FOCUS FINANCIAL PARTNERS INC. Unless otherwise indicated or the context requires, all references to "we,"
"us," "our," the "Company," "
The term "partner firms" refers to our consolidated subsidiaries engaged in wealth management and related services, the businesses of which are typically managed by the principals. The term "principals" refers to the wealth management professionals who manage the businesses of our partner firms pursuant to the relevant management agreement. The term "our partnership" refers to our business and relationship with our partner firms and is not intended to describe a particular form of legal entity or a legal relationship. The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as of and for the three months
endedMarch 31, 2022 and 2023. Forward-Looking Statements Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events, including with respect to the pending Merger. Words such as "may," "assume," "forecast," "position," "predict," "strategy," "expect," "intend," "plan," "estimate," "anticipate," "believe," "project," "budget," "potential," "continue," "will" and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 , as filed with theSecurities and Exchange Commission ("SEC") onFebruary 16, 2023 , and in our other filings with theSEC . Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
our ability to complete the proposed Merger on the terms and timeline
anticipated, or at all, the effect of the pendency of the Merger on our
business or business relationships, including our ability to maintain
? relationships with our partner firm clients and other parties and principals
and employees and management's attention to day-to-day operations of our
business, and other risks and uncertainties related to the Merger that may
affect future results;
? fluctuations in wealth management fees;
? our reliance on our partner firms and the principals who manage their
businesses;
? our ability to make successful acquisitions;
? unknown liabilities of or poor performance by acquired businesses;
? harm to our reputation;
? our inability to facilitate smooth succession planning at our partner firms;
? our inability to compete;
? our reliance on key personnel and principals;
? our inability to attract, develop and retain talented wealth management
professionals;
? our inability to retain clients following an acquisition;
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? our reliance on key vendors;
? write down of goodwill and other intangible assets;
? our failure to maintain and properly safeguard an adequate technology
infrastructure;
? cyber-attacks and other disruptions;
? our inability to recover from business continuity problems;
? inadequate insurance coverage;
? the termination of management agreements by management companies;
? our inability to generate sufficient cash to service all of our indebtedness or
our ability to access additional capital;
? the failure of our partner firms to comply with applicable
regulatory requirements and the highly regulated nature of our business;
? worsening economic conditions, including inflation, in
internationally;
? wars or other geopolitical conflict;
? changes to laws and regulations;
? legal proceedings and governmental inquiries, including any shareholder
litigation related to the proposed Merger; and
? other factors discussed in this Quarterly Report on Form 10-Q, including in
Part II, Item 1A. "Risk Factors".
All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements. Our forward-looking statements speak only as of the date of this Quarterly Report or as of the date as of which they are made. Except as required by applicable law, including federal securities laws, we do not intend to update or revise any forward-looking statements.
Overview
We are a leading partnership of independent, fiduciary wealth management firms
operating in the highly fragmented registered investment advisor ("RIA")
industry, with a footprint of 90 partner firms primarily in the United States .
We have achieved this market leadership by positioning ourselves as the partner
of choice for many firms in an industry where a number of secular trends are
driving consolidation. Our partner firms primarily service ultra-high net worth
and high net worth individuals and families by providing highly differentiated
and comprehensive wealth management services. Our partner firms benefit from our
intellectual and financial resources, operating as part of a scaled business
model with aligned economic interests, while retaining their entrepreneurial
culture and independence.
Our partnership is composed of trusted professionals providing comprehensive
wealth management services through a largely recurring, fee-based model, which
differentiates our partner firms from the traditional brokerage platforms whose
revenues are largely derived from commissions. We derive a substantial majority
of our revenues from wealth management fees for investment advice, financial and
tax planning, consulting, tax return preparation, family office services and
other services. We also generate other revenues primarily from recordkeeping and
administration service fees, commissions and distribution fees and outsourced
services.
We have to date, with limited exceptions, acquired substantially all of the
assets of the firms we chose to partner with but only a portion of the
underlying economics in order to align the principals' interests with our own
objectives. To determine the acquisition price, we first estimate the operating
cash flow of the business based on current
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and projected levels of revenue and expense, before compensation and benefits to
the selling principals or other individuals who become principals. We refer to
the operating cash flow of the business as Earnings Before Partner Compensation
("EBPC") and to this EBPC estimate as Target Earnings ("Target Earnings"). In
economic terms, we typically purchase only 40% to 60% of the partner firm's
EBPC. The purchase price is a multiple of the corresponding percentage of Target
Earnings and may consist of cash or a combination of cash and equity, and the
right to receive contingent consideration. We refer to the corresponding
percentage of Target Earnings on which we base the purchase price as Base
Earnings ("Base Earnings"). Under a management agreement between our operating
subsidiary and the management company and the principals, the management company
is entitled to management fees typically consisting of all future EBPC of the
acquired wealth management firm in excess of Base Earnings up to Target
Earnings, plus a percentage of any EBPC in excess of Target Earnings. Through
the management agreement, we create downside protection for ourselves by
retaining a preferred position in Base Earnings.
For mergers on behalf of our partner firms, including mergers for Connectus
Wealth Advisers ("Connectus"), one of our partner firms, we typically purchase
all of the target firms' EBPC and principals and other personnel of the target
firm join our partner firm as employees or may join the related management
company as a principal in some instances. There typically is an adjustment to
Target Earnings and Base Earnings in the related management agreement if
applicable based on the economics of the transaction.
Since 2006, when we began revenue-generating and acquisition activities, we have
created a partnership of 90 partner firms, the substantial majority of which are
RIAs registered with the SEC and built a business with revenues of approximately
$2.1 billion for the year ended December 31, 2022 and approximately $557.5
million for the three months ended March 31, 2023 . For the year ended
December 31, 2022 and the three months ended March 31, 2023 , in excess of 95% of
our revenues were fee-based and recurring in nature. We have established a
national footprint across the United States and primarily expanded our
international footprint into Australia , Canada , Switzerland and the United
Kingdom .
Recent Developments - Agreement and Plan of Merger
OnFebruary 27, 2023 ,Focus Inc. entered into an Agreement and Plan of Merger (the "Merger Agreement") by and amongFocus Inc. ,Focus LLC andFerdinand FFP Acquisition, LLC , aDelaware limited liability company ("Parent") that is affiliated withClayton, Dubilier & Rice, LLC ("CD&R") andStone Point Capital LLC ("Stone Point") and certain other entities affiliated with Parent pursuant to whichFocus Inc. is to be acquired by affiliates of CD&R in an all-cash transaction (the "Merger"). Affiliates of Stone Point will retain a portion of their investment inFocus Inc. and provide new equity financing as part of the Merger. Subject to the terms and conditions of the Merger Agreement, each share of the Company's Class A common stock will receive$53 in cash per share and each share of the Company's Class B common stock will be cancelled. If the Merger is consummated, the Company will cease to be publicly-traded. A special committee (the "Special Committee") of the board of directors of the Company (the "Board"), comprised solely of disinterested and independent members of the Board, unanimously recommended that the Board approve the Merger Agreement and the transactions contemplated thereby and recommend that the shareholders of the Company vote in favor of adoption of the Merger Agreement. The Board, acting on the Special Committee's recommendation, unanimously approved the Merger Agreement and the transactions contemplated thereby and recommended that the shareholders of the Company vote to adopt and approve the Merger Agreement. Completion of the Merger is subject to customary closing conditions, including approval by holders of a majority of the shares held by the shareholders other than CD&R, Stone Point and certain of their affiliates and portfolio companies and persons who are "officers" ofFocus Inc. within the meaning of Rule 16a-1(f) of the Securities Exchange Act of 1934. The Merger is expected to close in the third quarter of 2023. However, the Company cannot assure completion of the Merger by any particular date, if at all or that, if completed, it will be completed on the terms set forth in the Merger Agreement.
For more information, please refer to Note 1 to our unaudited condensed consolidated financial statements.
Sources of Revenue
Our partner firms provide comprehensive wealth management services through a largely recurring, fee-based model. We derive a substantial majority of our revenue from wealth management fees, which are composed of fees earned from wealth management services, including investment advice, financial and tax planning, consulting, tax return
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preparation, family office services and other services. Fees are primarily based
either on a contractual percentage of the client's assets based on the market
value of the client's assets on the predetermined billing date, a flat fee, an
hourly rate based on predetermined billing rates or a combination of such fees
and are billed either in advance or arrears on a monthly, quarterly or
semiannual basis. In certain cases, such wealth management fees may be subject
to minimum fee levels depending on the services performed. We also generate
other revenues, which primarily include recordkeeping and administration service
fees, commissions and distribution fees and outsourced services. The following
table summarizes our sources of revenue:
Three Months Ended March 31,
2022 2023
% of Total % of Total
Revenues Revenues Revenues Revenues
(dollars in thousands)
Wealth management fees $ 515,179 96.0 % $ 533,889 95.8 %
Other 21,388 4.0 % 23,618 4.2 %
Total revenues $ 536,567 100.0 % $ 557,507 100.0 %
During the three months ended March 31, 2023 , our wealth management fees were
impacted by the acquisition of a new partner firm (Spectrum Wealth Management)
and the growth of existing partner firms, which includes the acquisitions of
wealth management practices by our existing partner firms. During the three
months ended March 31, 2023 , our partner firms completed 11 acquisitions
consisting of business acquisitions accounted for in accordance with Financial
Accounting Standards Board Accounting Standard Codification ("ASC") Topic 805:
Business Combinations.
See Note 4 to our unaudited condensed consolidated financial statements for additional information about our acquisitions.
For the three months endedMarch 31, 2023 , in excess of 95% of our revenues were fee-based and recurring in nature. Although the substantial majority of our revenues are fee-based and recurring, our revenues can fluctuate due to macroeconomic factors and the overall state of the financial markets, particularly inthe United States . Our partner firms' wealth management fees are primarily based either on a contractual percentage of the client's assets based on the market value of the client's assets on the predetermined billing date, a flat fee, an hourly rate based on predetermined billing rates or a combination of such fees and are billed either in advance or arrears on a monthly, quarterly or semiannual basis. Additionally, we estimate that approximately 25.4% of our revenues for the three months endedMarch 31, 2023 , respectively, were not directly correlated to the financial markets. Of the approximately 74.6% of our revenues that were directly correlated to the financial markets, primarily equities and fixed income, for the three months endedMarch 31, 2023 , we estimate that approximately 64.8% of such revenues were generated from advance billings. These revenues are impacted by market movements as a result of contractual provisions with clients that entitle our partner firms to bill for their services either in advance or arrears based on the value of client assets at such time. Since approximately 64.8% of our market correlated revenues are set based on the market value of client assets in advance of the respective service period, this generally results in a one quarter lagged effect of any market movements on our revenues. Longer term trends in the financial markets may favorably or unfavorably impact our total revenues, but not in a linear relationship.
Operating Expenses
Our operating expenses consist of compensation and related expenses, management fees, selling, general and administrative expenses, intangible amortization, non-cash changes in fair value of estimated contingent consideration and depreciation and other amortization expense.
Compensation and Related Expenses
Compensation and related expenses include salaries and wages, including variable compensation, related employee benefits and taxes for employees at our partner firms and employees at theFocus LLC company level. Compensation and related expenses also include non-cash compensation expense associated with bothFocus Inc.'s andFocus LLC's equity grants to employees and non-employees, including management company principals. 28 Table of Contents Management Fees
While we have to date, with limited exceptions, acquired substantially all of the assets of a target firm, following our acquisition of a new partner firm, the partner firm continues to be primarily managed by its principals through their 100% ownership of a new management company formed by them concurrently with the acquisition. Our operating subsidiary, the management company and the principals enter into a management agreement that provides for the payment of ongoing management fees to the management company. The terms of the management agreements are generally six years subject to automatic renewals for consecutive one-year terms, unless earlier terminated by either the management company or us in certain limited situations. Under the management agreement, the management company is entitled to management fees typically consisting of all EBPC in excess of Base Earnings up to Target Earnings, plus a percentage of EBPC in excess of Target Earnings. We generally retain a preferred position in Base Earnings. To the extent earnings of an acquired business in any year are less than Base Earnings, in the following year we are entitled to receive Base Earnings together with the prior years' shortfall before any management fees are earned by the management company. The following table provides an illustrative example of our economics, including management fees earned by the management company, for periods of projected revenues, +10% growth in revenues and -10% growth in revenues. This example assumes (i) Target Earnings of$3.0 million ; (ii) Base Earnings acquired of 60% of Target Earnings or$1.8 million ; and (iii) a percentage of earnings in excess of Target Earnings retained by the management company of 40%. Projected +10% Growth in -10% Growth Revenues Revenues in Revenues (in thousands) New Partner Firm New partner firm revenues$ 5,000 $ 5,500$ 4,500 Less: Operating expenses (excluding management fees) (2,000) (2,000) (2,000) EBPC$ 3,000 $ 3,500$ 2,500 Base Earnings to Focus Inc. (60%) 1,800 1,800 1,800 Management fees to management company (40%) 1,200 1,200 700 EBPC in excess of Target Earnings: To Focus Inc. (60%) - 300 - To management company as management fees (40%) - 200 - Focus Inc. Focus Inc. revenues$ 5,000 $ 5,500$ 4,500 Less: Operating expenses (excluding management fees) (2,000) (2,000) (2,000) Less: Management fees to management company (1,200) (1,400) (700) Operating income$ 1,800 $ 2,100$ 1,800
As a result of our economic arrangements with the various management company entities, 100% of management fees are variable expenses.
Selling, General and Administrative
Selling, general and administrative expenses include rent, insurance premiums,
professional fees, travel and entertainment, Merger-related expenses and other
costs.
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Intangible Amortization
Amortization of intangibles consists of the amortization of intangibles we acquired through our various acquisitions of new partner firms and acquisitions by our partner firms.
Non-Cash Changes in Fair Value of Estimated Contingent Consideration
We have typically incorporated into our acquisition structure contingent
consideration paid to the sellers upon the satisfaction of specified financial
thresholds, and the purchase price for a typical acquisition is comprised of a
base purchase price and the right to receive such contingent consideration in
the form of earn out payments. The contingent consideration for acquisitions of
new partner firms is generally paid over a six-year period upon the satisfaction
of specified growth thresholds, in years three and six. These growth thresholds
are typically tied to the compound annual growth rate ("CAGR") of the partner
firm's earnings. Such growth thresholds can be set annually or for different
time frames as well, for example, annually over a six-year period. The
contingent consideration for acquisitions made by our partner firms is paid upon
the satisfaction of specified financial thresholds. These thresholds are
generally tied to revenue as adjusted for certain criteria or other operating
metrics based on the retention or growth of the business acquired. These
arrangements may result in the payment of additional purchase price
consideration to the sellers for periods following the closing of an
acquisition. Contingent consideration payments are typically payable in cash
and, in some cases, equity.
For business acquisitions, we recognize the fair value of estimated contingent
consideration at the acquisition date as part of the consideration transferred
in exchange for substantially all of the assets of the wealth management firm.
The contingent consideration is remeasured to fair value at each reporting date
until the contingency is resolved. Any changes in fair value are recognized each
reporting period in non-cash changes in fair value of estimated contingent
consideration in our consolidated statements of operations.
Depreciation and Other Amortization
Depreciation and other amortization expense primarily represents the benefits we received from using long-lived assets such as computers and equipment, leasehold improvements and furniture and fixtures. Those assets primarily consist of purchased fixed assets as well as fixed assets acquired through our acquisitions.
Business Acquisitions
We completed 12 business acquisitions during the three months endedMarch 31, 2023 , consisting of a new partner firm acquisition and acquisitions by partner firms. Such business acquisitions were accounted for in accordance with ASC Topic 805: Business Combinations. The purchase price is comprised of a base purchase price and a right to receive contingent consideration in the form of earn out payments. The base purchase price can consist of an upfront cash payment, deferred cash consideration and may include equity. The contingent consideration for acquisitions of new partner firms generally consists of earn outs over a six-year period following the closing, with payment upon the satisfaction of specified growth thresholds in years three and six. The growth thresholds are typically tied to the CAGR of the partner firm's earnings. Such growth thresholds can be set annually or for different time frames as well, for example, annually over a six-year period. The contingent consideration for acquisitions made by our partner firms generally is earned upon the satisfaction of specified financial thresholds, typically annually. These thresholds are generally tied to revenue as adjusted for certain criteria or other operating metrics based on the retention or growth of the business acquired. The contingent consideration is typically payable in cash and, in some cases, equity. 30 Table of Contents
The following table summarizes our business acquisitions for the three months
ended
Number of business acquisitions closed 12
Consideration:
Cash due at closing$ 85,077 Cash due subsequent to closing at net present value 3,313
Fair market value of
$ 226,591
During the three months ended
OnMay 1, 2023 , we completed a new partner firm business acquisition (accounted for in accordance with ASC Topic 805: Business Combinations). The Acquired Base Earnings associated with the acquisition of the new partner firm is$11.1 million . 31 Table of Contents 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 months endedMarch 31, 2022 and 2023 include the following: Three Months Ended March 31, 2022 2023 (dollars in thousands, except per share data) Revenue Metrics: Revenues $ 536,567 $ 557,507 Revenue growth (1) from prior period 36.1 % 3.9 % Organic revenue growth (2) from prior period 22.0 % 0.3 % Management Fees Metrics (operating expense): Management fees $ 137,839 $ 124,594 Management fees growth (3) from prior period 35.0 % (9.6) % Organic management fees growth (4) from prior period 21.6 % (11.1) % Net Income (loss) Metrics: Net income (loss) $ 39,082 $ (6,977) Net income (loss) growth from prior period * * Income (loss) per share of Class A common stock: Basic $ 0.45 $ (0.01) Diluted $ 0.44 $ (0.22) Income (loss) per share of Class A common stock growth from prior period: Basic * * Diluted * * Adjusted EBITDA Metrics: Adjusted EBITDA (5) $ 135,080 $ 132,518 Adjusted EBITDA growth (5) from prior period 33.7 % (1.9) % Adjusted Net Income Excluding Tax Adjustments Metrics: Adjusted Net Income Excluding Tax Adjustments (5) $ 83,073 $ 60,124 Adjusted Net Income Excluding Tax Adjustments growth (5) from prior period 30.9 % (27.6) % Tax Adjustments Tax Adjustments (5)(6) $ 14,813 $ 17,378 Tax Adjustments growth from prior period (5)(6) 41.2 % 17.3 % Adjusted Net Income Excluding Tax Adjustments Per Share and Tax Adjustments Per Share Metrics: Adjusted Net Income Excluding Tax Adjustments Per Share (5) $ 0.98 $ 0.69 Tax Adjustments Per Share (5)(6) $ 0.18 $ 0.20 Adjusted Net Income Excluding Tax Adjustments Per Share growth (5) from prior period 22.5 % (29.6) %
Tax Adjustments Per Share growth from prior period (5)(6)
38.5 % 11.1 %
Adjusted Shares Outstanding
Adjusted Shares Outstanding (5) 84,579,820 86,844,405
Other Metrics:
Net Leverage Ratio (7) at period end 3.84x 4.41x
Acquired Base Earnings (8) $ - $ 1,731
Number of partner firms at period end (9) 84 89 * Not meaningful
(1) Represents period-over-period growth in our GAAP revenue.
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Organic revenue growth represents the period-over-period growth in revenue
related to partner firms, including growth related to acquisitions of wealth
management practices and customer relationships by our partner firms,
including
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.
The terms of our management agreements entitle the management companies tomanagement 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 (3) Earnings. Management fees growth represents the period-over-period growth in
GAAP management fees earned by management companies. While an expense, we
believe that growth in management fees reflect the strength of the
partnership.
Organic management fees growth represents the period-over-period growth inmanagement 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 (4) 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.
For additional information regarding Adjusted EBITDA, Adjusted Net Income
Excluding Tax Adjustments, Adjusted Net Income Excluding Tax Adjustments Per
Share, Tax Adjustments, Tax Adjustments Per Share and Adjusted Shares (5) Outstanding, including a reconciliation of Adjusted EBITDA, Adjusted Net
Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax
Adjustments Per Share to the most directly comparable GAAP financial measure,
please read "-Adjusted EBITDA" and "-Adjusted Net Income Excluding Tax
Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share."
Tax Adjustments represent the tax benefits of intangible assets, including
goodwill, associated with deductions allowed for tax amortization of
intangible assets in the respective periods based on a pro forma 27% income
tax rate. Such amounts were generated from acquisitions completed where we
received a step-up in basis for tax purposes. Acquired intangible assets may
be amortized for tax purposes, generally over a 15-year period. Due to our (6) acquisitive nature, tax deductions allowed on acquired intangible assets
provide additional significant supplemental economic benefit. The tax benefit
from amortization is included to show the full economic benefit of deductions
for acquired intangible assets with the step-up in tax basis. As of
2023, estimated Tax Adjustments from intangible asset related income tax
benefits from closed acquisitions based on a pro forma 27% income tax rate
for the next 12 months is
Net Leverage Ratio represents the First Lien Leverage Ratio (as defined in
the Credit Facility), and means the ratio of amounts outstanding under the
first lien term loan A (the "First Lien Term Loan A"), first lien term loan B
(the "First Lien Term Loan B" and together with the "First Lien Term Loan A," (7) the "First Lien Term Loan"), and First Lien Revolver plus other outstanding
debt obligations secured by a lien on the assets of
letters of credit other than unpaid drawings thereunder) minus unrestricted
cash and cash equivalents to Consolidated EBITDA (as defined in the Credit
Facility).
The terms of our management agreements entitle the management companies to
management fees typically consisting of all future EBPC of the acquiredwealth management firm in excess of Base Earnings up to Target Earnings, plus
a percentage of any EBPC in excess of Target Earnings. Acquired Base Earnings
is equal to our collective preferred position in Base Earnings or comparable
measures. We are entitled to receive these earnings notwithstanding any (8) 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.
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(9) Represents the number of partner firms on the last day of the period
presented.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure. Adjusted EBITDA is defined as net income
(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, other expense-net and Merger-related expenses, if any. We believe
that Adjusted EBITDA, viewed in addition to and not in lieu of, our reported
GAAP results, provides additional useful information to investors regarding our
performance and overall results of operations for various reasons, including the
following:
non-cash equity grants made to employees or non-employees at a certain price
? and point in time do not necessarily reflect how our business is performing at
any particular time; stock-based compensation expense is not a key measure of
our operating performance;
contingent consideration or earn outs can vary substantially from company to
company and depending upon each company's growth metrics and accounting
? assumption methods; the non-cash changes in fair value of estimated contingent
consideration is not considered a key measure in comparing our operating performance; and
amortization expenses can vary substantially from company to company and from
period to period depending upon each company's financing and accounting
? methods, the fair value and average expected life of acquired intangible assets
and the method by which assets were acquired; the amortization of intangible
assets obtained in acquisitions are not considered a key measure in comparing
our operating performance. We use Adjusted EBITDA:
? as a measure of operating performance;
? for planning purposes, including the preparation of budgets and forecasts;
? to allocate resources to enhance the financial performance of our business;
? to evaluate the effectiveness of our business strategies; and
? as a consideration in determining compensation for certain employees.
Adjusted EBITDA does not purport to be an alternative to net income (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
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compensate for these limitations by relying also on the GAAP results and using Adjusted EBITDA as supplemental information.
Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA for
the three months ended
Three Months Ended
March 31,
2022 2023
(in thousands)
Net income (loss) $ 39,082 $ (6,977)
Interest income (3) (464)
Interest expense 17,616 43,929Income tax expense (benefit) 15,617
(18,703)
Amortization of debt financing costs 1,101
1,105
Intangible amortization 60,276
71,786
Depreciation and other amortization 3,633
3,967
Noncash equity compensation expense 6,707
7,911
Noncash changes in fair value of estimated contingent consideration (8,985) 16,488 Other expense-net 36 2,725 Merger-related expenses (1) - 10,751 Adjusted EBITDA$ 135,080 $ 132,518
(1) Represents costs incurred in conjunction with the Merger. For more information, please refer to Note 1 to our unaudited condensed consolidated financial statements.
Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share
We analyze our performance using Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share. Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are non GAAP measures. We define Adjusted Net Income Excluding Tax Adjustments as net income (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 and Merger-related expenses, if any. The calculation of Adjusted Net Income Excluding Tax Adjustments also includes adjustments to reflect a pro forma 27% income tax rate reflecting the estimatedU.S. federal, state, local and foreign income tax rates applicable to corporations in the jurisdictions we conduct business and is used for comparative purposes. The actual effective income tax rate, in current or future periods, may differ significantly from the pro forma income tax rate of 27%. Adjusted Net Income Excluding Tax Adjustments Per Share is calculated by dividing Adjusted Net Income Excluding Tax Adjustments by the Adjusted Shares Outstanding. Adjusted Shares Outstanding includes: (i) the weighted average shares of Class A common stock outstanding during the periods, (ii) the weighted average incremental shares of Class A common stock related to stock options and restricted stock units outstanding during the periods, (iii) the weighted average number ofFocus LLC common units outstanding during the periods (assuming that 100% of suchFocus LLC common units, including contingently issuableFocus LLC common units, if any, have been exchanged for Class A common stock), (iv) the weighted average number ofFocus LLC restricted common units outstanding during the periods (assuming that 100% of suchFocus LLC restricted common units have been exchanged for Class A common stock) and (v) the weighted average number of common unit equivalents ofFocus 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 suchFocus LLC common units have been exchanged for Class A common stock). We believe that Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share, viewed in addition to and not in lieu of, our reported GAAP results, provide additional useful 35
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information to investors regarding our performance and overall results of operations for various reasons, including the following:
non-cash equity grants made to employees or non-employees at a certain price
? and point in time do not necessarily reflect how our business is performing at
any particular time; stock-based compensation expense is not a key measure of
our operating performance;
contingent consideration or earn outs can vary substantially from company to
company and depending upon each company's growth metrics and accounting
? assumption methods; the non-cash changes in fair value of estimated contingent
consideration is not considered a key measure in comparing our operating performance; and
amortization expenses can vary substantially from company to company and from
period to period depending upon each company's financing and accounting
? methods, the fair value and average expected life of acquired intangible assets
and the method by which assets were acquired; the amortization of intangible
assets obtained in acquisitions are not considered a key measure in comparing
our operating performance.
Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share do not purport to be an alternative to net income (loss) or cash flows from operating activities. The terms Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are not defined under GAAP, and Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are not a measure of net income (loss), operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding
? Tax Adjustments Per Share do not reflect all cash expenditures, future
requirements for capital expenditures or contractual commitments;
Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding
? Tax Adjustments Per Share do not reflect changes in, or cash requirements for,
working capital needs; and
Other companies in the financial services industry may calculate Adjusted Net
? Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax
Adjustments Per Share differently than we do, limiting its usefulness as a
comparative measure.
In addition, Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share can differ significantly from company to company depending on strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We compensate for these limitations by relying also on the GAAP results and use Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share as supplemental information.
Tax Adjustments and Tax Adjustments Per Share
Tax Adjustments represent the tax benefits of intangible assets, including
goodwill, associated with deductions allowed for tax amortization of intangible
assets in the respective periods based on a pro forma 27% income tax rate. Such
amounts were generated from acquisitions completed where we received a step-up
in basis for tax purposes. Acquired intangible assets may be amortized for tax
purposes, generally over a 15-year period. Due to our acquisitive nature, tax
deductions allowed on acquired intangible assets provide additional significant
supplemental economic
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benefit. The tax benefit from amortization is included to show the full economic
benefit of deductions for acquired intangible assets with the step-up in tax
basis.
Tax Adjustments Per Share is calculated by dividing Tax Adjustments by the Adjusted Shares Outstanding.
Set forth below is a reconciliation of net income (loss) to Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share for the three months endedMarch 31, 2022 and 2023: Three Months Ended March 31, 2022 2023 (dollars in thousands, except per share data) Net income (loss) $ 39,082$ (6,977) Income tax expense (benefit) 15,617 (18,703)
Amortization of debt financing costs 1,101 1,105 Intangible amortization 60,276
71,786
Noncash equity compensation expense 6,707 7,911 Noncash changes in fair value of estimated contingent consideration (8,985) 16,488 Merger-related expenses (1) - 10,751 Subtotal 113,798 82,361
Pro forma income tax expense (27%) (2) (30,725)
(22,237)
Adjusted Net Income Excluding Tax Adjustments $ 83,073$ 60,124 Tax Adjustments (3) $ 14,813$ 17,378 Adjusted Net Income Excluding Tax Adjustments Per Share $ 0.98$ 0.69 Tax Adjustments Per Share (3) $ 0.18$ 0.20 Adjusted Shares Outstanding 84,579,820
86,844,405
Calculation of Adjusted Shares Outstanding: Weighted average shares of Class A common stock outstanding-basic (4) 65,331,370
65,940,004
Adjustments:
Weighted average incremental shares of Class A common stock related to stock options and restricted stock units (5)
436,093 443,542
Weighted averageFocus LLC common units outstanding (6) 11,621,814
12,072,890
Weighted averageFocus LLC restricted common units outstanding (7) 193,625
296,548
Weighted average common unit equivalent of
6,996,918 8,091,421
Adjusted Shares Outstanding 84,579,820
86,844,405
Represents costs incurred in conjunction with the Merger. For information, (1) please refer to Note 1 to our unaudited condensed consolidated financial
statements.
The pro forma income tax rate of 27% reflects the estimated
state, local and foreign income tax rates applicable to corporations in the
jurisdictions we conduct business and is used for comparative purposes. The
actual effective income tax rate, in current or future periods, may differ
significantly from the pro forma income tax rate of 27%. The actual effective (2) income tax rate is the percentage of income tax after taking into
consideration various tax deductions, credits and limitations. Among other
things, periods of increased interest expense and limits on our ability to
deduct interest expense may, in current or future periods, contribute to an
actual effective income tax rate that is less than or greater than the pro
forma income tax rate of 27%.
Tax Adjustments represent the tax benefits of intangible assets, including
goodwill, associated with deductions allowed for tax amortization of (3) intangible assets in the respective periods based on a pro forma 27% income
tax rate. Such amounts were generated from acquisitions completed where we
received a step-up in basis for tax purposes. Acquired intangible assets may
be amortized for tax purposes, generally over a 15-year period. Due to our
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acquisitive nature, tax deductions allowed on acquired intangible assets provide
additional significant supplemental economic benefit. The tax benefit from
amortization is included to show the full economic benefit of deductions for
acquired intangible assets with the step-up in tax basis. As of
estimated Tax Adjustments from intangible asset related income tax benefits from
closed acquisitions based on a pro forma 27% income tax rate for the next 12
months is
(4) Represents our GAAP weighted average Class A common stock outstanding-basic.
(5) Represents the incremental shares related to stock options and restricted
stock units as calculated under the treasury stock method.
Assumes that 100% of the
stock.
(7) Assumes that 100% of the
Class A common stock.
Assumes that 100% of the vested and unvested
Class A common stock at the end of the respective period and such
common units were exchanged for Class A common stock.
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Results of Operations
Three Months Ended
The following discussion presents an analysis of our results of operations for the three months endedMarch 31, 2022 and 2023. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where possible and practical, have quantified the impact of such items. Three Months Ended March 31, 2022 2023 $ Change % Change (dollars in thousands) Revenues: Wealth management fees$ 515,179 $ 533,889 $ 18,710 3.6 % Other 21,388 23,618 2,230 10.4 % Total revenues 536,567 557,507 20,940 3.9 % Operating expenses:
Compensation and related expenses 181,800 206,416 24,616 13.5 % Management fees 137,839 124,594 (13,245) (9.6) % Selling, general and administrative 88,650 112,816 24,166 27.3 % Intangible amortization 60,276 71,786 11,510 19.1 % Noncash changes in fair value of estimated contingent consideration (8,985) 16,488 25,473 * Depreciation and other amortization 3,633 3,967
334 9.2 %
Total operating expenses 463,213 536,067 72,854 15.7 %
Income from operations 73,354 21,440 (51,914) *
Other income (expense):
Interest income 3 464 461 * %
Interest expense (17,616) (43,929) (26,313) (149.4) %Amortization of debt financing costs (1,101) (1,105) (4) (0.4) % Other expense-net (36) (2,725) (2,689) * Income from equity method investments 95 175 80 84.2 % Total other expense-net (18,655) (47,120) (28,465) (152.6) % Income (loss) before income tax 54,699 (25,680)
(80,379) * Income tax expense (benefit) 15,617 (18,703) (34,320) * Net income (loss)$ 39,082 $ (6,977) $ (46,059) * * Not meaningful Revenues Wealth management fees increased$18.7 million , or 3.6%, for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . New partner firms added subsequent to the three months endedMarch 31, 2022 that are included in our results of operations for the three months endedMarch 31, 2023 includeAzimuth Capital Investment Management ,Octogone Holding ,Icon Wealth Partners , FourThought Private Wealth,Beaumont Financial Partners and Spectrum Wealth Management. Additionally, our partner firms completed 29 acquisitions subsequent to the three months endedMarch 31, 2022 . The new partner firms contributed approximately$17.4 million in revenue during the three months endedMarch 31, 2023 . The balance of the increase of$1.3 million was due to the revenue growth at our existing partner firms, includingConnectus , associated with wealth management services, which includes partner firm-level acquisitions.
Other revenues increased
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Operating Expenses
Compensation and related expenses increased $24.6 million , or 13.5%, for the
three months ended March 31, 2023 compared to the three months ended March 31,
2022 . The increase related to new partner firms was approximately $6.7 million .
Non-cash equity compensation increased $1.2 million primarily from equity grants
in 2022 and incremental non-cash equity compensation expense from the
modification of certain equity awards in 2022. The balance of the increase of
$16.7 million was due primarily to an increase in salaries and related expense
of existing partner firms and partner firm-level acquisitions.
Management fees decreased $13.3 million , or 9.6%, for the three months ended
March 31, 2023 compared to the three months ended March 31, 2022 . Management
fees are variable and a function of earnings during the period. The decrease
principally resulted from a reduction in profitability splits with the
management companies of $15.3 million during the three months ended March 31,
2023 compared to the three months ended March 31, 2022 . This decrease was offset
by an increase related to management fees for new partner firms of approximately
$2.0 million .
Selling, general and administrative expenses increased $24.2 million , or 27.3%,
for the three months ended March 31, 2023 compared to the three months ended
March 31, 2022 . New partner firms added approximately $4.1 million . The balance
of the increase of $20.1 million was due primarily to Merger-related expenses of
$10.8 million and an increase in expenses related to information technology and
travel and entertainment expenses related to our existing partner firms and
partner firm-level acquisitions.
Intangible amortization increased $11.5 million , or 19.1%, for the three months
ended March 31, 2023 compared to the three months ended March 31, 2022 . The
increase related to new partner firms was approximately $4.6 million . The
balance of the increase of $6.9 million was due primarily to partner firm-level
acquisitions.
Non-cash changes in fair value of estimated contingent consideration increased
$25.5 million for the three months ended March 31, 2023 compared to the three
months ended March 31, 2022 . During the three months ended March 31, 2023 , the
probability that certain contingent consideration payments would be achieved
increased due to Monte Carlo Simulation changes associated with market
conditions and forecasts, resulting in an increase in the fair value of the
contingent consideration liability.
Other income (expense)
Interest expense increased$26.3 million , or 149.4%, for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . The increase was due primarily to higher average interest rates during the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . Other expense-net increased$2.7 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . The increase was due primarily to a partial write-off of an insurance receivable.
Income Tax Expense (Benefit)
Income tax expense (benefit) decreased$34.3 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . For the three months endedMarch 31, 2023 , we recorded a tax benefit on loss before income tax based on an estimated annual effective tax rate, excluding Merger-related expenses which is a significant unusual or infrequent item. In addition, we recorded a discrete tax benefit of$2.3 million attributable to the Merger-related expenses, resulting in an effective tax rate of 72.8% for the three months endedMarch 31, 2023 . The estimated annual effective tax rate is primarily related to federal, state and local income taxes imposed onFocus Inc.'s allocable portion of taxable income fromFocus LLC and reflects an estimated valuation allowance for deferred tax assets relating to business
interest carryforwards.
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Liquidity and Capital Resources
Sources of Liquidity
During the three months endedMarch 31, 2023 , we met our cash and liquidity needs primarily through cash on hand, cash generated by our operations and borrowings under our Credit Facility. Over the next twelve months, and in the longer term, we expect that our cash and liquidity needs will be met by cash generated by our operations and borrowings under our Credit Facility, especially for acquisition activities. If our acquisition activity continues at an accelerated pace, or for larger acquisition opportunities, we may decide to issue equity either as consideration or, if market conditions are favorable, in an offering. For information regarding the Credit Facility, please read "-Credit Facilities." Tax Receivable Agreements Our Tax Receivable Agreements with the TRA holders generally provide for the payment byFocus Inc. to each TRA holder of 85% of the net cash savings, if any, inU.S. federal, state and local income and franchise tax thatFocus Inc. actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the initial public offering as a result of certain increases in tax basis and certain tax benefits attributable to imputed interest.Focus Inc. will retain the benefit of the remaining 15% of these cash savings. The payment obligations under the Tax Receivable Agreements areFocus Inc.'s obligations and not obligations ofFocus LLC , and we expect that such payments required to be made under the Tax Receivable Agreements will be substantial. Estimating the amount and timing of payments that may become due under the Tax Receivable Agreements is by its nature imprecise. For purposes of the Tax Receivable Agreements, cash savings in tax generally are calculated by comparingFocus Inc.'s actual tax liability (determined by using the actual applicableU.S. federal income tax rate and an assumed combined state and local income and franchise tax rate) to the amountFocus Inc. would have been required to pay had it not been able to utilize any of the tax benefits subject to the Tax Receivable Agreements. During the three months endedMarch 31, 2023 , payments totaling$9.6 million were made under the Tax Receivable Agreements. As ofMarch 31, 2023 , we expect that future payments to the TRA holders that have already exchangedFocus LLC units will be$215.0 million , in aggregate. Future payments under the Tax Receivable Agreements in respect of subsequent exchanges will be in addition to this amount. The actual increases in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreements, will vary depending upon a number of factors, including the timing of any redemption of units, the price of our Class A common stock at the time of each redemption, the extent to which such redemptions are taxable transactions, the amount ofFocus LLC's assets that consist of equity in entities taxed as corporations at the time of each redemption, the amount and timing of the taxable income we generate in the future, theU.S. federal income tax rates then applicable and the portion of the payments under the Tax Receivable Agreements that constitute imputed interest or give rise to depreciable or amortizable tax basis. The foregoing amount of expected future payments to TRA holders is an estimate and the actual payments could differ materially. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding payments under the Tax Receivable Agreements as compared to the foregoing estimates. Moreover, there may be a negative impact on our liquidity if, as a result of timing discrepancies or otherwise, (i) the payments under the Tax Receivable Agreements exceed the actual benefits realized in respect of the tax attributes subject to the Tax Receivable Agreements and/or (ii) distributions toFocus Inc. byFocus LLC are not sufficient to permitFocus Inc. to make payments under the Tax Receivable Agreements after it has paid its taxes and other obligations.
The payments under the Tax Receivable Agreements will not be conditioned upon a
TRA holder's having a continued ownership interest in either
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We expect that future unitholders may become party to one or more Tax Receivable
Agreements entered into in connection with future acquisitions by Focus LLC or
issuances of units of Focus LLC to employees, principals and directors.
Cash Flows
The following table presents information regarding our cash flows and cash and
cash equivalents for the three months ended
Three Months Ended
March 31,
2022 2023 $ Change % Change
(dollars in thousands)
Cash provided by (used in):
Operating activities $ (4,642) $ (3,228) $ 1,414 30.5 %
Investing activities (11,067) (90,317) (79,250) *
Financing activities 21,740 53,901 32,161 147.9 % Cash and cash equivalents-end of period 317,034 100,199 (216,835) (68.4) %
* Not meaningful Operating Activities Net cash used in operating activities includes net income (loss) adjusted for non-cash expenses such as intangible amortization, depreciation and other amortization, amortization of debt financing costs, non-cash equity compensation expense, non-cash changes in fair value of estimated contingent consideration, other non-cash items and changes in cash resulting from changes in operating assets and liabilities. Operating assets and liabilities include receivables from our clients, prepaid expenses and other assets, accounts payable and accrued expenses, deferred revenues and other assets and liabilities. Net cash used in operating activities decreased$1.4 million , or 30.5%, for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . The decrease was primarily related to the timing of management fee payments which resulted in a decrease of payments to affiliates which was partially offset by an increase in prepaids and other assets and other working capital changes. Investing Activities
Net cash used in investing activities increased$79.3 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . The increase was due primarily to an increase in cash paid for acquisitions and contingent consideration of$82.1 million based on increased acquisition activity offset in part by a decrease in investments and other, net of$5.2 million during the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 .
Financing Activities
Net cash provided by financing activities for the three months endedMarch 31, 2023 increased$32.2 million , or 147.9%, compared to the three months endedMarch 31, 2022 . The increase was primarily due to an increase in net borrowings from credit facilities of$48.2 million which was principally used to fund acquisitions, offset by increases in payments of contingent consideration of$4.4 million and deferred cash consideration of$12.5 million , respectively, in the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . 42 Table of Contents Adjusted Free Cash Flow To supplement our statements of cash flows presented on a GAAP basis, we use a non-GAAP liquidity measure on a trailing 4-quarter basis to analyze cash flows generated from our operations. We consider Adjusted Free Cash Flow to be a liquidity measure that provides useful information to investors about the amount of cash generated by the business and is one factor in evaluating the amount of cash available to pay contingent consideration and deferred cash consideration, make strategic acquisitions and repay outstanding borrowings. Adjusted Free Cash Flow does not represent our residual cash flow available for discretionary expenditures as it does not deduct our mandatory debt service requirements and other non-discretionary expenditures. We define Adjusted Free Cash Flow as net cash provided by operating activities, less purchase of fixed assets, distributions forFocus LLC unitholders and payments under Tax Receivable Agreements (if any). Adjusted Free Cash Flow is not defined under GAAP and should not be considered as an alternative to net cash from operating, investing or financing activities. Adjusted free cash flow may not be calculated the same for us as for other companies. The table below reconciles net cash provided by operating activities, as reflected on our cash flow statement, to our adjusted free cash flow. Trailing 4-Quarters EndedMarch 31, 2022 2023 (in thousands)
Net cash provided by operating activities (1)(2) $ 275,148
$ 290,013 Purchase of fixed assets (11,415) (23,394) Distributions for unitholders (31,465) (16,306) Payments under tax receivable agreements (4,167)
(9,598)
Adjusted Free Cash Flow $ 228,101 $ 240,715
A portion of contingent consideration paid is classified as operating cash
outflows in accordance with GAAP, with the balance reflected in investing and
financing cash flows. Contingent consideration paid classified as operating
cash outflows for each quarter in the trailing 4-quarters ended
2022 was
(1) respectively, totaling
31, 2022. Contingent consideration paid classified as operating cash outflows
for each quarter in the trailing 4-quarters ended
million,
our unaudited condensed consolidated financial statements for additional
information.
A portion of deferred cash consideration paid is classified as operating cash
(2) outflows in accordance with GAAP, with the balance reflected in financing
cash outflows. Deferred cash consideration paid classified as operating cash
outflows was
Credit Facilities
As ofMarch 31, 2023 , our credit facility (the "Credit Facility") consisted of a$2.5 billion first lien term loan B (the "First Lien Term Loan B"), consisting of a$1.75 billion tranche A ("First Lien Term Loan B - Tranche A") and$786.4 million tranche B ("First Lien Term Loan B - Tranche B"), a$240.0 million delayed draw first lien term loan A (the "First Lien Term Loan A") and a$650.0 million first lien revolving credit facility (the "First Lien Revolver"). The First Lien Term Loan B - Tranche A bears interest (at our option) at: (i) Secured Overnight Financing Rate ("SOFR") plus a margin of 3.25% with a 0.50% SOFR floor or (ii) the lender's Base Rate (as defined in the Credit Facility) plus a margin of 2.25%. The First Lien Term Loan B - Tranche A requires quarterly installment repayments of$4.4 million and has a maturity date ofJune 2028 . The debt was issued at a discount of 1.75% or$30.8 million which is being amortized to interest expense over the term of the First Lien Term Loan B - Tranche A. The First Lien Term Loan B - Tranche A also requires a prepayment penalty of 1%, of the then outstanding principal amount of the First Lien Term Loan B - Tranche A if repaid on or prior toMay 28, 2023 . 43
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The First Lien Term Loan B - Tranche B bears interest (at our option) at: (i) SOFR plus a margin of 2.50% with a 0.50% SOFR floor or (ii) the lender's Base Rate plus a margin of 1.50%. The First Lien Term Loan B - Tranche B requires quarterly installment repayments of$2.0 million and has a maturity date ofJune 2028 . The First Lien Term Loan A bears interest (at our option) at: (i) SOFR plus a margin of 2.50% with a 0.50% SOFR floor or (ii) the lender's Base Rate plus a margin of 1.50%. The First Lien Term Loan A has a nine month delayed draw feature, which expires inAugust 2023 . The delayed draw feature has a ticking fee with respect to the undrawn commitments with (i) no fee from 0-60 days fromNovember 28, 2022 (the "Closing Date"), (ii) 50% of the interest rate margin for the First Lien Term Loan A from 61-120 days of the Closing Date and (iii) 100% of the interest rate margin for the First Lien Term Loan A after 121 days of the Closing Date. The First Lien Term Loan A, when drawn, will be issued at a discount of 1.50% which will be amortized to interest expense over the remaining term from the date that it is drawn. When drawn, the First Lien Term Loan A will require quarterly installment repayments equal to 0.25% in 2023, 0.50% in 2024 and 2025, 1.25% in 2026 and 1.875% in 2027. InDecember 2022 ,$20.0 million was borrowed under the First Lien Term Loan A at a discount of$300.0 thousand with quarterly installment repayments of$50.0 thousand . During the three months endedMarch 31, 2023 ,$100.0 million was borrowed under the First Lien Term Loan A at a discount of$1.5 million with quarterly installment repayments of$250.0 thousand . The First Lien Term Loan A has a maturity date ofNovember 2027 . The First Lien Revolver bears interest (at our option) at SOFR plus a margin of 2.25% with step downs to 2.00% and 1.75% or the lender's Base Rate plus a margin of 1.25% with step downs to 1.00% and 0.75%, based on achievement of a specified First Lien Leverage Ratio. The First Lien Revolver unused commitment fee is 0.50% with step downs to 0.375% and 0.25% based on achievement of a specified First Lien Leverage Ratio. Up to$30.0 million of the First Lien Revolver is available for the issuance of letters of credit, subject to certain limitations. The First Lien Revolver has a maturity date ofNovember 2027 . Our obligations under the Credit Facility are collateralized by the majority ofFocus LLC's assets. The Credit Facility contains various customary covenants, including, but not limited to: (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring certain property and (v) declaring dividends or making other restricted payments. We are required to maintain a First Lien Leverage Ratio (as defined in the Credit Facility) of not more than 6.25:1.00 as of the last day of each fiscal quarter. AtMarch 31, 2023 , our First Lien Leverage Ratio was 4.41:1.00, 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 ofFocus LLC (excluding letters of credit other than unpaid drawings thereunder) minus unrestricted cash and cash equivalents to Consolidated EBITDA (as defined in the Credit Facility). Consolidated EBITDA for purposes of the Credit Facility was$580.2 million atMarch 31, 2023 .Focus LLC is also subject on an annual basis to contingent principal payments based on an excess cash flow calculation (as defined in the Credit Facility) for any fiscal year if the First Lien Leverage Ratio exceeds 3.75:1.00. No contingent principal payments were required to be made in 2022. Based on the excess cash flow calculation for the year endedDecember 31, 2022 , no contingent principal payments are required to be made in 2023. We defer and amortize our debt financing costs and unamortized discount over the respective terms of the borrowings. The debt financing costs related to the First Lien Term Loan B and First Lien Term Loan A are recorded as a reduction of the carrying amounts of the respective borrowings in the consolidated balance sheets. The debt financing costs related to the First Lien Revolver are recorded in debt financing costs-net in the consolidated balance sheets. AtMarch 31, 2023 , outstanding stated value borrowings under the Credit Facility were approximately$2.7 billion . The weighted-average interest rate for outstanding borrowings was approximately 6% for the three months endedMarch 31, 2023 . As ofMarch 31, 2023 , the First Lien Revolver available unused commitment line was$639.9 million . AtMarch 31, 2023 , we had outstanding letters of credit in the amount of$10.1 million bearing interest at an annual rate of approximately 2%. 44 Table of Contents AtMarch 31, 2023 , we had three floating to fixed SOFR interest rate swap agreements ("SOFR Swaps") with notional amounts of$400.0 million ,$250.0 million and$200.0 million , the terms of which provide that we pay interest to the counterparty each month at a rate of 0.619%, 0.447% and 0.440%, respectively, and receive interest from each of the counterparties each month at the 1 month USD Term SOFR rate, subject to a 0.50% floor.
The SOFR Swaps effectively fix the variable interest rate applicable to the
first
InApril 2023 , the Company entered into two forward starting floating to fixed SOFR Swaps (the "Forward Swaps") with notional amounts of$250.0 million and$250.0 million that commence inApril 2024 . The terms of the Forward Swaps provide that we pay interest to the counterparty each month at a rate of 3.157% and 3.176%, respectively, and receive interest from each of the counterparties each month at the 1 month USD Term SOFR rate, subject to a 0.50% floor. The term for the Forward Swaps is four years and expires inApril 2028 .
Critical Accounting Policies
As ofMarch 31, 2023 , there have been no significant changes to our critical accounting policies previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2022 .
Recent Accounting Pronouncements
The effects of new accounting pronouncements are discussed in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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