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Operations
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Shareholders' Deficit
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(Exact name of registrant as specified in its charter)
iDelaware
i86-1390679
(State
or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
iOne World Trade Center, Floor 65
iNew
York,
iNew York
i10007
(Address of principal executive offices)
(Zip
Code)
(i646) i429-1800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass A Common Stock, par value $0.001 per share
iSTGW
iNASDAQ
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer
☐
iAccelerated
Filer
☒
Non-accelerated Filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐
No ☒
The number of common shares outstanding as of October 28, 2022 was i130,785,623 shares of Class A Common Stock, i3,946
shares of Class B Common Stock, and i164,375,682 shares of Class C Common Stock.
On December 21, 2020, MDC Partners Inc. (“MDC”) and Stagwell Media LP (“Stagwell Media”) announced that they had entered into an agreement, providing for the combination of MDC with the operating businesses and subsidiaries of Stagwell Media (the “Stagwell Subject Entities”) (the “Transaction Agreement”). The Stagwell Subject Entities comprised Stagwell Marketing Group LLC (“Stagwell Marketing” or “SMG”) and its direct and indirect subsidiaries.
On August 2, 2021 (the “Closing Date”),
we completed the combination of MDC and the Stagwell Subject Entities and a series of steps and related transactions (such combination and transactions, the “Transactions”). In connection with the Transactions, among other things, (i) MDC completed a series of transactions pursuant to which it emerged as a wholly owned subsidiary of Stagwell Inc. (“the Company” or “Stagwell”), converted into a Delaware limited liability company and changed its name to Midas OpCo Holdings LLC and subsequently to Stagwell Global LLC (“OpCo”); (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into
a Delaware corporation, succeeded MDC as the publicly-traded company and changed its name to Stagwell Inc.
The Transactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the legal acquirer and Stagwell Marketing treated as the accounting acquirer. As a result of the Transactions and the change in our business and operations, under applicable accounting principles, the historical financial results of Stagwell Marketing prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presented in this Quarterly
Report
on Form 10-Q (this “Form 10-Q”) for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions or the financial results of MDC and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021.
References in this Form 10-Q to “Stagwell,”“we,”“us,”“our” and the “Company” refer (i) with respect to events occurring or periods ending before August 2, 2021, to Stagwell Marketing and its direct and indirect subsidiaries and (ii) with respect to events occurring or periods ending on or after August 2, 2021,
to Stagwell Inc. and its direct and indirect subsidiaries.
All dollar amounts are stated in U.S. dollars unless otherwise stated.
Note About Forward-Looking Statements
This document contains forward-looking statements. within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s representatives may also make forward-looking statements orally or in writing from time to time. Statements in this document that are not historical facts, including, but not limited to, statements about the
Company’s beliefs and expectations, future financial performance and future prospects, business and economic trends, potential acquisitions, and estimates of amounts for redeemable noncontrolling interests and deferred acquisition consideration, constitute forward-looking statements. Forward-looking statements, which are generally denoted by words such as “anticipate,”“assume,”“believe,”“continue,”“could,”“create,”“estimate,”“expect,”“focus,”“forecast,”“foresee,”“future,”“guidance,”“intend,”“look,”“may,”“opportunity,”“outlook,”“plan,”“possible,”“potential,”“predict,”“project,”“should,”“target,”“will,”“would” or the negative of such terms or other variations thereof and terms of similar substance used in connection with any discussion of current plans,
estimates and projections are subject to change based on a number of factors, including those outlined in this section.
Forward-looking statements in this document are based on certain key expectations and assumptions made by the Company. Although the management of the Company believes that the expectations and assumptions on which such forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. The material assumptions upon which such forward-looking statements are based include, among others, assumptions with respect to general business,
economic and market conditions, the competitive environment, anticipated and unanticipated tax consequences and anticipated and unanticipated costs. These forward-looking statements are based on current plans, estimates and projections, and are subject to change based on a number of factors, including those outlined in this section. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the Company’s control. Therefore, you should not place undue reliance on such statements. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new information or future events, if any.
Forward-looking statements involve inherent
risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such risk factors include, but are not limited to, the following:
•risks associated with international, national and regional unfavorable economic conditions that could affect the Company or its clients;
•the continued impact of the coronavirus pandemic (“COVID-19”), and evolving strains of COVID-19 on the economy and demand for the Company’s services, which may precipitate or exacerbate other risks and uncertainties;
•an inability
to realize expected benefits of the combination of the Company’s business with the business of MDC;
•adverse tax consequences in connection with the Transactions for the Company, its operations and its shareholders, that may differ from the expectations of the Company, including that future changes in tax law, potential increases to corporate tax rates in the United States and disagreements with the tax authorities on the Company’s determination of value and computations of its attributes may result in increased tax costs;
•the
occurrence of material Canadian federal income tax (including material “emigration tax”) as a result of the Transactions;
•the Company’s ability to attract new clients and retain existing clients;
•the impact of a reduction in client spending and changes in client advertising, marketing and corporate communications requirements;
•the Company’s implementation of strategic initiatives;
•the Company’s ability to remain in compliance with its
debt agreements and the Company’s ability to finance its contingent payment obligations when due and payable, including but not limited to those relating to redeemable noncontrolling interests and deferred acquisition consideration;
•the Company’s ability to manage its growth effectively, including the successful completion and integration of acquisitions which complement and expand the Company’s business capabilities;
•the Company’s material weaknesses in internal control over financial reporting
and its ability to establish and maintain an effective system of internal control over financial reporting;
•the Company’s ability to protect client data from security incidents or cyberattacks;
•economic disruptions resulting from war and other geopolitical tensions (such as the ongoing military conflict between Russia and Ukraine), terrorist activities and natural disasters;
•stock price volatility; and
•foreign currency fluctuations.
Investors should carefully consider these risk factors, other risk factors described herein, and the additional risk factors outlined
in more detail in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “2021 Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2022, and accessible on the SEC’s website at www.sec.gov, under the caption “Risk Factors,” an in the Company’s other SEC filings.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, unless otherwise stated)
i
1.
Business and Basis of Presentation
Stagwell Inc. (the “Company” or “Stagwell”), incorporated under the laws of Delaware, conducts its business through its networks and their Brands (“Brands”), which provide marketing and business solutions that realize the potential of combining data and creativity.Stagwell’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment.
The accompanying condensed consolidated financial statements include the accounts of Stagwell and its subsidiaries. Stagwell has prepared the unaudited condensed consolidated interim financial statements included herein in accordance with accounting
principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting interim financial information on Form 10-Q. Accordingly, the financial statements have been condensed and do not include certain information and disclosures pursuant to these rules. The preparation of financial statements in conformity with GAAP requires us to make judgments, assumptions and estimates about current and future results of operations and cash flows that affect the amounts reported and disclosed. Actual results could differ from these estimates and assumptions. The consolidated results for interim periods are not necessarily indicative of results for the full year and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December
31, 2021 (“2021 Form 10-K”).
On December 21, 2020, MDC Partners Inc. (“MDC”) and Stagwell Media LP (“Stagwell Media”) announced that they had entered into the Transaction Agreement, providing for the combination of MDC with the operating businesses and subsidiaries of Stagwell Media (the “Stagwell Subject Entities”). The Stagwell Subject Entities comprised Stagwell Marketing Group LLC (“Stagwell Marketing” or “SMG”) and its direct and indirect subsidiaries.
On August 2, 2021, we completed the previously announced combination of MDC and the operating businesses
and subsidiaries of Stagwell Media and a series related transactions (such combination and transactions, the “Transactions”). The Transactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the legal acquirer and Stagwell Marketing treated as the accounting acquirer. The results of MDC are included within the Unaudited Condensed Consolidated Statements of Operations for the period beginning on the date of the acquisition through the end of the respective period presented and the results of SMG are included for the entire period presented. See Note 3 of the Notes included herein for information in connection with the acquisition of MDC.
We continue to monitor the impact on our operations from worldwide events such as the COVID-19 pandemic and evolving strains of COVID-19, as well as the
military conflict between Russia and Ukraine, which we do not expect to have a material adverse effect on our operations. Our judgments, assumptions and estimates about the potential effects of such events are reflected in the financial statements. The use of different judgements, assumptions or estimates could have a material impact on our condensed consolidated financial statements.
The accompanying financial statements reflect all adjustments, consisting of normally recurring accruals, which in the opinion of management are necessary for a fair presentation, in all material respects, of the information contained therein. Intercompany balances and transactions have been eliminated in consolidation.Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.
iWe
have revised the presentation of Current Liabilities to separately present Accrued media, which was previously included in Accruals and other liabilities, of $i237,794 as of December 31, 2021. As a result, the accompanying Condensed Consolidated Balance Sheet has been revised to correct this immaterial classification error by decreasing the previously reported amount for Accruals and other liabilities as of December 31, 2021 by the $i237,794
of Accrued media. This revision had no effect on our previously reported Total Current Liabilities, or on any other previously reported amounts in our consolidated financial statements for the year ended December 31, 2021./
/
14
Recent Developments
On October 3, 2022, the
Company acquired all of the equity interest of Maru Group Limited Ltd, a software experience & insights data platform, for approximately £i23,000 in cash, subject to post-closing adjustments.
On October 3, 2022, the Company acquired the remaining 80% interest that it did not already own in Wolfgang, LLC, a creative agency combining consultancy,
strategy and technology experience, for approximately $i3,750 in cash and $i5,250
in shares of Stagwell Inc. Class A Common Stock, subject to post-closing adjustments. The stock payment is subject to the seller’s continued employment throughout the period, with total shares vesting on July 1, 2025.
On October 3, 2022, the Company acquired the assets of Epicenter Experience LLC, an enterprise software company that leverages mobile and location data to map and sequence complex consumer behavior patterns, for approximately $i9,729,
subject to post-closing adjustments, as well as contingent consideration up to a maximum value of $i5,000. The contingent consideration is based on meeting certain future earnings targets through 2024 and can be paid up to 25% in Stagwell Class A Common Stock.
The purchase price allocations have not yet been completed. The Company will
provide the purchase price allocations and pro forma operating results of the combined company in its Form 10-K for the period of December 31, 2022.
i2. iNew
Accounting Pronouncements/
In March 2020, the Financial Accounting Standards Board, (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, and in January 2021 subsequently issued ASU 2021-01, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective upon issuance, through December 31, 2022. The Combined Credit Agreement (as defined in Note 8 of the Notes included herein) is the
Company’s only contractual arrangement that referenced LIBOR and is impacted by ASU 2020-04. On April 28, 2022, the Company amended the Combined Credit Agreement. Among other things, this amendment replaced any references to LIBOR with references to the Secured Overnight Financing Rate (“SOFR”). Based on the Company’s assessment, the Company has elected to apply the optional expedient and treat the contract modifications as a continuation of an existing contract. This election does
not have a material effect on our results of operations or financial position. See Note 8 of the Notes included herein for information.
i3. Acquisitions
2022 Acquisitions
Acquisition of Brand New Galaxy
On April 19, 2022, the
Company acquired Brand New Galaxy (“BNG”), for approximately $i20,695 of cash consideration, as well as contingent consideration up to a maximum value of $i50,000.
The contingent consideration is due upon meeting certain future earnings targets through 2024, with approximately i67% payable in cash and i33%
payable in Class A Common Stock.
The consideration has been allocated to the assets acquired and assumed liabilities of BNG based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. iThe preliminary purchase price allocation is as follows:
15
Amount
Cash
and cash equivalents
$
i2,771
Accounts receivable
i7,638
Other
current assets
i1,634
Fixed assets
i2,338
Intangible
assets
i12,410
Other assets
i1,416
Accounts
payable
(i6,855)
Accruals and other liabilities
(i4,896)
Advance
billings
(i1,095)
Other liabilities
(i3,448)
Net
assets assumed
i11,913
Goodwill
i25,552
Purchase
price consideration
$
i37,465
The excess of purchase consideration over the fair value of the net assets acquired was
recorded as goodwill, which is primarily attributed to the assembled workforce of BNG. Goodwill of $i25,552 was assigned to the Brand Performance Network reportable segment. The majority of the goodwill is non-deductible for income tax purposes.
Intangible assets consist of trade names and customer relationships. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is ten years. iThe
following table presents the details of identifiable intangible assets acquired:
Estimated Fair Value
Estimated Useful Life in Years
Trade Names
$
i5,930
i10
Customer
Relationships
i5,390
i11
Other
i1,090
i7
Total
Acquired Intangible Assets
$
i12,410
Pro Forma Financial Information (unaudited)
The unaudited pro forma information
for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. iThe pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
Revenue
attributable to BNG, included within the three and nine months ended September 30, 2022 unaudited condensed consolidated statement of operations is $5,580 and $11,215, respectively and operating loss was $2,500 and $2,620, respectively.
Acquisition of TMA Direct, Inc.
On May 31, 2022, the Company acquired approximately i87%
of TMA Direct, Inc. (“TMA Direct”) for approximately $i17,247 of cash consideration and approximately $i457 of deferred
acquisition payments. The Company was also granted an option to purchase the remaining i13% minority interest in TMA Direct for up to approximately $i13,330.
16
The consideration has been allocated to the assets acquired and assumed liabilities of TMA Direct based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. The preliminary purchase price allocation is as follows:
Amount
Accounts receivable
$
i582
Other
current assets
i669
Intangible assets
i13,200
Accounts
payable
(i379)
Other liabilities
(i270)
Noncontrolling
interests
(i2,667)
Net assets assumed
i11,135
Goodwill
i6,569
Purchase
price consideration
$
i17,704
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily
attributed to the assembled workforce of TMA Direct. Goodwill of $i6,569 was assigned to the Communications Network reportable segment. The majority of the goodwill is deductible for income tax purposes.
Intangible assets consist of trade names and customer relationships. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is ten years. The following table presents the details of identifiable intangible assets acquired:
Estimated
Fair Value
Estimated Useful Life in Years
Customer Relationships
$
i11,400
i10
Trade
names
i1,800
i10
Total
Acquired Intangible Assets
$
i13,200
Pro Forma Financial Information (unaudited)
The unaudited pro forma information
for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
Revenue attributable to TMA Direct, included within the three and nine months ended September 30, 2022 unaudited condensed consolidated statement of operations is $3,774 and $5,026, respectively, and operating income was $1,369 and $1,626, respectively.
Other Acquisitions
On July 12, 2022, the Company acquired PEP Group Holdings B.V. (“PEP Group”), an omnichannel content creation and adaption production company for approximately $i521,
subject to post-closing adjustments, as well as contingent consideration up to a maximum value of $i2,679. The contingent consideration is based on meeting certain future earnings targets through 2025.
On July 15, 2022, the Company acquired Apollo Program II Inc. (“Apollo”), a
real-time artificial intelligence-powered software-as-a-service platform, for approximately $i2,300, subject to post-closing adjustments, as well as fixed deferred payments of $i1,000
and $i1,500 on or prior to July 1, 2023 and July 1, 2024, respectively.
The estimates of fair value for the aforementioned acquisitions are subject to change and could be significant. The Company expects to complete the allocation of purchase price as soon as practicable, but no later than one year after the acquisition
date.
2021 Acquisitions
Acquisition of MDC
On December 21, 2020, MDC and Stagwell Media announced that they had entered into the Transaction Agreement, providing for the combination of MDC with the operating businesses and subsidiaries of the Stagwell Subject Entities. The Stagwell Subject Entities comprised Stagwell Marketing and its direct and indirect subsidiaries.
On August 2, 2021 (the “Closing Date”), we completed the combination of MDC and the Stagwell Subject Entities and a series of steps and related
transactions (such combination and transactions, the “Transactions”). In connection with the Transactions, among other things, (i) MDC completed a series of transactions pursuant to which it emerged as a wholly owned subsidiary of the Company, converted into a Delaware limited liability company and changed its name to Midas OpCo Holdings LLC, and subsequently to Stagwell Global LLC (“OpCo”); (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into a Delaware corporation, succeeded MDC as the publicly-traded company and changed its name to Stagwell Inc.
In
respect of the Transactions, the acquired assets and assumed liabilities, together with acquired processes and employees, represent a business as defined in the FASB’s Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The Transactions were accounted for as a reverse acquisition using the acquisition method of accounting, pursuant to ASC Topic 805-10, Business Combinations, with MDC treated as the legal acquirer and SMG treated as the accounting acquirer. In identifying SMG as the acquiring entity for accounting purposes, MDC and SMG took into account a number of factors, including the relative voting rights and the corporate governance structure of the Company. SMG is considered the accounting acquirer since Stagwell Media controls the board of directors of the
Company following the Transactions and received an indirect ownership interest in the Company’s only operating subsidiary, OpCo, of i69.55% ownership of OpCo’s common units. However, no single factor was the sole determinant in the overall conclusion that Stagwell is the acquirer for accounting purposes; rather all factors were considered in arriving at such conclusion. Under the acquisition method of accounting, the assets and liabilities of MDC, as the accounting
acquiree, were recorded at their respective fair value as of the date the Transactions were completed.
On August 2, 2021, an aggregate of i179,970 shares of the Company’s Class C Common Stock were issued to Stagwell Media in exchange for $i1.80
(the “Stagwell New MDC Contribution”). The Class C Common Stock does not participate in the earnings of the Company. Additionally, an aggregate of i179,970 OpCo common units were issued to Stagwell Media in exchange for the equity interests of the Stagwell Subject Entities (the “Stagwell OpCo Contribution”).
The fair value of the purchase consideration is $i429,062,
consisting of approximately i80,000 shares of the Company’s Class A and B Common Stock and Common Stock equivalents based on a per share price of approximately $i5.42,
the closing stock price on the date of the combination.
ASC 805 requires the allocation of the purchase price consideration to the fair value of the identified assets acquired and liabilities assumed upon consummation of a business combination. For this purpose, fair value shall be determined in accordance with the fair value concepts defined in ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”). Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value measurements can be highly subjective and can involve a high degree of estimation. The purchase price valuation was completed during the third quarter of 2022.
18
The purchase price allocation is as follows:
Amount
Cash and cash equivalents
$
i130,197
Accounts
receivable
i398,736
Other current assets
i41,291
Fixed
assets
i81,343
Right-of-use lease assets - operating leases
i252,739
Intangible
assets
i810,900
Other assets
i18,282
Accounts
payable
(i139,590)
Accruals and other liabilities
(i307,439)
Advance
billings
(i211,212)
Current portion of lease liabilities
(i54,009)
Current
portion of deferred acquisition consideration
(i53,054)
Long-term debt
(i901,736)
Revolving
credit facility
(i109,954)
Long-term portion of deferred acquisition consideration
(i8,056)
Long-term
portion of lease liabilities
(i283,637)
Other liabilities
(i139,026)
Redeemable
noncontrolling interests
(i25,990)
Preferred shares
(i209,980)
Noncontrolling
interests
(i151,090)
Net liabilities assumed
(i861,285)
Goodwill
i1,290,347
Purchase
price consideration
$
i429,062
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributed to the assembled workforce of MDC. Goodwill of $i932,582,
$i285,396 and $i72,369 was assigned to the Integrated Agencies Network, the Brand Performance Network and the Communications Network reportable segments, respectively. The majority of the goodwill is non-deductible for income tax purposes. Goodwill has been reduced
from the reported amount as of June 30, 2022 of $i1,298,370 primarily to reflect the finalization of the assessment of certain tax positions and the related deferred taxes, as well as the finalization of the valuation of certain assets and liabilities in the Brand Performance Network. There has been no change that impacts the Consolidated Statement of Operations.
Intangible assets consist of trade names and customer relationships. We amortize purchased intangible assets on a straight-line basis over their respective useful
lives. The weighted average life of the total acquired identifiable intangible assets is ithirteen years. The following table presents the details of identifiable intangible assets acquired:
Estimated
Fair Value
Estimated Useful Life in Years
Trade Names
$
i98,000
i10
Customer
Relationships
i712,900
i6-i15
Total
Acquired Intangible Assets
$
i810,900
19
Pro
Forma Financial Information (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
The
pro forma net loss was nominal for the three and nine months ended September 30, 2021.
Revenue attributable to MDC, included within the three and nine months ended September 30, 2021 unaudited condensed consolidated statement of operations is $342,539 and $995,729, respectively and operating income was $17,506 and $77,817, respectively.
Acquisition of GoodStuff Holdings Limited
On December 31, 2021, the Company acquired GoodStuff Holdings Limited (“Goodstuff”) for approximately £i21,000
(approximately $i28,188) of cash consideration as well as contingent consideration up to a maximum of £i22,000.
The cash consideration included an initial payment of £i8,000, an excess working capital payment of approximately £i9,000
and approximately £i4,000 of deferred payments. The contingent consideration is tied to employees’ service and will be recognized as deferred acquisition consideration expense through 2026. Therefore, only the cash consideration has been allocated to the assets acquired and assumed liabilities of Goodstuff based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. The preliminary purchase price allocation is as follows:
Amount
Cash
and cash equivalents
$
i30,985
Accounts receivable
i28,685
Other
current assets
i3,207
Fixed assets
i237
Right-of-use
lease assets - operating leases
i2,060
Intangible assets
i14,974
Other
assets
i55
Accounts payable
(i6,344)
Accruals
and other liabilities
(i27,353)
Advance billings
(i15,956)
Current
portion of lease liabilities
(i857)
Income taxes payable
(i967)
Long-term
portion of lease liabilities
(i3,744)
Other liabilities
(i1,204)
Net
assets assumed
i23,778
Goodwill
i4,410
Purchase
price consideration
$
i28,188
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributed to the assembled workforce of Goodstuff. Goodwill of $i4,410
was assigned to the Brand Performance Network reportable segment. The majority of the goodwill is non-deductible for income tax purposes.
Intangible assets consist of trade names and customer relationships. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is ten years. The following table presents the details of identifiable intangible assets acquired:
20
Estimated
Fair Value
Estimated Useful Life in Years
Trade Names
$
i1,349
i15
Customer
Relationships
i13,625
i10
Total
Acquired Intangible Assets
$
i14,974
Pro Forma Financial Information (unaudited)
The unaudited pro forma information for the periods set forth below gives
effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
On April 1, 2022, the Company acquired the remaining interest in Hello Design, LLC (“Hello Design”) that it did not already own for an aggregate purchase price of $i4,600, comprised of a closing cash payment of $i3,600
and a contingent deferred acquisition payment of $i1,000. The contingent deferred payment will be based on the financial results of the underlying business through the end of 2022 with the payment due in 2023.
2021 Purchases of Noncontrolling Interests
On October 1, 2021, the Company entered into an agreement
to purchase the approximate i27% remaining interest of Targeted Victory it did not already own, stipulating the purchase of i13.3%
on October 1, 2021 and the remaining i13.3% on July 31, 2023, with the option for the seller to delay the second purchase until July 31, 2025. The purchase price of $i73,898
was comprised of a contingent deferred acquisition payment and redeemable noncontrolling interest with estimated present values at the acquisition date of $i46,618 and $i27,280,
respectively. The contingent deferred payment and redeemable noncontrolling interest were based on the financial results of the underlying business through 2025. In addition, at the option of the Company, up to i50% of the total purchase price can be paid in shares of Class A Common Stock and in no event may the purchase price exceed $i135,000.
On
December 1, 2021, the Company acquired the approximate i27% remaining interest of Concentric it did not already own for an aggregate purchase price of $i8,058,
comprised of a closing cash payment of $i1,581 and contingent deferred acquisition payments with an estimated present value at the acquisition date of $i6,477.
The contingent deferred payments were based on the financial results of the underlying business through 2022 with final payment due in 2023.
On December 31, 2021, the Company acquired the approximate i49% remaining interest of Instrument it did not already own for an aggregate purchase price of $i157,072,
comprised of a closing payment of $i37,500 in cash and $i37,500
in shares of Class A Common Stock and deferred acquisition payments with an estimated present value at the acquisition date of $i82,072. The deferred payments are not contingent and will be paid in 2023 and 2024.
i
4.
Revenue
The Company’s revenue recognition policies are established in accordance with ASC 606, and accordingly, revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The Stagwell network provides an extensive range of services to our clients, offering a variety of marketing and communication capabilities including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast), public relations services including strategy, editorial, crisis support or issues management, media training, influencer engagement and events management. We also provide media buying and
planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast), experiential marketing and application/website design and development.
The primary source of the Company’s revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses, depending on the terms of the client contract. In all circumstances, revenue is only recognized when collection is reasonably assured. Certain of the Company’s contractual arrangements
have more than one performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its
21
relative stand-alone selling price. Stand-alone selling prices are determined based on the prices charged to clients or using expected cost plus margin.
The determination of our performance obligations is specific to the services included within each contract. Based on a client’s requirements within the contract, and how these services are provided, multiple services could represent separate performance
obligations or be combined and considered one performance obligation. Contracts that contain services that are not significantly integrated or interdependent, and that do not significantly modify or customize each other, are considered separate performance obligations. Typically, we consider media planning, media buying, creative (or strategy), production and experiential marketing services to be separate performance obligations if included in the same contract as each of these services can be provided on a stand-alone basis, and do not significantly modify or customize each other. Public relations services and application/website design and development are typically each
considered one performance obligation as there is a significant integration of these services into a combined output.
Certain of the Company’s contracts consist of a single performance obligation. In these instances, the Company does not consider the underlying activities as separate or distinct performance obligations because its services are highly interrelated, and the integration of the various components is essential to the overall promise to the Company’s customer. In certain of the Company’s client
contracts, the performance obligation is a stand-ready obligation because the Company provides a constant level of similar services over the term of the contract.
We typically satisfy our performance obligations over time, as services are performed. Fees for services are typically recognized using input methods (direct labor hours, materials and third-party costs) that correspond with efforts incurred to date in relation to total estimated efforts to complete the contract. To a lesser extent, revenue is recognized using output measures, such as impressions or ongoing reporting.
For client contracts when the Company has a stand-ready obligation to perform services on an ongoing basis over the life of the contract, where the scope of these arrangements includes an undefined number of broad activities and there are no significant gaps in performing the services, the Company recognizes revenue ratably using a time-based measure. In addition, for client contracts where the Company is providing online subscription-based hosted services,
it recognizes revenue ratably over the contract term. Point in time recognition primarily relates to certain commission-based contracts, which are recognized upon the placement of advertisements in various media when the Company has no further performance obligation.
Revenue is recognized net of sales and other taxes due to be collected and remitted to governmental authorities. The Company’s contracts typically provide for termination by either party within i30 to i90 days.
Although payment terms vary by client, they are typically within i30 to i60 days. In addition, the Company generally has the right to payment for all services
provided through the end of the contract or termination date.
Within each contract, we identify whether the Company is principal or agent at the performance obligation level. In arrangements where the Company has substantive control over the service before transferring it to the client, and is primarily responsible for integrating the services into the final deliverables, we act as principal. In these arrangements, revenue is recorded at the gross amount billed. Accordingly, for these contractsthe Company has included reimbursed expenses in revenue. In other arrangements where a third-party supplier, rather than the Company, is primarily responsible for the integration of services into the final deliverables, and thus the Company is solely arranging for the third-party supplier to provide these services to our client, we generally act as agent and record revenue equal to the net amount retained, when the fee or commission is earned. The role of Stagwell’s agencies under a production services agreement is to facilitate a client’s purchasing of production capabilities from a third-party production company in accordance with the client’s strategy and guidelines. The obligation of Stagwell’s agencies under media
buying services is to negotiate and purchase advertising media from a third-party media vendor on behalf of a client to execute its media plan. Typically, we do not obtain control prior to transferring these services to our clients; therefore, we primarily act as agent for production and media buying services.
A small portion of the Company’s contractual arrangements with clients include performance incentive provisions, which allow the Company to earn additional revenues as a result of its performance relative to both quantitative and qualitative goals. Incentive compensation is primarily estimated using the most likely amount method and is included in revenue up to the amount that is not expected to result in a reversal
of a significant amount of cumulative revenue recognized. We recognize revenue related to performance incentives as we satisfy the performance obligation to which the performance incentives are related.
Disaggregated Revenue Data
The Company provides a broad range of services to a large base of clients across the full spectrum of verticals globally. The primary source of revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses. Certain clients may engage with the Company in various geographic locations, across multiple disciplines, and through multiple Brands. Representation of a client rarely means that Stagwell handles marketing communications
for all Brands or product lines of the client in every geographical location. The Company’s Brands often cooperate with one another through referrals and the sharing of both services and expertise, which enables Stagwell to service
22
clients’ varied marketing needs by crafting custom integrated solutions. Additionally, the Company maintains separate, independent operating companies to enable it to effectively manage potential conflicts of interest by representing competing clients across the Stagwell network.
i
The
following table presents revenue disaggregated by our principal capabilities for the three and nine months ended September 30, 2022 and 2021:
Stagwell
has historically largely focused where the Company was founded in North America, the largest market for its services in the world. The Company has expanded its global footprint to support clients looking for help to grow their businesses in new markets. Stagwell’s Brands are located in the United States and United Kingdom, and more than ithirty other countries around the world. In the past, some
clients have responded to weakening economic conditions with reductions to their marketing budgets, which included discretionary components that are easier to reduce in the short term than other operating expenses.
i
The following table presents revenue disaggregated by geography for the three and nine months ended September 30, 2022 and 2021:
Contract assets consist of fees and reimbursable outside vendor costs incurred on behalf of clients when providing advertising, marketing and corporate communications services that have not yet been invoiced to clients. Unbilled service fees were $i179,878 and $i116,558
at September 30, 2022 and December 31, 2021, respectively, and are included as a component of Accounts receivable on the Unaudited Condensed Consolidated Balance Sheets. Outside vendor costs incurred on behalf of clients which have yet to be invoiced were $i57,873 and $i63,065
at September 30, 2022 and December 31, 2021, respectively, and are included on the Unaudited Condensed Consolidated Balance Sheets as Expenditures billable to clients. Such amounts are invoiced to clients at various times over the course of providing services.
Contract liabilities consist of fees received from or billed to clients in excess of fees recognized. Such fees are classified as Advance billings presented on the Company’s Unaudited Condensed Consolidated Balance Sheets. In arrangements in which we are acting as an agent, the recognition related to the contract
liability is presented on a net basis within the Unaudited Condensed Consolidated Statements of Operations. Advance billings at September 30, 2022 and December 31, 2021 were $i340,675 and $i361,885,
respectively. The decrease in the Advance billings balance of $i21,210 for the nine months ended September 30, 2022 was primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $i323,734
of revenues recognized that were included in the Advance billings balances as of December 31, 2021 and reductions due to the incurrence of third-party costs.
Changes in the contract asset and liability balances during the nine months ended September 30, 2022 were not materially impacted by write offs, impairment losses or any other factors.
23
Unsatisfied Performance Obligations
The majority of our contracts
are for periods of one year or less. For those contracts with a term of more than one year, we had approximately $i42,438 of unsatisfied performance obligations as of September 30, 2022 of which we expect to recognize approximately i32%
in the remaining quarters of 2022, i56% in 2023 and i12% in 2024.
i
5.
Earnings Per Share
i
The following table sets forth the computations of basic and diluted income per common share for the three and nine months ended September 2022:
Net
loss attributable to other equity interest holders
(i5,379)
(i8,641)
Net
income attributable to noncontrolling and redeemable noncontrolling interests
(i24,665)
(i59,668)
Net
income attributable to Stagwell Inc. common shareholders
$
i10,609
$
i33,747
Denominator:
Weighted
Average number of common shares outstanding
i125,384
i124,710
Earnings
Per Share - Basic
$
i0.08
$
i0.27
Earnings
Per Share - Diluted
Numerator:
Net income attributable to Stagwell Inc. common shareholders
$
i10,609
$
i33,747
Denominator:
Basic
- Weighted Average number of common shares outstanding
i125,384
i124,710
Dilutive
shares:
Stock appreciation rights
i1,837
i1,885
Restricted
share and restricted unit awards
i3,277
i4,955
Diluted
- Weighted average number of common shares outstanding
i130,498
i131,550
Earnings
Per Share - Diluted
$
i0.08
$
i0.26
/
Restricted
stock awards of i2,340 as of September 30, 2022 are excluded from the computation of diluted income per common share because the performance contingency necessary for vesting had not been met as of the reporting date.
/
24
The following table sets forth the computations of basic and diluted income per common share for the three and nine months ended September 2021:
Net
loss attributable to Stagwell Inc. common shareholders
$
(ii4,545/)
$
(ii4,545/)
Denominator:
Weighted
average number of common shares outstanding
ii76,106/
ii76,106/
Loss
Per Share - Basic & Diluted
$ (ii0.06/)
$ (ii0.06/)
Anti-dilutive:
Class
C shares
i179,970
i179,970
Stock
Appreciation Rights and Restricted Awards
i6,596
i6,596
The
combination of MDC and SMG, completed on August 2, 2021, was treated as a reverse acquisition for financial reporting purposes. SMG was treated as the accounting acquirer and MDC as the accounting acquiree. Therefore, under applicable accounting principles, the historical financial results of SMG prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presented in this Form 10-Q for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions or the financial results of MDC and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021.
SMG’s equity structure, prior to the combination
with MDC, was a non-unitized single member limited liability company, resulting in all components of equity attributable to the member being reported within Members’ Capital. Given that SMG was a non-unitized single member limited liability company, net income (loss) prior to the combination is not applicable for purposes of calculating earnings per share. Therefore, the net income (loss) in the table above includes the income or loss for the period beginning on the acquisition date through the end of the respective reporting period and as such will not reconcile to the respective amounts presented within the Unaudited Condensed Consolidated Statements of Operations.
6. Deferred Acquisition Consideration
Deferred acquisition consideration on the balance sheet consists
of deferred obligations related to contingent and fixed purchase price payments, and contingent and fixed retention payments tied to continued employment of specific personnel. Contingent deferred acquisition consideration is recorded at the acquisition date fair value and adjusted at each reporting period through operating income.
25
iThe
following table presents changes in contingent deferred acquisition consideration, which is measured at fair value on a recurring basis using significant unobservable inputs, and a reconciliation to the amounts reported on the balance sheets as of September 30, 2022 and December 31, 2021:
Adjustment
to deferred acquisition consideration (1)
(i13,793)
i18,721
Additions
(2)
i24,594
i198,937
Currency
Translation Adjustment
(i1,576)
i—
Other
(i140)
(i705)
Ending
balance of contingent payments (3)
$
i159,589
$
i222,369
(1)
Adjustment to deferred acquisition consideration contains fair value changes from the Company’s initial estimates of deferred acquisition payments. Adjustment to deferred acquisition consideration is recorded within Office and general expenses on the Unaudited Condensed Consolidated Statements of Operations.
(2) In 2021, approximately $i61,000
of additions represent deferred acquisition consideration acquired in connection with the acquisition of MDC. Approximately $i136,000 of additions represent deferred acquisition consideration acquired in connection with the purchases of noncontrolling interests. See Note 3 of the Notes included herein for additional information related to the purchases of Concentric, Targeted Victory, and Instrument. In 2022, approximately i22,014
of additions represent deferred acquisition consideration acquired in connection with the acquisitions of BNG, Apollo, and PEP Group. See Note 3 of the Notes included herein for additional information related to these purchases.
(3) As of September 30, 2022, approximately, $i42,356 of the deferred acquisition consideration
is expected to be settled in the Company’s in Class A Common Stock.
i
7. Leases
The Company leases office space in North America, Europe, Asia, South America, Africa and Australia. This space is primarily used for office
and administrative purposes by the Company’s employees in performing professional services. These leases are classified as operating leases and expire between years 2022 through 2034. The Company’s finance leases are immaterial.
The Company’s leasing policies are established in accordance with ASC 842, and accordingly, the Company recognizes on the balance sheet at the time of lease commencement a right-of-use lease asset and a lease liability, initially measured at the present value of the lease payments. Right-of-use lease assets represent the
Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. All right-of-use lease assets are reviewed for impairment. As the Company’s implicit rate in its leases is not readily determinable, in determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the commencement date. Lease payments included in the measurement of the lease liability are comprised of non-cancellable lease payments, payments based upon an index or rate, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and
payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease costs are recognized in the Unaudited Condensed Consolidated Statements of Operations over the lease term on a straight-line basis. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset.
Some of the Company’s leases contain variable lease payments, including payments based upon an index or rate. Variable lease payments based upon an index or rate are initially measured using the index or rate in effect at the lease commencement date and are included within the lease liabilities. Lease liabilities are not remeasured as a result of changes in the index or rate, rather changes in these
types of payments are recognized in the period in which the obligation for those payments is incurred. In addition, some of our leases contain variable payments for utilities, insurance, real estate tax, repairs and maintenance, and other variable operating expenses. Such amounts are not included in the measurement of the lease liability and are recognized in the period when the facts and circumstances which the variable lease payments are based upon occur.
Some of the Company’s leases include options to extend or renew the leases through 2044. The renewal and extension options are not included in the lease term as the Company is not reasonably certain that it will exercise its option.
26
From time to time, the Company enters into sublease arrangements with unrelated third parties. These leases are classified as operating leases and expire between years 2022 through 2032. Sublease income is recognized over the lease term on a straight-line basis. Currently, the Company subleases office space in North America and Europe.
As of September 30, 2022, the Company has entered into ione
operating lease for which the commencement date has not yet occurred primarily because the premises is in the process of being prepared for occupancy by the landlord. Accordingly, this ione lease represents an obligation of the Company that is not reflected within the Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022. The aggregate future liability related
to this lease is approximately $i1,167.
The discount rate used for leases accounted for under ASC 842 is the Company’s collateralized credit adjusted borrowing rate.
i
The
following table presents lease costs and other quantitative information for the three and nine months ended September 30, 2022 and 2021:
Cash paid for amounts included in the measurement of lease liabilities for operating leases
Operating cash flows
$
i22,694
$
i16,490
$
i69,827
$
i29,854
Right-of-use
lease assets obtained in exchange for operating lease liabilities and other non-cash adjustments
$
i5,189
$
i353,984
$
i27,878
$
i353,984
/
As
of September 30, 2022, the weighted average remaining lease term (in years) and weighted average discount rate were i6.4 and i4.3%, respectively.
Operating
lease expense is included in office and general expenses in the Unaudited Condensed Consolidated Statements of Operations. The Company’s lease expense for leases with a term of 12 months or less is immaterial.
In the three and nine months ended September 30, 2022, the Company recorded a charge of $i1,734
and $i2,014, respectively, primarily to reduce the carrying value of one of its right-of-use lease assets and related leasehold improvements. This right-of-use lease asset related to an agency within the Integrated Agencies Network. As a result of subleasing the space, the Company evaluated the facts and circumstances related to the use of the assets which indicated that they may not be recoverable. Using the sublease income to develop expected future cash flows, it was determined
that the fair value of the asset was less than its carrying value. This impairment charge is included in Impairment and other losses within the Unaudited Condensed Consolidated Statements of Operations.
iThe following table presents minimum future rental payments under the Company’s leases at September 30, 2022 and their reconciliation to the corresponding lease liabilities:
Interest
expense related to long-term debt included in Interest expense, net on the Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 was $i19,022 and $i54,918,
respectively, and for the three and nine months ended September 30, 2021 was $i9,913 and $i15,560, respectively.
The
amortization of debt issuance costs included in Interest expense, net on the Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 was $i573 and $i1,784,
respectively, and for the three and nine months ended September 30, 2021 was $i1,623 and $i2,092, respectively.
Revolving
Credit Agreement
On November 18, 2019, the Company entered into a debt agreement (“JPM Syndicated Facility”) with a syndicate of banks led by JPMorgan Chase Bank, N.A (“JPM”). The JPM Syndicated Facility consisted of a ifive-year revolving credit facility of $i265,000
(“JPM Revolver”) with the right to be increased by an additional $i150,000. On March 18, 2020, the Company increased the commitments on the JPM Revolver by $i60,000
to $i325,000.
On August 2, 2021, in connection with the closing of the acquisition of MDC, the Company entered into an amended and restated credit agreement (the “Combined Credit Agreement”) with a syndicate of banks led by JPM to increase commitments on the existing JPM Revolver. The Combined Credit Agreement consists of a $i500,000
senior secured revolving credit facility with a ifive-year maturity.
The Combined Credit Agreement contains sub-limits for revolving loans and letters of credit of $i50,000
for loans denominated in pounds sterling or euros. It also includes an accordion feature under which the Company may request, subject to lender approval and certain conditions, to increase the amount of the commitments to an aggregate amount not to exceed $i650,000.
On April 28, 2022, the
Company amended the Combined Credit Agreement. Among other things, this amendment replaced any references to LIBOR with references to SOFR. Borrowings pursuant to the Combined Credit Agreement, as amended, bear interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the prime rate of interest in effect on such day, (b) the federal funds effective rate plus i0.50% and (c) SOFR plus i1%
in each case, plus the applicable margin (calculated based on the Company’s Total Leverage Ratio, as defined in the Combined Credit Agreement) at that time. Additionally, the Combined Credit Agreement was amended to remove certain pre-commencement notice provisions for certain acquisitions under $i50,000 in the aggregate, increased the amount permitted for certain investments allowed under the Combined Credit Agreement,
and, subject to certain conditions, to allow for the repurchase of Stagwell Inc. stock in an amount not to exceed $i100,000 in any fiscal year. All other substantive terms of the Combined Credit Agreement remain unchanged.
Prior to April 28, 2022, borrowings under the Combined Credit Agreement bore interest at a rate equal to, at the
Company’s option, (i) the greatest of (a) the prime rate of interest announced from time to time by JPM, (b) the federal funds
/
28
effective rate from time to time plus i0.50% and (c) the LIBOR rate plus i1%,
in each case, plus the applicable margin (calculated based on the Company’s total leverage ratio) at that time or (ii) the LIBOR rate plus the applicable margin (calculated based on the Company’s total leverage ratio) at that time.
Advances under the Combined Credit Agreement may be prepaid in whole or in part from time to time without penalty or premium. The Combined Credit Agreement commitment may be reduced by the Company from time to time. Principal amounts outstanding under the Combined Credit Agreement are due and payable in full at maturity within ifive
years of the date of the Combined Credit Agreement.
If an event of default occurs under the Combined Credit Agreement or any future secured indebtedness, the holders of such secured indebtedness will have a prior right to our assets securing such indebtedness, to the exclusion of the holders of the i5.625% Notes (as defined below), even if we are in default with respect to the i5.625%
Notes. In that event, our assets securing such indebtedness would first be used to repay in full all indebtedness and other obligations secured by them (including all amounts outstanding under the Combined Credit Agreement), resulting in all or a portion of our assets being unavailable to satisfy the claims of the holders of the i5.625% Notes and other unsecured indebtedness.
The Combined Credit Agreement contains a number of financial and nonfinancial covenants and is guaranteed by substantially all of our present and future subsidiaries,
subject to customary exceptions.
A portion of the Combined Credit Agreement in an amount not to exceed $i50,000 is available for the issuance of standby letters of credit. At September 30, 2022
and December 31, 2021, the Company had issued undrawn outstanding letters of credit of $i24,973 and $i24,332,
respectively.
Senior Notes
In August 2021, the Company issued $i1,100,000 aggregate principal amount of i5.625%
senior notes (“i5.625% Notes”). A portion of the proceeds from the issuance of the i5.625% Notes was used to redeem $i870,300
aggregate principal amount of the outstanding i7.50% Senior Notes due 2024 (the “Existing Notes”) for a price of $i904,200. This price is equal to i101.625%
of the outstanding principal amount of the Existing Notes being redeemed, plus, accrued, and unpaid interest on the principal amount of such Existing Notes. The Company did not recognize a gain or loss on redemption.
The i5.625% Notes are due August 15, 2029 and bear interest of i5.625%
to be paid on February 15 and August 15 of each year, commencing on February 15, 2022.
The i5.625% Notes are guaranteed on a senior unsecured basis by substantially all of the Company’s subsidiaries. The i5.625%
Notes rank (i) equally in right of payment with all of the Company’s or any guarantor’s existing and future unsubordinated indebtedness, (ii) senior in right of payment to the Company’s or any guarantor’s existing and future subordinated indebtedness, (iii) effectively subordinated to any of the Company’s or any guarantor’s existing and future secured indebtedness to the extent of the collateral securing such indebtedness, including the Combined Credit Agreement, and (iv) structurally subordinated to all existing and future liabilities of the Company’s subsidiaries
that are not guarantors.
Our obligations under the i5.625% Notes are unsecured and are effectively junior to our secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. Borrowings under the Combined Credit Agreement are secured by substantially all of the assets of the Company, and any existing and future subsidiary guarantors, including all of the capital stock of each restricted subsidiary.
The
Company may, at its option, redeem the i5.625% Notes in whole at any time or in part from time to time, on and after August 15, 2024 at a redemption price of i102.813%
of the principal amount thereof if redeemed during the twelve-month period beginning on August 15, 2024, at a redemption price of i101.406% of the principal amount thereof if redeemed during the twelve-month period beginning on August 15, 2025 and at a redemption price of i100%
of the principal amount thereof if redeemed on August 15, 2026 and thereafter. Prior to August 15, 2024, the Company may, at its option, redeem some or all of the i5.625% Notes at a price equal to i100%
of the principal amount of the i5.625% Notes plus a “make whole” premium and accrued and unpaid interest. The Company may also redeem, at its option, prior to August 15, 2024, up to i40%
of the i5.625% Notes with the net proceeds from one or more equity offerings at a redemption price of i105.625% of the principal amount thereof.
If
the Company experiences certain kinds of changes of control (as defined in the indenture), holders of the i5.625% Notes may require the Company to repurchase any i5.625%
Notes held by them at a price equal to i101% of the principal amount of the i5.625% Notes plus accrued and unpaid interest.
In addition, if the Company sells assets under certain circumstances, it must offer to repurchase the i5.625% Notes at a price equal to i100%
of the principal amount of the i5.625% Notes plus accrued and unpaid interest.
29
The indenture includes covenants that, among other things, restrict the Company’s ability and the ability of its restricted
subsidiaries (as defined in the indenture) to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of the Company; make certain types of investments; create restrictions on the payment of dividends or other amounts from the Company’s restricted subsidiaries; sell assets; enter into transactions with affiliates; create liens; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of the
Company’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The i5.625% Notes are also subject to customary events of default, including cross-payment default and cross-acceleration provisions. The Company was in compliance with all covenants at September 30, 2022.
Interest Rate Swap
The
Company had an interest rate swap that matured in April 2022. The fair value of the swap was $i77 as of December 31, 2021.
i
9.
Noncontrolling and Redeemable Noncontrolling Interests
Noncontrolling Interests
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling interests in the equity section of the
Company’s Unaudited Condensed Consolidated Balance Sheets. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity at their estimated acquisition date redemption value and adjusted at each reporting period for changes to their estimated redemption value through Retained earnings (but not less than their initial redemption value), except for foreign currency translation adjustments.
Net income (loss) attributable to Stagwell Inc. common shareholders
$
i10,609
$
(i2,071)
$
i33,747
$
i20,199
Transfers
from the noncontrolling interest:
Change in Stagwell Inc. Paid-in capital for purchase of redeemable noncontrolling interests and noncontrolling interests
i—
i9,679
(i1,000)
i9,679
Net
transfers from noncontrolling interests
i—
i9,679
(i1,000)
i9,679
Change
from net income attributable to Stagwell Inc. and transfers to noncontrolling interests
$
i10,609
$
i7,608
$
i32,747
$
i29,878
The
following table presents net income attributable to noncontrolling interests between holders of Class C shares and other equity interest holders for the three and nine months ended September 30, 2022 and 2021:
Net
income attributable to other equity interest holders
i2,287
i7,210
i4,083
i9,833
Net
income attributable to noncontrolling interests
$
i21,573
$
i9,320
$
i55,110
$
i11,943
The
following table presents noncontrolling interests between holders of Class C shares and other equity interest holders as of September 30, 2022 and December 31, 2021:
Net
income (loss) attributable to redeemable noncontrolling interests
i4,558
(i412)
Other
i860
i1,299
Ending
Balance
$
i65,817
$
i43,364
(1)
As of December 31, 2021, approximately $i26,000 represents redeemable noncontrolling interests acquired in connection with the acquisition of MDC. Approximately $i27,000
represents redeemable noncontrolling interests acquired in connection with the purchase of the noncontrolling interest of Targeted Victory. See Note 3 of the Notes included herein for additional information related to the purchase of Targeted Victory.
/
The noncontrolling shareholders’ ability to exercise any such option right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise and specific employment termination conditions. In addition, these rights cannot be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the
related amounts during 2022 to 2025. It is not determinable, at this time, if or when the owners of these rights will exercise all or a portion of these rights.
The redeemable noncontrolling interest of $i65,817 as of September 30, 2022, consists of $i62,197,
assuming that the subsidiaries perform over the relevant periods at their current profit levels, and $i3,620upon termination of such owner’s employment with the applicable subsidiary or death.
These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. There is no related
impact on the Company’s income per share calculations.
i
10. Commitments, Contingencies, and Guarantees
Legal Proceedings. The Company’s operating entities are involved
in legal proceedings of various types. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.
Deferred Acquisition Consideration and Options to Purchase. See Notes 6 and 9 of the Notes included herein for information regarding potential payments associated with deferred acquisition consideration and the acquisition of noncontrolling shareholders’ ownership interest in subsidiaries.
Guarantees.
Generally, the Company has indemnified the purchasers of certain assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable
that a loss has occurred and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
The
Company entered into ione operating lease for which the commencement date has not yet occurred as of September 30, 2022. See Note 7 of the Notes included herein for additional information.
/
In the ordinary course of business, the
Company may enter into long-term, non-cancellable contracts with partner associations that include revenue or profit-sharing commitments related to the provision of its services. These contracts may also include provisions that require the partner associations to meet certain performance targets prior to any obligation to the Company. As of September 30, 2022, the Company estimates its future minimum commitments under these non-cancellable agreements to be: $i1,948,
$i6,558, $i2,093, $i1,226,
$i1,008, and $i82 for the remainder of 2022, 2023, 2024, 2025, 2026, and 2027, respectively.
31
i
11. Share Capital
On March 23, 2022, the board of directors authorized a stock repurchase program (the “Repurchase Program”) under which we may repurchase up to $i125,000
of shares of our outstanding Class A common stock. The Repurchase Program will expire on March 23, 2025.
Under the Repurchase Program, share repurchases may be made at our discretion from time to time in open market transactions at prevailing market prices (including through trading plans that may be adopted in accordance with Rule 10b5-1 of the Exchange Act), in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions, regulatory requirements, the availability of funds, and other considerations we deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directors will review the Repurchase Program periodically
and may authorize adjustments of its terms.
When repurchasing shares, we reduce the value of our Class A Common Stock for the par value of the shares repurchased and account for the difference between the price paid for the Class A Common Stock, excluding fees, and the par value of such stock recorded to Paid-in capital.
As of September 30, 2022, there were i4,006 shares of Class A Common
Stock repurchased under the Repurchase Program at an aggregate value, excluding fees, of $i28,671. These were purchased at an average share price of $i7.16 per share. The remaining value of shares
of Class A Common Stock permitted to be repurchased under the Repurchase Program was $i96,249 as of September 30, 2022.
The authorized and outstanding share capital of the Company is below.
Class A Common Stock (“Class A Shares”)
There
are i1,000,000 shares of Class A Shares authorized. There were i131,540 Class A Shares issued and outstanding as of September 30,
2022. The Class A Shares carry ione vote each, with a par value of $i0.001, entitled to dividends equal to or greater than Class B Shares, and convertible at
the option of the holder into one Class B Share for each Class A Share after the occurrence of certain events related to an offer to purchase all Class B shares.
Class B Common Stock (“Class B Shares”)
There are i5 shares of Class B Shares authorized. There were i4
of Class B Shares issued and outstanding as of September 30, 2022. The Class B Shares carry itwenty votes each, with a par value of $i0.001,
convertible at any time at the option of the holder into one Class A Share for each Class B Share.
Class C Common Stock (“Class C Shares”)
There are i250,000 shares of Class C Shares authorized. There were i164,376
Class C Shares issued and outstanding as of September 30, 2022. The Class C Shares do not participate in the earnings of the Company and have a par value of $i.00001. In 2021, an aggregate of i179,970
OpCo common units were issued to Stagwell Media in exchange for the equity interests of the Stagwell Subject Entities. Each Class C Share, together with the related OpCo common unit, is convertible at any time, at the option of the holder, into one Class A Share. In the nine months ended September 30, 2022, holders of Class C Shares and OpCo Units (the “Paired Units”) exchanged i15,594 Paired Units for the same number of Class A Shares. Approximately i5,000
Paired Units exchanged into an equal number of Class A Shares triggered an employee tax withholding obligation of $i14,900. The Company repurchased approximately i2,000
of the i5,000 Class A Shares issued to the employees to satisfy their employee tax withholding obligation.
/i
12.
Fair Value Measurements
A fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. The hierarchy for observable and unobservable inputs used to measure fair value into three broad levels are described below:
•Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
•Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
•Level 3 - Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
32
Financial Instruments that are not Measured at Fair Value on a Recurring Basis
i
The
following table presents certain information for our financial liability that is not measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021:
Our
long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices in markets that are not active. Therefore, this debt is classified as Level 2 within the fair value hierarchy.
Financial Instruments Measured at Fair Value on a Recurring Basis
Contingent deferred acquisition consideration (Level 3 fair value measurement) is recorded at the acquisition date fair value and adjusted at each reporting period. The estimated liability is determined in accordance with models of each business’ future performance, including revenue growth and free cash flows. These models are dependent upon significant assumptions, such as the growth rate of the earnings of the relevant subsidiary during the contractual period and the discount rate. These growth rates are consistent with the
Company’s long-term forecasts. As of September 30, 2022, the discount rate used to measure these liabilities ranged from 4.2% to 6.0%.
As these estimates require the use of assumptions about future performance, which are uncertain at the time of estimation, the fair value measurements presented on the Unaudited Condensed Consolidated Balance Sheets are subject to material uncertainty.
See Note 6 of the Notes included herein for additional information regarding contingent deferred acquisition consideration.
At September 30, 2022 and December 31, 2021, the carrying amount of the
Company’s financial instruments, including cash, cash equivalents, accounts receivable and accounts payable, approximated fair value because of their short-term maturity.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Certain non-financial assets are measured at fair value on a nonrecurring basis, primarily goodwill, intangible assets (Level 3 fair value measurement) and right-of-use lease assets (Level 2 fair value measurement). Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment.
The Company recognized an impairment of goodwill and an impairment of right-of-use lease assets for the three and nine months
ended September 30, 2022. The Company did not recognize an impairment of goodwill or right-of-use lease assets in the three and nine months ended September 30, 2021. See Note 7 of the Notes included herein for additional information regarding right-of-use assets and Note 13 of the Notes included herein for additional information regarding goodwill.
i
13.
Supplemental Information
Subsidiary Awards
Certain of the Company’s subsidiaries grant awards to their employees providing them with an equity interest in the respective subsidiary (the “profits interests awards”). The awards generally provide the employee the right, but not the obligation, to sell its profits interest in the subsidiary to the Company based on a performance-based formula and, in certain cases, receive a profit share distribution. The profits interests awards are settled in cash and the corresponding liability at fair value was $i32,198
at September 30, 2022 (Level 3 fair value model), and included as a component of Accruals and other liabilities and Other liabilities on the Unaudited Condensed Consolidated Balance Sheets.
Stock-based Compensation
Total stock-based compensation recognized for the nine months ended September 30, 2022 was $i33,410, primarily attributable to $i26,288
recognized for stock-based compensation associated with grants of Class A Common Stock and $i5,550 recognized for profits interest awards. In the nine months ended September 30, 2022, the Company granted approximately i5,728
share based awards.
Impairment and Other Losses
The Company recognized an impairment and other losses charge of $i28,034 for the nine months ended September 30, 2022, primarily related to the impairment of goodwill totaling $i23,139.
The goodwill impairment was to write-down the carrying value in excess of the fair value at three reporting units, one in the Integrated Agencies Network, one in the Brand Performance Network and one within the All Other category. The expense was recorded within Impairment and other losses on the Unaudited Condensed Consolidated Statements of Operations.
/
33
As of September 30, 2022, the Company assessed whether it was more likely than not that the carrying amount of its reporting
units exceeded their fair value. As a result of this assessment, the Company completed a quantitative impairment test for certain reporting units that resulted in the impairment charge due to a combination of changes in fair value measures such as an increase in interest rates and decrease in market multiples of comparable public companies, as well as actual performance below previous financial forecasts. The Company uses a combination of the income approach, which incorporates the use of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. The Company generally applies an equal weighting to the income and market approaches for the
impairment test. The income approach and the market approach both require the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.
i
14. Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in interim periods.
The Company had an income tax expense for the three months ended September 30, 2022 of $i11,540 (on a pre-tax income of $i46,601
resulting in an effective tax rate of i24.8%) compared to income tax expense of $i5,183 (on pre-tax income of $i13,182
resulting in an effective tax rate of i39.3%) for the three months ended September 30, 2021.
The difference in the effective tax rate of i24.8%
in the three months ended September 30, 2022 as compared to i39.3% in the three months ended September 30, 2021 was primarily attributable to higher non-deductible share based compensation in September 30, 2021, and favorable return to provision adjustments at September 30, 2022, offset in part by the impact of non-deductible goodwill impairments in September
30, 2022.
The Company had an income tax expense for the nine months ended September 30, 2022 of $i20,150 (on a pre-tax income of $i112,512
resulting in an effective tax rate of i17.9%) compared to income tax expense of $i9,205 (on pre-tax income of $i40,466
resulting in an effective tax rate of i22.7%) for the nine months ended September 30, 2021.
The difference in the effective tax rate of i17.9%
in the nine months ended September 30, 2022 as compared to i22.7% in the nine months ended September 30, 2021 was primarily related to favorable adjustments for share-based compensation vesting and return to provision adjustments at September 30, 2022, offset in part by the impact of non-deductible goodwill impairments in September 30, 2022.
In
connection with the finalization of the MDC purchase accounting, the Company finalized its tax basis calculations and adjusted deferred taxes and goodwill.The change in goodwill also impacted the deferred tax liability on Company’s ownership interest in OpCo.This change has been accounted for as an equity transaction resulting in a reduction in paid in capital of $17,303.
Tax Receivables Agreement
In connection with the closing of the Transactions, we entered into the Tax Receivables Agreement (“TRA”) with OpCo and Stagwell Media, pursuant to which we are required to make cash payments to Stagwell Media equal to 85% of certain U.S. federal, state and local
income tax or franchise tax savings, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) increases in the tax basis of OpCo’s assets resulting from exchanges of Paired Units (defined in Note 11) for shares of Class A Common Stock or cash, as applicable, and (ii) certain other tax benefits related to us making payments under the TRA.
The Company accounts for amounts payable under the TRA in accordance with ASC 450—Contingencies. We will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance and a corresponding reduction to the TRA liability. The amounts to be
recorded for both the deferred tax assets and the liability under the TRA will be estimated at the time of any purchase or exchange as a reduction to shareholders’ equity, and the effects of changes in any of our estimates after this date will be included in net income or loss. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income or loss.
In the first quarter of 2022, the Company had its first exchange of Paired Units for shares of Class A Common Stock and recorded its initial TRA liability. Further exchanges have been made in the subsequent quarters. As of September 30, 2022, the Company had a TRA liability of $i17,649
and has recognized deferred tax benefits of $i20,763 as a reduction to the net deferred tax liability on its unaudited condensed consolidated balance sheets in connection with the exchanges of the Paired Units and the projected obligations under the TRA.
/
34
i15. Related Party Transactions
In the ordinary course of business, the Company enters into transactions with related parties, including its affiliates. The transactions may range in the nature and value of services underlying the arrangements. iThe
following table presents significant related party transactions where a third party receives services from the Company:
(1) Family member of one of the Brand’s partners holds an executive leadership position in the third party.
(2) Chief Executive Officer of the Brand is a shareholder of the affiliate providing the services.
(3 ) A family member of the Company’s President holds a key leadership position in the client.
(4) This arrangement was entered into for an indefinite term and is invoiced as services are provided.
In 2019, a Brand of the Company, entered into a loan agreement with a third party who
holds a minority interest in the Brand. The loan receivable of $i4,029 and $i3,784 due from the third party is included within Other current assets in the
Company’s Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, respectively. The Company recognized $i80 and $i234
for the three and nine months ended September 30, 2022, respectively, and $i76 and $i227 for the three and nine months ended September 30, 2021,
respectively, of interest income within interest expense, net on its Unaudited Condensed Consolidated Statements of Operations.
During the three and nine months ended September 30, 2021, Stagwell Media made additional non-cash investments in the Company of $i300 and $i12,400,
respectively. Additionally, during the three and nine months ended September 30, 2021, the Company made cash investments of $ii1,600/.
In March 2021, the Company made a non-cash distribution to Stagwell Media of $i13,000. Additionally, the Company made cash distributions to Stagwell Media of $i165,700
and $i191,900 for the three and nine months ended September 30, 2021, respectively.
i
16.
Segment Information
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Mark Penn, Chief Executive Officer and Chairman, to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability
for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
The CODM uses Adjusted EBITDA (defined below) as a key metric, to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions. Adjusted EBITDA is defined as Net income excluding non-operating income or expense to achieve operating income, plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, and other items. Other items include restructuring costs, acquisition-related expenses, and non-recurring items.
Due to changes in the Company’s internal management and reporting structure in the second quarter of
2022, reportable segment results for periods presented prior to the second quarter of 2022 have been recast to reflect the reclassification of certain reporting units (brands) between operating segments. The changes in reportable segments were that the Forsman & Bodenfors, Observatory, Crispin Porter Bogusky, Bruce Mau and Vitro brands, previously within the Integrated Agencies Network, are now within the Brand Performance Network.
The Company has ithree
reportable segments as follows: “Integrated Agencies Network,”“Brand Performance Network” and the “Communications Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.”The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described throughout the Notes to the Unaudited Condensed Consolidated Financial Statements included herein.
•The Integrated Agencies Network includes five operating segments: the Anomaly Alliance, Constellation, the Doner Partner Network,
Code and Theory, and National Research Group. The operating segments offer an array of complementary services spanning our core capabilities of Digital Transformation, Performance Media & Data, Consumer Insights & Strategy, and Creativity & Communications. The brands included in the operating segments that comprise the Integrated Agencies Network reportable segment are as follows: Anomaly Alliance (Anomaly, Concentric, Hunter, Mono, YML and Scout (brands), Constellation (72andSunny, Colle McVoy, Instrument, Redscout, Hello Design, Team Enterprises, and Harris Insights), the Doner Partner Network (Doner, KWT Global, Harris X, Veritas, Doner North, Northstar, which is currently sunsetting, and Yamamoto (brands)), Code and Theory and National Research Group.
These operating segments share similar characteristics related to (i) the nature of their services; (ii) the type of clients and the methods used to provide services;
and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these operating segments may occasionally compete with each other for new business or have business move between them.
•The Brand Performance Network (“BPN”), previously referred to as the “Media Network” reportable segment, is comprised of a single operating segment. BPN includes a unified media and data management structure with omnichannel media placement, creative media consulting, influencer and business-to-business marketing capabilities.
/
36
Our Brands in this segment aim to provide scaled creative performance through developing and executing sophisticated omnichannel campaign strategies leveraging significant amounts of consumer data. BPN’s Brands combine media buying and planning across a range of digital and traditional platforms (out-of-home, paid search, social media, lead generation, programmatic, television, broadcast, among others) and includes multichannel brands Assembly, Brand New Galaxy, Crispin Porter Bogusky, Forsman & Bodenfors, Bruce Mau Design, Goodstuff, MMI Agency, digital creative & transformation consultancy Gale, B2B specialist Multiview, Observatory, Vitro, CX specialists Kenna, and travel media experts Ink.
•The Communications Network reportable segment is comprised of a single operating segment, our specialist
network that provides advocacy, strategic corporate communications, investor relations, public relations, online fundraising and other services to both corporations and political and advocacy organizations and consists of our Allison & Partners SKDK (including Sloane & Company), and Targeted Victory brands.
•All Other consists of the Company’s digital innovation group and Stagwell Marketing Cloud products such as PRophet and Reputation Defender (which was sold in September 2021).
•Corporate consists of corporate office expenses incurred in connection with the strategic resources provided to the operating segments, as well as certain other centrally managed expenses that are not fully allocated to
the operating segments. These office and general expenses include (i) salaries and related expenses for corporate office employees, including employees dedicated to supporting the operating segments, (ii) occupancy expenses relating to properties occupied by all corporate office employees, (iii) other office and general expenses including professional fees for the financial statement audits and other public company costs, and (iv) certain other professional fees managed by the corporate office. Additional expenses managed by the corporate office that are directly related to the operating segments are allocated to the appropriate reportable segment and the All Other category.
Income
before income taxes and equity in earnings of non-consolidated affiliates
i46,601
i13,182
i112,512
i40,466
Income
tax expense
i11,540
i5,183
i20,150
i9,205
Income
before equity in earnings of non-consolidated affiliates
i35,061
i7,999
i92,362
i31,261
Equity
in income (loss) of non-consolidated affiliates
i213
(i76)
i1,053
(i75)
Net
income
i35,274
i7,923
i93,415
i31,186
Net
income attributable to noncontrolling and redeemable noncontrolling interests
(i24,665)
(i9,994)
(i59,668)
(i10,987)
Net
income (loss) attributable to Stagwell Inc. common shareholders
$
i10,609
$
(i2,071)
$
i33,747
$
i20,199
Depreciation
and amortization:
Integrated Agencies Network
$
i18,316
$
i13,494
$
i55,206
$
i18,787
Brand
Performance Network
i8,205
i7,499
i25,044
i18,070
Communications
Network
i2,654
i2,110
i7,718
i5,087
All
Other
i1,206
i493
i2,457
i2,013
Corporate
i1,826
i1,194
i5,217
i2,165
Total
$
i32,207
$
i24,790
$
i95,642
$
i46,122
Stock-based
compensation
Integrated Agencies Network
$
i5,308
$
i32,431
$
i15,044
$
i32,431
Brand
Performance Network
i2,923
i2,620
i9,152
i2,620
Communications
Network
i671
i15,384
i1,077
i15,384
All
Other
i7
i16
i15
i16
Corporate
i3,349
i3,014
i8,122
i3,014
Total
$
i12,258
$
i53,465
$
i33,410
$
i53,465
The
Company’s CODM does not use segment assets to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
See Note 4 of the Notes included herein for a summary of the Company’s revenue by geographic region for the three and nine months ended September 30, 2022 and 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis are based on and should be read in conjunction with
our unaudited condensed consolidated financial statements and the notes related thereto included in Part 1, Item 1 of this Form 10-Q. The following discussion and analysis contains forward-looking statements and should be read in conjunction with the disclosures and information contained and referenced under the captions “Note about Forward-Looking Statements” and “Risk Factors” in this Form 10-Q and “Forward-Looking Statements” and “Risk Factors” in our 2021 Form 10-K. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. A description of the non-GAAP financial measures discussed in this section and reconciliations to the comparable GAAP financial measures are below.
In this section, the terms “Stagwell,”“we,”“us,”“our” and the “Company” refer (i) with respect to events occurring or periods ending before August
2, 2021, to Stagwell Marketing Group LLC and its direct and indirect subsidiaries and (ii) with respect to events occurring or periods ending on or after August 2, 2021, to Stagwell Inc. and its direct and indirect subsidiaries.
39
References to a “fiscal year” mean the Company’s year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 2022 means the period beginning January
1, 2022, and ending December 31, 2022).
Executive Summary
Overview
Stagwell conducts its business through its networks, which provide marketing and business solutions that realize the potential of combining data and creativity. Stagwell’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. Stagwell’s differentiation lies in its creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. Stagwell leverages its range of services in an integrated manner, offering strategic,
creative and innovative solutions that are technologically forward and media-agnostic. The Company’s work is designed to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
Stagwell manages its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are revenue, operating expenses, capital expenditures and the non-GAAP measures described below. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) growth from existing clients and the addition of new clients, (iii) growth by principal capability, (iv) growth from currency changes, and (v) growth from acquisitions. In addition to monitoring the foregoing
financial indicators, the Company assesses and monitors several non-financial performance indicators relating to the business performance of our networks. These indicators may include a network’s recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the network’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.
We continue to monitor the impact on our operations from worldwide events such as the COVID-19 pandemic and evolving strains of COVID-19, as well as the military conflict between Russia and Ukraine, which we do not expect to have a material adverse effect on our operations. If the impacts of either of the aforementioned
events are beyond our expectations, we believe we are well positioned to successfully work through such impacts for the foreseeable future.
Business Combination
On December 21, 2020, MDC and Stagwell Media LP announced that they had entered into the Transaction Agreement, providing for the combination of MDC with the “Stagwell Subject Entities.” The Stagwell Subject Entities comprised Stagwell Marketing and its direct and indirect subsidiaries.
On August 2, 2021 (the “Closing Date”), we completed the Transactions. In connection with the Transactions, among other things, (i) MDC completed a series of transactions pursuant to which it emerged
as a wholly owned subsidiary of the Company, converted into OpCo; (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into a Delaware corporation, succeeded MDC as the publicly-traded company and changed its name to Stagwell Inc.
The Transactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the legal acquirer and Stagwell Marketing treated as the accounting acquirer. As a result of the Transactions and the change in our business and operations, under applicable accounting principles, the historical financial results of
Stagwell Marketing prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presented in this Form 10-Q for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021, which do not include the financial results of MDC. See Note 3 of the Unaudited Condensed Consolidated Financial Statements included herein for additional information regarding the Transactions.
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Recent Developments
On
October 3, 2022, the Company acquired all of the equity interest of Maru Group Limited Ltd, a software experience & insights data platform, for approximately £23,000 in cash, subject to post-closing adjustments.
On October 3, 2022, the Company acquired the remaining 80% interest that it did not already own in Wolfgang, LLC, a creative agency combining consultancy, strategy and technology experience, for approximately $3,750 in cash and $5,250 in shares of Stagwell Inc. Class A Common Stock, subject to post-closing adjustments. The stock payment is subject to the seller’s continued employment throughout the period, with total shares vesting on July
1, 2025.
On October 3, 2022, the Company acquired the assets of Epicenter Experience LLC, an enterprise software company that leverages mobile and location data to map and sequence complex consumer behavior patterns, for approximately $9,729, subject to post-closing adjustments, as well as contingent consideration up to a maximum value of $5,000. The contingent consideration is based on meeting certain future earnings targets through 2024 and can be paid up to 25% in Stagwell Class A Common Stock.
Significant Factors Affecting our Business and Results of Operations
The most significant factors affecting our business and results of operations include national, regional, and local economic conditions,
our clients’ profitability, mergers and acquisitions of our clients, changes in top management of our clients and our ability to retain and attract key employees. New business wins and client losses occur due to a variety of factors. The two most significant factors are (i) our clients’ desire to change marketing communication firms, and (ii) the digital and data-driven products that our brands offer. A client may choose to change marketing communication firms for several reasons, such as a change in leadership where new management wants to retain an agency that it may have previously worked with. In addition, if the client is merged or acquired by another company, the marketing communication firm is often changed. Clients also change firms as a result of the firm’s failure to meet marketing performance targets or other expectations in client service delivery.
Seasonality
Historically,
we typically generate the highest quarterly revenue during the fourth quarter in each year. In addition, client concentration increases during election years due to the cyclical nature of our advocacy Brands. The highest volumes of retail related consumer marketing increase with the back-to-school season through the end of the holiday season.
Non-GAAP Measures
The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). In addition, the Company has included non-GAAP financial measures and ratios, which management uses to operate the business, which it believes provide useful supplemental information to both management and readers of this
report in making period-to-period comparisons in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by GAAP and should not be construed as an alternative to other titled measures determined in accordance with GAAP. The non-GAAP measures included are “organic revenue growth or decline,”“Adjusted EBITDA,” and “Adjusted diluted EPS.”
“Organic revenue growth” and “organic revenue decline” refer to the positive or negative results, respectively, of subtracting both the foreign exchange and acquisition (disposition) components from total revenue growth. The acquisition (disposition) component is calculated by aggregating prior period revenue for any acquired businesses, less the prior period revenue of any businesses that were
disposed of during the current period. The organic revenue growth (decline) component reflects the constant currency impact of (a) the change in revenue of the brands that the Company has held throughout each of the comparable periods presented, and (b) “Net acquisitions (divestitures).” Net acquisitions (divestitures) consists of (i) for acquisitions during the current year, the revenue effect from such acquisition as if the acquisition had been owned during the equivalent period in the prior year and (ii) for acquisitions during the previous year, the revenue effect from such acquisitions as if they had been owned during that entire year (or the same prior year period as the current reportable period), taking into account their respective pre-acquisition revenues for the applicable periods, and (iii) for dispositions, the revenue effect from such disposition as if they had been
disposed of during the equivalent period in the prior year.
Adjusted EBITDA is defined as Net income (loss) attributable to Stagwell Inc. common shareholders excluding non-operating income or expense to achieve operating income (loss), plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, and other items. Other items include restructuring costs, acquisition-related expenses, and non-recurring items.
Adjusted EPS is defined as Net income (loss) attributable to Stagwell Inc. common shareholders, plus net income attributable to Class C shareholders, excluding amortization expense, impairment and other losses, stock-based compensation, deferred acquisition consideration adjustments, discrete tax items, and other items, per diluted weighted average shares outstanding (if dilutive). Other items includes restructuring costs, acquisition-related
expenses, and non-recurring items.
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This analysis should be read in conjunction with the interim Unaudited Condensed Consolidated Financial Statements presented in this interim report and the annual Audited Consolidated Financial Statements and Management’s Discussion and Analysis presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).
All amounts are in dollars unless otherwise stated. Amounts reported in millions herein are computed based on the amounts in thousands. As a result, the sum of the components, and related calculations,
reported in millions may not equal the total amounts due to rounding.
The percentage changes included in the tables herein Item 2 that are not considered meaningful are presented as “NM.”
Segments
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Mark Penn, Chief Executive Officer and Chairman, to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the
Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
The CODM uses Adjusted EBITDA as a key metric, to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions.
Due to changes in the Company’s internal management and reporting structure in the second quarter of 2022, reportable segment results for periods presented prior to the second quarter of 2022 have been recast to reflect the reclassification
of certain reporting units (brands) between operating segments. The changes in reportable segments were that the Forsman & Bodenfors, Observatory, Crispin Porter Bogusky, Bruce Mau and Vitro brands, previously within the Integrated Agencies Network, are now within the Stagwell Brand Performance Network.
The Company has three reportable segments as follows: “Integrated Agencies Network,”“Brand Performance Network” and the “Communications Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.”The Company also reports corporate expenses, as further detailed below, as
“Corporate.” All segments follow the same basis of presentation and accounting policies as those described throughout the Notes to the Unaudited Condensed Consolidated Financial Statements included herein and Note 2 of the Company’s audited consolidated financial statements included in the 2021 Form 10-K.
In addition, Stagwell reports its corporate office expenses incurred in connection with the strategic resources provided to the networks, as well as certain other centrally managed expenses that are not fully allocated to the operating segments as Corporate. Corporate provides client and business development support to the networks as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions.
Income before income taxes and equity in earnings of non-consolidated affiliates
46,601
13,182
112,512
40,466
Income
tax expense
11,540
5,183
20,150
9,205
Income before equity in earnings of non-consolidated affiliates
35,061
7,999
92,362
31,261
Equity
in income (loss) of non-consolidated affiliates
213
(76)
1,053
(75)
Net income
35,274
7,923
93,415
31,186
Net
income attributable to noncontrolling and redeemable noncontrolling interests
(24,665)
(9,994)
(59,668)
(10,987)
Net income (loss) attributable to Stagwell Inc. common shareholders
$
10,609
$
(2,071)
$
33,747
$
20,199
Reconciliation
to Adjusted EBITDA
Net income (loss) attributable to Stagwell Inc. common shareholders
$
10,609
$
(2,071)
$
33,747
$
20,199
Non-operating
items (1)
59,444
(17,563)
139,298
(9,387)
Operating income (loss)
70,053
(19,634)
173,045
10,812
Depreciation
and amortization
32,207
24,790
95,642
46,122
Impairment and other losses
25,211
14,926
28,034
14,926
Stock-based
compensation
12,258
53,465
33,410
53,465
Deferred acquisition consideration
(29,789)
3,422
(14,420)
9,456
Other
items, net (1)
5,152
10,549
12,112
15,298
Adjusted EBITDA
$
115,092
$
87,518
$
327,823
$
150,079
(1)
Non-operating items includes items within the Statements of Operations, below Operating Income, and above Net income attributable to Stagwell Inc. common shareholders.
The components of operating results for the three months ended September 30,
2022 compared to the three months ended September 30, 2021 were as follows:
(1) See the Results of Operations section above for a reconciliation of Operating Income to Net Income
attributable to Stagwell Inc. common shareholders.
Revenue
Revenue for the three months ended September 30, 2022 was $663.8 million compared to $466.6 million for the three months ended September 30, 2021, an increase of $197.2 million.
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Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
For the three months ended September 30, 2022, organic net revenue increased $47.7 million, or 11.7%. Organic revenue grew across all segments. Such growth was primarily attributable to increased spending by existing clients and business with new clients. The increase in net acquisition (divestitures) was primarily driven by the acquisitions of MDC,
Brand New Galaxy (“BNG”), GoodStuff Holdings Limited (“Goodstuff”), and TMA Direct, Inc. (“TMA Direct”).
The geographic mix in net revenues for the three months ended September 30, 2022 and 2021 is as follows:
The Company recognized an impairment and other losses charge of $25,211 for the three months ended September 30, 2022, primarily related to the impairment of goodwill totaling $23,139. The goodwill impairment was to write-down the carrying value in excess of the fair value at three reporting units, one within the Integrated Agencies Network, one within the Brand Performance Network and one within the All Other category. The expense was recorded within Impairment and other losses on the Unaudited Condensed Consolidated Statements of Operations.
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As of September
30, 2022, the Company assessed whether it was more likely than not that the carrying amount of its reporting units exceeded their fair value. As a result of this assessment, the Company completed a quantitative impairment test for certain reporting units that resulted in the impairment charge due to a combination of changes in fair value measures such as an increase in interest rates and decrease in market multiples of comparable public companies, as well as actual performance below previous financial forecasts. The Company uses a combination of the income approach, which incorporates the use of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples
based on market data. The Company generally applies an equal weighting to the income and market approaches for the impairment test. The income approach and the market approach both require the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates. These estimates and assumptions may vary between each reporting unit depending on the facts and circumstances specific to that reporting unit. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit. For the tests performed as of September 30, 2022, the discount rate we used for our reporting units tested ranged between 14.0% and 15.5%, and the terminal value growth rate ranged between 1.0% and 3.0%. The
terminal value growth rate represents the expected long-term growth rate for our industry, which incorporates the type of services each reporting unit provides as well as the global economy. For the tests performed as of September 30, 2022, the revenue growth rates for our reporting units used in our analysis were between 1.0% and 10.0%. Factors influencing the revenue growth rates include the nature of the services the reporting unit provides for its clients, the geographic locations in which the reporting unit conducts business and the maturity of the reporting unit.
To the extent that (i) there is underperformance in one or more reporting units (ii) a potential recession further disrupts the economic environment impacting the performance or (iii) interest rates continue to rise in response to persistent inflation, the fair value of
one or more of the reporting units could fall below their carrying value, resulting in a goodwill impairment charge.
The Company's annual goodwill test as of October 1, 2022 is in process. Based on our initial assessment, the fair value of seven reporting units, with goodwill of approximately $590 million, exceed their carrying value by less than 20%. As we finalize the annual goodwill impairment test, there could be reductions to the fair value of those reporting units, resulting in a goodwill impairment charge.
Operating Income (Loss)
Operating income for the three months ended September 30, 2022 was $70.1 million compared to operating loss of $19.6 million
for the three months ended September 30, 2021, representing an increase of $89.7 million.
The three months ended September 30, 2022 was impacted primarily by an increase in revenue and expenses due to the acquisition of MDC, BNG, Goodstuff and TMA Direct, and costs associated with an increase in services provided. Stock-based compensation expense decreased primarily driven by awards issued to employees in the third quarter of 2021, in connection with the acquisition of MDC, that fully vested in the third quarter of 2021 and the first quarter of 2022. Deferred acquisition costs decreased primarily as the result of a decrease in the fair value of future earn out payments as a result of lower forecasted financial results. Impairment and other losses primarily increased due to the impairment of goodwill and a right-of-use lease asset
in the third quarter of 2022. Depreciation and amortization was higher primarily due to the recognition of amortizable intangible assets in connection with the acquisitions of MDC, BNG, Goodstuff and TMA Direct. Other items, net decreased due to the reduction of merger-related expenses.
Other, net
Other, net, for the three months ended September 30, 2022 was income of $0.1 million, compared to income of $45.6 million for the three months ended September 30, 2021, representing an decrease of $45.5 million primarily driven by sale of Reputation Defender in the third quarter of 2021.
Foreign Exchange Transaction Gain (Loss)
The foreign exchange loss for the three months ended September
30, 2022 was $3.9 million compared to a loss of $0.9 million for the three months ended September 30, 2021.
Interest Expense, Net
Interest expense, net, for the three months ended September 30, 2022 was $19.7 million compared to $11.9 million for the three months ended September 30, 2021, representing an increase of $7.8 million, primarily driven by a higher level of debt, principally due to amounts outstanding under the Combined Credit Agreement.
Income Tax Expense
The Company had an income tax expense for the three months ended September
30, 2022 of $11.5 million (on a pre-tax income of $46.6 million resulting in an effective tax rate of 24.8%) compared to income tax expense of $5.2 million (on pre-tax income of $13.2 million resulting in an effective tax rate of 39.3%) for the three months ended September 30, 2021.
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The difference in the effective tax rate of 24.8% in the three months ended September 30, 2022 as compared to 39.3% in the three months ended September 30, 2021 was primarily attributable to higher non-deductible share based compensation in September 30, 2021, and favorable return to
provision adjustments at September 30, 2022, offset in part by the impact of non-deductible goodwill impairments in September 30, 2022.
Noncontrolling and Redeemable Noncontrolling Interests
The effect of noncontrolling and redeemable noncontrolling interests for the three months ended September 30, 2022 was $24.7 million compared to $10.0 million for the three months ended September 30, 2021.
Net Income (Loss) Attributable to Stagwell Inc. Common Shareholders
As a result of the foregoing, net income attributable to Stagwell Inc. common shareholders for the three months ended September
30, 2022 was $10.6 million compared to net loss attributable to Stagwell Inc. common shareholders of $2.1 million for the three months ended September 30, 2021.
Earnings Per Share
Diluted EPS and adjusted diluted EPS for the three months ended September 30, 2022 was as follows:
Reported
(GAAP)
Adjustments
Reported (Non-GAAP)
(Dollars in Thousands)
Net income attributable to Stagwell Inc. common shareholders
$
10,609
$
16,159
$
26,768
Weighted
average number of common shares outstanding
130,498
130,498
130,498
Adjusted Diluted EPS
$
0.08
$
0.12
$
0.21
Adjustments
to Net Income (loss) attributable to Stagwell Inc. Common shareholders
Pre-Tax
Tax
Net
(Dollars in Thousands)
Amortization
$
23,814
$
(4,763)
$
19,051
Impairment
and other losses
25,211
(414)
24,797
Stock-based compensation
12,258
(2,452)
9,806
Deferred acquisition consideration
(29,789)
5,958
(23,831)
Other
items, net
5,152
(1,030)
4,122
Discrete tax items
—
2,680
2,680
$
36,646
$
(21)
$
36,625
Less:
Net income attributable to Class C shareholders
(20,466)
Net income attributable to Stagwell Inc. common shareholders
$
16,159
Adjusted EBITDA
Adjusted EBITDA for the three months ended September 30, 2022 was $115.1 million, compared to $87.5 million for the three months ended September
30, 2021, representing an increase of $27.6 million, driven by the increase in revenue, partially offset by higher operating expenses.
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Integrated Agencies Network
The components of operating results for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
Revenue
for the three months ended September 30, 2022 was $367.1 million compared to $269.1 million for the three months ended September 30, 2021, an increase of $98.1 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
The increase in organic net revenue was primarily attributable to increased spending by existing and new clients, primarily driven by creative, digital transformation and consumer insights services. The increase in net acquisitions (divestitures) was primarily driven by the acquisition of MDC.
The increase in expenses was primarily driven by the impact of
the acquisition of MDC and costs associated with an increase in services provided. Deferred acquisition consideration decreased as a result of payments made during 2022. Depreciation and amortization increased primarily due to the recognition of amortizable intangible assets following the acquisition of MDC. Stock-based compensation expense decreased primarily driven by awards issued to employees in the third quarter of 2021 in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022. Impairment and other losses resulted from the impairment of one right-of-use lease asset and associated leasehold improvements.
Operating income and Adjusted EBITDA were higher, driven by an increase in revenues, partially offset by higher expenses as detailed above.
Brand
Performance Network
The components of operating results for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
Revenue
for the three months ended September 30, 2022 was $171.5 million compared to $122.8 million for the three months ended September 30, 2021, an increase of $48.6 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
The increase in organic net revenue was primarily attributable to new clients and increased spending by existing clients. The increase in net acquisitions (divestitures) was primarily driven by the acquisitions of MDC, GoodStuff, and BNG.
The increase in expenses was primarily driven by the impact of the acquisitions of MDC, BNG and Goodstuff and costs associated
with an increase in services provided. Deferred acquisition consideration increased primarily due to the assumption of additional liabilities in connection with the acquisitions of BNG and Goodstuff. Impairment and other losses decreased as a result of the write-down of certain trade names that were no longer in use in the third quarter of 2021, partially offset by the impairment of goodwill in the third quarter of 2022.
Operating income (loss) and Adjusted EBITDA increased due to an increase in revenues, partially offset by higher expenses as detailed above.
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Communications Network
The
components of operating results for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
Revenue
for the three months ended September 30, 2022 was $121.8 million compared to $67.3 million for the three months ended September 30, 2021, an increase of $54.4 million.
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Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
The increase in organic net revenue was attributable to increased spending by existing and new clients, primarily driven by higher public relations as well as advocacy services, as these are typically higher during election years. The increase in net acquisitions (divestitures) was driven by the acquisition of MDC and TMA Direct.
The increase in expenses
was driven by the impact from the acquisitions of MDC and TMA Direct and costs associated with an increase in services provided. Deferred acquisition consideration decreased due to the purchase of the remaining interest we did not already own in one of our Brands on October 1, 2021. In the third quarter of 2022, the fair value of the deferred acquisition consideration liability associated with this Brand was reduced as a result of a decrease in the fair value. Stock-based compensation expense decreased primarily driven by awards issued to employees in the third quarter of 2021 in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022.
Operating income (loss) and Adjusted EBITDA were driven by an increase in revenues, partially offset by higher expenses as detailed above.
All Other
The components of operating results for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
Revenue
for the three months ended September 30, 2022 was $3.4 million compared to $7.4 million for the three months ended September 30, 2021, a decrease of $4.0 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
The decrease related to net acquisitions (divestitures) was primarily attributable to the sale of Reputation Defender in the third quarter of 2021.
The increase in impairment and other losses was driven by the impairment of goodwill.
Increases in operating loss and decreases in Adjusted EBITDA were driven by a
decrease in revenues and an increase in expenses, primarily driven by the sale of Reputation Defender and the impairment of goodwill.
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Corporate
The components of operating results for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
Operating
expenses increased primarily in connection with an increase in stock-based compensation expense as a result of awards issued in the first quarter of 2022, partially offset by the reduction of professional fees and other merger-related expenses associated with the acquisition of MDC.
(1)
See the Results of Operations section above for a reconciliation of Operating Income to Net Income attributable to Stagwell Inc. common shareholders.
Revenue
Revenue for the nine months ended September 30, 2022 was $1,979.6 million compared to $857.4 million for the nine months ended September 30, 2021, an increase of $1,122.2 million.
Net Revenue
The components of the fluctuations in net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
For the nine months ended September 30, 2022, organic net revenue increased $224.6 million, or 30.0%. There was organic revenue growth across all segments, primarily attributable to increased spending by existing clients and business with
new clients. The increase in net acquisitions (divestitures) was primarily driven by the acquisitions of MDC, BNG, TMA Direct and Goodstuff.
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The geographic mix in net revenues for the nine months ended September 30, 2022 and 2021 is as follows:
The Company recognized an impairment and other losses charge of $28,034 for the nine months ended September 30, 2022, primarily related to the impairment of goodwill totaling $23,139. The goodwill impairment was to write-down the carrying value in excess of the fair value at three reporting units, one within the Integrated Agencies Network, one within the Brand Performance Network and one within the All Other category. The expense was recorded within Impairment and other losses on the Unaudited Condensed Consolidated Statements of Operations. See the Consolidated Results of Operations for the three months ended September 30, 2022, above, for additional information regarding our goodwill impairment assessment.
In
addition, in the three and nine months ended September 30, 2022, the Company recorded a charge of $2,014 primarily to reduce the carrying value of one of its right-of-use lease assets and related leasehold improvements. This right-of-use lease asset related to an agency within the Integrated Agencies Network. As a result of subleasing the space, the Company evaluated the facts and circumstances related to the use of the assets which indicated that they may not be recoverable. Using the sublease income to develop expected future cash flows, it was determined that the fair value of the asset was less than its carrying value. This impairment charge is included in Impairment and other losses within the Unaudited Condensed Consolidated Statements of Operations.
Operating
Income
Operating income for the nine months ended September 30, 2022 was $173.0 million compared to $10.8 million for the nine months ended September 30, 2021, representing an increase of $162.2 million.
Operating income for the nine months ended September 30, 2022 was impacted primarily by an increase in revenue and expenses due to the acquisitions of MDC, BNG, TMA Direct and Goodstuff and costs associated with an increase in services provided. Stock-based compensation expense decreased, primarily driven by awards issued to employees in the third quarter of 2021, in connection with the acquisition of MDC, that fully vested in the third quarter of 2021 and the first quarter of 2022, partially offset by awards issued in the first quarter
of 2022. Deferred acquisition consideration decreased primarily due to the assumption of additional liabilities in connection with the acquisitions of MDC, BNG, TMA Direct and Goodstuff, more than offset by the negative change in fair value associated with a Brand in which the deferred acquisition consideration liability originated from the purchase of the remaining interest we did not already own in the fourth quarter of 2021. Depreciation and amortization was higher primarily due to the recognition of amortizable intangible assets in connection with the acquisitions of MDC, BNG, TMA Direct and Goodstuff. Impairment and other losses primarily increased due to the impairment of goodwill and a right-of-use lease asset in the third quarter of 2022.
Other, net
Other, net, for the nine months ended September 30, 2022 was income of $0.18
million, compared to income of $46.8 million for the nine months ended September 30, 2021.
Foreign Exchange Transaction Gain (Loss)
The foreign exchange loss for the nine months ended September 30, 2022 was $4.2 million compared to a loss of $2.0 million for the nine months ended September 30, 2021.
Interest Expense, Net
Interest expense, net, for the nine months ended September 30, 2022 was $56.6 million compared to $15.2 million for the nine months ended September 30, 2021, representing an increase of $41.4 million, primarily driven by a higher level
of debt in connection with the acquisition of MDC.
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Income Tax Expense
The Company had an income tax expense for the nine months ended September 30, 2022 of $20.2 million (on a pre-tax income of $112.5 million resulting in an effective tax rate of 17.9%) compared to income tax expense of $9.2 million (on pre-tax income of $40.5 million resulting in an effective tax rate of 22.7%) for the nine months ended September 30, 2021.
The difference in the effective tax rate of 17.9% in the nine months
ended September 30, 2022 as compared to 22.7% in the nine months ended September 30, 2021 was primarily related to favorable adjustments for share based compensation vesting and return to provision adjustments at September 30, 2022, offset in part by the impact of non-deductible goodwill impairments in September 30, 2022.
Noncontrolling and Redeemable Noncontrolling Interests
The effect of noncontrolling and redeemable noncontrolling interests for the nine months ended September 30, 2022 was $59.7 million compared to $11.0 million for the nine months ended September 30, 2021.
Net
Income (Loss) Attributable to Stagwell Inc. Common Shareholders
As a result of the foregoing, net income attributable to Stagwell Inc. common shareholders for the nine months ended September 30, 2022 was $33.7 million compared to net income attributable to Stagwell Inc. common shareholders of $20.2 million for the nine months ended September 30, 2021.
Earnings Per Share
Diluted EPS and adjusted diluted EPS for the nine months ended September 30, 2022 was as follows:
Reported
(GAAP)
Adjustments
Reported (Non-GAAP)
(Dollars in Thousands)
Net income attributable to Stagwell Inc. common shareholders
$
33,747
$
50,815
$
84,562
Weighted
average number of common shares outstanding
131,550
131,550
131,550
Adjusted Diluted EPS
$
0.26
$
0.39
$
0.64
Adjustments
to Net Income (loss) attributable to Stagwell Inc. Common shareholders
Pre-Tax
Tax
Net
(Dollars in Thousands)
Amortization
$
70,541
$
(14,108)
$
56,433
Impairment
and other losses
28,034
(979)
27,055
Stock-based compensation
33,410
(6,682)
26,728
Deferred acquisition consideration
(14,420)
2,884
(11,536)
Other
items, net
12,112
(2,422)
9,690
Discrete tax items
—
6,805
6,805
$
129,677
$
(14,502)
$
115,175
Less:
Net income attributable to Class C shareholders
(64,360)
Net income attributable to Stagwell Inc. common shareholders
$
50,815
Adjusted EBITDA
Adjusted EBITDA for the nine months ended September 30, 2022 was $327.8 million, compared to $150.1 million for the nine months ended September
30, 2021, representing an increase of $177.7 million, driven by the increase in revenue, partially offset by higher operating expenses and the impact of the acquisitions of MDC, GoodStuff, TMA Direct and BNG.
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Integrated Agencies Network
The components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
Revenue
for the nine months ended September 30, 2022 was $1,095.8 million compared to $419.7 million for the nine months ended September 30, 2021, an increase of $676.1 million.
Net Revenue
The components of the fluctuations in net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
The growth in organic net revenue was primarily attributable to increased spending by existing and new clients, primarily driven by creative, digital transformation and consumer insights services. The increase in net acquisitions (divestitures) was primarily driven by the acquisition of MDC.
The increase in expenses was primarily driven by the impact of the acquisition
of MDC and costs associated with an increase in services provided. Stock-based compensation expense decreased primarily driven by awards issued to employees in the third quarter of 2021 in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022. Depreciation and amortization grew due to the recognition of amortizable intangible assets primarily in connection with the acquisition of MDC. Impairment and other losses increased primarily due to the impairment of a right-of-use lease asset in the third quarter of 2022.
Operating income and Adjusted EBITDA were higher driven by an increase in revenues, partially offset by higher expenses as detailed above.
Brand Performance Network
The
components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
Revenue for the nine months ended September 30, 2022 was $563.5 million compared to $257.1 million for the nine months ended September 30, 2021, an increase of $306.4 million.
Net Revenue
The
components of the fluctuations in net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
The increase in organic net revenue was primarily attributable to new clients and increased spending by existing clients. The increase in net acquisitions (divestitures) was primarily driven by the acquisitions of MDC, Goodstuff and BNG.
The increase in expenses was primarily driven by the impact of the acquisitions of MDC, BNG and Goodstuff and costs associated
with an increase in services provided. Deferred acquisition consideration increased primarily due to the assumption of additional liabilities in connection with the acquisitions of MDC, Goodstuff and BNG. Stock-based compensation expense increased, primarily driven by share based awards issued to employees in the first quarter of 2022 as well as increases in the fair value of profits interest awards in 2022. Depreciation and amortization expense increased primarily due to the recognition of amortizable intangible assets in connection with the acquisitions of MDC, Goodstuff and BNG. Impairment and other losses of $14.8 million for the nine months ended September 30, 2021 relates to the write-down of certain trade names no longer in use, compared to impairment and other losses for the nine months ended September 30, 2022 of $8.1 million which relates to the impairment of
goodwill.
Operating income (loss) and Adjusted EBITDA were driven by an increase in revenues, partially offset by higher expenses as detailed above.
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Communications Network
The components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
Revenue for the nine months ended September 30, 2022 was $311.1 million compared to $157.8 million for the nine months ended September 30, 2021, an increase of $153.3 million.
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Net Revenue
The components of the fluctuations in net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
The increase in organic net revenue was primarily attributable to increased spending by existing and new clients, primarily driven by higher public relations as well as advocacy services, as these are typically higher during election years. The increase in net acquisitions (divestitures) was driven by the acquisitions of MDC and TMA Direct.
The increase in
expenses was primarily driven by the impact from the acquisitions of MDC and TMA Direct and costs associated with an increase in services provided. Deferred acquisition consideration decreased primarily due to the reduction in fair value associated with the deferred acquisition consideration assumed in connection with the purchase of the remaining interest in one of our Brands on October 1, 2021. Stock-based compensation expense decreased primarily driven by awards issued to employees in the third quarter of 2021 in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022. Depreciation and amortization increased primarily due to the recognition of amortizable intangible assets in connection with the acquisitions of MDC and TMA Direct.
Operating income and Adjusted EBITDA were driven by an increase in revenues and lower
expenses as detailed above.
All Other
The components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
Revenue
for the nine months ended September 30, 2022 was $9.2 million compared to $22.9 million for the nine months ended September 30, 2021, a decrease of $13.6 million.
Net Revenue
The components of the fluctuations in net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
The increase in organic net revenue was attributable to services at the central innovations group.
The decrease related to net acquisitions (divestitures) was primarily attributable to the sale of Reputation Defender in the third quarter of 2021.
The increases in operating loss and decrease in Adjusted EBITDA
were primarily driven by a decrease in revenues and expenses due to the sale of Reputation Defender, and an increase in impairment and other losses due to the impairment of goodwill in the third quarter of 2022.
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Corporate
The components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
Operating
expenses increased primarily in connection with the acquisition of MDC. In addition, stock-based compensation expense increased, primarily driven by awards issued to employees in the first quarter of 2022.
Liquidity and Capital Resources:
The following table provides summary information about the Company’s liquidity position:
Net cash (used in) provided by investing activities
(64,284)
153,721
Net
cash used in financing activities
(12,312)
(151,860)
We continue to monitor the impact on our liquidity from worldwide events such as the COVID-19 pandemic and evolving strains of COVID-19, as well as the military conflict between Russia and Ukraine, which we do not expect to have a material adverse effect on our liquidity. If the impacts of either of the aforementioned events are beyond our expectations, we believe we are well positioned to work through such impacts for the foreseeable future.
The Company had cash and cash equivalents of $165.3 million and $184.0 million as of September
30, 2022 and December 31, 2021, respectively. The Company expects to maintain sufficient cash and/or available borrowings to fund operations for the next twelve months. The Company has historically maintained and expanded its business using cash generated from operating activities, funds available under its revolving credit agreement, and other initiatives, such as obtaining additional debt and equity financing. On September 30, 2022, the Company had $245.0 million of borrowings outstanding, $25.0 million of outstanding and undrawn letters of credit resulting in $230.0 million available under its $500.0 million Combined
Credit Agreement (as defined and discussed in Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein).
The Company’s obligations extending beyond twelve months primarily consist of deferred acquisition consideration payments, purchases of noncontrolling interests, capital expenditures, scheduled lease obligation payments, and interest payments on borrowings under the Company’s 5.625% Notes (as defined in Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein) and Combined Credit Agreement. The Company expects to make estimated cash payments in the future to satisfy obligations under the Tax
Receivables Agreement (“TRA”) (see Note 14 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional details). The amount and timing of payments are contingent on the Company achieving certain tax savings, if any, that we actually realize, or in certain circumstances are deemed to realize as a result of (i) increases in the tax basis of OpCo’s assets resulting from exchanges of Paired Units (each as defined in Note 11 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein) for shares of the Company’s Class A Common Stock or cash, as applicable, and (ii) certain other tax benefits related to the Company making payments under the TRA.
Based on the current outlook, the Company believes future cash flows from operations, together with the Company’s existing cash balance and availability of funds under the Combined Credit Agreement,
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will be sufficient to meet the Company’s anticipated cash needs for the next twelve months. The Company’s ability to make scheduled deferred acquisition consideration payments, principal and interest payments, to refinance indebtedness or
to fund planned capital expenditures or other obligations will depend on future performance, which is subject to general economic conditions, the competitive environment and other factors, including those described in this Form 10-Q and in the Company’s other SEC filings.
On March 23, 2022, the board of directors authorized a stock repurchase program (the “Repurchase Program”) under which we may repurchase up to $125 million of shares of our outstanding Class A Common Stock. The Repurchase Program will expire on March 23, 2025.
Under the Repurchase Program, share repurchases may be made at our discretion from time to time in open market transactions at prevailing market prices (including through
trading plans that may be adopted in accordance with Rule 10b5-1 of the Exchange Act), in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions, regulatory requirements, the availability of funds, and other considerations we deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directors will review the Repurchase Program periodically and may authorize adjustments of its terms.
As of September 30, 2022, there were 4.0 million shares of Class A Common Stock repurchased under the Repurchase Program at an aggregate value, excluding fees, of $28.7 million. These were purchased at an average
share price of $7.16 per share. The remaining value of shares of Class A Common Stock permitted to be repurchased under the Repurchase Program was $96.2 million as of September 30, 2022.
Cash Flows
Operating Activities
Cash flows provided by operating activities for the nine months ended September 30, 2022 were $73.1 million, primarily driven by earnings, partially offset by unfavorable working capital requirements, including the timing of media supplier payments.
Cash flows provided by operating activities for the nine months ended September 30, 2021 were $20.1 million, primarily driven by earnings, partially offset by unfavorable working capital
requirements.
Investing Activities
Cash flows used in investing activities were $64.3 million for the nine months ended September 30, 2022, primarily driven by $37.5 million in acquisitions and $25.5 million in capital expenditures.
Cash flows provided by investing activities were $153.7 million for the nine months ended September 30, 2021, primarily driven by the addition of $130.2 million of cash from MDC cash in connection with the acquisition of MDC, and $37.2 million from the sale of Reputation Defender, partially offset by capital expenditures of $13.7 million.
Financing Activities
During the nine months ended September
30, 2022, cash flows used in financing activities were $12.3 million, primarily driven by $134.5 million in net borrowings under the Combined Credit Agreement, more than offset primarily by $61.1 million of deferred acquisition consideration payments, $38.5 million of distributions to noncontrolling interests, $28.7 million in stock repurchases under the Repurchase Program, and $15.0 million related to shares acquired and cancelled in connection with the vesting of stock awards.
During the nine months ended September 30, 2021, cash flows used in financing activities were $151.9 million, which primarily consisted of $884.4 million for the repurchase of the Company’s 7.50% Senior Notes due 2024, $127.1 million in net payments under the
Company’s previous revolving credit agreement, $19.2 million in distributions to minority interest holders, and distributions of $204.9 million to Stagwell Media, offset by receipt of $1.1 billion from the issuance of the 5.625% Notes.
Total Debt
Debt, net of debt issuance costs, as of September 30, 2022 was $1,329.1 million as compared to $1,191.6 million outstanding at December 31, 2021. See Note 8 to the Unaudited Condensed Consolidated Financial Statements included herein for information regarding the Company’s 5.625% Notes, and the Combined Credit Agreement, which provides for a $500.0 million senior secured revolving credit facility with a five-year maturity.
The
Company is currently in compliance with all of the terms and conditions of the Combined Credit Agreement, and management believes, based on its current financial projections, that the Company will be in compliance with its covenants over the next twelve months.
65
If the Company loses all or a substantial portion of its lines of credit under the Combined Credit Agreement, or if the Company uses the maximum available amount under the agreement, it will be required to seek other sources of liquidity. If the
Company were unable to find these sources of liquidity, for example through an equity offering or access to the capital markets, the Company’s ability to fund its working capital needs and any contingent obligations with respect to acquisitions and redeemable noncontrolling interests would be adversely affected.
On April 28, 2022, the Company amended the Combined Credit Agreement. Among other things, this amendment replaced any references to LIBOR with references to SOFR. Borrowings pursuant to the Combined Credit Agreement, as amended, bear interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the
prime rate of interest in effect on such day, (b) the federal funds effective rate plus 0.50% and (c) SOFR plus 1% in each case, plus the applicable margin (calculated based on the Company’s Total Leverage Ratio, as defined in the Combined Credit Agreement) at that time. Additionally, the Combined Credit Agreement was amended to remove certain pre-commencement notice provisions for certain acquisitions under $50 million in the aggregate, to increase the amount permitted for certain investments allowed under the Combined Credit Agreement, and, subject to certain conditions, to allow for the repurchase of Stagwell Inc. stock in an amount not to exceed $100 million in any fiscal year. All other substantive terms of the Combined Credit Agreement remain unchanged.
Pursuant to the Combined Credit Agreement, the
Company must maintain a Total Leverage Ratio (as defined in the Combined Credit Agreement) below a threshold established in the Combined Credit Agreement. For the period ended September 30, 2022, the Company’s calculation of each of this ratio, and the maximum permitted under the Combined Credit Agreement, respectively, were calculated based on the trailing twelve months as follows:
These ratios and measures are not based on GAAP and are not presented as alternative measures of operating performance or liquidity. Some of these ratios and measures include, among other things, pro forma adjustments for acquisitions, one-time charges, and other items, as defined in the Combined Credit Agreement. They are presented here to demonstrate compliance with the covenants in the Combined Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company.
Material Cash Requirements
The Company’s Agencies enter into contractual commitments
with media providers and agreements with production companies on behalf of its clients at levels that exceed the revenue from services. Some of our agencies purchase media for clients and act as an agent for a disclosed principal. These commitments are included in Accounts payable and Accruals and other liabilities when the media services are delivered by the media providers. Stagwell takes precautions against default on payment for these services and has historically had a very low incidence of default. Stagwell is still exposed to the risk of significant uncollectible receivables from our clients. The risk of a material loss could significantly increase in periods of severe economic downturn.
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments. See Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements included
herein for additional information regarding contingent deferred acquisition consideration.
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity. See Note 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional information
regarding noncontrolling interests and redeemable noncontrolling interests.
The Company intends to finance the cash portion of these contingent payment obligations using available cash from operations, borrowings under the Combined Credit Agreement (or any refinancings thereof), and, if necessary, through the incurrence of additional debt and/or issuance of additional equity. The ultimate amount payable in the future relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised.
Critical Accounting Policies
See the
Company’s 2021 Form 10-K for information regarding the Company’s critical accounting policies.
Stagwell Inc. is the successor SEC registrant to MDC Partners Inc. Stagwell Inc.’s Internet website address is www.stagwellglobal.com.
The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Exchange Act, will be made available free of charge through the Company’s website as soon as reasonably practical after those reports are electronically filed with, or furnished to, the SEC. The Company announces material information to the public through a variety of means, including filings with the SEC, press releases, public conference
calls, and its website. The Company uses these channels, as well as social media, including its Twitter account (@stagwell) and its LinkedIn page (https://www.linkedin.com/company/stagwell/), to communicate with investors and the public about the Company, its products and services, and other matters. Therefore, investors, the media, and others interested in the Company are encouraged to review the information the
Company makes public in these locations, as such information could be deemed to be material information. Information on or that can be accessed through the Company’s websites or these social media channels is not part of this Form 10-Q, and the inclusion of the Company’s website addresses and social media channels are inactive textual references only.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
In the normal course of business, the Company is exposed to market risk related to interest rates, foreign currencies and impairment risk.
Debt Instruments: At September 30, 2022, the Company’s debt obligations consisted of amounts outstanding under its Combined Credit Agreement and the 5.625% Notes. The 5.625% Notes bear a fixed 5.625% interest rate. The revolving credit agreement bears interest at variable rates based upon the Secured Overnight Financing Rate (“SOFR”), EURIBOR, and SONIA depending on the duration of the borrowing product. The
Company’s ability to obtain the required bank syndication commitments depends in part on conditions in the bank market at the time of syndication.
On April 28, 2022, the Company amended the Combined Credit Agreement. This amendment replaced references to LIBOR with references to SOFR. With regard to our variable rate debt, a 10% increase or decrease in interest rates would not be material to our interest expense or cash flows.
Foreign Exchange: While the Company primarily conducts business in markets that use the U.S. dollar, the Canadian dollar, the Euro and the British Pound, its non-U.S. operations transact business in numerous different
currencies. The Company’s results of operations are subject to risk from the translation to the U.S. dollar of the revenue and expenses of its non-U.S. operations. The effects of currency exchange rate fluctuations on the translation of the Company’s results of operations are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 2 of the Company’s audited consolidated financial statements included in the 2021 Form 10-K. For the most part, revenues and expenses incurred related to the non-U.S. operations are denominated in their functional currency. This reduces the impact that fluctuations in exchange rates will have on profit margins. Translation of intercompany
debt, which is not intended to be repaid, is included in cumulative translation adjustments. Translation of current intercompany balances are included in net income (loss). The Company generally does not enter into foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
Impairment Risk: For the nine months ended September 30, 2022, the Company recognized an impairment charge of $23,139 to write-down the carrying value of goodwill in excess of the fair value. The
Company reviews goodwill for impairment annually as of October 1st of each year or more frequently if indicators of potential impairment exist.
The Company’s annual goodwill test as of October 1, 2022 is in process. To the extent that (i) there is underperformance in one or more reporting units (ii) a potential recession further disrupts the economic environment impacting the performance or (iii) interest rates continue to rise in response to persistent inflation, the fair value of one or more of the reporting units could fall below their carrying value, resulting in a goodwill impairment charge.
In addition, in the nine months ended September 30, 2022, the
Company recorded an impairment charge of $2,014 primarily to reduce the carrying value of one of its right-of-use lease assets and related leasehold improvements.
See the Critical Accounting Estimates section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 2021 Form 10-K for information related to impairment testing and the risk of potential impairment charges in future periods.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures
designed to ensure that information required to be included in our SEC reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer
67
(“CEO”), who is our principal executive officer, and Chief Financial Officer (“CFO”), who is our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure
controls and procedures can provide only reasonable assurance of achieving their control objectives. However, our disclosure controls and procedures are designed to provide reasonable assurances of achieving our control objectives.
We conducted an evaluation, under the supervision and with the participation of our management, including our CEO, CFO and management Disclosure Committee, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, and in light of the material weaknesses identified in our internal control over financial reporting as disclosed in our Form 10-K for the fiscal year ended December 31, 2021, our CEO and CFO concluded that, as of September 30, 2022, our disclosure
controls and procedures were not effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
The Company identified material weaknesses in its internal controls over financial reporting as of December 31, 2021 as described in its 2021 Form 10-K. The Company has finalized its remediation plan and has executed the following remediation activities through September 30, 2022:
•Hired a Senior Vice President of Sarbanes-Oxley Act (“SOX”)reporting directly to the Chief
Financial Officer with the appropriate level of knowledge and experience to lead the development and execution of the remediation plan.
•Established a SOX Steering Committee, that monitors and advises with respect to the remediation plan.
•Enhanced communications with the Audit Committee for increased oversight. The Company also formally reports quarterly to the Audit Committee regarding progress against the remediation plan.
•Assessed the state of the entire system of internal control, including information technology systems and controls, at the consolidated and entity levels. The results of this assessment have allowed management to identify the necessary remediation activities
to address the outstanding material weaknesses.
•Appointed third-party consultants and additional staff to assist in the design and implementation of business process and information technology control activities, enhancement of existing business process and information technology control activities, and assessment of the size and structure of its staff.
•Conducted a detailed qualitative, quantitative, and fraud risk assessment.
•Conducted multiple SOX trainings to control owners throughout the Company.
The Company
is also undergoing a finance transformation, which involves a phased deployment of new enterprise resource planning and human resource information systems and a shared service platform. The Company will continue executing the above remediation activities through the end of the first quarter of 2023 with the goal of having the system of internal control designed and in operation from March 31, 2023. However, the material weaknesses will not be considered remediated until the system of internal control has operated for a sufficient period of time and results of testing by management conclude the internal controls are operating effectively. The Company will provide an update on the progress of its remediation plan throughout the fiscal year.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we are involved in various legal proceedings. We do not currently expect that these proceedings will have a material adverse effect on our results of operations, cash flows or financial position.
Item 1A. Risk Factors
There have been no material changes to the risk factors in Part I, Item 1A “Risk Factors” of our 2021 Form 10-K. These
risks could materially and adversely affect our business, results of operations, financial condition, cash flows, projected results and future prospects. These risks are not exclusive and additional risks to which we are subject include the factors listed under “Note About Forward-Looking Statements” and the risks described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the three months ended September
30, 2022, the Company granted 327,974 shares of Class A Common Stock in transactions exempt from registration under Section 4(a)(2) of the Securities Act. Of these, 27,974 shares of Class A Common Stock were granted to employees as inducement for employment, and 300,000 were issued as payments in lieu of cash for the Company’s obligation to make deferred payments as part of the purchase price for a prior acquisition and therefore did not result in any proceeds to the Company. The Company received no cash proceeds and no commissions were paid to any person in connection with the issuance of the shares.
Purchase
of Equity Securities by the Issuer and Affiliated Purchasers
On March 23, 2022, the board of directors authorized a stock repurchase program (the “Repurchase Program”) under which we may repurchase up to $125,000,000 of shares of our outstanding Class A Common Stock. The Repurchase Program will expire on March 23, 2025. Under the Repurchase Program, share repurchases may be made at our discretion from time to time in open market transactions at prevailing market prices (including through trading plans that may be adopted in accordance with Rule 10b5-1 of the Exchange Act), in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions,
regulatory requirements, the availability of funds, and other considerations we deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directors will review the Repurchase Program periodically and may authorize adjustments of its terms. Pursuant to its Combined Credit Agreement and the indenture governing the 5.625% Notes, the Company is currently limited as to the dollar value of shares it may repurchase in the open market.
The following table details our monthly shares repurchased during the third quarter of 2022:
Period
Total
Number of Shares Purchased (1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program
7/1/2022 - 7/31/2022
6,525
$
6.93
$
—
$
110,119,330
8/1/2022
- 8/31/2022
1,160,025
6.78
1,160,025
102,260,248
9/1/2022 - 9/30/2022
864,741
6.97
864,536
96,249,317
Total
2,031,291
$
6.89
$
2,024,561
$
96,249,317
(1) Includes
6,730 shares repurchased to settle employee tax withholding obligations related to the vesting of restricted stock awards.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On
November 2, 2022, our board of directors approved a new form of indemnification agreement (the “Indemnification Agreement”) to be entered into by the Company with its directors, executive officers and certain other key employees (each, an “Indemnitee”). The Indemnification Agreement replaces the Company’s existing form of indemnification agreement and was primarily adopted to update the governing law from the laws of the Province of Ontario and the federal laws of Canada applicable therein to the laws of the State of Delaware. As is the case with the Company’s previous form of indemnification agreement, the Indemnification Agreement requires the
Company to indemnify the Indemnitee to the fullest extent permitted by law.
The foregoing summary of the Indemnification Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Indemnification Agreement, the form of which is filed as Exhibit 10.2 hereto and is incorporated herein by reference.
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Item 6. Exhibits
The
exhibits required by this item are listed on the Exhibit Index.
Certification by Chief Executive Officer pursuant to Rules 13a - 14(a) and 15d - 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification by Chief Financial Officer pursuant to Rules 13a - 14(a) and 15d - 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act
of 2002.*
Certification by Chief Financial Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101
Interactive
Data File, for the period ended September 30, 2022. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.*
104
Cover Page Interactive Data File. The cover page XBRL tags are embedded within the inline XBRL document and are included in Exhibit 101.*
† Indicates management contract or compensatory plan.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
