PERELLA WEINBERG PARTNERS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled "Risk Factors" and elsewhere in this Form 10-Q.
Executive Overview
We are a leading global independent advisory firm that provides strategic and financial advice to clients across a range of the most active industry sectors and international markets. We provide advisory services to a wide range of clients globally, including large public multinational corporations, mid-sized public and private companies, individual entrepreneurs, private and institutional investors, creditor committees and government institutions. We were founded inJune 2006 with the opening of offices inNew York andLondon , led by a team of ten seasoned advisory partners who previously held senior management positions at large global investment banks. Our mission is helping clients address complex strategic and financial challenges. The foundation of our Company was rooted in a belief, among other considerations, that clients would increasingly seek out deeply experienced advisors who offer independent strategic thinking and who are not burdened by the complicated conflicts that large investment banking institutions may face due to their various businesses. The 2008 global financial crisis reinforced this hypothesis and contributed to the early growth of our firm. Today, we believe that our independence is even more important. For clients and for us independence means freedom from the distractions that dilute strategic thinking and a willingness and candor to share an honest opinion. We believe that our clients choose to engage us because they value our unbiased perspective and expert advice regarding complex financial and strategic matters. Our business provides services to multiple industry sectors and geographic markets. We believe that our collaborative partnership and integrated approach combining deep industry insights, significant technical, product and transactional expertise, and rigorous work ethic create a significant opportunity for our Company to realize sustainable growth. We seek to advise clients throughout their evolution, with the full range of our advisory capabilities including, among other things, advice related to mission-critical strategic and financial decisions, mergers and acquisitions ("M&A") execution, capital markets advisory, shareholder and defense advisory, capital raising, capital structure and restructuring, specialized underwriting and research services for the energy industry. Since our inception, we have experienced significant growth in our business, driven by hiring professionals who are highly regarded in their fields of expertise, expanding the scope and geographic reach of our advisory services, deepening and expanding our client relationships and maintaining a firm culture that attracts, develops and retains talented people. In addition to our hiring and internal development of individual professionals, inNovember 2016 , we completed a business combination withTudor, Pickering, Holt & Co., LLC ("TPH"), an independent advisory firm, focused on the energy industry. As ofJune 30, 2021 , we serve our clients with 57 advisory partners based in 10 offices, located in five countries around the world.
We generate and recognize revenues when earned, primarily from providing advisory services on transactions that are subject to individually negotiated engagement letters, which set forth our fees.
Upfront fees are recognized over the estimated period that the related services
are performed. Transaction-related fees are recognized when or as services for a
transaction are provided and specified conditions or certain milestones have
been achieved, which are often outside of our control. Underwriting revenues are
recognized when the offering is deemed complete. As a result, revenues and net
income in any period may not be indicative of full year results or the results
of any other period and may vary significantly from year to year and quarter to
quarter. The performance of our business depends on the ability of our
professionals to build relationships with clients over many years by providing
trusted advice and exceptional transaction execution.
43
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On June 24, 2021 , Perella Weinberg Partners consummated the Business Combination
Agreement whereby (i) FTIV acquired certain partnership interests in PWP OpCo,
(ii) PWP OpCo became jointly-owned by Perella Weinberg Partners , Professional
Partners and certain existing partners of PWP OpCo, and (iii) PWP OpCo serves as
the Company's operating partnership as part of an umbrella limited partnership
C-corporation (Up-C) structure. The Business Combination was structured as a
reverse recapitalization. The historical operations of PWP OpCo are deemed to be
those of the Company. Thus, the condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q reflect (i) the historical
operating results of PWP OpCo prior to the Business Combination and (ii) the
combined results of the Company following the Business Combination. The Company
shareholders are entitled to receive a portion of PWP OpCo's economics through
their direct ownership interests in shares of Class A common stock of Perella
Weinberg Partners . The non-controlling interest owners of PWP OpCo receive
economics through ownership of PWP OpCo Class A partnership units ("PWP OpCo
Units"). See Note 3 - Business Combination and Note 11 - Stockholders' Equity in
the notes to condensed consolidated financial statements included elsewhere in
this Form 10-Q for additional discussion related to the transaction.
Business Environment and Outlook
Worldwide announced M&A volumes during the first quarter of 2021 increased significantly as compared to the same period in 2020. While the overall level of mergers and acquisitions globally declined in 2020, heavily influenced by the impact of the COVID-19 pandemic, M&A activity began to recover in the third quarter of 2020, accelerated in the fourth quarter of 2020, and continued to reflect a strong performance for the six months endedJune 30, 2021 . The level of M&A advisory dialogue remains strong across all our industries and geographies of focus and among our large cap, middle market and sponsor clients. As companies continue to focus on strategic growth and capital deployment, we expect these considerations and the overall business environment will keep activity robust in the medium term. Although restructuring activity in the first half of 2021 was higher than in the first half of 2020, this level of activity moderated in the first half of 2021 compared to the elevated levels seen throughout most of 2020. Restructuring activity continues to be less active as compared to 2020 and while we expect that this more moderate pace of activity will continue through the year, we believe that the restructuring and liability management opportunity remains significant. More broadly, our core advisory services benefit from changes which impact our client base and lead them to consider business combinations, acquisitions and divestitures, capital raises and restructurings. These changes can include a broad range of economic factors in global or local markets, technological advancements which alter the competitive landscape, regulatory and political policies, globalization, changing consumer preferences, commodity and financial market movements, among many other factors. As our team of advisory professionals expands and continues to gain traction, and as we continue to expand our advisory services, we expect our sector-focused global team collaboration will deepen and continue to resonate with clients. We expect to continue to experience growing global demand for independent advice. Economic and global financial conditions can materially affect our operational and financial performance. See "Risk Factors" included elsewhere in this Form 10-Q for a discussion of some of the factors that can affect our performance. 44 --------------------------------------------------------------------------------
Results of Operations
The following is a discussion of our results of operations for the respective periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
Revenues $ 255,520 $ 114,601 123% $ 425,322 $ 206,997 105%
Expenses
Compensation and benefits 164,404 86,254 91% 273,874 144,765 89%
Equity-based compensation 7,065 6,179 14% 13,222 12,364 7%
Total compensation and benefits 171,469 92,433 86% 287,096 157,129 83%
Non-compensation expenses 34,565 42,869 (19%) 60,696 74,164 (18%)
Total operating expenses 206,034 135,302 52% 347,792 231,293 50%
Operating income (loss) 49,486 (20,701 ) NM 77,530 (24,296 ) NM
Non-operating income (expenses)
Related party income 1,565 2,402 (35%) 3,774 4,771 (21%)
Other income (expense) 526 1,002 (48%) (1,328 ) 2,850 NM
Change in fair value of warrant
liabilities 948 - 100% 948 - 100%
Loss on debt extinguishment (39,408 ) - (100%) (39,408 ) - (100%)
Interest expense (3,596 ) (3,996 ) 10% (7,464 ) (7,970 ) 6%
Total non-operating income
(expenses) (39,965 ) (592 ) NM (43,478 ) (349 ) NM
Income (loss) before income taxes 9,521 (21,293 ) NM 34,052 (24,645 ) NM
Income tax benefit (expense) (521 ) (834 ) 38% (2,545 ) (1,544 ) (65%)
Net income (loss) 9,000 $ (22,127 ) NM 31,507 $ (26,189 ) NM
Net income (loss) attributable to
non-controlling interests 21,499 44,006
Net income (loss) attributable to Perella Weinberg Partners$ (12,499 ) $ (12,499 ) NM = Not meaningful Revenues We operate in a highly competitive environment. Each revenue-generating engagement is separately solicited, awarded and negotiated, and there are limited long-term sources of revenue in the form of recurring retainers. Therefore, our fee-paying client engagements are not predictable, and high levels of revenues in one quarter are not necessarily predictive of continued high levels of revenues in future periods. To develop new business, our professionals maintain an active business dialogue with a large number of existing and potential clients. We expect to add new clients each year as our advisory professionals continue to expand their relationships, as we hire senior advisory professionals who bring their client relationships and as we receive introductions from our relationship network of senior executives, board members, attorneys and other third parties. We also lose clients each year as a result of the sale or merger of clients, changes in clients' senior management, competition from other financial services firms and other reasons. 45 -------------------------------------------------------------------------------- In many cases, revenue is not recognized until the successful completion of an underlying transaction. Complications that may terminate or delay a transaction include failure to agree upon final terms with the counterparty, failure to obtain regulatory consents, failure to obtain board or stockholder approvals, failure to secure financing, adverse market conditions or unexpected operating or financial problems related to either party to the transaction (or their customer base). While transactions typically close within a 12 month period post-announcement of such transaction, they can occasionally extend longer. Such delays often occur with larger transactions and can contribute to unpredictability in the timing of such revenues. In other circumstances, we often do not receive the same level of advisory fees that would have been received if the transaction had been completed, and in some cases we may receive no advisory fee despite the fact that we may have devoted considerable time and resources to the transaction. Other barriers to the completion of a restructuring transaction specifically may include a lack of anticipated bidders for the assets or securities of our client, the inability of our client to restructure its operations, the absence of court approval in a bankruptcy proceeding, or a failure to reach agreement with a client's creditors. In these circumstances, our advisory fees are generally limited to monthly retainer fees (if any). In the case of bankruptcy engagements, fees are subject to approval by the applicable court. In most cases, even if a transaction is not successfully completed, we are reimbursed for certain out-of-pocket expenses incurred in connection with the engagement. We do not present our revenue by the type of advice we provide because of the complexity of the transactions on which we may earn revenue and our holistic approach to client service. For example, (i) a restructuring engagement may evolve to require a sale of all or a portion of the client, (ii) M&A assignments can develop from relationships established on prior restructuring engagements, (iii) capital markets expertise can be instrumental on both M&A and restructuring assignments, and (iv) capital markets revenue can be generated through the provision of capital markets advisory work, capital raising assignments or the issuance of focused equity research services. We dedicate the resources and expertise needed on any given assignment regardless of product lines and focus on achieving the desired outcome for our clients. Such an approach does not lend itself to tracking the type of advisory service offered in each instance.
Three Months Ended
Revenues were
For the three months endedJune 30, 2021 and 2020, we earned revenues from 106 and 76 advisory clients, respectively. The number of advisory clients who paid fees equal to or greater than$1.0 million increased to 46 for the three months endedJune 30, 2021 compared to 23 advisory clients for the three months endedJune 30, 2020 . The average fee size increased to$2.4 million for the three months endedJune 30, 2021 from$1.4 million for the three months endedJune 30, 2020 .
Six Months Ended
Revenues were$425.3 million for the six months endedJune 30, 2021 as compared with$207.0 million for the same period in 2020, representing an increase of 105%. The period-over-period growth reflects a significant acceleration of activity across substantially all industry groups, geographies, and product areas, particularly in M&A activity when compared to the decreased M&A activity in the prior year period primarily due to the COVID-19 pandemic. Restructuring activity has begun to moderate from levels experienced in the back half of 2020. For the six months endedJune 30, 2021 and 2020, we earned revenues from 149 and 102 advisory clients, respectively. The number of advisory clients who paid fees equal to or greater than$1.0 million increased to 70 advisory clients for the six months endedJune 30, 2021 compared to 44 advisory clients for the six months endedJune 30, 2020 . The average fee size increased to$2.8 million for the six months endedJune 30, 2021 from$1.9 million for the six months endedJune 30, 2020 . 46
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Operating Expenses
The following table sets forth information relating to our operating expenses:
Three Months Ended June 30 , Six Months Ended June 30,
2021 2021
vs. vs.
(Dollars in thousands) 2021 2020 2020 2021
2020 2020
Expenses
Compensation and $ 164,404 $ 86,254 91% $ 273,874 $ 144,765 89%
benefits
% of revenues 64% 75% 64% 70%
Equity-based $ 7,065 $ 6,179 14% $ 13,222 $ 12,364 7%
compensation
% of revenues 3% 5% 3% 6%
Total compensation and
$ 157,129 83% benefits % of revenues 67% 81% 68%
76%
Non-compensation$ 34,565 $ 42,869 (19%)$ 60,696 $ 74,164 (18%) expenses % of revenues 14% 37% 14%
36%
Total operating expenses
$ 231,293 50% % of revenues 81% 118% 82%
112%
Income (loss) before
$ (24,645 ) NM income taxes % of revenues 4% (19%) 8% (12%) Our operating expenses are classified as (i) compensation and benefits expenses and equity-based compensation and (ii) non-compensation expenses. Headcount is the primary driver of the level of our operating expenses. Compensation and benefits expenses account for the majority of our operating expenses. Compensation expenses also include expense associated with hiring which has been a significant focus of the Company in all of the historical periods described herein. Non-compensation expenses, which include the costs of professional fees, travel and related expenses, technology and infrastructure, rent and occupancy, depreciation and amortization, and general, administrative and other expenses generally have been less significant in comparison with compensation and benefits expenses.
Three Months Ended
Operating expenses were$206.0 million for the three months endedJune 30, 2021 and represented 81% of revenues, compared with$135.3 million for the three months endedJune 30, 2020 , which represented 118% of revenues. The increase in operating expenses was primarily driven by an increase in compensation and benefits expenses, which were$164.4 million , for the three months endedJune 30, 2021 compared to$86.3 million , for the three months endedJune 30, 2020 , partially offset by lower non-compensation expenses which were$34.6 million for the three months endedJune 30, 2021 compared to$42.9 million for the three months endedJune 30, 2020 . The increase in compensation and benefits expenses was primarily due to a larger bonus accrual associated with the increase in revenue despite a lower compensation margin. The decrease in non-compensation expense was primarily driven by a decrease in professional fees compared to the prior year period which included the write-off of certain previously deferred offering costs due to the termination of a public company transaction process inMay 2020 , partially offset by an increase in technology and infrastructure expenses and travel and related expenses.
Six Months Ended
Operating expenses were$347.8 million for the six months endedJune 30, 2021 and represented 82% of revenues, compared with$231.3 million for the six months endedJune 30, 2020 , which represented 112% of revenues. The increase in operating expenses was primarily driven by an increase in compensation and benefits expenses, which were$273.9 million for the six months endedJune 30, 2021 compared to$144.8 million for the six months endedJune 30, 2020 , partially offset by lower non-compensation expenses which were$60.7 million for the six months endedJune 30, 2021 compared to$74.2 million for the six months endedJune 30, 2020 . The increase in compensation and benefits expense was primarily due to a larger bonus accrual associated with the increase in revenue despite a lower compensation margin. The decrease in non-compensation expense was primarily driven by decreased professional fees compared to the prior year period which included the write-off of certain previously deferred offering costs due to the termination of a public company transaction process inMay 2020 and decreased travel and entertainment as well as conference and seminars from the COVID-19 pandemic. 47
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Compensation and Benefits Expenses
Our compensation and benefits expenses are determined by management based on revenues earned, the competitiveness of the prevailing labor market and anticipated compensation requirements for our employees, the level of recruitment of new partners, the amount of compensation expense amortized for equity awards and other relevant factors. Such factors can fluctuate, including headcount, and as a result, our compensation expenses may fluctuate materially in any particular period. Accordingly, the amount of compensation expenses recognized in any particular period may not be consistent with prior periods or indicative of future periods. Our compensation expenses consist of base salary, benefits, payroll taxes, annual incentive compensation payable as cash bonus awards, deferred compensation awards, profit sharing arrangements and amortization of equity-based compensation awards. Compensation expenses also include signing bonuses and compensation paid pursuant to guarantees for new hires. These amounts have historically been significant. Base salary and benefits are paid ratably throughout the year. Depending on the plan, deferred compensation and profit-sharing awards vest immediately, at future dates, or upon the occurrence of certain events. Cash bonuses, which are accrued each quarter, are discretionary and dependent upon many factors, including the performance of the Company, and are generally paid during the first quarter of each calendar year with respect to prior year performance. Equity awards are measured at fair value on the grant date and recognized on a straight-line basis over the vesting period. The awards are subject to a service vesting condition, and in some cases a market-based performance vesting condition, and vest ratably on a graded vesting schedule of up to five years. The awards are recorded within equity as they are expensed. The vesting of Legacy Awards granted prior to the Business Combination and the variousProfessional Partners awards issued in connection with the Business Combination have no economic impact on, and do not dilute, PWP shareholders relative toProfessional Partners . The awards do not change the economic allocations betweenProfessional Partners and PWP shareholders, nor do they change theProfessional Partners' interest in PWP OpCo. As a result, all of the compensation expense and corresponding capital contribution associated with theProfessional Partners Awards is allocated to non-controlling interests on the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Financial Condition. Beginning in the third quarter of 2021, the Company plans to grant incentive compensation awards in accordance with thePerella Weinberg Partners 2021 Omnibus Incentive Plan (the "PWP Incentive Plan"). The Company intends to use newly issued shares of PWP Class A common stock to satisfy vested awards under the plan. The vesting of these awards will be recorded as equity-based compensation expense at PWP OpCo forU.S. GAAP accounting purposes. Due to the accounting for this equity-based compensation expense, we may experience operating losses in future periods.
We intend to compensate our personnel competitively in order to continue building our business and growing our firm.
Three Months Ended
For the three months endedJune 30, 2021 , compensation-related expenses of$171.5 million represented 67% of revenues, compared with$92.4 million of compensation-related expenses, which represented 81% of revenues for the three months endedJune 30, 2020 . Included in total compensation-related expense was$7.1 million amortization of equity awards, for the three months endedJune 30, 2021 . The increase in total compensation and benefit expenses was due to a larger bonus accrual associated with the increase in revenue despite a lower compensation margin when compared to the same period in 2020.
Six Months Ended
For the six months endedJune 30, 2021 , compensation-related expenses of$287.1 million represented 68% of revenues, compared with$157.1 million of compensation-related expenses, which represented 76% of revenues for the six months endedJune 30, 2020 . Included in total compensation-related expense was$13.2 million and$12.4 million amortization of equity awards for the six months endedJune 30, 2021 and 2020, respectively. The increase in total compensation and benefit expenses was due to a larger bonus accrual associated with the increase in revenue despite a lower compensation margin when compared to the same period in 2020. 48
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Non-Compensation Expenses
Our non-compensation expenses include the costs of professional fees, travel and related expenses, technology and infrastructure, rent and occupancy, depreciation and amortization and general, administrative and other expenses including certain co-advisory fees and expenses reimbursed by our clients. Any expenses reimbursed by clients and the co-advisory fees are also presented within revenues on our Condensed Consolidated Statements of Operations. Historically, our non-compensation expenses associated with business development have increased as we have increased our headcount. These costs include non-compensation support costs such as travel and related expenses. Growth in our headcount has increased rent and occupancy expenses while geographic expansion has increased regulatory expenses. This trend may continue as we expand into new sectors, geographies and products to serve our clients' growing needs, domestically and internationally.
Three Months Ended
For the three months endedJune 30, 2021 , non-compensation expenses of$34.6 million represented 14% of revenues, compared with$42.9 million , which represented 37% of revenues, for the three months endedJune 30, 2020 . The decrease in non-compensation expense was primarily driven by a$10.1 million decrease in professional fees, partially offset by an increase in technology and infrastructure costs and travel and related expenses. This reduction is largely due to elevated professional fees during the three months endedJune 30, 2020 related to previously deferred offering costs of$14.8 million that were expensed due to the termination of a public company transaction process inMay 2020 . Excluding this write-off, professional fees during the three months endedJune 30, 2021 , increased$4.7 million , including$2.9 million of transaction-related expenses as well as increased consulting expenses and recruiting placement fees for strategic hires.
Six Months Ended
For the six months endedJune 30, 2021 , non-compensation expenses of$60.7 million represented 14% of revenues, compared with$74.2 million , which represented 36% of revenues, for the six months endedJune 30, 2020 . The decrease in non-compensation expense was primarily driven by a$10.4 million decrease in professional fees. This reduction is largely due to elevated professional fees during the six months endedJune 30, 2021 as previously deferred offering costs of$14.8 million were expensed due to the termination of a public company transaction process inMay 2020 . Excluding this write-off, professional fees during the six months endedJune 30, 2021 , increased$4.4 million , including$2.9 million of transaction-related expenses as well as increased consulting expenses and recruiting expenses. The decrease in non-compensation expense was also due to a$2.7 million decrease in travel and related expenses as a result of the COVID-19 pandemic.
Non-Operating Income (Expenses)
Non-operating income (expenses) includes the impact of income and expense items that we consider to be non-operational in nature, including related party income, interest expense, change in the fair value of warrant liabilities, loss on debt extinguishment and other income (expense). For the three and six months endedJune 30, 2021 , the most significant component and change from the prior year periods was the$39.4 million loss on debt extinguishment which was related to the redemption of the$150.0 million aggregate principal of the Convertible Notes concurrent with the Business Combination. The loss is composed of the$10.9 million premium and$28.5 million of unamortized debt discount and issuance costs.
Income Tax Benefit (Expense)
Prior to the Business Combination, the Company operated as a partnership, and therefore, was generally not subject toU.S. federal and state corporate income taxes. Subsequent to the Business Combination, PWP is a corporation and is subject toU.S. federal and state corporate income taxes on its proportionate share of taxable income generated by the operating partnership, PWP OpCo, as well as any standalone income (or loss) generated at the PWP entity level. The Company's income tax provision and the corresponding annual effective tax rate are based on projectedU.S. GAAP income and the currently enacted statutory tax rates in the various jurisdictions in which the Company operates. For interim reporting, the Company estimates the annual effective tax rate based on projected income for the full year and records a quarterly tax provision in accordance with the annual effective tax rate. 49 -------------------------------------------------------------------------------- The Company's effective tax rate is dependent on many factors, including the estimated amount of income subject to tax. Consequently, the effective tax rate can vary from period to period. The Company's overall effective tax rate in each of the periods described above varies from theU.S. federal statutory rate primarily because (i) the Company was not subject toU.S. federal corporate income taxes prior to the Business Combination, (ii) a portion of equity-based compensation expense is non-deductible, both prior to the Business Combination and for the subsequent period and (iii) a portion of the Company's income is allocated to non-controlling interests held in PWP OpCo in which the majority of any tax liability on such income is borne by the holders of such non-controlling interests and reported outside of the condensed consolidated financial statements.
Three Months Ended
The Company's income tax expense and effective tax rate were
Six Months Ended
The Company's income tax expense and effective tax rate were$2.5 million and 7.47%, respectively, for the six months endedJune 30, 2021 , compared to income tax expense and effective tax rate of$1.5 million and (6.26%), respectively, for the six months endedJune 30, 2020 .
Liquidity and Capital Resources
We regularly monitor our liquidity position, including cash and cash equivalents, working capital assets and liabilities, commitments and other liquidity requirements. Our primary sources of liquidity are our cash balances and net cash generated from operations.
Our current assets are primarily composed of cash, short-term liquid investments, receivables related to fees earned from providing advisory services and due from related parties. Our current liabilities are primarily composed of accounts payable, accrued expenses, accrued and deferred employee compensation and due to related parties. Due from related parties primarily includes amounts due fromPWP Capital Holdings LP . We pay a significant portion of our annual incentive compensation, in the form of cash bonuses, during the first quarter of each calendar year with respect to the prior year's results. Therefore, levels of cash generally decline during the first quarter of each year after our annual incentive compensation has been paid to our employees. Cash then typically builds over the remainder of the year. The Company made partner tax distributions of$47.4 million and$9.4 million during the six months endedJune 30, 2021 and 2020, respectively. Additionally, as a public company, we intend to pay dividends throughout the year and may consider share repurchases as well. We evaluate our cash needs on a regular basis in light of current market conditions. Cash and cash equivalents include short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. The Company had no cash equivalents as ofJune 30, 2021 andDecember 31, 2020 . As ofJune 30, 2021 andDecember 31, 2020 , the Company had cash balances of$349.7 million and$329.1 million , respectively, maintained inU.S. and non-U.S. bank accounts, of which most bank account balances exceeded theU.S. Federal Deposit Insurance Corporation ("FDIC") andU.K. Financial Services Compensation Scheme ("FSCS") coverage limits. Our liquidity is highly dependent upon cash receipts from clients, which generally require the successful completion of transactions. Accounts receivable generally have net terms of 30 days. Accounts receivable was$85.1 million , with$1.1 million of allowance for credit losses balance as ofJune 30, 2021 . Accounts receivable was$40.8 million , with$1.0 million of allowance for credit losses balance as ofDecember 31, 2020 . InDecember 2018 , the Company amended the Credit Agreement to modify a term loan to a revolving credit facility with a line of credit of$50.0 million (the "Revolving Credit Facility"). During the six months endedJune 30, 2020 , the Company made principal payments on the Revolving Credit Facility of$10.0 million as well as drawdowns of$22.0 million . 50 -------------------------------------------------------------------------------- Upon consummation of the Business Combination, the Company repaid all of the outstanding borrowings under the Credit Agreement, which included$27.7 million principal amount plus accrued and unpaid interest. As of the Closing Date, the Credit Agreement was amended such that (i) the maturity was extended fromApril 1, 2022 toJuly 1, 2025 , (ii) interest accrues at LIBOR plus a fixed rate of 2.00% per annum (with a 0.25% LIBOR floor) with an alternate base rate option equal toCadence Bank's prime rate minus 1.00% (with a 3.25% floor), (iii) up to$15.0 million of the Revolving Credit Facility may be used for the issuance of letters of credit, (iv) up to$20.0 million of incremental revolving commitments above the$50.0 million commitment amount may be incurred under the Credit Agreement, and (v) certain financial covenants were amended. As ofJune 30, 2021 , the Company had no outstanding balance related to the Revolving Credit Facility and no incremental revolving commitments were incurred. For further information on the Revolving Credit Facility, refer to Note 10 - Debt in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q. Based on current market conditions, we believe that the cash we retain post-transaction, the net cash generated from operations and the available borrowing capacity under our Revolving Credit Facility will be sufficient to meet our operating needs and commitments for the next twelve months; however, if these sources of liquidity are not sufficient, we may seek additional debt or equity financing.Regulatory Capital We actively monitor our regulatory capital base. Our principal subsidiaries are subject to regulatory requirements in their respective jurisdictions to ensure general financial soundness and liquidity. This requires, among other things, that we comply with certain minimum capital requirements, record-keeping, reporting procedures, experience and training requirements for employees and certain other requirements and procedures. These regulatory requirements may restrict the flow of funds to and from affiliates. Refer to Note 7 - Regulatory Requirements in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q for further information. These regulations differ inthe United States ,United Kingdom ,Canada ,France and other countries in which we operate a registered broker-dealer or regionally similar construct. The license or regulatory framework under which we operate in each such country is meant to comply with applicable laws and regulations to conduct an advisory business. We believe that we provide each of our subsidiaries with sufficient capital and liquidity, consistent with their business and regulatory requirements to effectively operate in each jurisdiction.
Exchange Rights
In accordance with the PWP OpCo LPA, PWP OpCo Unitholders (other than the Company) may exchange these units for (i) shares of Class A common stock on a one-for-one basis or (ii) cash from an offering of shares of Class A common stock with the form of consideration determined by the Company. Depending on our liquidity and capital resources, market conditions, the timing and concentration of exchanges and other considerations, we may choose to fund exchanges of PWP OpCo Units with available cash, borrowings or issuances of Class A common stock. The PWP OpCo LPA contains restrictions on the ability to exchange PWP OpCo Units for shares of Class A common stock or cash from an offering of shares of Class A common stock, for the following periods: (i) PWP OpCo Units held byProfessional Partners will be subject to a restriction for time periods that are fully back-to-back with the lock-up periods contemplated in the amended and restated limited partnership agreement ofProfessional Partners (generally speaking, such lock-up periods (a) for former working partners, will be 180 days after Closing; and (b) for working partners, will be between three to five years after the Closing), (ii) PWP OpCo Units held by ILPs existing at the time of the Business Combination will be subject to such restriction for 180 days after the Closing, and (iii) any other outstanding PWP OpCo Units not previously covered by clauses (i) and (ii) above will be subject to such restriction for a period of twelve months following the date on which such PWP OpCo Units were acquired. PWP GP may waive the foregoing restrictions for any holder with respect to all or a portion of such holder's units, with no obligation to do so for any other holder. 51 --------------------------------------------------------------------------------
Sponsor Share Surrender and Share Restriction Agreement
Concurrent with the Business Combination Agreement, FTIV, PWP OpCo and certain other parties entered into the Sponsor Share Surrender and Share Restriction Agreement with the Sponsor, which was amended onMay 4, 2021 . Pursuant to this agreement, if, prior to the fourth anniversary of the Closing, the closing share price is greater than$12.00 per share or$15.00 per share for any 20 trading days out of 30 consecutive trading days (each a "Trigger Date"), then, during the 15 day period following such Trigger Date, the Company shall have the right to purchase from the Sponsor up to an aggregate of 1,000,000 founder shares per Trigger Date for a purchase price of$12.00 per share or$15.00 per share, respectively, by providing written notice of such repurchase election to the Sponsor.
On
Cash Flows
Our operating cash flows are primarily influenced by the amount and timing of receipt of advisory fees, which generally have net terms of 30 days, and the payment of operating expenses, including payments of incentive compensation to our employees. We pay a significant portion of incentive compensation during the first quarter of each calendar year with respect to the prior year's results. Our investing and financing cash flows are primarily influenced by debt payments and distributions to partners, and in the six months endedJune 30, 2021 , the proceeds and distributions related to the Business Combination. A summary of our operating, investing and financing cash flows is as follows: Six Months Ended June 30, (Dollars in thousands) 2021 2020 Cash Provided By (Used In) Operating Activities Net income (loss)$ 31,507 $ (26,189 ) Non-cash charges and other operating activity 69,765 30,300 adjustments Other operating activities (73,443 ) (112,510 ) Total operating activities 27,829 (108,399 ) Investing Activities (1,429 ) (4,104 ) Financing Activities (6,459 ) 2,570 Effect of exchange rate changes on cash, cash 668 (3,130 ) equivalents and restricted cash Net increase (decrease) in cash, cash equivalents 20,609 (113,063 ) and restricted cash Cash, cash equivalents and restricted cash, 330,908
266,582
beginning of period Cash, cash equivalents and restricted cash, end of$ 351,517 $
153,519
period
Six Months Ended
Cash and restricted cash were$351.5 million as ofJune 30, 2021 , an increase of$20.6 million from$330.9 million as ofDecember 31, 2020 . Operating activities resulted in a net inflow of$27.8 million largely attributable to net income generated during the six months endedJune 30, 2021 , partially offset by changes in working capital. Net income included$30.4 million of non-cash charges as well as a$39.4 million loss on debt extinguishment related to the redemption of the Convertible Notes concurrent with the Business Combination. Investing activities resulted in a net outflow of$1.4 million attributable to the Company's deconsolidation inPFAC Holdings and the purchases of fixed assets. Financing activities resulted in a net outflow of$6.5 million primarily related to the transactions associated with the Business Combination, the payoff of all outstanding debt and tax distributions to partners.
Six Months Ended
Cash and restricted cash were$153.5 million as ofJune 30, 2020 . Operating activities resulted in a net outflow of$108.4 million attributable to changes in working capital and net loss incurred during the six months endedJune 30, 2020 , both partially offset by non-cash operating charges. Investing activities resulted in a net outflow of$4.1 million primarily attributable to purchases of fixed assets. Financing activities resulted in a net inflow of$2.6 million primarily related to draw downs and principal payments on the Revolving Credit Facility and distributions to partners. 52 --------------------------------------------------------------------------------
Commitments and Contingencies
Contractual Obligations
We have various non-cancelable operating leases in connection with the leases of our office spaces and equipment. The related lease agreements, which range from non-cancelable and month-to-month terms, generally provide for fixed monthly rentals and can also include renewal options. See Note 5 - Leases in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q for further information. In addition, PWP OpCo sponsors certain deferred compensation arrangements whereby portions of compensation related to employees (including working partners) providing services to the Company are deferred and paid in later periods. The deferred compensation amounts are charged to expenses over the period that each employee (including working partners) is required to provide services in order to vest in the payment. Refer to Note 14 - Other Compensation and Benefits in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q for further information.
Guarantees
PWP OpCo has also unconditionally guaranteed, through a wholly-owned subsidiary, certain loans to limited partners ofProfessional Partners ("Limited Partners") with First Republic Bank (the "Program Lender"), whereby PWP OpCo will pay the Program Lender upon the occurrence of a default event. Refer to Note 17 - Related Party Transactions and Note 18 - Commitments and Contingencies in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q for further information. Tax Receivable Agreement In connection with the Business Combination, the Company entered into a tax receivable agreement withProfessional Partners and certain other persons (the "TRA") under which the Company agreed to payments of 85% of the amount of savings, if any, that the Company realizes inU.S. federal, state, local and foreign income taxes as a result of (i) exchanges of interests in PWP OpCo for cash or stock of the Company and certain other transactions and (ii) payments made under the tax receivable agreement.
Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our condensed consolidated financial statements except for those described under "Commitments and Contingencies" above. Market Risk and Credit Risk
Our business is not capital-intensive and we do not invest in derivative instruments. We are not subject to significant market risk (including interest rate risk, foreign currency exchange rate risk and commodity price risk) or significant credit risk.
Risks Related to Cash and Cash Equivalents
Our cash and cash equivalents include any short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. Cash is maintained inU.S. and non-U.S. bank accounts. MostU.S. andU.K. account balances exceed theFDIC and FSCS coverage limits. We believe our cash and cash equivalents are not subject to any material interest rate risk, equity price risk, credit risk or other market risk. Credit Risk We regularly review our accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality, age of the accounts receivable, and the current economic conditions that may affect a client's ability to pay such amounts owed to the Company. We maintain an allowance for credit losses that, in our opinion, provides for an adequate reserve to cover current expected credit losses. Refer to Note 2 - Summary of Significant Accounting Policies in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q for further information. 53 --------------------------------------------------------------------------------
Exchange Rate Risk
The Company is exposed to exchange rate risk as a result of entering into transactions that are not denominated in the functional currency of its operating subsidiaries, as well as having foreign subsidiaries with non-U.S. dollar functional currencies. For the six months endedJune 30, 2021 and 2020, the net impact of non-functional currency-related transaction gains and losses recorded in other income (expense) on our Condensed Consolidated Statements of Operations was a$1.8 million loss and a$2.7 million gain, respectively. In addition, the reported amounts in our condensed consolidated financial statements may be affected by movements in the rate of exchange between the pound sterling, Euro, Canadian dollar and our reporting currency, theU.S. dollar, resulting in translation gains and losses. For the six months endedJune 30, 2021 and 2020, the net impact of the fluctuation of foreign currencies recorded in Foreign currency translation gain (loss) within our Condensed Consolidated Statements of Comprehensive Income (Loss) was a$0.5 million gain and$2.5 million loss, respectively. We have not entered into any transactions to hedge our exposure to these foreign currency fluctuations using derivative instruments or other methods but may do so if we deem appropriate in the future.
As of
Critical Accounting Policies
This Quarterly Report on Form 10-Q should be read together with the discussion within "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Current Report on Form 8-K filed onJune 24, 2021 regarding these critical accounting policies. For changes to our critical accounting policies during the six months endedJune 30, 2021 , refer to Note 2 - Summary of Significant Accounting Policies in the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q.
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