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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-Q



(Mark One)    

ý

 

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

For the Quarterly Period Ended June 30, 2019

OR

o

 

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

Commission File No. 001-38604



Focus Financial Partners Inc.
(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  47-4780811
(I.R.S. Employer
Identification No.)

875 Third Avenue, 28th Floor
New York, NY
(Address of Principal Executive Offices)

 

10022
(Zip Code)

(646) 519-2456
(Registrant's telephone number, including area code)

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

Title of each class   Trading Symbol(s)   Name of each exchange
on which registered
Class A common stock, par value $0.01 per share   FOCS   Nasdaq Global Select Market

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

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

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

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý   Smaller reporting company o

Emerging growth company ý

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

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

        As of August 5, 2019, the registrant had 47,116,817 shares of Class A common stock and 22,308,446 shares of Class B common stock outstanding.

   


Table of Contents


FOCUS FINANCIAL PARTNERS INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2019

 
   
  Page No.

PART I: FINANCIAL INFORMATION

  1

Item 1.

 

Financial Statements

 
1

 

Unaudited condensed consolidated balance sheets

 
2

 

Unaudited condensed consolidated statements of operations

 
3

 

Unaudited condensed consolidated statements of comprehensive income (loss)

 
4

 

Unaudited condensed consolidated statements of cash flows

 
5

 

Unaudited condensed consolidated statements of changes in members' deficit/shareholders' equity

 
6

 

Notes to unaudited condensed consolidated financial statements

 
8

Item 2.

 

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

 
25

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 
46

Item 4.

 

Controls and Procedures

 
46

PART II: OTHER INFORMATION

 
47

Item 1.

 

Legal Proceedings

 
47

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 
47

Item 6.

 

Exhibits

 
47

SIGNATURES

 
49

Table of Contents


PART I: FINANCIAL INFORMATION

Item 1.    Financial Statements

Financial Statements Introductory Note

        The unaudited condensed consolidated financial statements and other disclosures contained in this report include those of Focus Financial Partners Inc. ("we," "us," "our," "Focus Inc.," the "Registrant" or the "Company"), which is the registrant, and those of Focus Financial Partners, LLC, a Delaware limited liability company ("Focus LLC"), which became the principal operating subsidiary of the Registrant in a series of reorganization transactions that were completed on July 30, 2018 (the "Reorganization Transactions") in connection with our initial public offering ("IPO"). For more information regarding the transactions described above, see Note 3 to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

        As a result of the IPO and Reorganization Transactions, we became the managing member of Focus LLC. The unaudited condensed consolidated financial statements reflect the historical results of operations and financial position of the Company, including consolidation of its investment in Focus LLC, since July 30, 2018. Prior to July 30, 2018, the closing date of the IPO, the unaudited condensed consolidated financial statements represent the financial statements of Focus LLC. The unaudited condensed consolidated financial statements do not reflect what the financial position, results of operations or cash flows of the Company or Focus LLC would have been had these companies been stand-alone public companies for the periods presented. Specifically, the historical financial statements of Focus LLC do not give effect to the following matters:

    IPO and Reorganization Transactions;

    U.S. corporate federal income taxes; and

    Non-controlling interest held by other members of Focus LLC after the IPO and Reorganization Transactions.

Table of Contents


FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated balance sheets

(In thousands, except share and per share amounts)

 
  December 31,
2018
  June 30,
2019
 

ASSETS

             

Cash and cash equivalents

  $ 33,213   $ 37,944  

Accounts receivable less allowances of $576 at 2018 and $785 at 2019

    98,596     118,674  

Prepaid expenses and other assets

    76,150     70,950  

Fixed assets—net

    24,780     34,363  

Operating lease assets

        168,867  

Debt financing costs—net

    12,340     10,993  

Deferred tax assets—net

    70,009     77,045  

Goodwill

    860,495     988,706  

Other intangible assets—net

    762,195     913,110  

TOTAL ASSETS

  $ 1,937,778   $ 2,420,652  

LIABILITIES AND EQUITY

             

LIABILITIES:

             

Accounts payable

  $ 8,935   $ 12,216  

Accrued expenses

    36,252     45,456  

Due to affiliates

    39,621     23,156  

Deferred revenue

    6,215     6,183  

Other liabilities

    158,497     178,016  

Operating lease liabilities

        180,451  

Borrowings under credit facilities (stated value of $838,985 and $1,114,970 at December 31, 2018 and June 30, 2019, respectively)

    836,582     1,112,784  

Tax receivable agreements obligation

    39,156     46,535  

TOTAL LIABILITIES

    1,125,258     1,604,797  

COMMITMENTS AND CONTINGENCIES (Note 13)

             

EQUITY:

             

Class A common stock, par value $0.01, 500,000,000 shares authorized; 46,265,903 and 47,116,817 shares issued and outstanding at December 31, 2018 and June 30, 2019, respectively

    462     471  

Class B common stock, par value $0.01, 500,000,000 shares authorized; 22,823,272 and 22,308,446 shares issued and outstanding at December 31, 2018 and June 30, 2019, respectively

    228     223  

Additional paid-in capital

    471,386     489,566  

Accumulated deficit

    (590 )   (2,736 )

Accumulated other comprehensive loss

    (1,824 )   (2,000 )

Total shareholders' equity

    469,662     485,524  

Non-controlling interest

    342,858     330,331  

Total equity

    812,520     815,855  

TOTAL LIABILITIES AND EQUITY

  $ 1,937,778   $ 2,420,652  

   

See notes to unaudited condensed consolidated financial statements

2


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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of operations

(In thousands, except share and per share amounts)

 
  For the three months
ended June 30,
  For the six months
ended June 30,
 
 
  2018   2019   2018   2019  

REVENUES:

                         

Wealth management fees

  $ 216,328   $ 283,296   $ 400,651   $ 526,380  

Other

    15,107     18,249     27,013     35,089  

Total revenues

    231,435     301,545     427,664     561,469  

OPERATING EXPENSES:

                         

Compensation and related expenses

    81,273     105,531     154,622     206,979  

Management fees

    60,559     79,252     106,859     136,258  

Selling, general and administrative

    41,493     59,736     77,780     111,993  

Management contract buyout

                1,428  

Intangible amortization

    22,290     31,221     41,784     59,962  

Non-cash changes in fair value of estimated contingent consideration

    11,944     3,847     18,315     11,261  

Depreciation and other amortization

    2,162     2,425     4,044     4,738  

Total operating expenses

    219,721     282,012     403,404     532,619  

INCOME FROM OPERATIONS

    11,714     19,533     24,260     28,850  

OTHER INCOME (EXPENSE):

                         

Interest income

    235     339     377     536  

Interest expense

    (18,212 )   (14,424 )   (32,484 )   (27,283 )

Amortization of debt financing costs

    (929 )   (782 )   (1,888 )   (1,564 )

Gain on sale of investment

            5,509      

Loss on extinguishment of borrowings          

            (14,011 )    

Other income (expense)—net

    203     (468 )   296     (704 )

Income from equity method investments          

    79     329     153     643  

Total other expense—net

    (18,624 )   (15,006 )   (42,048 )   (28,372 )

INCOME (LOSS) BEFORE INCOME TAX

    (6,910 )   4,527     (17,788 )   478  

INCOME TAX EXPENSE

    746     1,425     1,922     204  

NET INCOME (LOSS)

  $ (7,656 )   3,102   $ (19,710 )   274  

Non-controlling interest

          (2,306 )         (2,420 )

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS

        $ 796         $ (2,146 )

Income (loss) per share of Class A common stock:

                         

Basic

        $ 0.02         $ (0.05 )

Diluted

        $ 0.02         $ (0.05 )

Weighted average shares of Class A common stock outstanding:

                         

Basic

          46,696,200           46,455,238  

Diluted

          46,721,559           46,455,238  

   

See notes to unaudited condensed consolidated financial statements

3


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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of comprehensive income (loss)

(In thousands)

 
  For the three months
ended June 30,
  For the six months
ended June 30,
 
 
  2018   2019   2018   2019  

Net income (loss)

  $ (7,656 ) $ 3,102   $ (19,710 ) $ 274  

Other comprehensive loss:

                         

Foreign currency translation adjustments, net of tax          

    (1,122 )   (687 )   (1,506 )   (333 )

Comprehensive income (loss)

  $ (8,778 )   2,415   $ (21,216 )   (59 )

Less: Comprehensive income attributable to noncontrolling interest

          (2,025 )         (2,263 )

Comprehensive income (loss) attributable to common shareholders

        $ 390         $ (2,322 )

   

See notes to unaudited condensed consolidated financial statements

4


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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)

 
  For the six months
ended June 30,
 
 
  2018   2019  

CASH FLOWS FROM OPERATING ACTIVITIES:

             

Net income (loss)

  $ (19,710 ) $ 274  

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

             

Intangible amortization

    41,784     59,962  

Depreciation and other amortization

    4,044     4,738  

Amortization of debt financing costs

    1,888     1,564  

Non-cash equity compensation expense

    7,555     9,099  

Non-cash changes in fair value of estimated contingent consideration

    18,315     11,261  

Income from equity method investments

    (153 )   (643 )

Distributions received from equity method investments

    613     618  

Other non-cash items

    (203 )   843  

Loss on extinguishment of borrowings

    14,011      

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

             

Accounts receivable

    (21,467 )   (18,219 )

Prepaid expenses and other assets

    (14,791 )   3,220  

Accounts payable

    3,324     389  

Accrued expenses

    12,358     25,166  

Due to affiliates

    (7,548 )   (16,518 )

Other liabilities

    (2,600 )   (24,848 )

Deferred revenue

    (268 )   (1,688 )

Net cash provided by operating activities

    37,152     55,218  

CASH FLOWS FROM INVESTING ACTIVITIES:

             

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

    (215,332 )   (289,101 )

Purchase of fixed assets

    (4,429 )   (10,060 )

Investment and other

    (24,300 )    

Net cash used in investing activities

    (244,061 )   (299,161 )

CASH FLOWS FROM FINANCING ACTIVITIES:

             

Borrowings under credit facilities

    200,000     370,000  

Repayments of borrowings under credit facilities

    (4,477 )   (94,014 )

Contingent consideration paid

    (4,814 )   (16,293 )

Payments of debt financing costs

    (1,981 )    

Proceeds from exercise of stock options

        796  

Payments on finance lease obligations

    (116 )   (94 )

Distributions for unitholders

    (506 )   (11,734 )

Net cash provided by financing activities

    188,106     248,661  

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

    (80 )   13  

CHANGE IN CASH AND CASH EQUIVALENTS

    (18,883 )   4,731  

CASH AND CASH EQUIVALENTS:

             

Beginning of period

    51,455     33,213  

End of period

  $ 32,572   $ 37,944  

See Note 14 for supplemental cash flow disclosure

   

See notes to unaudited condensed consolidated financial statements

5


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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in members' deficit/shareholders' equity

Three months ended June 30, 2018 and 2019

(In thousands, except share amounts)

 
  Class A
Common Stock
  Class B
Common Stock
   
   
   
   
  Total
Members'
Deficit/
Shareholders'
Equity
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
Loss
   
   
   
 
 
  Additional
Paid-In
Capital
  Accumulated
Deficit
  Common
Units
  Non-
controlling
Interest
  Total
Equity
 
 
  Shares   Amount   Shares   Amount  

Balance at April 1, 2018

      $       $   $ 34,585   $ (817,492 ) $ (8,653 ) $ 10,931   $ (780,629 ) $   $ (780,629 )

Net loss

                        (7,656 )           (7,656 )       (7,656 )

Issuance of restricted common units in connection with acquisitions and contingent consideration

                                26,245     26,245         26,245  

Non-cash equity compensation expense-net of related forfeitures, related to incentive units

                    3,701                 3,701         3,701  

Currency translation adjustment-net of tax

                            (1,122 )       (1,122 )       (1,122 )

Distribution for unitholders

                        (82 )           (82 )       (82 )

Balance at June 30, 2018

      $       $   $ 38,286   $ (825,230 ) $ (9,775 ) $ 37,176   $ (759,543 ) $   $ (759,543 )

 

 
  Class A
Common Stock
  Class B
Common Stock
   
   
   
   
  Total
Members'
Deficit/
Shareholders'
Equity
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
Loss
   
   
   
 
 
  Additional
Paid-In
Capital
  Accumulated
Deficit
  Common
Units
  Non-
controlling
Interest
  Total
Equity
 
 
  Shares   Amount   Shares   Amount  

Balance at April 1, 2019

    46,675,183   $ 467     22,568,831   $ 225   $ 459,488   $ (3,532 ) $ (1,594 ) $   $ 455,054   $ 357,222   $ 812,276  

Net income

                        796             796     2,306     3,102  

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

    260,385     3     (260,385 )   (2 )   7,304                 7,305         7,305  

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

    163,600     1             4,537                 4,538         4,538  

Exercise of stock options

    17,649                 582                 582         582  

Change in non-controlling interest allocation

                    17,315                 17,315     (28,916 )   (11,601 )

Non-cash equity compensation expenses

                    948                 948         948  

Currency translation adjustment-net of tax

                            (406 )       (406 )   (281 )   (687 )

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

                    (608 )               (608 )       (608 )

Balance at June 30, 2019

    47,116,817   $ 471     22,308,446   $ 223   $ 489,566   $ (2,736 ) $ (2,000 ) $   $ 485,524   $ 330,331   $ 815,855  

   

See notes to unaudited condensed consolidated financial statements

6


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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in members' deficit/shareholders' equity

Six months ended June 30, 2018 and 2019

(In thousands, except share amounts)

 
  Class A
Common Stock
  Class B
Common Stock
   
   
   
   
  Total
Members'
Deficit/
Shareholders'
Equity
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
Loss
   
   
   
 
 
  Additional
Paid-In
Capital
  Accumulated
Deficit
  Common
Units
  Non-
controlling
Interest
  Total
Equity
 
 
  Shares   Amount   Shares   Amount  

Balance at January 1, 2018

      $       $   $ 30,731   $ (805,470 ) $ (8,269 ) $ 4,347   $ (778,661 ) $   $ (778,661 )

Net loss

                        (19,710 )           (19,710 )       (19,710 )

Issuance of restricted common units in connection with acquisitions and contingent consideration

                                32,829     32,829         32,829  

Non-cash equity compensation expense-net of related forfeitures, related to incentive units

                    7,555                 7,555         7,555  

Currency translation adjustment-net of tax

                            (1,506 )       (1,506 )       (1,506 )

Distribution for unitholders

                        (50 )           (50 )       (50 )

Balance at June 30, 2018

      $       $   $ 38,286   $ (825,230 ) $ (9,775 ) $ 37,176   $ (759,543 ) $   $ (759,543 )

 

 
  Class A
Common Stock
  Class B
Common Stock
   
   
   
   
  Total
Members'
Deficit/
Shareholders'
Equity
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
Loss
   
   
   
 
 
  Additional
Paid-In
Capital
  Accumulated
Deficit
  Common
Units
  Non-
controlling
Interest
  Total
Equity
 
 
  Shares   Amount   Shares   Amount  

Balance at January 1, 2019

    46,265,903   $ 462     22,823,272   $ 228   $ 471,386   $ (590 ) $ (1,824 ) $   $ 469,662   $ 342,858   $ 812,520  

Net income (loss)

                        (2,146 )           (2,146 )   2,420     274  

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

    514,826     6     (514,826 )   (5 )   16,571                 16,572         16,572  

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

    312,871     3             9,972                 9,975         9,975  

Forfeiture of unvested Class A common stock

    (909 )               (30 )               (30 )       (30 )

Exercise of stock options

    24,126                 796                 796         796  

Change in non-controlling interest allocation

                    (11,032 )               (11,032 )   (14,790 )   (25,822 )

Non-cash equity compensation expenses

                    1,653                 1,653         1,653  

Currency translation adjustment-net of tax

                            (176 )       (176 )   (157 )   (333 )

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

                    250                 250         250  

Balance at June 30, 2019

    47,116,817   $ 471     22,308,446   $ 223   $ 489,566   $ (2,736 ) $ (2,000 ) $   $ 485,524   $ 330,331   $ 815,855  

   

See notes to unaudited condensed consolidated financial statements

7


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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—The Company was formed as a Delaware corporation on July 29, 2015 for the sole purpose of completing the IPO and Reorganization Transactions in order to carry on the business of Focus LLC. On July 30, 2018, the Company became the managing member of Focus LLC and operates and controls the businesses and affairs of Focus LLC and its subsidiaries. Accordingly, the unaudited condensed consolidated financial statements reflect the historical results of operations and financial position of Focus LLC (predecessor) prior to July 30, 2018.

        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 were governed by its Third Amended and Restated Operating Agreement, as amended, through July 30, 2018 and then its Fourth Amended and Restated Operating Agreement (as amended, the "Operating Agreement"), effective on July 30, 2018.

        Focus LLC is in the business of acquiring and overseeing independent fiduciary wealth management and related businesses.

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 ("SEC"). Accordingly, they do not include all of the information and footnotes 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 the Company and its majority and wholly owned subsidiaries. The Company consolidates Focus LLC and its subsidiaries' consolidated financial statements and records the interests in Focus LLC that the Company does not own as non-controlling interests. Non-controlling interests were measured initially at the proportionate share of Focus LLC's identifiable net assets at the date of the IPO. 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 March 28, 2019.

        Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

        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

8


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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

2. SUMMARY OF ACCOUNTING POLICIES (Continued)

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 generates the revenues and therefore may not be reflective of the geography in which clients are located.

 
  Three Months
Ended June 30,
  Six Months
Ended June 30,
 
 
  2018   2019   2018   2019  

Domestic revenue

  $ 225,894   $ 287,920   $ 416,519   $ 542,212  

International revenue

    5,541     13,625     11,145     19,257  

Total revenue

  $ 231,435   $ 301,545   $ 427,664   $ 561,469  

Leases

        In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)." ASU No. 2016-02 requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right of use asset for the right to use the underlying asset for the lease term. ASU No. 2016-02 was effective for the Company for interim and annual periods beginning January 1, 2019. The Company adopted ASU No. 2016-02 effective January 1, 2019 using a modified retrospective method and therefore has not restated comparative periods. The Company elected to use certain practical expedients to assist in the transition and has not reassessed the identification and classification of leases upon adoption. Based on the portfolio of leases as of January 1, 2019, the Company recognized approximately $144,000 of lease liabilities and $134,000 of right of use assets (which reflects the reclassification of previous deferred rent balances into the right of use asset as required under the transition guidance) on the balance sheet, primarily related to operating leases for real estate. There was no material impact to the consolidated statement of operations and comprehensive income (loss) or consolidated statement of cash flows as a result of adoption of this new guidance. Refer to Note 12 for further information regarding leases.

Recent Accounting Pronouncements

        In January 2017, the FASB issued ASU No. 2017-04, "Simplifying the Test for Goodwill Impairment," which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019 and will be applied prospectively. Early adoption is permitted. ASU No. 2017-04 is not expected to have a material effect on the Company's consolidated financial statements.

        In June 2018, the FASB issued ASU No. 2018-07 "Improvements to Nonemployee Share-Based Payment Accounting," which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU No. 2018-07 was effective for fiscal years beginning after December 15, 2018, including interim periods

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

2. SUMMARY OF ACCOUNTING POLICIES (Continued)

within that fiscal year. The adoption of ASU No. 2018-07 on January 1, 2019 did not have a material effect on the Company's consolidated financial statements.

3. IPO, REORGANIZATION TRANSACTIONS AND USE OF PROCEEDS

Initial Public Offering

        On July 30, 2018, the Company completed its IPO of 18,648,649 shares of its Class A common stock, par value $0.01 per share, including 2,432,432 shares of Class A common stock sold in connection with the full exercise of the option to purchase additional shares granted to the underwriters, at a price to the public of $33.00 per share. The shares began trading on the NASDAQ Global Select Market on July 26, 2018 under the ticker symbol "FOCS."

Reorganization Transactions

        In connection with the IPO, Focus LLC completed the Reorganization Transactions. The equity interests in Focus LLC at the date of the IPO consisted of convertible preferred units, common units and incentive units, each incentive unit having a hurdle amount similar to the exercise price of a stock option. The owners of Focus LLC units immediately prior to the IPO ("Existing Owners") primarily included (i) affiliates of Focus LLC's private equity investors ("Private Equity Investors"), (ii) members of management of Focus LLC, (iii) current and former principals of independent fiduciary wealth management and related businesses acquired by Focus LLC and (iv) current and former employees of Focus LLC.

        In connection with the Reorganization Transactions, all outstanding Focus LLC convertible preferred units converted into Focus LLC common units and the Company purchased certain Focus LLC common and incentive units from certain Existing Owners and issued an aggregate of 23,881,002 shares of Class A common stock, non-compensatory stock options to purchase an aggregate of 386,832 shares of Class A common stock, compensatory stock options to purchase an aggregate of 348,577 shares of Class A common stock and an aggregate of 22,499,665 shares of Class B common stock to certain Existing Owners. Due to certain post-closing adjustments, the Company cancelled 240,457 shares of Class A common stock and issued 240,457 shares of Class B common stock effective as of the closing date of the IPO.

        Existing Owners who hold common units of Focus LLC after the Reorganization Transactions received shares of Class B common stock of the Company. Shares of Class B common stock do not entitle their holders to any economic rights. Holders of Class A common stock and Class B common stock of the Company vote together as a single class on all matters presented to the shareholders of the Company for their vote or approval, except as otherwise required by applicable law. Each share of Class A and Class B common stock entitles its holder to one vote.

Use of Proceeds

        The Company received $565,160 of net proceeds from the sale of the Class A common stock in the IPO including $74,651 in connection with the full exercise of the option to purchase additional shares granted to the underwriters. The Company used $35,537 of the net proceeds to pay certain Existing Owners who elected to sell their units of Focus LLC. The Company contributed $529,623 of

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

3. IPO, REORGANIZATION TRANSACTIONS AND USE OF PROCEEDS (Continued)

the net proceeds from the IPO to Focus LLC in exchange for 17,583,947 common units of Focus LLC. Focus LLC used $392,535 of such contribution to reduce indebtedness under its Credit Facility (as defined below). The residual $137,088 of such contribution was used by Focus LLC for acquisitions and general corporate business purposes.

4. NON-CONTROLLING INTEREST AND INCOME (LOSS) PER SHARE

        Historical income (loss) per share information is not applicable for reporting periods prior to the consummation of the IPO. Net income (loss) attributable to common shareholders is the net income (loss) recorded by the Company based on its interest in Focus LLC during the respective period after the IPO.

        The calculation of controlling and non-controlling interest is as follows as of June 30, 2019:

Focus LLC common units held by continuing owners

    22,308,446  

Common unit equivalents of outstanding vested and unvested incentive units held by continuing owners(1)

    5,125,588  

Total common units and common unit equivalents attributable to non-controlling interest

    27,434,034  

Total common units and common unit equivalents of incentive units outstanding

    74,550,851  

Non-controlling interest allocation

    36.8 %

Company's interest in Focus LLC

    63.2 %

(1)
Focus LLC common units issuable upon conversion of 17,830,564 (see Note 9) vested and unvested Focus LLC incentive units was calculated using the common unit equivalent of vested and unvested Focus LLC incentive units based on the closing price of the Company's Class A common stock on the last trading day of the period.

        The below table contains a reconciliation of net income to net income (loss) attributable to common shareholders:

 
  Three Months
Ended
June 30, 2019
  Six Months
Ended
June 30, 2019
 

Net income

  $ 3,102   $ 274  

Non-controlling interest

    (2,306 )   (2,420 )

Net income (loss) attributable to common shareholders

  $ 796   $ (2,146 )

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

4. NON-CONTROLLING INTEREST AND INCOME (LOSS) PER SHARE (Continued)

        The calculation of basic and diluted income (loss) per share is described below:

        Basic income (loss) per share is calculated utilizing net income (loss) attributable to common shareholders for the three and six months ended June 30, 2019 divided by the weighted average number of shares of Class A common stock outstanding during the same periods:

 
  Three Months
Ended
June 30, 2019
  Six Months
Ended
June 30, 2019
 

Basic income (loss) per share:

             

Net income (loss) attributable to common shareholders

  $ 796   $ (2,146 )

Weighted average shares of Class A common stock outstanding

    46,696,200     46,455,238  

Basic income (loss) per share

  $ 0.02   $ (0.05 )

        Diluted income (loss) per share is calculated utilizing net income (loss) attributable to common shareholders for the three and six months ended June 30, 2019 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 and unvested Class A common stock as calculated using the treasury stock method:

 
  Three Months
Ended
June 30, 2019
  Six Months
Ended
June 30, 2019
 

Diluted income (loss) per share:

             

Net income (loss) attributable to common shareholders

  $ 796   $ (2,146 )

Weighted average shares of Class A common stock outstanding

    46,696,200     46,455,238  

Effect of dilutive stock options

         

Effect of dilutive unvested Class A common stock

    25,359      

Total

    46,721,559     46,455,238  

Diluted income (loss) per share

  $ 0.02   $ (0.05 )

        Diluted loss per share for the six months ended June 30, 2019 excludes incremental shares of 16,607 related to unvested Class A common stock since the effect would be antidilutive due to the net loss for the period. Diluted income (loss) per share for the three and six months ended June 30, 2019 excludes shares related to 155,000 market-based stock options that vest on the fifth anniversary of the pricing of the IPO if the volume weighted average per share price for any ninety-calendar day period within such five-year period immediately following the pricing of the IPO reaches at least $100. Such market-based criteria were not met at June 30, 2019.

5. ACQUISITIONS

Business Acquisitions

        Business acquisitions are accounted for in accordance with Accounting Standards Codification ("ASC") Topic 805: Business Combinations.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

5. ACQUISITIONS (Continued)

        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, 2019 is as follows:

Number of business acquisitions closed

    21  

Consideration:

       

Cash and option premium

  $ 283,291  

Fair market value of estimated contingent consideration

    50,945  

Total consideration

  $ 334,236  

Allocation of purchase price:

       

Total tangible assets

  $ 37,627  

Total liabilities assumed

    (41,515 )

Customer relationships

    199,977  

Management contracts

    9,184  

Goodwill

    128,391  

Other intangibles

    572  

Total allocated consideration

  $ 334,236  

        Management believes approximately $280,460 of tax goodwill and intangibles related to business acquisitions completed during the six months ended June 30, 2019 will be deductible for tax purposes over a 15 year period. Additional tax goodwill may be deductible when estimated contingent consideration is earned and paid.

        The accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2019 includes revenue and income from operations for the 5 business acquisitions that are new subsidiary partner firms from the date they were acquired of $28,950 and $3,453, respectively.

Asset Acquisitions

        The Company also separately purchases customer relationships and other intangible assets. These purchases are accounted for as asset acquisitions as they do not qualify as business acquisitions pursuant to ASC Topic 805, Business Combinations. There were 2 asset acquisitions during the six months ended June 30, 2019. Total purchase consideration for asset acquisitions during the six months ended June 30, 2019 was $600 in cash plus contingent consideration as additional purchase consideration when the outcome is determinable.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

5. ACQUISITIONS (Continued)

        The weighted-average useful lives of intangible assets acquired during the six months ended June 30, 2019 through business acquisitions and asset acquisitions are as follows:

 
  Number
of Years
 

Management contracts

    19  

Customer relationships

    9  

Other intangibles

    5  

Weighted-average useful life of all intangibles acquired

    10  

        From July 1, 2019 to August 8, 2019, the Company completed 7 business acquisitions for cash of $203,281, plus contingent consideration.

6. GOODWILL AND OTHER INTANGIBLE ASSETS

        The following table summarizes the change in the goodwill balances for the year ended December 31, 2018 and the six months ended June 30, 2019:

 
  December 31,
2018
  June 30,
2019
 

Balance beginning of period:

             

Goodwill

  $ 538,113   $ 883,119  

Cumulative impairment losses

    (22,624 )   (22,624 )

    515,489     860,495  

Goodwill acquired

    347,496     128,391  

Other

    (2,490 )   (180 )

    345,006     128,211  

Balance end of period:

             

Goodwill

    883,119     1,011,330  

Cumulative impairment losses

    (22,624 )   (22,624 )

  $ 860,495   $ 988,706  

        The following table summarizes the amortizing acquired intangible assets at December 31, 2018:

 
  Gross Carry
Amount
  Accumulated
Amortization
  Net Book
Value
 

Customer relationships

  $ 1,008,186   $ (349,125 ) $ 659,061  

Management contracts

    133,112     (31,911 )   101,201  

Other intangibles

    4,402     (2,469 )   1,933  

Total

  $ 1,145,700   $ (383,505 ) $ 762,195  

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

6. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

        The following table summarizes the amortizing acquired intangible assets at June 30, 2019:

 
  Gross Carry
Amount
  Accumulated
Amortization
  Net Book
Value
 

Customer relationships

  $ 1,209,291   $ (404,967 ) $ 804,324  

Management contracts

    142,319     (35,735 )   106,584  

Other intangibles

    5,031     (2,829 )   2,202  

Total

  $ 1,356,641   $ (443,531 ) $ 913,110  

7. FAIR VALUE MEASUREMENTS

        ASC Topic 820, Fair Value Measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.

        The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

        Level 1—Unadjusted price quotations in active markets for identical assets or liabilities.

        Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

        Level 3—Significant unobservable inputs that are not corroborated by market data.

        The implied fair value of the Company's First Lien Term Loan (as defined below) based on Level 2 inputs at December 31, 2018 and June 30, 2019 are as follows:

 
  December 31, 2018   June 30, 2019  
 
  Stated
Value
  Fair
Value
  Stated
Value
  Fair
Value
 

First Lien Term Loan

  $ 798,985   $ 773,018   $ 794,970   $ 793,976  

        For business acquisitions, the Company recognizes the fair value of estimated contingent consideration at the acquisition date as part of purchase price. This fair value measurement is based on Level 3 inputs.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

7. FAIR VALUE MEASUREMENTS (Continued)

        The following table represents changes in the fair value of estimated contingent consideration for business acquisitions for the year ended December 31, 2018 and the six months ended June 30, 2019:

Balance at January 1, 2018

  $ 76,677  

Additions to estimated contingent consideration

    42,086  

Payments of contingent consideration

    (26,237 )

Non-cash changes in fair value of estimated contingent consideration

    6,638  

Other

    (259 )

Balance at December 31, 2018

    98,905  

Additions to estimated contingent consideration

    50,945  

Payments of contingent consideration

    (29,475 )

Non-cash changes in fair value of estimated contingent consideration

    11,261  

Other

    (203 )

Balance at June 30, 2019

  $ 131,433  

        Estimated contingent consideration is included in other liabilities in the accompanying unaudited condensed consolidated balance sheets.

        During the year ended December 31, 2018, the Company paid $23,816 in cash and issued $2,421 of restricted common units as contingent consideration associated with business acquisitions. During the six months ended June 30, 2019, the Company paid $29,475 in cash as contingent consideration associated with business acquisitions.

        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. The fair value of the Company's estimated contingent consideration is established using the Monte Carlo Simulation model.

        The primary significant unobservable input used in the fair value measurement of the Company's estimated contingent consideration is the forecasted growth rates over the measurement period. Significant increases or decreases in the Company's forecasted growth rates over the measurement period would result in a higher or lower fair value measurement.

        Inputs used in the fair value measurement of estimated contingent consideration at December 31, 2018 and June 30, 2019 are summarized below:

 
  Quantitative Information About Level 3 Fair Value Measurements
Fair Value at
December 31, 2018
  Valuation Technique   Unobservable Input   Range

$98,905

  Monte Carlo Simulation model   Forecasted growth rates   (16.2)% - 18.7%

 

 
  Quantitative Information About Level 3 Fair Value Measurements
Fair Value at
June 30, 2019
  Valuation Technique   Unobservable Input   Range

$131,433

  Monte Carlo Simulation model   Forecasted growth rates   (17.0)% - 129.8%

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

8. CREDIT FACILITY

        As of June 30, 2019, Focus LLC's credit facility (the "Credit Facility") consisted of a $803,000 first lien term loan (the "First Lien Term Loan") and a $650,000 first lien revolving credit facility (the "First Lien Revolver").

        The First Lien Term Loan has a maturity date of July 2024 and, as of June 30, 2019, required quarterly installment repayments of approximately $2,007. The First Lien Term Loan bears interest (at Focus LLC's option) at: (i) the London InterBank Offered Rate ("LIBOR") plus a margin of 2.50% or (ii) the lender's Base Rate (as defined in the Credit Facility) plus a margin of 1.50%.

        The First Lien Revolver has a maturity date of July 2023. Up to $30,000 of the First Lien Revolver is available for the issuance of letters of credit, subject to certain limitations. The First Lien Revolver bears interest at LIBOR plus a margin of 2.00% with step downs to 1.75%, 1.50% and 1.25% or the lender's Base Rate plus a margin of 1.00% with step downs to 0.75%, 0.50% and 0.25%, 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.

        Focus LLC's obligations under the Credit Facility are collateralized by the majority of Focus LLC's assets. The Credit Facility contains various customary covenants, including, but not limited to: (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring certain property and (v) declaring dividends or making other restricted payments.

        Focus LLC is required to maintain a First Lien Leverage Ratio (as defined in the Credit Facility) of not more than 6.25:1.00 as of the last day of each fiscal quarter. At June 30, 2019, Focus LLC's First Lien Leverage Ratio was 4.05:1.00, 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). Focus LLC is also subject to contingent principal payments based on excess cash flow for any fiscal year if the First Lien Leverage Ratio exceeds 3.75:1.00.

        The Company defers and amortizes its debt financing costs over the respective terms of the First Lien Term Loan and First Lien Revolver. The debt financing costs related to the First Lien Term Loan are recorded as a reduction of the carrying amount of the First Lien Term Loan 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.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

8. CREDIT FACILITY (Continued)

        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, 2018 and June 30, 2019:

 
  December 31,
2018
  June 30,
2019
 

First Lien Term Loan

  $ 798,985   $ 794,970  

First Lien Revolver

    40,000     320,000  

Unamortized debt financing costs

    (2,403 )   (2,186 )

Total

  $ 836,582   $ 1,112,784  

        Weighted-average interest rates for outstanding borrowings were approximately 6% for the year ended December 31, 2018 and approximately 5% for the six months ended June 30, 2019.

        As of December 31, 2018 and June 30, 2019, the First Lien Revolver available unused commitment line was $605,793 and $323,673, respectively.

        As of December 31, 2018 and June 30, 2019, Focus LLC was contingently obligated for letters of credit in the amount of $4,207 and $6,327, respectively, each bearing interest at an annual rate of approximately 1% and 2%, respectively.

        In July 2019, the Company expanded its First Lien Term Loan by $350,000 and incurred approximately $3,800 in estimated debt financing costs. The debt was issued at a discount of 0.25% or $875. The proceeds were used by the Company to reduce the amount outstanding under the Company's First Lien Revolver. Additionally, the quarterly installment repayments related to the First Lien Term Loan were increased to $2,891.

9. EQUITY

Common Stock

        Each Focus LLC common unit, together with a corresponding share of 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 the Company's Class A common stock, or, if either the Company or Focus LLC so elects, cash.

        In March 2019, the Company issued an aggregate of 403,712 shares of Class A common stock and retired 254,441 shares of Class B common stock and 217,730 incentive units in Focus LLC and acquired 403,712 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.

        In June 2019, the Company issued an aggregate of 423,985 shares of Class A common stock and retired 260,385 shares of Class B common stock and 248,142 incentive units in Focus LLC and acquired 423,985 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

9. EQUITY (Continued)

Stock Options and Unvested Class A Common Stock

        The following table provides information relating to the changes in the Company's stock options during the six months ended June 30, 2019:

 
  Stock
Options
  Weighted
Average
Exercise Price
 

Outstanding—January 1, 2019

    1,401,276   $ 31.34  

Granted

    55,513     35.30  

Exercised

    (24,126 )   33.00  

Forfeited

    (22,358 )   30.33  

Outstanding—June 30, 2019

    1,410,305     31.48  

Vested—June 30, 2019

    478,888     33.00  

        The following table provides information relating to the changes in the Company's unvested Class A common stock during the six months ended June 30, 2019:

 
  Unvested Class A
Common Stock
  Grant Date
Fair Value
 

Outstanding—January 1, 2019

    119,078   $ 33.00  

Forfeited

    (909 )   33.00  

Outstanding—June 30, 2019

    118,169     33.00  

        For the purpose of calculating equity-based compensation expense for time-based stock option awards granted during the six months ended June 30, 2019, the grant date fair value was determined through the application of the Black-Scholes model with the following weighted average assumptions:

Expected term

  6.25 years  

Expected stock price volatility

  28 %

Risk-free interest rate

  2.42 %

Expected dividend yield

  %

Weighted average grant date fair value

  $11.67  

        The Company recognized $1,158 and $2,060 of non-cash equity compensation expense in relation to the stock options and unvested Class A common stock during the three and six months ended June 30, 2019, respectively.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

9. EQUITY (Continued)

Focus LLC Incentive Units

        The following table provides information relating to the changes in Focus LLC incentive units during the six months ended June 30, 2019:

 
  Incentive
Units
  Weighted
Average
Hurdle Price
 

Outstanding—January 1, 2019

    18,597,474   $ 20.63  

Granted

    30,000     36.64  

Exchanged

    (465,872 )   11.34  

Forfeited

    (331,038 )   27.80  

Outstanding—June 30, 2019

    17,830,564     20.77  

Vested—June 30, 2019

    9,487,585     14.35  

        Incentive units outstanding and vested at June 30, 2019 were as follows:

Hurdle Rates
  Number
Outstanding
  Vested Incentive
Units
 

$1.42

    175,421     175,421  

5.50

    97,798     97,798  

6.00

    56,702     56,702  

7.00

    482,545     482,545  

9.00

    2,001,982     2,001,982  

11.00

    1,271,965     1,271,965  

12.00

    520,000     520,000  

13.00

    842,418     835,752  

14.00

    56,205     56,205  

16.00

    168,552     168,552  

17.00

    80,000     72,500  

19.00

    865,731     791,981  

21.00

    3,975,500     2,475,500  

22.00

    1,289,667     342,104  

23.00

    524,828     131,207  

27.00

    29,484     7,371  

28.50

    1,646,766      

33.00

    3,715,000      

36.64

    30,000      

    17,830,564     9,487,585  

        The Company recorded $3,701 and $7,555 of non-cash equity compensation expense for incentive units and other during the three and six months ended June 30, 2018, respectively.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

9. EQUITY (Continued)

        The Company recorded $4,020 and $7,039 of non-cash equity compensation expense for incentive units and other during the three and six months ended June 30, 2019, respectively.

10. INCOME TAXES

        The estimated annual effective tax rate for the six months ended June 30, 2019 was 42.7% as compared to 30.2% for the three months ended March 31, 2019. The increase in the estimated annual effective tax rate is primarily attributable to an increase in estimated non-deductible equity-based compensation expense. Income tax expense for the six months ended June 30, 2019 is primarily related to federal, state and local income taxes imposed on the Company's allocable portion of taxable income from Focus LLC. The allocable portion of taxable income primarily differs from the net loss attributable to the Company due to permanent differences such as non-deductible equity-based compensation expense of Focus LLC.

        During the six months ended June 30, 2019, there were no changes to the Company's uncertain tax positions.

11. TAX RECEIVABLE AGREEMENTS

        In connection with the Reorganization Transactions and the closing of the IPO, the Company entered into two Tax Receivable Agreements ("TRAs"): one with certain entities affiliated with the Private Equity Investors and the other with certain other Existing Owners (the parties to the two agreements, collectively, the "TRA holders"). The agreements generally provide for the payment by the Company to each TRA holder of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in connection with the Reorganization Transactions and in periods after the IPO, as a result of certain increases in tax bases and certain tax benefits attributable to imputed interest. The Company will retain the benefit of the remaining 15% of these cash savings.

        As of June 30, 2019, the Company recorded a liability of $46,535 relating to the TRA obligations. Future payments under the TRAs in respect of future exchanges of Focus LLC units for shares of Class A common stock will be in addition to the amount recorded.

12. LEASES

        The Company rents office space under operating leases with various expiration dates. The Company determines if a contract contains a lease at inception. Leases with an initial term of 12 months or less, which are immaterial to the condensed consolidated financial statements, are not recorded in the balance sheet. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recorded on a straight-line basis over the lease term. The Company has a limited number of finance leases which are not material to the consolidated financial statements.

        Operating lease costs are recorded within selling, general and administrative expenses. The implicit discount rates used to determine the present value of the Company's leases are not readily determinable. Therefore, an incremental borrowing rate is used which is estimated based on the

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

12. LEASES (Continued)

Company's cost of borrowing for the relevant terms of each lease. The weighted average discount rate used to determine the Company's operating lease liabilities was approximately 6.6% at June 30, 2019. The weighted average remaining lease term at June 30, 2019 was 7.4 years.

        The future minimum lease payments under operating leases in place as of June 30, 2019 were as follows:

Period
  Amount  

Six months ending December 31, 2019

  $ 20,834  

2020

    39,965  

2021

    33,461  

2022

    27,944  

2023

    22,854  

2024 and thereafter

    88,139  

    233,197  

Less: present value discount

    (52,746 )

Operating lease liabilities at June 30, 2019

  $ 180,451  

        Other information pertaining to leases consists of the following:

 
  Three Months
Ended
June 30, 2019
  Six Months
Ended
June 30, 2019
 

Operating lease costs included in selling general and administrative expenses

  $ 11,298   $ 20,963  

Operating cash flows from operating leases

    10,379     19,473  

Operating lease assets obtained in exchange for operating lease obligations

    13,469     37,317  

        In accordance with ASC 840 future minimum lease payments under operating leases in place at December 31, 2018 were as follows:

Year Ending December 31,
  Amount  

2019

  $ 35,426  

2020

    31,695  

2021

    24,813  

2022

    20,906  

2023

    16,743  

2024 and thereafter

    50,045  

Total minimum lease payments

  $ 179,628  

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

13. 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, 2018 and June 30, 2019, the Company had recorded no liabilities in connection with this right.

        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 Company is also exposed to credit risk for changes in the benchmark interest rate (LIBOR or Base Rate) in connection with its Credit Facility.

        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, 2018 and June 30, 2019, 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 is involved in lawsuits 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's subsidiaries receive requests for information from governmental authorities regarding business activities. The Company has cooperated and plans to continue to cooperate with all governmental agencies. 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.

        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 liability arising under these indemnification provisions is remote. Management cannot estimate any potential maximum exposure due to both the

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (Continued)

(In thousands, except unit data, share and per share amounts)

13. COMMITMENTS AND CONTINGENCIES (Continued)

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.

14. CASH FLOW INFORMATION

 
  Six Months Ended
June 30,
 
 
  2018   2019  

Supplemental disclosures of cash flow information—cash paid for:

             

Interest

  $ 32,655   $ 25,904  

Income taxes

  $ 2,922   $ 3,356  

Supplemental non-cash cash flow information:

             

Fair market value of estimated contingent consideration in connection with acquisitions

  $ 21,878   $ 50,945  

Fair market value of restricted common units in connection with acquisitions and contingent consideration

  $ 32,829   $  

Net tangible assets (liabilities) acquired in connection with business acquisitions

  $ 684   $ (3,888 )

Deferred taxes and tax receivable agreements

  $   $ 250  

Right of use asset related to operating leases

  $   $ 168,867  

Lease liability related to operating leases

  $   $ 180,451  

15. RELATED PARTIES

        The Company reimburses the Company's Chief Executive Officer for certain costs and third-party payments associated with the 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, 2019, the Company recognized expenses of $441 and $1,070, respectively, related to these reimbursements. During the three and six months ended June 30, 2018, the Company recognized expenses of $374 and $897, respectively, related to these reimbursements.

        At June 30, 2019, affiliates of certain holders of the Company's Class A common stock and Class B common stock were lenders under the Credit Facility.

16. OTHER

        In February 2019, the Company recorded a management contract buyout expense of $1,428 related to cash consideration for the buyout of a management agreement with one of the Company's retiring principals whereby the business operations of the relevant partner firm were transitioned to one of the Company's other partner firms.

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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." and similar terms for periods prior to our initial public offering ("IPO") and related reorganization transactions (the "Reorganization Transactions") refer to Focus Financial Partners, LLC and its subsidiaries. For periods subsequent to the IPO and Reorganization Transactions, these terms refer to Focus Financial Partners Inc. and its consolidated subsidiaries. "Focus LLC" refers to Focus Financial Partners, LLC, a Delaware limited liability company and a consolidated subsidiary of ours following the IPO.

        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 for the three and six months ended June 30, 2018 and 2019.

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. 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, 2018, as filed with the Securities and Exchange Commission ("SEC") on March 28, 2019, 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:

    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;

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    write down of goodwill and other intangible assets;

    our failure to maintain and properly safeguard an adequate technology infrastructure;

    cyber-attacks;

    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;

    legal proceedings, governmental inquiries; and

    other factors discussed in this Quarterly Report on Form 10-Q.

        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 over 60 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 RIA 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 in a scaled business model with aligned interests, while retaining their entrepreneurial culture and independence.

        Our partnership is comprised of trusted professionals providing comprehensive wealth management services under 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 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 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 consists 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"). We create downside protection for ourselves by

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retaining a cumulative preferred position in Base Earnings, with the excess of Base Earnings up to Target Earnings being retained by the principals via a management agreement. EBPC in excess of the Target Earnings is shared typically in accordance with the same economic percentages, creating an incentive for the principals to grow earnings above the Target Earnings.

        Since we began revenue-generating and acquisition activities in 2006, we have created a partnership of over 60 partner firms, the substantial majority of which are RIAs registered with the SEC and built a business with revenues of $910.9 million for the year ended December 31, 2018 and $561.5 million for the six months ended June 30, 2019. For the year ended December 31, 2018 and the six months ended June 30, 2019, 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 expanded our international footprint into the United Kingdom, Canada and Australia.

Sources of Revenue

        Our partner firms provide comprehensive wealth management services under a largely recurring, fee-based model. We, solely through our partner firms, derive a substantial majority of our revenue from wealth management fees, which are comprised 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, a flat fee, an hourly rate 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,  
 
  2018   2019   2018   2019  
 
  Revenues   % of Total
Revenues
  Revenues   % of Total
Revenues
  Revenues   % of Total
Revenues
  Revenues   % of Total
Revenues
 
 
  (dollars in thousands)
 

Wealth management fees

  $ 216,328     93.5 % $ 283,296     93.9 % $ 400,651     93.7 % $ 526,380     93.8 %

Other

    15,107     6.5 %   18,249     6.1 %   27,013     6.3 %   35,089     6.2 %

Total revenues

  $ 231,435     100.0 % $ 301,545     100.0 % $ 427,664     100.0 % $ 561,469     100.0 %

        During the three and six months ended June 30, 2019, our wealth management fees were impacted by the acquisitions of new partner firms and the growth of existing partner firms, which includes the acquisitions of wealth management practices by our existing partner firms. In the three and six months ended June 30, 2019, we completed acquisitions of 2 and 5 partner firms, respectively. During the three months ended June 30, 2019, the new partner firms were Escala Partners and Sound View Wealth Advisors. During the six months ended June 30, 2019, the new partner firms were Altman, Greenfield & Selvaggi, Prime Quadrant, Foster Dykema Cabot, Escala Partners and Sound View Wealth Advisors. During the three and six months ended June 30, 2019, our partner firms completed 9 and 18 acquisitions, respectively, consisting of business acquisitions accounted for in accordance with Accounting Standard Codification ("ASC") Topic 805: Business Combinations and asset acquisitions.

        See Note 5 to our unaudited condensed consolidated financial statements for additional information about our acquisitions.

        For the six months ended June 30, 2019, 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, a flat fee, an hourly rate or a combination of such

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fees and are billed either in advance or arrears on a monthly, quarterly or semiannual basis. Because of the variety of billing practices across our partner firms, the timing of any impact of short-term financial market movements on revenues will vary. Additionally, we estimate that approximately 30% of our revenues for the three months ended June 30, 2019 were not directly correlated to the financial markets. Of the 70% of our revenues that were directly correlated to the financial markets, primarily equities and fixed income, for the three months ended June 30, 2019, we estimate that approximately 70% of such revenues were generated from advance billings. These revenues are impacted by market movements and generally result in a one-quarter lagged effect 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, management contract buyout, intangible amortization, non-cash changes in fair value of estimated contingent consideration and depreciation and other amortization expense.

Compensation and Related Expenses

        Compensation and related expenses include salaries, wages, 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 retain a cumulative 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

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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
Revenues
+10%
Growth in
Revenues
–10%
Growth in
Revenues
 
 

 

 

(dollars 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  
 
 
 

        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 and other costs.

Management Contract Buyout

        Management contract buyout represents cash consideration to buyout a management agreement with one of our retiring principals whereby the business operations of the relevant partner firm were transitioned to one of our other partner firms.

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 is paid upon the satisfaction of specified growth thresholds typically over a six-year period. This arrangement may result in the payment of additional purchase price consideration to the sellers for periods following the closing of an acquisition. The growth thresholds are typically tied to the compounded annual growth rate ("CAGR") of the partner firm's earnings. Earn out payments are typically payable in cash and, in some cases, equity.

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        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 using a Monte Carlo Simulation model 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 21 business acquisitions during the six months ended June 30, 2019, consisting of both new partner firms and acquisitions by our 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 typically consists of an upfront cash payment and may include equity. The contingent consideration generally consists of earn outs over a six-year period following the closing, with payment upon the satisfaction of specified growth thresholds. The growth thresholds are typically tied to the CAGR of the partner firm's earnings. 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, 2019 (dollars in thousands):

Number of business acquisitions closed

    21  

Consideration:

       

Cash and option premium

  $ 283,291  

Fair market value of estimated contingent consideration

    50,945  

Total consideration

  $ 334,236  

        During the six months ended June 30, 2019, our acquisitions have been paid for with a combination of cash flow from operations and proceeds from borrowings under the Credit Facility.

Recent Developments

        In May 2019, we announced a new value add service for our partner firms that we refer to as Focus Client Solutions. Focus Client Solutions will enable our partner firms to provide their clients with a competitive array of cash and credit solutions through a third-party network of bank and non-bank lenders.

        From July 1, 2019 to the date of this Quarterly Report, we completed 7 business acquisitions (accounted for in accordance with ASC Topic 805: Business Combinations) consisting of both a new partner firm and acquisitions by our partner firms. The Acquired Base Earnings associated with the acquisition of the new partner firm during this period was $16.5 million. For additional information regarding Acquired Base Earnings, please see "—How We Evaluate Our Business."

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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, 2018 and 2019 include the following:

 
  Three Months
Ended June 30,
  Six Months
Ended June 30,
 
 
  2018   2019   2018   2019  
 
  (dollars in thousands, except share and per share data)
 

Revenue Metrics:

                         

Revenues

  $ 231,435   $ 301,545   $ 427,664   $ 561,469  

Revenue growth(1) from prior period

    47.2 %   30.3 %   46.1 %   31.3 %

Organic revenue growth(2) from prior period

    16.7 %   18.0 %   16.9 %   11.0 %

Management Fees Metrics (operating expense):

                         

Management fees

  $ 60,559   $ 79,252   $ 106,859   $ 136,258  

Management fees growth(3) from prior period

    53.1 %   30.9 %   46.8 %   27.5 %

Organic management fees growth(4) from prior period

    22.1 %   16.5 %   22.4 %   6.6 %

Adjusted EBITDA Metrics:

                         

Adjusted EBITDA(5)

  $ 51,890   $ 62,953   $ 96,111   $ 117,467  

Adjusted EBITDA growth(5) from prior period

    58.9 %   21.3 %   58.0 %   22.2 %

Adjusted Net Income Metrics:

                         

Adjusted Net Income(5)

  $ 29,012   $ 41,232   $ 54,468   $ 76,946  

Adjusted Net Income growth(5) from prior period

    37.6 %   42.1 %   38.1 %   41.3 %

Adjusted Net Income Per Share Metrics:

                         

Adjusted Net Income Per Share(5)

  $ 0.40   $ 0.55   $ 0.76   $ 1.03  

Adjusted Net Income Per Share growth(5) from prior period

    37.6 %   37.5 %   38.1 %   35.5 %

Adjusted Shares Outstanding(5)

    71,843,916     74,444,102     71,843,916     74,422,405  

Other Metrics:

                         

Acquired Base Earnings(6)

  $ 23,800   $ 6,725   $ 26,550   $ 18,638  

Number of partner firms at period end(7)

    56     62     56     62  

(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 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

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    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, Adjusted Net Income Per Share and Adjusted Shares Outstanding, including a reconciliation of Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income Per Share to the most directly comparable GAAP financial measure, please read "—Adjusted EBITDA" and "—Adjusted Net Income and Adjusted Net Income Per Share".

(6)
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 retained cumulative preferred position in Base Earnings. 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 and the principals is amended to adjust Base Earnings and Target Earnings to reflect the projected post-acquisition earnings of the partner firm.

(7)
Represents the number of partner firms on the last day of the period presented. The number includes new partner firms acquired during the period reduced by any partner firms that merged with existing partner firms prior to the last day of the period.

Adjusted EBITDA

        Adjusted EBITDA is a non-GAAP measure. Adjusted EBITDA is defined as net income (loss) 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, gain on sale of investment, loss on extinguishment of borrowings, other expense/income, net, other one-time transaction expenses, and management contract buyout, 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

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    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; and

    to evaluate the effectiveness of our business strategies.

        Adjusted EBITDA does not purport to be an alternative to net income (loss) 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 (loss), 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.

        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.

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        Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA for the three and six months ended June 30, 2018 and 2019:

 
  Three Months
Ended June 30,
  Six Months
Ended June 30,
 
 
  2018   2019   2018   2019  
 
  (dollars in thousands)
 

Net income (loss)

  $ (7,656 ) $ 3,102   $ (19,710 ) $ 274  

Interest income

    (235 )   (339 )   (377 )   (536 )

Interest expense

    18,212     14,424     32,484     27,283  

Income tax expense

    746     1,425     1,922     204  

Amortization of debt financing costs

    929     782     1,888     1,564  

Intangible amortization

    22,290     31,221     41,784     59,962  

Depreciation and other amortization

    2,162     2,425     4,044     4,738  

Non-cash equity compensation expense

    3,701     5,178     7,555     9,099  

Non-cash changes in fair value of estimated contingent consideration

    11,944     3,847     18,315     11,261  

Gain on sale of investment

            (5,509 )    

Loss on extinguishment of borrowings

            14,011      

Other expense (income), net

    (203 )   468     (296 )   704  

Management contract buyout

                1,428  

Other one-time transaction expenses

        420         1,486  

Adjusted EBITDA

  $ 51,890   $ 62,953   $ 96,111   $ 117,467  

Adjusted Net Income and Adjusted Net Income Per Share

        We analyze our performance using Adjusted Net Income and Adjusted Net Income Per Share. Adjusted Net Income and Adjusted Net Income Per Share are non-GAAP measures. We define Adjusted Net Income as net income (loss) 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, gain on sale of investment, loss on extinguishment of borrowings, management contract buyout, if any, and other one-time transaction expenses. The calculation of Adjusted Net Income also includes adjustments to reflect (i) a pro forma 27% income tax rate assuming all earnings of Focus LLC were recognized by Focus Inc. and no earnings were attributable to non-controlling interests and (ii) tax adjustments from intangible asset related income tax benefits from acquisitions based on a pro forma 27% tax rate.

        Adjusted Net Income Per Share for the three and six months ended June 30, 2019 is calculated by dividing Adjusted Net Income by the Adjusted Shares Outstanding. Adjusted Shares Outstanding for the three and six months ended June 30, 2019 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 unvested Class A common stock, if any, 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 have been exchanged for Class A common stock) and (iv) 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).

        Adjusted Net Income Per Share for the periods prior to July 30, 2018 is calculated by dividing Adjusted Net Income by the Adjusted Shares Outstanding. Adjusted Shares Outstanding for the periods prior to July 30, 2018 was 71,843,916 and includes all vested and unvested shares of Class A

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common stock issued in connection with the IPO and Reorganization Transactions, assumes that all vested non-compensatory stock options and unvested compensatory stock options outstanding at the closing of the IPO have been exercised (assuming vesting of unvested compensatory stock options and a then-current value of the Class A common stock equal to the $33.00 IPO price) and assumes that 100% of the Focus LLC common units and vested and unvested incentive units outstanding at the closing of the IPO have been exchanged for Class A common stock (assuming vesting of the unvested incentive units and a then-current value of the Focus LLC common units equal to the $33.00 IPO price).

        We believe that Adjusted Net Income and Adjusted Net Income Per Share, viewed in addition to and not in lieu of, our reported GAAP results, provide 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.

        Adjusted Net Income and Adjusted Net Income Per Share do not purport to be an alternative to net income (loss) or cash flows from operating activities. The terms Adjusted Net Income and Adjusted Net Income Per Share are not defined under GAAP, and Adjusted Net Income and Adjusted Net Income Per Share are not a measure of net income (loss), operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, Adjusted Net Income and Adjusted Net Income 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 and Adjusted Net Income Per Share do not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;

    Adjusted Net Income and Adjusted Net Income 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 and Adjusted Net Income Per Share differently than we do, limiting its usefulness as a comparative measure.

        In addition, Adjusted Net Income and Adjusted Net Income 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 and Adjusted Net Income Per Share as supplemental information.

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        Set forth below is a reconciliation of net income (loss) to Adjusted Net Income and Adjusted Net Income Per Share for the three and six months ended June 30, 2018 and 2019:

 
  Three Months Ended June 30,   Six Months Ended June 30,  
 
  2018   2019   2018   2019  
 
  (in thousands,
except share and per share data)

 

Net income (loss)

  $ (7,656 ) $ 3,102   $ (19,710 ) $ 274  

Income tax expense

    746     1,425     1,922     204  

Amortization of debt financing costs

    929     782     1,888     1,564  

Intangible amortization

    22,290     31,221     41,784     59,962  

Non-cash equity compensation expense

    3,701     5,178     7,555     9,099  

Non-cash changes in fair value of estimated contingent consideration

    11,944     3,847     18,315     11,261  

Gain on sale of investment

            (5,509 )    

Loss on extinguishment of borrowings

            14,011      

Management contract buyout

                1,428  

Other one-time transaction expenses(1)

        420         1,486  

Subtotal

  $ 31,954   $ 45,975   $ 60,256   $ 85,278  

Pro forma income tax expense (27%)(2)

    (8,628 )   (12,413 )   (16,269 )   (23,025 )

Tax Adjustments(2)(3)

    5,686     7,670     10,481     14,693  

Adjusted Net Income

  $ 29,012   $ 41,232   $ 54,468   $ 76,946