | ||
$ |
| | | |
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | | ||
| | |||
| | | ||
| | |||
| | |||
| | |||
| | | ||
| | |||
| — | |||
| | |||
| | |||
| | |||
| | |||
| |
In connection with the IPO, Focus LLC granted
22
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
interpolation in between, except as governed by the employment agreements entered into with the Company’s executive officers.
The Company recorded $
The Company recorded $
10. INCOME TAXES
The effective tax rate for the six months ended June 30, 2023 was
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. Due to the uncertainty regarding the Company’s ability to utilize certain deferred tax assets in the future, the Company included a valuation allowance in its estimated annual effective tax rate at June 30, 2023 against certain of its deferred tax assets, which more than likely will not be realized.
During the six months ended June 30, 2023, there were
11. TAX RECEIVABLE AGREEMENTS
In connection with the IPO and the reorganization transactions that occurred in connection with the IPO, Focus Inc. entered into
As of June 30, 2023, the Company had recorded a liability of $
23
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
shares of Class A common stock will be in addition to the amount recorded. During the six months ended June 30, 2023, payments totaling $
12. COMMITMENTS AND CONTINGENCIES
Credit Risk—The Company’s broker-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-dealer subsidiaries and their clearing brokers, the clearing brokers have the right to charge the Company’s broker-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 clearing brokers. Accordingly, at December 31, 2022 and June 30, 2023, the Company had recorded
In addition, the Company has the right to pursue collection or performance from the counterparties who do not perform under their contractual obligations. The Company monitors the credit standing of the clearing brokers and counterparties with which they conduct business.
The Company is exposed to credit risk for accounts receivable from clients. Such credit risk is limited to the amount of accounts receivable.
The counterparties to the Company’s derivative financial instruments are major international financial institutions. The Company is exposed to credit risk for the net exchanges under these agreements, but not for the notional amounts. The Company does not anticipate non-performance by any of its counterparties.
The Company maintains its cash in bank depository accounts, which, at times, may exceed federally insured limits. The Company selects depository institutions based, in part, upon management’s review of the financial stability of the institution. At December 31, 2022 and June 30, 2023, a significant portion of cash and cash equivalents were held at a single institution.
Contingent Consideration Arrangements—Contingent consideration is payable in the form of cash and, in some cases, equity. Since the contingent consideration to be paid is based on the growth of forecasted financial performance levels over a number of years, the Company cannot calculate the maximum contingent consideration that may be payable under these arrangements.
Legal and Regulatory Matters— In the ordinary course of business, the Company and its subsidiaries are involved in lawsuits, regulatory matters and other claims. The Company has insurance to cover certain losses that arise in such matters; however, this insurance may not be sufficient to cover these losses. Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of any existing legal matters will have a material effect on the Company’s consolidated financial position, results of operations or cash flows. From time to time, the Company and its subsidiaries receive requests for information from governmental authorities regarding business activities. The Company continues to believe that the resolution of any governmental inquiry will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Litigation Relating to the Merger— On March 28, 2023, Mark “Mickey” Segal and KSFB Management, LLC (“KSFB”), the management company for certain Focus LLC subsidiaries (the “NKSFB Subsidiaries”), brought an action against Focus LLC and Goldman Sachs in the Superior Court of the State of California. The complaint alleged, among other things, that Focus LLC and Goldman Sachs’ efforts in respect of a potential sale of the Company to CD&R violated certain duties and obligations owed to Mr. Segal and KSFB in connection with a separate potential transaction involving the sale of the NKSFB Subsidiaries and KSFB. Mr. Segal voluntarily
24
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
dismissed certain claims in June 2023 and, on August 2, 2023, the court dismissed the remainder of the case based on the applicable New York forum selection clause. Additionally, on June 7, 2023, KSFB brought an additional action against Focus LLC in the Superior Court of the State of California seeking declaratory and injunctive relief with respect to the enforceability of a restrictive covenant contained in a management agreement among Focus LLC, the NKSFB Subsidiaries, KSFB and the principals party thereto.
On June 19, 2023, a purported stockholder of the Company brought an action against the individual members of the board, certain members of Company management, Focus Inc., CD&R, and Stone Point in New York state court. The complaint alleged that the proxy statement filed in connection with the Merger negligently misrepresented or omitted certain information. In order to moot what the Company considered to be unmeritorious disclosure claims, alleviate the costs, risks and uncertainties inherent in litigation and provide additional information to its stockholders, the Company determined to voluntarily supplement the proxy statement with certain information as described in the Current Report on Form 8-K filed on July 6, 2023. As a result of such supplemental disclosure, the named plaintiff decided that the claims in the lawsuit were mooted and dismissed the action with prejudice on July 7, 2023.
In July 2023, four purported stockholders of the Company brought actions against the Company in the Delaware Court of Chancery seeking the Company’s books and records relating to the Mergers.
The Company intends to defend all of the above lawsuits that remain active vigorously but cannot predict the ultimate outcome of these lawsuits or the amount of time and expense that will be required to resolve them.
Indemnifications—In the ordinary course of business, the Company enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.
Management believes that the likelihood of any material liability arising under these indemnification provisions is remote. Management cannot estimate any potential maximum exposure due to both the remoteness of any potential claims and the fact that items that would be included within any such calculated claim would be beyond the control of the Company. Consequently, no liability has been recorded in the unaudited condensed consolidated balance sheets.
13. CASH FLOW INFORMATION
Six Months Ended | ||||||
June 30, | ||||||
| 2022 |
| 2023 | |||
Supplemental disclosures of cash flow information—cash paid for: | ||||||
Interest | $ | | $ | | ||
Income taxes | $ | | $ | | ||
Supplemental non-cash cash flow information: |
|
|
|
| ||
Fair market value of estimated contingent consideration in connection with acquisitions | $ | | $ | |
14. RELATED PARTIES
The Company’s Chief Executive Officer, through an entity owned and controlled by him, owns a personal aircraft that was acquired without Company resources that he uses for business travel. The Company reimburses the Company’s Chief Executive Officer for certain costs and third party payments associated with the
25
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
use of his personal aircraft for Company-related business travel. The Company also pays pilot fees for such business travel flights. During the three and six months ended June 30, 2022, the Company recognized expenses of $
Certain Company employees perform outsourced accounting services to an affiliated entity. In connection with these services, the Company recognized revenues of $
At June 30, 2023, affiliates of certain holders of the Company’s Class A common stock and Class B common stock were lenders under the Credit Facility.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or the context requires, all references to “we,” “us,” “our,” the “Company,” “Focus Inc.” refer to Focus Financial Partners Inc. and its consolidated subsidiaries. “Focus LLC” refers to Focus Financial Partners, LLC, a Delaware limited liability company and our consolidated subsidiary.
The term “partner firms” refers to our consolidated subsidiaries engaged in wealth management and related services, the businesses of which are typically managed by the principals. The term “principals” refers to the wealth management professionals who manage the businesses of our partner firms pursuant to the relevant management agreement. The term “our partnership” refers to our business and relationship with our partner firms and is not intended to describe a particular form of legal entity or a legal relationship.
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2022 and 2023.
Forward-Looking Statements
Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events, including with respect to the pending Merger. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” “continue,” “will” and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (“SEC”) on February 16, 2023, and in our other filings with the SEC. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
● | our ability to complete the proposed Merger on the terms and timeline anticipated, or at all, the effect of the pendency of the Merger on our business or business relationships, including our ability to maintain relationships with our partner firm clients and other parties and principals and employees and management’s attention to day-to-day operations of our business, and other risks and uncertainties related to the Merger that may affect future results; |
● | fluctuations in wealth management fees; |
● | our reliance on our partner firms and the principals who manage their businesses; |
● | our ability to make successful acquisitions; |
● | unknown liabilities of or poor performance by acquired businesses; |
● | harm to our reputation; |
● | our inability to facilitate smooth succession planning at our partner firms; |
● | our inability to compete; |
● | our reliance on key personnel and principals; |
● | our inability to attract, develop and retain talented wealth management professionals; |
● | our inability to retain clients following an acquisition; |
27
● | our reliance on key vendors; |
● | write down of goodwill and other intangible assets; |
● | our failure to maintain and properly safeguard an adequate technology infrastructure; |
● | cyber-attacks and other disruptions; |
● | our inability to recover from business continuity problems; |
● | inadequate insurance coverage; |
● | the termination of management agreements by management companies; |
● | our inability to generate sufficient cash to service all of our indebtedness or our ability to access additional capital; |
● | the failure of our partner firms to comply with applicable U.S. and non-U.S. regulatory requirements and the highly regulated nature of our business; |
● | worsening economic conditions, including inflation, in the United States or internationally; |
● | wars or other geopolitical conflict; |
● | changes to laws and regulations; |
● | legal proceedings and governmental inquiries, including any shareholder litigation related to the proposed Merger; and |
● | other factors discussed in this Quarterly Report on Form 10-Q, including in Part II, Item 1A. “Risk Factors”. |
All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements. Our forward-looking statements speak only as of the date of this Quarterly Report or as of the date as of which they are made. Except as required by applicable law, including federal securities laws, we do not intend to update or revise any forward-looking statements.
Overview
We are a leading partnership of independent, fiduciary wealth management firms operating in the highly fragmented registered investment advisor (“RIA”) industry, with a footprint of 90 partner firms primarily in the United States. We have achieved this market leadership by positioning ourselves as the partner of choice for many firms in an industry where a number of secular trends are driving consolidation. Our partner firms primarily service ultra-high net worth and high net worth individuals and families by providing highly differentiated and comprehensive wealth management services. Our partner firms benefit from our intellectual and financial resources, operating as part of a scaled business model with aligned economic interests, while retaining their entrepreneurial culture and independence.
Our partnership is composed of trusted professionals providing comprehensive wealth management services through a largely recurring, fee-based model, which differentiates our partner firms from the traditional brokerage platforms whose revenues are largely derived from commissions. We derive a substantial majority of our revenues from wealth management fees for investment advice, financial and tax planning, consulting, tax return preparation, family office services and other services. We also generate other revenues primarily from recordkeeping and administration service fees, commissions and distribution fees and outsourced services.
We have to date, with limited exceptions, acquired substantially all of the assets of the firms we chose to partner with but only a portion of the underlying economics in order to align the principals’ interests with our own objectives. To determine the acquisition price, we first estimate the operating cash flow of the business based on current
28
and projected levels of revenue and expense, before compensation and benefits to the selling principals or other individuals who become principals. We refer to the operating cash flow of the business as Earnings Before Partner Compensation (“EBPC”) and to this EBPC estimate as Target Earnings (“Target Earnings”). In economic terms, we typically purchase only 40% to 60% of the partner firm’s EBPC. The purchase price is a multiple of the corresponding percentage of Target Earnings and may consist of cash or a combination of cash and equity, and the right to receive contingent consideration. We refer to the corresponding percentage of Target Earnings on which we base the purchase price as Base Earnings (“Base Earnings”). Under a management agreement between our operating subsidiary and the management company and the principals, the management company is entitled to management fees typically consisting of all future EBPC of the acquired wealth management firm in excess of Base Earnings up to Target Earnings, plus a percentage of any EBPC in excess of Target Earnings. Through the management agreement, we create downside protection for ourselves by retaining a preferred position in Base Earnings.
For mergers on behalf of our partner firms, including mergers for Connectus Wealth Advisers (“Connectus”), one of our partner firms, we typically purchase all of the target firms’ EBPC and principals and other personnel of the target firm join our partner firm as employees or may join the related management company as a principal in some instances. There typically is an adjustment to Target Earnings and Base Earnings in the related management agreement if applicable based on the economics of the transaction.
Since 2006, when we began revenue-generating and acquisition activities, we have created a partnership of 90 partner firms, the substantial majority of which are RIAs registered with the SEC and built a business with revenues of $2.1 billion for the year ended December 31, 2022 and $1.1 billion for the six months ended June 30, 2023. For the year ended December 31, 2022 and the six months ended June 30, 2023, in excess of 95% of our revenues were fee-based and recurring in nature. We have established a national footprint across the United States and primarily expanded our international footprint into Australia, Canada, Switzerland and the United Kingdom.
Recent Developments - Agreement and Plan of Merger
On February 27, 2023, Focus Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Focus Inc., Focus LLC and Ferdinand FFP Acquisition, LLC, a Delaware limited liability company (“Parent”) that is affiliated with Clayton, Dubilier & Rice, LLC (“CD&R”) and Stone Point Capital LLC (“Stone Point”) and certain other entities affiliated with Parent pursuant to which Focus Inc. is to be acquired by affiliates of CD&R in an all-cash transaction (the “Merger”). Affiliates of Stone Point will retain a portion of their investment in Focus Inc. and provide new equity financing as part of the Merger. Subject to the terms and conditions of the Merger Agreement, each share of the Company’s Class A common stock will receive $53 in cash per share and each share of the Company’s Class B common stock will be cancelled. If the Merger is consummated, the Company will cease to be publicly-traded. A special committee (the “Special Committee”) of the board of directors of the Company (the “Board”), comprised solely of disinterested and independent members of the Board, unanimously recommended that the Board approve the Merger Agreement and the transactions contemplated thereby and recommend that the shareholders of the Company vote in favor of adoption of the Merger Agreement. The Board, acting on the Special Committee’s recommendation, unanimously approved the Merger Agreement and the transactions contemplated thereby and recommended that the shareholders of the Company vote to adopt and approve the Merger Agreement.
At a Special Meeting held on July 14, 2023, the shareholders of the Company, including a majority in voting power of the outstanding shares of common stock held by Unaffiliated Stockholders (as defined in the Merger Agreement), adopted and approved the Merger Agreement. Completion of the Merger is subject to other customary closing conditions. The Merger is expected to close in the third quarter of 2023. However, the Company cannot assure completion of the Merger by any particular date, if at all or that, if completed, it will be completed on the terms set forth in the Merger Agreement.
For more information, please refer to Note 1 to our unaudited condensed consolidated financial statements.
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Sources of Revenue
Our partner firms provide comprehensive wealth management services through a largely recurring, fee-based model. We derive a substantial majority of our revenue from wealth management fees, which are composed of fees earned from wealth management services, including investment advice, financial and tax planning, consulting, tax return preparation, family office services and other services. 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. In certain cases, such wealth management fees may be subject to minimum fee levels depending on the services performed. We also generate other revenues, which primarily include recordkeeping and administration service fees, commissions and distribution fees and outsourced services. The following table summarizes our sources of revenue:
Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||||||||||||||
2022 | 2023 |
| 2022 | 2023 |
| ||||||||||||||||||
|
| % of Total |
|
| % of Total |
|
|
| % of Total |
|
| % of Total |
| ||||||||||
Revenues | Revenues | Revenues | Revenues |
| Revenues | Revenues | Revenues | Revenues |
| ||||||||||||||
(dollars in thousands) | (dollars in thousands) |
| |||||||||||||||||||||
Wealth management fees | $ | 517,421 |
| 96.0 | % | $ | 555,574 |
| 95.2 | % | $ | 1,032,600 |
| 96.0 | % | $ | 1,089,463 |
| 95.5 | % | |||
Other |
| 21,790 |
| 4.0 | % |
| 28,231 |
| 4.8 | % |
| 43,178 |
| 4.0 | % |
| 51,849 |
| 4.5 | % | |||
Total revenues | $ | 539,211 |
| 100.0 | % | $ | 583,805 |
| 100.0 | % | $ | 1,075,778 |
| 100.0 | % | $ | 1,141,312 |
| 100.0 | % |
During the three and six months ended June 30, 2023, our wealth management fees were impacted by the acquisition of new partner firms and the growth of existing partner firms, which includes the acquisitions of wealth management practices by our existing partner firms. During the three and six months ended June 30, 2023, our partner firms completed 3 and 14 acquisitions, respectively, consisting of business acquisitions accounted for in accordance with Financial Accounting Standards Board Accounting Standard Codification (“ASC”) Topic 805: Business Combinations.
See Note 4 to our unaudited condensed consolidated financial statements for additional information about our acquisitions.
For the six months ended June 30, 2023, in excess of 95% of our revenues were fee-based and recurring in nature. Although the substantial majority of our revenues are fee-based and recurring, our revenues can fluctuate due to macroeconomic factors and the overall state of the financial markets, particularly in the United States. Our partner firms’ wealth management 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. Additionally, we estimate that approximately 26% of our revenues for the three and six months ended June 30, 2023 were not directly correlated to the financial markets. Of the approximately 74% of our revenues that were directly correlated to the financial markets, primarily equities and fixed income, for each of the three and six months ended June 30, 2023, we estimate that approximately 65% of such revenues were generated from advance billings. These revenues are impacted by market movements as a result of contractual provisions with clients that entitle our partner firms to bill for their services either in advance or arrears based on the value of client assets at such time. Since approximately 65% of our market correlated revenues are set based on the market value of client assets in advance of the respective service period, this generally results in a one quarter lagged effect of any market movements on our revenues. Longer term trends in the financial markets may favorably or unfavorably impact our total revenues, but not in a linear relationship.
Operating Expenses
Our operating expenses consist of compensation and related expenses, management fees, selling, general and administrative expenses, intangible amortization, non-cash changes in fair value of estimated contingent consideration and depreciation and other amortization expense.
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Compensation and Related Expenses
Compensation and related expenses include salaries and wages, including variable compensation, related employee benefits and taxes for employees at our partner firms and employees at the Focus LLC company level. Compensation and related expenses also include non-cash compensation expense associated with both Focus Inc.’s and Focus LLC’s equity grants to employees and non-employees, including management company principals.
Management Fees
While we have to date, with limited exceptions, acquired substantially all of the assets of a target firm, following our acquisition of a new partner firm, the partner firm continues to be primarily managed by its principals through their 100% ownership of a new management company formed by them concurrently with the acquisition. Our operating subsidiary, the management company and the principals enter into a management agreement that provides for the payment of ongoing management fees to the management company. The terms of the management agreements are generally six years subject to automatic renewals for consecutive one-year terms, unless earlier terminated by either the management company or us in certain limited situations. Under the management agreement, the management company is entitled to management fees typically consisting of all EBPC in excess of Base Earnings up to Target Earnings, plus a percentage of EBPC in excess of Target Earnings.
We generally retain a preferred position in Base Earnings. To the extent earnings of an acquired business in any year are less than Base Earnings, in the following year we are entitled to receive Base Earnings together with the prior years’ shortfall before any management fees are earned by the management company.
The following table provides an illustrative example of our economics, including management fees earned by the management company, for periods of projected revenues, +10% growth in revenues and −10% growth in revenues. This example assumes (i) Target Earnings of $3.0 million; (ii) Base Earnings acquired of 60% of Target Earnings or $1.8 million; and (iii) a percentage of earnings in excess of Target Earnings retained by the management company of 40%.
Projected | +10% Growth in | −10% Growth | |||||||||
| Revenues |
| Revenues |
| in Revenues | ||||||
(in thousands) | |||||||||||
New Partner Firm | |||||||||||
New partner firm revenues | $ | 5,000 | $ | 5,500 | $ | 4,500 | |||||
Less: | |||||||||||
Operating expenses (excluding management fees) |
| (2,000) |
| (2,000) |
| (2,000) | |||||
EBPC | $ | 3,000 | $ | 3,500 | $ | 2,500 | |||||
Base Earnings to Focus Inc. (60%) |
| 1,800 |
| 1,800 |
| 1,800 | |||||
Management fees to management company (40%) |
| 1,200 |
| 1,200 |
| 700 | |||||
EBPC in excess of Target Earnings: | |||||||||||
To Focus Inc. (60%) |
| — |
| 300 |
| — | |||||
To management company as management fees (40%) |
| — |
| 200 |
| — | |||||
Focus Inc. | |||||||||||
Focus Inc. revenues | $ | 5,000 | $ | 5,500 | $ | 4,500 | |||||
Less: | |||||||||||
Operating expenses (excluding management fees) |
| (2,000) |
| (2,000) |
| (2,000) | |||||
Less: | |||||||||||
Management fees to management company |
| (1,200) |
| (1,400) |
| (700) | |||||
Operating income | $ | 1,800 | $ | 2,100 | $ | 1,800 | |||||
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As a result of our economic arrangements with the various management company entities, 100% of management fees are variable expenses.
Selling, General and Administrative
Selling, general and administrative expenses include rent, insurance premiums, professional fees, travel and entertainment, Merger-related expenses and other costs.
Intangible Amortization
Amortization of intangibles consists of the amortization of intangibles we acquired through our various acquisitions of new partner firms and acquisitions by our partner firms.
Non-Cash Changes in Fair Value of Estimated Contingent Consideration
We have typically incorporated into our acquisition structure contingent consideration paid to the sellers upon the satisfaction of specified financial thresholds, and the purchase price for a typical acquisition is comprised of a base purchase price and the right to receive such contingent consideration in the form of earn out payments. The contingent consideration for acquisitions of new partner firms is generally paid over a six-year period upon the satisfaction of specified growth thresholds, in years three and six. These growth thresholds are typically tied to the compound annual growth rate (“CAGR”) of the partner firm’s earnings. Such growth thresholds can be set annually or for different time frames as well, for example, annually over a six-year period. The contingent consideration for acquisitions made by our partner firms is paid upon the satisfaction of specified financial thresholds. These thresholds are generally tied to revenue as adjusted for certain criteria or other operating metrics based on the retention or growth of the business acquired. These arrangements may result in the payment of additional purchase price consideration to the sellers for periods following the closing of an acquisition. Contingent consideration payments are typically payable in cash and, in some cases, equity.
For business acquisitions, we recognize the fair value of estimated contingent consideration at the acquisition date as part of the consideration transferred in exchange for substantially all of the assets of the wealth management firm. 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 our consolidated statements of operations.
Depreciation and Other Amortization
Depreciation and other amortization expense primarily represents the benefits we received from using long-lived assets such as computers and equipment, leasehold improvements and furniture and fixtures. Those assets primarily consist of purchased fixed assets as well as fixed assets acquired through our acquisitions.
Business Acquisitions
We completed 16 business acquisitions during the six months ended June 30, 2023, consisting of new partner firm acquisitions and acquisitions by partner firms. Such business acquisitions were accounted for in accordance with ASC Topic 805: Business Combinations.
The purchase price is comprised of a base purchase price and a right to receive contingent consideration in the form of earn out payments. The base purchase price can consist of an upfront cash payment, deferred cash consideration and may include equity. The contingent consideration for acquisitions of new partner firms generally consists of earn outs over a six-year period following the closing, with payment upon the satisfaction of specified growth thresholds in years three and six. The growth thresholds are typically tied to the CAGR of the partner firm’s earnings. Such growth thresholds can be set annually or for different time frames as well, for example, annually over a six-year period. The contingent consideration for acquisitions made by our partner firms generally is earned upon the satisfaction of specified financial thresholds, typically annually. These thresholds are generally tied to revenue as adjusted for certain criteria or
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other operating metrics based on the retention or growth of the business acquired. The contingent consideration is typically payable in cash and, in some cases, equity.
The following table summarizes our business acquisitions for the six months ended June 30, 2023 (dollars in thousands):
Number of business acquisitions closed | 16 | |
Consideration: | ||
Cash due at closing | $ | 134,601 |
Cash due subsequent to closing at net present value and working capital adjustment |
| 3,450 |
Fair market value of Focus LLC common units issued at closing |
| 36,973 |
Fair market value of estimated contingent consideration |
| 212,624 |
Total consideration | $ | 387,648 |
During the six months ended June 30, 2023, our acquisitions have been paid for with a combination of cash on hand, cash generated by our operations, borrowings under the Credit Facility and Focus LLC common units.
How We Evaluate Our Business
We focus on several key financial metrics in evaluating the success of our business, the success of our partner firms and our resulting financial position and operating performance. Key metrics for the three and six months ended June 30, 2022 and 2023 include the following:
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Three Months Ended |
| Six Months Ended |
| ||||||||||||
June 30, | June 30, | ||||||||||||||
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| |||||||
(dollars in thousands, except per share data) | |||||||||||||||
Revenue Metrics: |
|
|
|
|
|
|
| ||||||||
Revenues | $ | 539,211 | $ | 583,805 | $ | 1,075,778 | $ | 1,141,312 | |||||||
Revenue growth (1) from prior period |
| 26.8 | % |
| 8.3 | % |
| 31.3 | % |
| 6.1 | % | |||
Organic revenue growth (2) from prior period |
| 15.0 | % |
| 4.9 | % |
| 18.6 | % |
| 2.6 | % | |||
Management Fees Metrics (operating expense): | |||||||||||||||
Management fees | $ | 136,802 | $ | 139,035 | $ | 274,641 | $ | 263,629 | |||||||
Management fees growth (3) from prior period |
| 17.7 | % |
| 1.6 | % |
| 25.8 | % |
| (4.0) | % | |||
Organic management fees growth (4) from prior period |
| 8.4 | % |
| 0.5 | % |
| 14.5 | % |
| (5.4) | % | |||
Net Income (loss) Metrics: | |||||||||||||||
Net income | $ | 49,318 | $ | 29,082 | $ | 88,400 | $ | 22,105 | |||||||
Net income growth from prior period | * | (41.0) | % | * | (75.0) | % | |||||||||
Income (loss) per share of Class A common stock: | |||||||||||||||
Basic | $ | 0.51 | $ | 0.49 | $ | 0.95 | $ | 0.48 | |||||||
Diluted | $ | 0.50 | $ | (0.10) | $ | 0.95 | $ | (0.32) | |||||||
Income (loss) per share of Class A common stock growth from prior period: | |||||||||||||||
Basic | * | (3.9) | % | * | (49.5) | % | |||||||||
Diluted | * | (120.0) | % | * | (133.7) | % | |||||||||
Adjusted EBITDA Metrics: | |||||||||||||||
Adjusted EBITDA (5) | $ | 137,021 | $ | 136,022 | $ | 272,101 | $ | 268,540 | |||||||
Adjusted EBITDA growth (5) from prior period |
| 27.1 | % |
| (0.7) | % |
| 30.3 | % |
| (1.3) | % | |||
Adjusted Net Income Excluding Tax Adjustments Metrics: | |||||||||||||||
Adjusted Net Income Excluding Tax Adjustments (5) | $ | 81,679 | $ | 61,347 | $ | 164,752 | $ | 121,471 | |||||||
Adjusted Net Income Excluding Tax Adjustments growth (5) from prior period |
| 20.5 | % |
| (24.9) | % |
| 25.5 | % |
| (26.3) | % | |||
Tax Adjustments | |||||||||||||||
Tax Adjustments (5)(6) | $ | 15,977 | $ | 17,637 | $ | 30,790 | $ | 35,015 | |||||||
Tax Adjustments growth from prior period (5)(6) | 44.7 | % | 10.4 | % | 43.0 | % | 13.7 | % | |||||||
Adjusted Net Income Excluding Tax Adjustments Per Share and Tax Adjustments Per Share Metrics: | |||||||||||||||
Adjusted Net Income Excluding Tax Adjustments Per Share (5) | $ | 0.99 | $ | 0.70 | $ | 2.01 | $ | 1.39 | |||||||
Tax Adjustments Per Share (5)(6) | $ | 0.19 | $ | 0.20 | $ | 0.37 | $ | 0.40 | |||||||
Adjusted Net Income Excluding Tax Adjustments Per Share growth (5) from prior period |
| 17.9 | % |
| (29.3) | % |
| 24.1 | % |
| (30.8) | % | |||
Tax Adjustments Per Share growth from prior period (5)(6) | 35.7 | % | 5.3 | % | 37.0 | % | 8.1 | % | |||||||
Adjusted Shares Outstanding | |||||||||||||||
Adjusted Shares Outstanding (5) |
| 82,312,683 |
| 87,533,867 |
| 82,123,532 |
| 87,238,409 | |||||||
Other Metrics: | |||||||||||||||
Net Leverage Ratio (7) at period end | 3.90x | 4.36x | 3.90x | 4.36x | |||||||||||
Acquired Base Earnings (8) | $ | 11,450 | $ | 11,066 | $ | 11,450 | $ | 12,797 | |||||||
Number of partner firms at period end (9) |
| 85 |
| 90 |
| 85 |
| 90 |
* Not meaningful
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(1) | Represents period-over-period growth in our GAAP revenue. |
(2) | Organic revenue growth represents the period-over-period growth in revenue related to partner firms, including growth related to acquisitions of wealth management practices and customer relationships by our partner firms, including Connectus, and partner firms that have merged, that for the entire periods presented, are included in our consolidated statements of operations for each of the entire periods presented. We believe these growth statistics are useful in that they present full-period revenue growth of partner firms on a “same store” basis exclusive of the effect of the partial period results of partner firms that are acquired during the comparable periods. |
(3) | The terms of our management agreements entitle the management companies to management fees typically consisting of all EBPC in excess of Base Earnings up to Target Earnings, plus a percentage of any EBPC in excess of Target Earnings. Management fees growth represents the period-over-period growth in GAAP management fees earned by management companies. While an expense, we believe that growth in management fees reflect the strength of the partnership. |
(4) | Organic management fees growth represents the period-over-period growth in management fees earned by management companies related to partner firms, including growth related to acquisitions of wealth management practices and customer relationships by our partner firms and partner firms that have merged, that for the entire periods presented, are included in our consolidated statements of operations for each of the entire periods presented. We believe that these growth statistics are useful in that they present full-period growth of management fees on a “same store” basis exclusive of the effect of the partial period results of partner firms that are acquired during the comparable periods. |
(5) | For additional information regarding Adjusted EBITDA, Adjusted Net Income Excluding Tax Adjustments, Adjusted Net Income Excluding Tax Adjustments Per Share, Tax Adjustments, Tax Adjustments Per Share and Adjusted Shares Outstanding, including a reconciliation of Adjusted EBITDA, Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share to the most directly comparable GAAP financial measure, please read “—Adjusted EBITDA” and “—Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share.” |
(6) | Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income tax rate. Such amounts were generated from acquisitions completed where we received a step-up in basis for tax purposes. Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets provide additional significant supplemental economic benefit. The tax benefit from amortization is included to show the full economic benefit of deductions for acquired intangible assets with the step-up in tax basis. As of June 30, 2023, estimated Tax Adjustments from intangible asset related income tax benefits from closed acquisitions based on a pro forma 27% income tax rate for the next 12 months is $70,769. |
(7) | Net Leverage Ratio represents the First Lien Leverage Ratio (as defined in the Credit Facility), and means the ratio of amounts outstanding under the first lien term loan A (the “First Lien Term Loan A”), first lien term loan B (the “First Lien Term Loan B” and together with the “First Lien Term Loan A,” the “First Lien Term Loan”), and First Lien Revolver 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). |
(8) | The terms of our management agreements entitle the management companies to management fees typically consisting of all future EBPC of the acquired wealth management firm in excess of Base Earnings up to Target Earnings, plus a percentage of any EBPC in excess of Target Earnings. Acquired Base Earnings is equal to our collective preferred position in Base Earnings or comparable measures. We are entitled to receive these earnings notwithstanding any earnings that we are entitled to receive in excess of Target Earnings. Base Earnings may change in future periods for various business or contractual matters. For example, from time to time when a partner firm consummates an acquisition, the management agreement among the partner firm, the management company |
35
and the principals is amended to adjust Base Earnings and Target Earnings to reflect the projected post-acquisition earnings of the partner firm. |
(9) | Represents the number of partner firms on the last day of the period presented. |
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure. Adjusted EBITDA is defined as net income excluding interest income, interest expense, income tax expense (benefit), amortization of debt financing costs, intangible amortization and impairments, if any, depreciation and other amortization, non-cash equity compensation expense, non-cash changes in fair value of estimated contingent consideration, other expense-net and Merger-related expenses, if any. We believe that Adjusted EBITDA, viewed in addition to and not in lieu of, our reported GAAP results, provides additional useful information to investors regarding our performance and overall results of operations for various reasons, including the following:
● | non-cash equity grants made to employees or non-employees at a certain price and point in time do not necessarily reflect how our business is performing at any particular time; stock-based compensation expense is not a key measure of our operating performance; |
● | contingent consideration or earn outs can vary substantially from company to company and depending upon each company’s growth metrics and accounting assumption methods; the non-cash changes in fair value of estimated contingent consideration is not considered a key measure in comparing our operating performance; and |
● | amortization expenses can vary substantially from company to company and from period to period depending upon each company’s financing and accounting methods, the fair value and average expected life of acquired intangible assets and the method by which assets were acquired; the amortization of intangible assets obtained in acquisitions are not considered a key measure in comparing our operating performance. |
We use Adjusted EBITDA:
● | as a measure of operating performance; |
● | for planning purposes, including the preparation of budgets and forecasts; |
● | to allocate resources to enhance the financial performance of our business; |
● | to evaluate the effectiveness of our business strategies; and |
● | as a consideration in determining compensation for certain employees. |
Adjusted EBITDA does not purport to be an alternative to net income or cash flows from operating activities. The term Adjusted EBITDA is not defined under GAAP, and Adjusted EBITDA is not a measure of net income, operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
● | Adjusted EBITDA does not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments; |
● | Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and |
● | Adjusted EBITDA does not reflect the interest expense on our debt or the cash requirements necessary to service interest or principal payments. |
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In addition, Adjusted EBITDA can differ significantly from company to company depending on strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We compensate for these limitations by relying also on the GAAP results and using Adjusted EBITDA as supplemental information.
Set forth below is a reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2022 and 2023:
Three Months Ended |
| Six Months Ended | |||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2023 |
| 2022 |
| 2023 | ||||||
(in thousands) | |||||||||||||
Net income | $ | 49,318 | $ | 29,082 | $ | 88,400 | $ | 22,105 | |||||
Interest income |
| (17) |
| (639) |
| (20) |
| (1,103) | |||||
Interest expense |
| 19,892 |
| 48,341 |
| 37,508 |
| 92,270 | |||||
Income tax expense (benefit) |
| 32,228 |
| (41,279) |
| 47,845 |
| (59,982) | |||||
Amortization of debt financing costs |
| 949 |
| 1,115 |
| 2,050 |
| 2,220 | |||||
Intangible amortization |
| 64,649 |
| 74,623 |
| 124,925 |
| 146,409 | |||||
Depreciation and other amortization |
| 3,805 |
| 4,053 |
| 7,438 |
| 8,020 | |||||
Non‑cash equity compensation expense |
| 7,503 |
| 7,688 |
| 14,210 |
| 15,599 | |||||
Non‑cash changes in fair value of estimated contingent consideration |
| (42,757) |
| 6,076 |
| (51,742) |
| 22,564 | |||||
Other expense—net |
| 1,451 |
| 229 |
| 1,487 |
| 2,954 | |||||
Merger-related expenses (1) |
| — |
| 6,733 |
| — |
| 17,484 | |||||
Adjusted EBITDA | $ | 137,021 | $ | 136,022 | $ | 272,101 | $ | 268,540 |
(1) Represents costs incurred in conjunction with the Merger. For more information, please refer to Note 1 to our unaudited condensed consolidated financial statements.
Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share
We analyze our performance using Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share. Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are non-GAAP measures. We define Adjusted Net Income Excluding Tax Adjustments as net income excluding income tax expense (benefit), amortization of debt financing costs, intangible amortization and impairments, if any, non-cash equity compensation expense, non-cash changes in fair value of estimated contingent consideration and Merger-related expenses, if any. The calculation of Adjusted Net Income Excluding Tax Adjustments also includes adjustments to reflect a pro forma 27% income tax rate reflecting the estimated U.S. federal, state, local and foreign income tax rates applicable to corporations in the jurisdictions we conduct business and is used for comparative purposes. The actual effective income tax rate, in current or future periods, may differ significantly from the pro forma income tax rate of 27%.
Adjusted Net Income Excluding Tax Adjustments Per Share is calculated by dividing Adjusted Net Income Excluding Tax Adjustments by the Adjusted Shares Outstanding. Adjusted Shares Outstanding includes: (i) the weighted average shares of Class A common stock outstanding during the periods, (ii) the weighted average incremental shares of Class A common stock related to stock options and restricted stock units outstanding during the periods, (iii) the weighted average number of Focus LLC common units outstanding during the periods (assuming that 100% of such Focus LLC common units, including contingently issuable Focus LLC common units, if any, have been exchanged for Class A common stock), (iv) the weighted average number of Focus LLC restricted common units outstanding during the periods (assuming that 100% of such Focus LLC restricted common units have been exchanged for Class A common stock) and (v) the weighted average number of common unit equivalents of Focus LLC vested and unvested incentive units outstanding during the periods based on the closing price of our Class A common stock on the last trading day of the periods (assuming that 100% of such Focus LLC common units have been exchanged for Class A common stock).
We believe that Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share, viewed in addition to and not in lieu of, our reported GAAP results, provide additional useful
37
information to investors regarding our performance and overall results of operations for various reasons, including the following:
● | non-cash equity grants made to employees or non-employees at a certain price and point in time do not necessarily reflect how our business is performing at any particular time; stock-based compensation expense is not a key measure of our operating performance; |
● | contingent consideration or earn outs can vary substantially from company to company and depending upon each company’s growth metrics and accounting assumption methods; the non-cash changes in fair value of estimated contingent consideration is not considered a key measure in comparing our operating performance; and |
● | amortization expenses can vary substantially from company to company and from period to period depending upon each company’s financing and accounting methods, the fair value and average expected life of acquired intangible assets and the method by which assets were acquired; the amortization of intangible assets obtained in acquisitions are not considered a key measure in comparing our operating performance. |
Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share do not purport to be an alternative to net income or cash flows from operating activities. The terms Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are not defined under GAAP, and Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are not a measure of net income, operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
● | Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share do not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments; |
● | Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share do not reflect changes in, or cash requirements for, working capital needs; and |
● | Other companies in the financial services industry may calculate Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share differently than we do, limiting its usefulness as a comparative measure. |
In addition, Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share can differ significantly from company to company depending on strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We compensate for these limitations by relying also on the GAAP results and use Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share as supplemental information.
Tax Adjustments and Tax Adjustments Per Share
Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income tax rate. Such amounts were generated from acquisitions completed where we received a step-up in basis for tax purposes. Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets provide additional significant supplemental economic
38
benefit. The tax benefit from amortization is included to show the full economic benefit of deductions for acquired intangible assets with the step-up in tax basis.
Tax Adjustments Per Share is calculated by dividing Tax Adjustments by the Adjusted Shares Outstanding.
Set forth below is a reconciliation of net income to Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share for the three and six months ended June 30, 2022 and 2023:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2022 |
| 2023 |
| 2022 |
| 2023 | ||||||
(dollars in thousands, except per share data) | |||||||||||||
Net income | $ | 49,318 | $ | 29,082 | $ | 88,400 | $ | 22,105 | |||||
Income tax expense (benefit) |
| 32,228 |
| (41,279) |
| 47,845 |
| (59,982) | |||||
Amortization of debt financing costs |
| 949 |
| 1,115 |
| 2,050 |
| 2,220 | |||||
Intangible amortization |
| 64,649 |
| 74,623 |
| 124,925 |
| 146,409 | |||||
Non‑cash equity compensation expense |
| 7,503 |
| 7,688 |
| 14,210 |
| 15,599 | |||||
Non‑cash changes in fair value of estimated contingent consideration |
| (42,757) |
| 6,076 |
| (51,742) |
| 22,564 | |||||
Merger-related expenses (1) |
| — |
| 6,733 |
| — |
| 17,484 | |||||
Subtotal |
| 111,890 |
| 84,038 |
| 225,688 |
| 166,399 | |||||
Pro forma income tax expense (27%) (2) |
| (30,211) |
| (22,691) |
| (60,936) |
| (44,928) | |||||
Adjusted Net Income Excluding Tax Adjustments | $ | 81,679 | $ | 61,347 | $ | 164,752 | $ | 121,471 | |||||
Tax Adjustments (3) | $ | 15,977 | $ | 17,637 | $ | 30,790 | $ | 35,015 | |||||
Adjusted Net Income Excluding Tax Adjustments Per Share | $ | 0.99 | $ | 0.70 | $ | 2.01 | $ | 1.39 | |||||
Tax Adjustments Per Share (3) | $ | 0.19 | $ | 0.20 | $ | 0.37 | $ | 0.40 | |||||
Adjusted Shares Outstanding |
| 82,312,683 |
| 87,533,867 |
| 82,123,532 |
| 87,238,409 | |||||
Calculation of Adjusted Shares Outstanding: | |||||||||||||
Weighted average shares of Class A common stock outstanding—basic (4) |
| 65,389,642 | 65,999,323 |
| 65,360,667 |
| 65,969,827 | ||||||
Adjustments: | |||||||||||||
Weighted average incremental shares of Class A common stock related to stock options and restricted stock units (5) |
| 206,735 | 516,151 |
| 321,414 |
| 479,847 | ||||||
Weighted average Focus LLC common units outstanding (6) |
| 12,175,282 | 12,540,262 |
| 11,900,077 |
| 12,307,867 | ||||||
Weighted average Focus LLC restricted common units outstanding (7) | 193,625 | 295,978 | 193,625 | 296,261 | |||||||||
Weighted average common unit equivalent of Focus LLC incentive units outstanding (8) |
| 4,347,399 | 8,182,153 |
| 4,347,749 |
| 8,184,607 | ||||||
Adjusted Shares Outstanding |
| 82,312,683 |
| 87,533,867 |
| 82,123,532 |
| 87,238,409 |
(1) | Represents costs incurred in conjunction with the Merger. For information, please refer to Note 1 to our unaudited condensed consolidated financial statements. |
(2) | The pro forma income tax rate of 27% reflects the estimated U.S. federal, state, local and foreign income tax rates applicable to corporations in the jurisdictions we conduct business and is used for comparative purposes. The actual effective income tax rate, in current or future periods, may differ significantly from the pro forma income tax rate of 27%. The actual effective income tax rate is the percentage of income tax after taking into consideration various tax deductions, credits and limitations. Among other things, periods of increased interest expense and limits on our ability to deduct interest expense may, in current or future periods, contribute to an actual effective income tax rate that is less than or greater than the pro forma income tax rate of 27%. |
39
(3) | Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income tax rate. Such amounts were generated from acquisitions completed where we received a step-up in basis for tax purposes. Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets provide additional significant supplemental economic benefit. The tax benefit from amortization is included to show the full economic benefit of deductions for acquired intangible assets with the step-up in tax basis. As of June 30, 2023, estimated Tax Adjustments from intangible asset related income tax benefits from closed acquisitions based on a pro forma 27% income tax rate for the next 12 months is $70,769. |
(4) | Represents our GAAP weighted average Class A common stock outstanding—basic. |
(5) | Represents the incremental shares related to stock options and restricted stock units as calculated under the treasury stock method. |
(6) | Assumes that 100% of the Focus LLC common units, including contingently issuable Focus LLC common units, if any, were exchanged for Class A common stock. |
(7) | Assumes that 100% of the Focus LLC restricted common units were exchanged for Class A common stock. |
(8) | Assumes that 100% of the vested and unvested Focus LLC incentive units were converted into Focus LLC common units based on the closing price of our Class A common stock at the end of the respective period and such Focus LLC common units were exchanged for Class A common stock. |
40
Results of Operations
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2023
The following discussion presents an analysis of our results of operations for the three months ended June 30, 2022 and 2023. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where possible and practical, have quantified the impact of such items.
Three Months Ended |
| |||||||||||
June 30, | ||||||||||||
| 2022 |
| 2023 |
| $ Change |
| % Change |
| ||||
(dollars in thousands) |
| |||||||||||
Revenues: | ||||||||||||
Wealth management fees | $ | 517,421 | $ | 555,574 | $ | 38,153 |
| 7.4 | % | |||
Other |
| 21,790 |
| 28,231 |
| 6,441 |
| 29.6 | % | |||
Total revenues |
| 539,211 |
| 583,805 |
| 44,594 |
| 8.3 | % | |||
Operating expenses: | ||||||||||||
Compensation and related expenses |
| 178,131 |
| 208,532 |
| 30,401 |
| 17.1 | % | |||
Management fees |
| 136,802 |
| 139,035 |
| 2,233 |
| 1.6 | % | |||
Selling, general and administrative |
| 94,771 |
| 114,991 |
| 20,220 |
| 21.3 | % | |||
Intangible amortization |
| 64,649 |
| 74,623 |
| 9,974 |
| 15.4 | % | |||
Non‑cash changes in fair value of estimated contingent consideration |
| (42,757) |
| 6,076 |
| 48,833 |
| 114.2 | % | |||
Depreciation and other amortization |
| 3,805 |
| 4,053 |
| 248 |
| 6.5 | % | |||
Total operating expenses |
| 435,401 |
| 547,310 |
| 111,909 |
| 25.7 | % | |||
Income from operations |
| 103,810 |
| 36,495 |
| (67,315) |
| (64.8) | % | |||
Other income (expense): | ||||||||||||
Interest income |
| 17 |
| 639 |
| 622 |
| * | ||||
Interest expense |
| (19,892) |
| (48,341) |
| (28,449) |
| (143.0) | % | |||
Amortization of debt financing costs |
| (949) |
| (1,115) |
| (166) |
| (17.5) | % | |||
Other expense—net |
| (1,451) |
| (229) |
| 1,222 |
| 84.2 | % | |||
Income from equity method investments |
| 11 |
| 354 |
| 343 |
| * | ||||
Total other expense—net |
| (22,264) |
| (48,692) |
| (26,428) |
| (118.7) | % | |||
Income (loss) before income tax |
| 81,546 |
| (12,197) |
| (93,743) |
| (115.0) | % | |||
Income tax expense (benefit) |
| 32,228 |
| (41,279) |
| 73,507 |
| 228.1 | % | |||
Net income | $ | 49,318 | $ | 29,082 | $ | (20,236) |
| (41.0) | % |
* | Not meaningful |
Revenues
Wealth management fees increased $38.2 million, or 7.4%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. New partner firms added subsequent to the three months ended June 30, 2022 that are included in our results of operations for the three months ended June 30, 2023 include Octogone Holding, Icon Wealth Partners, FourThought Private Wealth, Beaumont Financial Partners, Spectrum Wealth Management and Westcourt Capital. Additionally, our partner firms completed 28 acquisitions subsequent to the three months ended June 30, 2022. The new partner firms contributed approximately $13.8 million in revenue during the three months ended June 30, 2023. The balance of the increase of $24.4 million was due to the revenue growth at our existing partner firms, including Connectus, associated with wealth management services, which includes partner firm-level acquisitions.
Other revenues increased $6.4 million, or 29.6%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Other revenues from new partner firms was approximately $4.4 million.
41
Operating Expenses
Compensation and related expenses increased $30.4 million, or 17.1%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase related to new partner firms was approximately $7.6 million. The balance of the increase of $22.8 million was due primarily to an increase in salaries and related expense of existing partner firms and partner firm-level acquisitions.
Management fees increased $2.2 million, or 1.6%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase related to new partner firms was approximately $1.6 million. Management fees are variable and a function of earnings during the period. The balance of the increase principally resulted from the impact of profitability splits with the management companies of $0.6 million during the three months ended June 30, 2023 compared to the three months ended June 30, 2022.
Selling, general and administrative expenses increased $20.2 million, or 21.3%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. New partner firms added approximately $5.0 million. The balance of the increase of $15.2 million was due primarily to Merger-related expenses of $6.7 million and an increase in expenses related to information technology and insurance related to our existing partner firms and partner firm-level acquisitions.
Intangible amortization increased $10.0 million, or 15.4%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase related to new partner firms was approximately $3.9 million. The balance of the increase of $6.1 million was due primarily to partner firm-level acquisitions.
Non-cash changes in fair value of estimated contingent consideration increased $48.8 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. During the three months ended June 30, 2023, the probability that certain contingent consideration payments would be achieved increased due to Monte Carlo Simulation changes associated with market conditions and forecasts, resulting in an increase in the fair value of the contingent consideration liability.
Other income (expense)
Interest expense increased $28.4 million, or 143.0%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase was due primarily to higher average interest rates during the three months ended June 30, 2023 compared to the three months ended June 30, 2022.
Income Tax Expense (Benefit)
Income tax expense (benefit) decreased $73.5 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. For the three months ended June 30, 2023, we recorded a tax benefit on loss before income tax based on an estimated annual effective tax rate, excluding Merger-related expenses which is a significant unusual or infrequent item. In addition, we recorded a discrete tax benefit of $1.3 million attributable to the Merger-related expenses, resulting in an effective tax rate of 338.4% for the three months ended June 30, 2023. The estimated annual effective tax rate is primarily related to federal, state and local income taxes imposed on Focus Inc.’s allocable portion of taxable income from Focus LLC and reflects an estimated valuation allowance for deferred tax assets relating to business interest carryforwards.
42
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2023
The following discussion presents an analysis of our results of operations for the six months ended June 30, 2022 and 2023. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where possible and practical, have quantified the impact of such items.
Six Months Ended |
| |||||||||||
June 30, | ||||||||||||
| 2022 |
| 2023 |
| $ Change |
| % Change |
| ||||
(dollars in thousands) |
| |||||||||||
Revenues: | ||||||||||||
Wealth management fees | $ | 1,032,600 | $ | 1,089,463 | $ | 56,863 |
| 5.5 | % | |||
Other |
| 43,178 |
| 51,849 |
| 8,671 |
| 20.1 | % | |||
Total revenues |
| 1,075,778 |
| 1,141,312 |
| 65,534 |
| 6.1 | % | |||
Operating expenses: | ||||||||||||
Compensation and related expenses |
| 359,931 |
| 414,948 |
| 55,017 |
| 15.3 | % | |||
Management fees |
| 274,641 |
| 263,629 |
| (11,012) |
| (4.0) | % | |||
Selling, general and administrative |
| 183,421 |
| 227,807 |
| 44,386 |
| 24.2 | % | |||
Intangible amortization |
| 124,925 |
| 146,409 |
| 21,484 |
| 17.2 | % | |||
Non‑cash changes in fair value of estimated contingent consideration |
| (51,742) |
| 22,564 |
| 74,306 |
| 143.6 | % | |||
Depreciation and other amortization |
| 7,438 |
| 8,020 |
| 582 |
| 7.8 | % | |||
Total operating expenses |
| 898,614 |
| 1,083,377 |
| 184,763 |
| 20.6 | % | |||
Income from operations |
| 177,164 |
| 57,935 |
| (119,229) |
| (67.3) | % | |||
Other income (expense): | ||||||||||||
Interest income |
| 20 |
| 1,103 |
| 1,083 |
| * | ||||
Interest expense |
| (37,508) |
| (92,270) |
| (54,762) |
| (146.0) | % | |||
Amortization of debt financing costs |
| (2,050) |
| (2,220) |
| (170) |
| (8.3) | % | |||
Other expense—net |
| (1,487) |
| (2,954) |
| (1,467) |
| (98.7) | % | |||
Income from equity method investments | 106 |
| 529 |
| 423 |
| * | |||||
Total other expense—net |
| (40,919) |
| (95,812) |
| (54,893) |
| (134.2) | % | |||
Income (loss) before income tax |
| 136,245 |
| (37,877) |
| (174,122) |
| (127.8) | % | |||
Income tax expense (benefit) |
| 47,845 |
| (59,982) |
| 107,827 |
| 225.4 | % | |||
Net income | $ | 88,400 | $ | 22,105 | $ | (66,295) |
| (75.0) | % |
* | Not meaningful |
Revenues
Wealth management fees increased $56.9 million, or 5.5%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. New partner firms added subsequent to the six months ended June 30, 2022 that are included in our results of operations for the six months ended June 30, 2023 include Octogone Holding, Icon Wealth Partners, FourThought Private Wealth, Beaumont Financial Partners, Spectrum Wealth Management and Westcourt Capital. Additionally, our partner firms completed 28 acquisitions subsequent to the six months ended June 30, 2022. The new partner firms contributed approximately $26.9 million in revenue during the six months ended June 30, 2023. The balance of the increase of $30.0 million was due to the revenue growth at our existing partner firms, including Connectus, associated with wealth management services, which includes partner firm-level acquisitions.
Other revenues increased $8.7 million, or 20.1%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Other revenues from new partner firms was approximately $6.2 million.
43
Operating Expenses
Compensation and related expenses increased $55.0 million, or 15.3%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The increase related to new partner firms was approximately $13.7 million. Non-cash equity compensation increased $1.4 million primarily from equity grants in 2022 and incremental non-cash equity compensation expense from the modification of certain equity awards in 2022. The balance of the increase of $39.9 million was due primarily to an increase in salaries and related expense of existing partner firms and partner firm-level acquisitions.
Management fees decreased $11.0 million, or 4.0%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Management fees are variable and a function of earnings during the period. The decrease principally resulted from a reduction in profitability splits with the management companies of $13.9 million during the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This decrease was offset by an increase related to management fees for new partner firms of approximately $2.9 million.
Selling, general and administrative expenses increased $44.4 million, or 24.2%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. New partner firms added approximately $8.7 million. The balance of the increase of $35.7 million was due primarily to Merger-related expenses of $17.5 million and an increase in expenses related to information technology and insurance related to our existing partner firms and partner firm-level acquisitions.
Intangible amortization increased $21.5 million, or 17.2%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The increase related to new partner firms was approximately $6.6 million. The balance of the increase of $14.9 million was due primarily to partner firm-level acquisitions.
Non-cash changes in fair value of estimated contingent consideration increased $74.3 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. During the six months ended June 30, 2023, the probability that certain contingent consideration payments would be achieved increased due to Monte Carlo Simulation changes associated with market conditions and forecasts, resulting in an increase in the fair value of the contingent consideration liability.
Other income (expense)
Interest expense increased $54.8 million, or 146.0%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The increase was due primarily to higher average interest rates during the six months ended June 30, 2023 compared to the six months ended June 30, 2022.
Income Tax Expense (Benefit)
Income tax expense (benefit) decreased $107.8 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. For the six months ended June 30, 2023, we recorded a tax benefit on loss before income tax based on an estimated annual effective tax rate, excluding Merger-related expenses which is a significant unusual or infrequent item. In addition, we recorded a discrete tax benefit of $3.6 million attributable to the Merger-related expenses, resulting in an effective tax rate of 158.4% for the six months ended June 30, 2023. The estimated annual effective tax rate is primarily related to federal, state and local income taxes imposed on Focus Inc.’s allocable portion of taxable income from Focus LLC and reflects an estimated valuation allowance for deferred tax assets relating to business interest carryforwards.
44
Liquidity and Capital Resources
Sources of Liquidity
During the six months ended June 30, 2023, we met our cash and liquidity needs primarily through cash on hand, cash generated by our operations and borrowings under our Credit Facility. Over the next twelve months, and in the longer term, we expect that our cash and liquidity needs will be met by cash generated by our operations and borrowings under our Credit Facility, especially for acquisition activities. If our acquisition activity continues at an accelerated pace, or for larger acquisition opportunities, we may decide to issue equity either as consideration or, if market conditions are favorable, in an offering. For information regarding the Credit Facility, please read “—Credit Facilities.”
Tax Receivable Agreements
Our Tax Receivable Agreements with the TRA holders generally provide for the payment by Focus 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 Focus 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 periods after the initial public offering as a result of certain increases in tax basis and certain tax benefits attributable to imputed interest. Focus Inc. will retain the benefit of the remaining 15% of these cash savings.
The payment obligations under the Tax Receivable Agreements are Focus Inc.’s obligations and not obligations of Focus LLC, and we expect that such payments required to be made under the Tax Receivable Agreements will be substantial. Estimating the amount and timing of payments that may become due under the Tax Receivable Agreements is by its nature imprecise. For purposes of the Tax Receivable Agreements, cash savings in tax generally are calculated by comparing Focus Inc.’s actual tax liability (determined by using the actual applicable U.S. federal income tax rate and an assumed combined state and local income and franchise tax rate) to the amount Focus Inc. would have been required to pay had it not been able to utilize any of the tax benefits subject to the Tax Receivable Agreements. During the six months ended June 30, 2023, payments totaling $9.6 million were made under the Tax Receivable Agreements. As of June 30, 2023, we expect that future payments to the TRA holders that have already exchanged Focus LLC units will be $215.0 million, in aggregate. Future payments under the Tax Receivable Agreements in respect of subsequent exchanges will be in addition to this amount.
The actual increases in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreements, will vary depending upon a number of factors, including the timing of any redemption of units, the price of our Class A common stock at the time of each redemption, the extent to which such redemptions are taxable transactions, the amount of Focus LLC’s assets that consist of equity in entities taxed as corporations at the time of each redemption, the amount and timing of the taxable income we generate in the future, the U.S. federal income tax rates then applicable and the portion of the payments under the Tax Receivable Agreements that constitute imputed interest or give rise to depreciable or amortizable tax basis.
The foregoing amount of expected future payments to TRA holders is an estimate and the actual payments could differ materially. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding payments under the Tax Receivable Agreements as compared to the foregoing estimates. Moreover, there may be a negative impact on our liquidity if, as a result of timing discrepancies or otherwise, (i) the payments under the Tax Receivable Agreements exceed the actual benefits realized in respect of the tax attributes subject to the Tax Receivable Agreements and/or (ii) distributions to Focus Inc. by Focus LLC are not sufficient to permit Focus Inc. to make payments under the Tax Receivable Agreements after it has paid its taxes and other obligations.
The payments under the Tax Receivable Agreements will not be conditioned upon a TRA holder’s having a continued ownership interest in either Focus Inc. or Focus LLC.
45
We expect that future unitholders may become party to one or more Tax Receivable Agreements entered into in connection with future acquisitions by Focus LLC or issuances of units of Focus LLC to employees, principals and directors.
Cash Flows
The following table presents information regarding our cash flows and cash and cash equivalents for the six months ended June 30, 2022 and 2023:
Six Months Ended |
| |||||||||||
June 30, |
| |||||||||||
| 2022 |
| 2023 |
| $ Change |
| % Change |
| ||||
(dollars in thousands) | ||||||||||||
Cash provided by (used in): | ||||||||||||
Operating activities | $ | 129,292 | $ | 106,821 | $ | (22,471) |
| (17.4) | % | |||
Investing activities |
| (263,717) |
| (150,233) |
| 113,484 |
| 43.0 | % | |||
Financing activities |
| 46,129 |
| 40,250 |
| (5,879) |
| (12.7) | % | |||
Cash and cash equivalents—end of period |
| 221,049 |
| 137,040 |
| (84,009) |
| (38.0) | % |
* Not meaningful
Operating Activities
Net cash used in operating activities includes net income adjusted for non-cash expenses such as intangible amortization, depreciation and other amortization, amortization of debt financing costs, non-cash equity compensation expense, non-cash changes in fair value of estimated contingent consideration, other non-cash items and changes in cash resulting from changes in operating assets and liabilities. Operating assets and liabilities include receivables from our clients, prepaid expenses and other assets, accounts payable and accrued expenses, deferred revenues and other assets and liabilities.
Net cash provided by operating activities decreased $22.5 million, or 17.4%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The decrease was primarily related to an increase in prepaids and other assets which was partially offset by the timing of management fee payments which resulted in a decrease of payments to affiliates.
Investing Activities
Net cash used in investing activities decreased $113.5 million, or 43.0%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The decrease was primarily related to a decrease in cash paid for acquisitions and contingent consideration of $111.8 million based on acquisition activity during the six months ended June 30, 2023 compared to the six months ended June 30, 2022.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2023 decreased $5.9 million, or 12.7%, compared to the six months ended June 30, 2022. The decrease primarily related to increases in payments in connection with tax receivable agreements of $5.7 million and deferred cash consideration of $12.5 million, respectively, offset in part by a reduction in distributions for unitholders of $12.8 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022.
Adjusted Free Cash Flow
To supplement our statements of cash flows presented on a GAAP basis, we use a non-GAAP liquidity measure on a trailing 4-quarter basis to analyze cash flows generated from our operations. We consider Adjusted Free Cash Flow
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to be a liquidity measure that provides useful information to investors about the amount of cash generated by the business and is one factor in evaluating the amount of cash available to pay contingent consideration and deferred cash consideration, make strategic acquisitions and repay outstanding borrowings. Adjusted Free Cash Flow does not represent our residual cash flow available for discretionary expenditures as it does not deduct our mandatory debt service requirements and other non-discretionary expenditures. We define Adjusted Free Cash Flow as net cash provided by operating activities, less purchase of fixed assets, distributions for Focus LLC unitholders and payments under Tax Receivable Agreements (if any). Adjusted Free Cash Flow is not defined under GAAP and should not be considered as an alternative to net cash from operating, investing or financing activities. Adjusted free cash flow may not be calculated the same for us as for other companies. The table below reconciles net cash provided by operating activities, as reflected on our cash flow statement, to our adjusted free cash flow.
Trailing 4-Quarters Ended June 30, | ||||||
| 2022 |
| 2023 | |||
(in thousands) | ||||||
Net cash provided by operating activities (1)(2) |
| $ | 291,250 | $ | 266,128 | |
Purchase of fixed assets |
| (13,129) |
| (24,056) | ||
Distributions for unitholders | (29,159) | (10,200) | ||||
Payments under tax receivable agreements | (3,856) | (9,598) | ||||
Adjusted Free Cash Flow | $ | 245,106 | $ | 222,274 |
(1) | A portion of contingent consideration paid is classified as operating cash outflows in accordance with GAAP, with the balance reflected in investing and financing cash flows. Contingent consideration paid classified as operating cash outflows for each quarter in the trailing 4-quarters ended June 30, 2022 was $20.4 million, $16.4 million, $23.1 million and $18.2 million, respectively, totaling $78.1 million for the trailing 4-quarters ended June 30, 2022. Contingent consideration paid classified as operating cash outflows for each quarter in the trailing 4-quarters ended June 30, 2023 was $29.5 million, $6.1 million, $9.0 million and $4.0 million, respectively, totaling $48.6 million for the trailing 4-quarters ended June 30, 2023. See Note 6 to our unaudited condensed consolidated financial statements for additional information. |
(2) | A portion of deferred cash consideration paid is classified as operating cash outflows in accordance with GAAP, with the balance reflected in financing cash outflows. Deferred cash consideration paid classified as operating cash outflows was $0.3 million for the six months ended June 30, 2023. |
Credit Facilities
As of June 30, 2023, our credit facility (the “Credit Facility”) consisted of a $2.5 billion first lien term loan B (the “First Lien Term Loan B”), consisting of a $1.75 billion tranche A (“First Lien Term Loan B - Tranche A”) and $784.4 million tranche B (“First Lien Term Loan B - Tranche B”), a $240.0 million delayed draw first lien term loan A (the “First Lien Term Loan A”) and a $650.0 million first lien revolving credit facility (the “First Lien Revolver”).
The First Lien Term Loan B - Tranche A bears interest (at our option) at: (i) Secured Overnight Financing Rate (“SOFR”) plus a margin of 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 2.25%. The First Lien Term Loan B - Tranche A requires quarterly installment repayments of $4.4 million and has a maturity date of June 2028. The debt was issued at a discount of 1.75% or $30.8 million which is being amortized to interest expense over the term of the First Lien Term Loan B - Tranche A.
The First Lien Term Loan B - Tranche B bears interest (at our 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 $2.0 million and has a maturity date of June 2028.
The First Lien Term Loan A bears interest (at our 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 on August 28, 2023. The delayed draw feature has a ticking fee with respect to the undrawn
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commitments with (i) no fee from 0-60 days from November 28, 2022 (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, $20.0 million was borrowed under the First Lien Term Loan A at a discount of $300.0 thousand. During the six months ended June 30, 2023, $100.0 million was borrowed under the First Lien Term Loan A at a discount of $1.5 million. As of June 30, 2023, the First Lien Term Loan A has quarterly installment repayments of 300.0 thousand. The First Lien Term Loan A has a maturity date of November 2027.
The First Lien Revolver bears interest (at our 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 1.25% with step downs to 1.00% and 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 $30.0 million 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.
Our 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.
We are 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 June 30, 2023, our First Lien Leverage Ratio was 4.36:1.00, 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 Revolver 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 $576.9 million at June 30, 2023. 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 2022. Based on the excess cash flow calculation for the year ended December 31, 2022, no contingent principal payments are required to be made in 2023.
We defer and amortize our debt financing costs and unamortized discount over the respective terms of the 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 amounts of the respective 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.
At June 30, 2023, outstanding stated value borrowings under the Credit Facility were approximately $2.7 billion. The weighted-average interest rate for outstanding borrowings was approximately 7% for the six months ended June 30, 2023. As of June 30, 2023, the First Lien Revolver available unused commitment line was $640.3 million. At June 30, 2023, we had outstanding letters of credit in the amount of $9.7 million bearing interest at an annual rate of approximately 2%.
At June 30, 2023, we had three floating to fixed SOFR interest rate swap agreements (“SOFR Swaps”) with notional amounts of $400.0 million, $250.0 million and $200.0 million, the terms of which provide that we 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 expire in March 2024 and April 2024.
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At June 30, 2023, the Company also had two forward starting floating to fixed swaps (“SOFR Forward Swaps”) with notional amounts of $250.0 million and $250.0 million that commence in April 2024, based on the contracts executed in April 2023. The terms of these SOFR Forward Swaps provide that the Company pay interest to the counterparty each month at a rate of 3.157% and 3.176%, 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 term for the SOFR Forward Swaps is four years and expires in April 2028.
The SOFR Swaps effectively fix the variable interest rate applicable to the first $850.0 million of the Company’s variable interest rate borrowings outstanding. Beginning in April 2024, the SOFR Forward Swaps will effectively fix the variable interest rate applicable to $500.0 million 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 this portion of its borrowings. Our First Lien Term Loan uses SOFR as a benchmark for establishing the interest rate.
Critical Accounting Policies
As of June 30, 2023, there have been no significant changes to our critical accounting policies previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recent Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a significant effect on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our exposure to market risk is primarily related to our partner firms’ wealth management services. For the six months ended June 30, 2023, over 95% of our revenues were fee-based and recurring in nature. Although the substantial majority of our revenues are fee-based and recurring, our revenues can fluctuate due to macroeconomic factors and the overall state of the financial markets, particularly in the United States. The substantial majority of our revenues are derived from the wealth management fees charged by our partner firms for providing clients with investment advice, financial and tax planning, consulting, tax return preparation, family office services and other services. The majority of our wealth management fees are based on the value of the client assets and we expect those fees to increase over time as the assets increase. A decrease in the aggregate value of client assets across our partner firms may cause our revenue and income to decline.
Interest Rate Risk
Interest payable on our Credit Facility is variable. Interest rate changes will therefore affect the amount of our interest payments, future earnings and cash flows. We entered into SOFR Swaps and SOFR Forward Swaps to manage interest rate exposure in connection with our variable interest rate borrowings. As of June 30, 2023, we had total stated value borrowings outstanding under our Credit Facility of approximately $2.7 billion. At June 30, 2023, interest payments associated with $850 million of these borrowings was effectively converted to a fixed rate through the use of SOFR Swaps. The contract period of 4 years for the SOFR Forward Swaps will commence in April 2024. If 1 month USD Term SOFR was 1.0% higher during the six months ended June 30, 2023, our interest expense would have increased by approximately $8.9 million.
Item 4. Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined
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in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2023. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2023, our disclosure controls and procedures were effective, at the reasonable assurance level. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective, and management necessarily applies its judgment in evaluating the cost-benefit relationship of all possible controls and procedures.
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, involved in various legal claims and regulatory matters arising out of our operations in the normal course of business. After consultation with legal counsel, we do not believe that the resolutions of any matters we are currently involved in, individually or in the aggregate, will have a material adverse impact on our financial condition, results of operations or cash flows. However, we can provide no assurance that any pending or future matters will not have a material effect on our financial condition, results of operations or cash flows in future reporting periods.
From time to time, we and our partner firms receive requests for information from governmental authorities. While we are unable to determine the ultimate outcome of any matter, we believe that the resolution of all current governmental inquiries will not have a material impact on our financial condition, results of operations or cash flows.
Litigation Relating to the Merger
On March 28, 2023, Mark “Mickey” Segal and KSFB Management, LLC (“KSFB”), the management company for certain Focus LLC subsidiaries (the “NKSFB Subsidiaries”), brought an action against Focus LLC and Goldman Sachs in the Superior Court of the State of California. The complaint alleged, among other things, that Focus LLC and Goldman Sachs’ efforts in respect of a potential sale of the Company to CD&R violated certain duties and obligations owed to Mr. Segal and KSFB in connection with a separate potential transaction involving the sale of the NKSFB Subsidiaries and KSFB. Mr. Segal voluntarily dismissed certain claims in June 2023 and, on August 2, 2023, the court dismissed the remainder of the case based on the applicable New York forum selection clause. Additionally, on June 7, 2023, KSFB brought an additional action against Focus LLC in the Superior Court of the State of California seeking declaratory and injunctive relief with respect to the enforceability of a restrictive covenant contained within a management agreement among Focus LLC, the NKSFB Subsidiaries, KSFB and the principals party thereto.
On June 19, 2023, a purported stockholder of the Company brought an action against the individual members of the board, certain members of Company management, Focus Inc., CD&R, and Stone Point in New York state court. The complaint alleged that the proxy statement filed in connection with the Merger negligently misrepresented or omitted certain information. In order to moot what the Company considered to be unmeritorious disclosure claims, alleviate the costs, risks and uncertainties inherent in litigation and provide additional information to its stockholders, the Company determined to voluntarily supplement the proxy statement with certain information as described in the Current Report on Form 8-K filed on July 6, 2023. As a result of such supplemental disclosure, the named plaintiff decided that the claims in the lawsuit were mooted and dismissed the action with prejudice on July 7, 2023.
In July 2023, four purported stockholders of the Company brought actions against the Company in the Delaware Court of Chancery seeking the Company’s books and records relating to the Mergers.
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The Company intends to defend all of the above lawsuits that remain active vigorously but cannot predict the ultimate outcome of these lawsuits or the amount of time and expense that will be required to resolve them.
Item 1A. Risk Factors
In addition to the other information set forth in this report, readers should carefully consider the risks under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. Except as set forth below, there has been no material change in our risk factors from those described in our Annual Report on Form 10-K for the year ended December 31, 2022. These risks, as updated below, are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations.
The consummation of the Merger is subject to a number of conditions, many of which are largely outside of the parties’ control, and, if these conditions are not satisfied or waived on a timely basis, the Merger Agreement may be terminated and the Merger may not be completed.
Consummation of the Merger is subject to the satisfaction or, if permitted by law, waiver by Parent, Focus Inc. or both of a number of conditions, including among other customary closing conditions that (a) the Merger Agreement be adopted by the affirmative vote of (i) the holders of a majority in voting power of the outstanding shares of our common stock, voting together as a single class, and entitled to vote thereon and (ii) the holders of a majority in voting power of the outstanding shares of our common stock beneficially owned by shareholders other than CD&R, Stone Point and certain of their affiliates and portfolio companies and persons who are “officers” of Focus Inc. within the meaning of Rule 16a-1(f) of the Exchange Act, voting together as a single class, and entitled to vote thereon, (b) the waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 has expired or been terminated and the necessary approvals, clearances or expirations of waiting periods under certain other antitrust, foreign direct investment and other laws have been obtained or deemed obtained as a result of the expiry of applicable waiting periods, (c) no court or other governmental authority has enacted, announced, issued, promulgated, enforced or entered into any law that restrains, enjoins, renders illegal or otherwise prohibits consummation of the Merger and (d) the absence of a material adverse effect since the date of the Merger Agreement. Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions, including the accuracy of the other party’s representations and warranties (subject to certain materiality qualifiers) and the other party’s compliance with its covenants and agreements contained in the Merger Agreement (subject to certain materiality qualifiers).
The Merger Agreement was unanimously approved by our board of directors, based on the recommendation of a special committee of the board of directors. At a Special Meeting held on July 14, 2023, the shareholders of the Company, including a majority in voting power of the outstanding shares of common stock held by Unaffiliated Stockholders (as defined in the Merger Agreement), adopted and approved the Merger Agreement. However, the failure to satisfy all of the required conditions could delay the completion of the Merger by a significant period of time or prevent it from occurring. Any delay in completing the Merger could cause the parties to not realize some or all of the benefits that are expected to be achieved if the Merger is successfully completed within the expected timeframe. There can be no assurance that the conditions to closing of the Merger will be satisfied or waived or that the Merger will be completed within the expected timeframe or at all.
The description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed on February 28, 2023.
Failure to complete the Merger could adversely affect the stock price and future business and financial results of the Company.
There can be no assurance that the conditions to the closing of the Merger will be satisfied or waived or that the Merger will be completed. If the Merger is not completed within the expected timeframe or at all, the ongoing business of
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the Company could be adversely affected and the Company will be subject to a variety of risks and possible consequences associated with the failure to complete the Merger, including the following: (i) upon termination of the Merger Agreement under specified circumstances, Focus Inc. is required to pay Parent a termination fee of up to $150.3 million; (ii) the Company will incur certain transaction costs, including legal, accounting, financial advisor, filing, printing and mailing fees, regardless of whether the Merger closes; (iii) under the Merger Agreement, the Company is subject to certain restrictions on the conduct of its business prior to the closing of the Merger, which may adversely affect its ability to execute certain of its business strategies; (iv) principals of our partner firms and employees may experience uncertainty about their future roles with us, which might adversely affect our ability to attract, retain and motivate key personnel and employees and (v) the attention of management may be directed to transaction related considerations and maybe diverted from day-to-day operations of the business.
If the Merger is not completed, these risks could materially affect the business and financial results of the Company and its stock price, including to the extent that the current market price of the Company’s common stock is positively affected by a market assumption that the Merger will be completed.
While the Merger is pending, the Company will be subject to business uncertainties and certain contractual restrictions that could adversely affect the business and operations of the Company.
In connection with the pending Merger, some partner firm clients, vendors or other third parties of the Company may react unfavorably, including terminating, delaying or renegotiating their business relationships or transactions with the Company, which could adversely affect the revenues, earnings and cash flows, regardless of whether the Merger is completed. In addition, due to certain restrictions in the Merger Agreement on the conduct of business prior to completing the Merger, the Company may be unable (without the other party’s prior written consent), during the pendency of the Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial and may cause the Company to forego certain opportunities it might otherwise pursue. In addition, the pendency of the Merger may make it more difficult for the Company to effectively retain and incentivize key personnel and may cause distractions from the Company’s strategy and day-to-day operations for its current employees and management.
The Company will incur substantial transaction fees and merger-related costs in connection with the Merger that could adversely affect the business and operations of the Company if the Merger is not completed.
The Company has incurred and expects to incur non-recurring transaction fees, which include legal and advisory fees and substantial merger-related costs associated with completing the Merger, and which could adversely affect the business operations of the Company if the Merger is not completed.
Litigation against the Company, CD&R, Stone Point or the members of their respective governing bodies, could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger.
It is a condition to the Merger that no injunction or other order preventing the consummation of the Merger shall have been issued by any court of competent jurisdiction or other governmental authority of competent jurisdiction and remain in effect. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, such an injunction may delay the consummation of the Merger in the expected timeframe, or may prevent the Merger from being consummated at all. Whether or not any plaintiff’s claim is successful, this type of litigation can result in significant costs and divert management’s attention and resources from the closing of the Merger and ongoing business activities, which could adversely affect the operations of the Company. While we will evaluate and defend against any lawsuits, the time and costs of defending against litigation relating to the Merger may adversely affect our business.
If the Merger is not consummated by November 27, 2023, either the Company or Parent may terminate the Merger Agreement, subject to certain exceptions.
Either the Company or Parent may terminate the Merger Agreement if the Merger has not been consummated by November 27, 2023. However, this termination right will not be available to a party if that party breached any representation, warranty, covenant or agreement under the Merger Agreement and that breach was the proximate cause of the failure of the Merger to be consummated on time. In the event the Merger Agreement is terminated by either party due
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to the failure of the Merger to close by November 27, 2023, the Company will have incurred significant costs and will have diverted significant management focus and resources from other strategic opportunities and ongoing business activities without realizing the anticipated benefits of the Merger.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
None.
Item 6. Exhibits
Exhibit |
| Description |
3.1 | Amended and Restated Certificate of Incorporation of Focus Financial Partners Inc.(1) | |
3.2 | Amended and Restated Bylaws of Focus Financial Partners Inc.(1) | |
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | ||
101.INS* | Inline XBRL Instance Document | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
104* | Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the inline XBRL document. |
* | Filed or furnished herewith. |
(1) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-38604) filed with the SEC on July 31, 2018. |
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SIGNATURES
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.
FOCUS FINANCIAL PARTNERS INC. | ||
Date: August 3, 2023 | By: | /s/ RUEDIGER ADOLF |
Ruediger Adolf | ||
Chairman and Chief Executive Officer (Principal Executive Officer) | ||
Date: August 3, 2023 | By: | /s/ JAMES SHANAHAN |
James Shanahan | ||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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