Stagwell Inc 8-K/A, filed Oct 12, 2021
Stagwell Inc (STGW)
About this 8-K/A
Stagwell Inc filed this 8-K/A on October 12, 2021, reporting on events of August 2, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Amendment No. 2)
CURRENT REPORT
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Explanatory Note
This Amendment No. 2 to Current Report on Form 8-K/A (this “Second Amendment”) is being filed by Stagwell Inc., a Delaware Corporation (the “Company”), to amend its Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on August 2, 2021 (as amended by Amendment No. 1 to Current Report on Form 8-K/A of the Company filed with the SEC on September 16, 2021, the “Original 8-K”), in connection with the consummation on August 2, 2021 of the transactions contemplated by that certain Transaction Agreement, dated as of December 21, 2020, as amended on June 4, 2021 and July 8, 2021 (the “Transaction Agreement”), by and among certain subsidiaries of Stagwell Media LP, MDC Partners Inc., New MDC LLC and Midas Merger Sub 1 LLC (the transactions contemplated by the Transaction Agreement, the “Transactions”).
The Company is filing this Second Amendment solely to provide certain financial statements and pro forma financial information referred to in Item 9.01 below, which were excluded from the Original 8-K in reliance on the instructions to such item. Except for the foregoing, this Second Amendment does not modify or update any other disclosure contained in the Original 8-K.
| Item 9.01 | Financial Statements and Exhibits. |
(a) Financial statements of businesses acquired.
The unaudited condensed consolidated balance sheets of Stagwell Marketing Group LLC as of June 30, 2021, the unaudited condensed consolidated statements of operations and comprehensive income (loss) and changes in equity of Stagwell Marketing Group LLC for the three and six months ended June 30, 2021 and 2020, the unaudited condensed consolidated statements of cash flows of Stagwell Marketing Group LLC for the six months ended June 30, 2021 and 2020 and the notes related thereto are filed as Exhibit 99.1 hereto and are incorporated herein by reference.
The audited consolidated balance sheets of Stagwell Marketing Group LLC as of December 31, 2020 and 2019, and the audited consolidated statements of operations, comprehensive income, changes in equity and cash flows of Stagwell Marketing Group LLC for each of the three years ended December 31, 2020, 2019 and 2018, and the notes related thereto are filed as Exhibit 99.2 hereto and are incorporated herein by reference.
(b) Pro forma financial information.
The unaudited pro forma condensed combined balance sheet of Stagwell Inc. and Stagwell Marketing Group LLC as of June 30, 2021 and the unaudited pro forma condensed combined statements of operations of Stagwell Inc. and Stagwell Marketing Group LLC for the year ended December 31, 2020 and the six months ended June 30, 2021 are filed as Exhibit 99.3 hereto and are incorporated herein by reference.
(d) Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: October 12, 2021
| STAGWELL INC. | ||||
| By: | /s/ Frank Lanuto | |||
| Frank Lanuto | ||||
| Chief Financial Officer | ||||
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-226895, 333-212261, and 333-176059) of Stagwell Inc. of our report dated June 2, 2020, except for the change in the manner in which the Company accounts for leases as discussed in Note 4 to the consolidated financial statements, except for the effects of the reorganization of entities under common control as discussed in Note 5 to the consolidated financial statements and except for the change in composition of reportable segments as discussed in Note 18 to the consolidated financial statements, as to which the date is January 18, 2021 relating to the financial statements of Stagwell Marketing Group LLC.
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
October 12, 2021
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Post-Effective Amendments to Registration Statements on Form S-8 of Stagwell Inc. (file nos. 333-226895, 333-212261 and 333-176059) of our report dated March 6, 2021, relating to the financial statements of Stagwell Marketing Group, LLC appearing in the Current Report on Form 8-K of Stagwell Inc. dated August 2, 2021.
/s/ Deloitte & Touche LLP
New York, NY
October 12, 2021
Exhibit 99.1
Stagwell Marketing Group LLC and Subsidiaries
Condensed Consolidated Financial Statements
As of June 30, 2021 (unaudited) and December 31, 2020 and for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)
Stagwell Marketing Group LLC and
Subsidiaries
Condensed Consolidated Balance Sheets
| (in thousands) | June
30, 2021 (Unaudited) | December
31, 2020 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash, cash equivalents and restricted cash | $ | 73,450 | $ | 92,457 | ||||
| Accounts receivable, net | 196,821 | 225,733 | ||||||
| Expenditures billable to clients | 15,909 | 11,063 | ||||||
| Other current assets | 37,701 | 36,433 | ||||||
| Total current assets | 323,881 | 365,686 | ||||||
| Investments | 1,865 | 14,256 | ||||||
| Property and equipment, net of accumulated depreciation of $34,076 and $28,364, respectively | 37,842 | 35,614 | ||||||
| Goodwill | 352,469 | 351,725 | ||||||
| Intangible assets, net | 171,130 | 186,035 | ||||||
| Right-of-use assets – operating leases | 53,997 | 57,752 | ||||||
| Other assets | 2,578 | 2,787 | ||||||
| Total assets | $ | 943,762 | $ | 1,013,855 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 108,734 | $ | 147,826 | ||||
| Accruals and other liabilities (Note 9) | 87,620 | 89,562 | ||||||
| Current maturities of long-term debt | 497 | 994 | ||||||
| Advanced billings | 70,049 | 66,418 | ||||||
| Current portion of operating lease liabilities | 19,280 | 19,579 | ||||||
| Current portion of deferred acquisition consideration (Note 10) | 8,767 | 12,579 | ||||||
| Total current liabilities | 294,947 | 336,958 | ||||||
| Long-term debt, net | 184,319 | 198,024 | ||||||
| Long-term portion of deferred acquisition consideration (Note 10) | 7,516 | 5,268 | ||||||
| Long-term portion of operating lease liabilities | 49,435 | 52,606 | ||||||
| Deferred tax liabilities, net | 16,232 | 16,050 | ||||||
| Other liabilities | 7,345 | 5,802 | ||||||
| Total liabilities | 559,794 | 614,708 | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| Redeemable noncontrolling interest (Note 12) | 2,626 | 604 | ||||||
| Member’s equity | 350,395 | 358,756 | ||||||
| Noncontrolling interest | 30,947 | 39,787 | ||||||
| Total equity | 381,342 | 398,543 | ||||||
| Total liabilities, redeemable noncontrolling interest and equity | $ | 943,762 | $ | 1,013,855 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Stagwell Marketing Group LLC and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Revenue | $ | 209,560 | $ | 162,330 | $ | 390,802 | $ | 346,873 | ||||||||
| Operating expenses: | ||||||||||||||||
| Cost of services sold | 122,074 | 103,296 | 234,073 | 224,054 | ||||||||||||
| Office and general expenses | 52,674 | 41,243 | 104,952 | 84,515 | ||||||||||||
| Depreciation and amortization | 10,381 | 10,108 | 21,331 | 19,864 | ||||||||||||
| Total operating expenses | 185,129 | 154,647 | 360,356 | 328,433 | ||||||||||||
| Operating income | 24,431 | 7,683 | 30,446 | 18,440 | ||||||||||||
| Other expenses, net: | ||||||||||||||||
| Interest expense, net | (1,935 | ) | (1,976 | ) | (3,286 | ) | (2,887 | ) | ||||||||
| Other (expense) income, net | (486 | ) | (691 | ) | 122 | 2,336 | ||||||||||
| Income before taxes and equity in (losses) earnings of unconsolidated affiliates | 22,010 | 5,016 | 27,282 | 17,889 | ||||||||||||
| Provision for income taxes | (3,348 | ) | (134 | ) | (4,021 | ) | (593 | ) | ||||||||
| Income before equity in (losses) earnings of unconsolidated affiliates | 18,662 | 4,882 | 23,261 | 17,296 | ||||||||||||
| Equity in (losses) earnings of unconsolidated affiliates | (3 | ) | (37 | ) | 1 | 42 | ||||||||||
| Net income | 18,659 | 4,845 | 23,262 | 17,338 | ||||||||||||
| Less: Net income attributable to noncontrolling interests | 1,470 | 1,671 | 2,623 | 2,809 | ||||||||||||
| Less: Net loss attributable to redeemable noncontrolling interests | (156 | ) | (1,097 | ) | (1,071 | ) | (1,789 | ) | ||||||||
| Net income attributable to Member | $ | 17,345 | $ | 4,271 | $ | 21,710 | $ | 16,318 | ||||||||
| Other comprehensive loss, net of income taxes: | ||||||||||||||||
| Net income attributable to Member | $ | 17,345 | $ | 4,271 | $ | 21,710 | $ | 16,318 | ||||||||
| Net unrealized loss on available for sale investment | - | (6,372 | ) | - | (4,996 | ) | ||||||||||
| Foreign currency translation adjustments | (487 | ) | (68 | ) | (350 | ) | (4,980 | ) | ||||||||
| Total other comprehensive loss, net of income taxes | (487 | ) | (6,440 | ) | (350 | ) | (9,976 | ) | ||||||||
| Comprehensive income (loss) attributable to Member | $ | 16,858 | $ | (2,169 | ) | $ | 21,360 | $ | 6,342 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Stagwell Marketing Group LLC and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
| (in thousands) | Member’s
equity | Noncontrolling interest | Total equity | |||||||||
| Balance at March 31, 2021 | $ | 345,122 | $ | 30,050 | $ | 375,172 | ||||||
| Capital contributions | 1,854 | - | 1,854 | |||||||||
| Distributions | (11,208 | ) | (112 | ) | (11,320 | ) | ||||||
| Net income attributable to Member and noncontrolling interests | 17,345 | 1,470 | 18,815 | |||||||||
| Changes in redemption value of redeemable noncontrolling interest | (2,231 | ) | (461 | ) | (2,692 | ) | ||||||
| Other comprehensive loss, net | (487 | ) | - | (487 | ) | |||||||
| Balance at June 30, 2021 | $ | 350,395 | $ | 30,947 | $ | 381,342 | ||||||
| (in thousands) | Member’s
equity | Noncontrolling interest | Total equity | |||||||||
| Balance at December 31, 2020 | $ | 358,756 | $ | 39,787 | $ | 398,543 | ||||||
| Capital contributions | 12,122 | - | 12,122 | |||||||||
| Distributions | (39,212 | ) | (11,002 | ) | (50,214 | ) | ||||||
| Net income attributable to Member and noncontrolling interests | 21,710 | 2,623 | 24,333 | |||||||||
| Changes in redemption value of redeemable noncontrolling interest | (2,631 | ) | (461 | ) | (3,092 | ) | ||||||
| Other comprehensive income, net | (350 | ) | - | (350 | ) | |||||||
| Balance at June 30, 2021 | $ | 350,395 | $ | 30,947 | $ | 381,342 | ||||||
| (in thousands) | Member’s
equity | Noncontrolling interest | Total equity | |||||||||
| Balance at March 31, 2020 | $ | 318,869 | $ | 32,715 | $ | 351,584 | ||||||
| Capital contributions | 65,898 | - | 65,898 | |||||||||
| Distributions | (68,000 | ) | - | (68,000 | ) | |||||||
| Net income attributable to Member and noncontrolling interests | 4,271 | 1,671 | 5,942 | |||||||||
| Other comprehensive loss, net | (6,440 | ) | - | (6,440 | ) | |||||||
| Balance at June 30, 2020 | $ | 314,598 | $ | 34,386 | $ | 348,984 | ||||||
| (in thousands) | Member’s
equity | Noncontrolling interest | Total equity | |||||||||
| Balance at December 31, 2019 | $ | 316,960 | $ | 31,577 | $ | 348,537 | ||||||
| Capital contributions | 84,818 | - | 84,818 | |||||||||
| Distributions | (93,914 | ) | - | (93,914 | ) | |||||||
| Net income attributable to Member and noncontrolling interests | 16,318 | 2,809 | 19,127 | |||||||||
| Changes in redemption value of redeemable noncontrolling interest | 392 | - | 392 | |||||||||
| Other comprehensive loss, net | (9,976 | ) | - | (9,976 | ) | |||||||
| Balance at June 30, 2020 | $ | 314,598 | $ | 34,386 | $ | 348,984 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Stagwell Marketing Group LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For
the Six Months Ended June 30, | ||||||||
| (in thousands) | 2021 | 2020 | ||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 23,261 | $ | 17,338 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 21,331 | 19,864 | ||||||
| Debt issuance cost amortization | 466 | 259 | ||||||
| Provision for bad debt expense | 381 | 1,561 | ||||||
| Deferred tax benefit | 138 | (3,491 | ) | |||||
| Changes in fair value of investments in unconsolidated affiliates | (282 | ) | (129 | ) | ||||
| Changes in deferred acquisition consideration | 2,359 | 2,121 | ||||||
| Interest from preferred investments | (113 | ) | (300 | ) | ||||
| Interest from loan to related party | (179 | ) | - | |||||
| Equity in earnings (losses) of unconsolidated affiliates, net of dividends received | (1 | ) | 42 | |||||
| Transaction costs contributed by Stagwell Media LP | 5,042 | - | ||||||
| Foreign currency transaction gain (loss) on foreign denominated debt | 1,061 | (1,650 | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 28,960 | 33,381 | ||||||
| Expenditures billable to clients | (4,752 | ) | (4,704 | ) | ||||
| Other assets | (676 | ) | (5,315 | ) | ||||
| Accounts payable | (40,344 | ) | (26,730 | ) | ||||
| Accruals and other liabilities | (1,037 | ) | 17,218 | |||||
| Advanced billings | 3,603 | (2,652 | ) | |||||
| Net cash provided by operating activities | 39,218 | 46,813 | ||||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (7,288 | ) | (5,317 | ) | ||||
| Acquisitions, net of cash acquired | - | (696 | ) | |||||
| Acquisitions of intangible assets | - | (1,895 | ) | |||||
| Net cash used in investing activities | (7,288 | ) | (7,908 | ) | ||||
| Cash flows from financing activities | ||||||||
| Payment of contingent consideration | - | (500 | ) | |||||
| Payment of deferred consideration | - | (1,000 | ) | |||||
| Payment of long-term debt | (25,496 | ) | (96,496 | ) | ||||
| Proceeds from long-term debt | 10,000 | 167,000 | ||||||
| Debt issuance costs | - | (319 | ) | |||||
| Distributions | (37,214 | ) | (93,914 | ) | ||||
| Contributions | - | 1,576 | ||||||
| Net cash used in financing activities | (52,710 | ) | (23,653 | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1,773 | 380 | ||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (19,007 | ) | 15,632 | |||||
| Cash, cash equivalents and restricted cash at beginning of period | 92,457 | 63,860 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 73,450 | $ | 79,492 | ||||
| Supplemental cash flow information: | ||||||||
| Cash interest paid | $ | (4,649 | ) | $ | (4,490 | ) | ||
| Income taxes paid | (3,047 | ) | (1,310 | ) | ||||
| Non-cash investing and financing activities: | ||||||||
| Acquisitions of business | - | (23,720 | ) | |||||
| Net unrealized gain (loss) on available for sale investment | - | (4,999 | ) | |||||
| Non-cash contributions included in Member’s equity | 12,122 | 83,242 | ||||||
| Non-cash distributions to Stagwell Media LP (Note 7) | (13,000 | ) | - | |||||
| Non-cash payment of deferred acquisition consideration | (7,080 | ) | (64,322 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 1. | Business Description |
Stagwell Marketing Group LLC (the “Company,” or “SMG”) is a Delaware company that was formed on March 9, 2017 and is governed by the terms and conditions of a limited liability agreement effective as of the same date. Stagwell Media LP (the “Member”, “Stagwell Media” or the “Fund”), is a private equity fund that owns all interests in Stagwell Marketing Group through a wholly owned holding company named Stagwell Marketing Group Holdings LLC. The Fund is managed by a registered investment advisor named The Stagwell Group LLC (“Stagwell Group” or the “Manager”).
On March 9, 2017 Stagwell Media formed two holding company subsidiaries, Stagwell Marketing Group Holdings LLC and Stagwell Marketing Group. The companies were formed in contemplation of holding all of Stagwell Media’s operating investments. Under a single entity, the Company could realize cost savings under enterprise level vendor arrangements, better serve the Company’s customers with an integrated offering, and more effectively report the operating results of the Company’s businesses. The transaction was effectuated by way of a contribution agreement dated March 13, 2017, which contributed all the Fund interests in the existing businesses as of the execution date to Stagwell Marketing Group. This transaction has been accounted for at historical cost as a transaction under common control. The Company’s equity structure is a non-unitized single member limited liability company (“LLC”), therefore all components of equity attributable to the Member are reported within Member’s Equity on the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Changes in Equity.
The Company owns the membership interests of small and mid-sized marketing services companies that create customized marketing programs for clients that range in scale from regional and local clients to large global marketers. The Company’s equity positions usually include, but are not limited to, partner and membership interests, common and preferred stock as well as call and put options.
As of June 30, 2021, the Company has six reportable segments with its Corporate function reported separately. The Company’s segments aggregate each of its operating companies (referred to as “Brands”) based on the services provided, comparable marketing verticals serviced, and comparability of economic performance. The Company’s segments are as follows: 1. Digital Transformation and Performance Marketing (“Digital - Marketing”), 2. Digital Content (“Digital - Content”), 3. Research for Technology and Entertainment (“Research - Technology”), 4. Research for Corporate (“Research – Corporate”), 5. Marketing Communications for Public Affairs and Corporate Communication (“Communications, Public Affairs and Advocacy”), and 6. All Other Brands (“All Other”). Refer to Note 16 – Segment Information for further information.
On December 21, 2020, the Fund reached a definitive agreement with MDC Partners, Inc. (“MDC”) for a potential merger between the Company and MDC (the “Proposed MDC Transaction”). The definitive agreement is subject to customary closing procedures for transactions of this nature and subject to several conditions, including obtaining relevant third-party consents. The definitive agreement allows for certain conditions under which the agreement can be terminated, including in instances where the required regulatory approvals are not obtained. No assurances can be given regarding the likelihood of obtaining such consents, obtaining such regulatory approvals, or ultimately completing the Proposed MDC Transaction. On February 8, 2021, MDC filed a registration statement on Form S-4 (“Registration Statement”), together with an amendment filed March 29, 2021 and the second amendment filed April 22, 2021, with the U.S. Securities and Exchange Commission (the “SEC”) related to the Proposed MDC Transaction. The Registration Statement was declared effective by the SEC on May 7, 2021 and the prospectus filed on May 10, 2021. A supplement to the prospectus was filed on July 12, 2021. The MDC shareholder vote occurred on July 26, 2021 and the Proposed Transaction closed on August 2, 2021.
7
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On March 11, 2020, the World Health Organization announced a new strain of coronavirus ("COVID-19”) was reported worldwide, resulting in COVID-19 being declared a pandemic, and on March 13, 2020 the U.S. President announced a National Emergency relating to the disease. The spread of COVID-19 has caused significant volatility in the United States and international markets and, in many industries, business activity has virtually shut down entirely. While it is difficult to predict the full scale of the impact, including whether any such impact could materially impact operations and cash flows, certain of the Company’s Brands have experienced a negative impact to their operating results for the three and six months ended June 30, 2021 and 2020, primarily due to a downturn in the industries their customers operate in. The Company has taken actions to address the impact of the pandemic, such as working closely with the Company’s clients, reducing expenses and monitoring liquidity. The impact of the pandemic and the corresponding actions are reflected in the Company’s judgments, assumptions and estimates in the preparation of the condensed consolidated financial statements. However, if the duration of the COVID-19 pandemic is longer and the operational impact is greater than estimated, the judgments, assumptions and estimates will be updated and could result in different results in the future.
The Company also adopted a remote-work policy and other physical distancing policies for its offices. The Company does not anticipate these policies to have any adverse impact on its ability to continue to operate its business.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the SEC. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and all normal recurring adjustments have been included. The condensed consolidated balance sheet and income statement were derived from the Company’s audited annual consolidated financial statements, but do not contain all of the information and notes required by GAAP for complete financial statements. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020, which provide a more complete understanding of the Company’s accounting policies, financial position, operating results, and other matters.
In the opinion of management, all adjustments of a normal recurring nature necessary for a fair statement of the results for the period presented have been included. The results of operations for the three and six months ended June 30, 2021 and 2020, are not necessarily indicative of the results for the full year.
Principles of Consolidation
The Company’s condensed consolidated financial statements include the accounts of its consolidated subsidiaries, some of which are not wholly owned. All intercompany transactions have been eliminated in consolidation.
Noncontrolling Interest
The Company recognizes the noncontrolling interests that were created as part of a business combination at fair value as of the date of the transaction.
When acquiring less than 100% ownership of an entity, the Company may enter into agreements with the noncontrolling interest holders that offer the ability to tender their membership interests for redemption by the Company or the related subsidiary under certain circumstances. The Company presents noncontrolling interests as permanent equity when the option to redeem the incremental ownership is within the control of the Company. Noncontrolling interest holders have usual and customary voting and other rights under the respective operating agreements and/or governing documents as they pertain to the class of equity held.
8
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Net income or loss of the Company’s subsidiaries are allocated to its noncontrolling interests based on the noncontrolling interests' ownership percentages in the subsidiary.
Redeemable Noncontrolling Interest
The Company enters into contractual arrangements under which noncontrolling shareholders may require the Company to purchase such noncontrolling shareholders’ incremental ownership interests under certain circumstances. The redemption date value under these contractual arrangements are not a fixed amount, but rather is dependent upon various valuation formulas, such as the average earnings of the relevant subsidiary through the date of exercise or the growth rate of the earnings of the relevant subsidiary during that period. These contractual arrangements are contingently redeemable at the option of the noncontrolling shareholder and are presented in Redeemable noncontrolling interest on the Condensed Consolidated Balance Sheets at its acquisition date fair value, plus net income or loss attributable to the redeemable noncontrolling interest in accordance with Accounting Standards Codification (“ASC”) 810, Consolidation, which is based on the noncontrolling interests' ownership percentage in the subsidiary. The options are only adjusted to their redemption date value at such point in time that the options are deemed to be currently redeemable by the Company, and if determined to be greater than the cumulative net income allocated to the noncontrolling interests in accordance with ASC 810, Consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires the Company to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used in the allocation of fair value of purchase consideration, deferred acquisition consideration, redeemable noncontrolling interests, goodwill and intangible assets, property and equipment, income taxes, and revenue recognition. These estimates are evaluated on an ongoing basis and are based on historical experience and other assumptions that the Company believes are reasonable under the circumstances. These estimates require the use of assumptions about future performance, which are uncertain at the time of estimation. To the extent actual results differ from the assumptions used, results of operations and cash flows could be materially impacted. Further, the uncertainty over the ultimate impact COVID-19 will have on the global economy and the Company’s business makes any estimates and assumptions as of June 30, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results could differ from those estimates.
Concentrations of Credit Risk
The financial instruments that could potentially subject the Company to concentrations of credit risk consist of cash deposits and trade receivables. All cash, cash equivalents and restricted cash are held at financial institutions that management believes to be of high credit quality. Domestically, cash, cash equivalents and restricted cash from time-to-time may exceed federally insured limits set by the Federal Deposit Insurance Company (“FDIC”), and international cash balances may not qualify for foreign government insurance programs. To date, the Company has not experienced any losses on cash, cash equivalents and restricted cash.
9
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Exposure to losses on trade receivables is principally dependent on each customer’s financial condition. To manage the credit risk associated with trade receivables, the Company evaluates the creditworthiness of customers, monitors exposure for credit losses and maintains a provision for bad debt expense. The Company does not believe its exposed to a concentration of credit risk. As of June 30, 2021, and December 31, 2020, no individual customer accounted for more than 10% of the Company’s consolidated revenue and accounts receivable, with no individual countries except for the United States and the United Kingdom accounting for more than 10% of the Company’s consolidated revenue for the three and six months ended June 30, 2021 and 2020. Refer to Note 3 – Revenue for further information.
Deferred Acquisition Consideration
Certain acquisitions include an initial payment at closing and provide for future additional contingent payments. These payments are typically contingent upon the acquired businesses reaching certain profit and/or growth targets. In instances where such contingent payments require sellers’ continuous employment with the Company after the transaction, they are recorded as compensation expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The related liability is measured using management’s best estimate of such future payments and is recorded as a deferred acquisition consideration liability in the Condensed Consolidated Balance Sheets. At each reporting date, the Company models each business’ future performance, including revenue growth and free cash flows, to estimate the value of each deferred acquisition consideration liability. Subsequent changes to the liability are recorded in results of operations. When contingent payment arrangements do not require continuous employment, they are initially recorded as purchase consideration at fair value and are subsequently remeasured at fair value at each reporting date with any changes recorded in Office and general expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. Revenue is recognized as the Company’s performance obligations are satisfied. The Company’s revenue is primarily derived from the provision of marketing and communications services which includes: Digital Marketing, which includes the development of websites and content management systems, execution of performance marketing campaigns, and/or execution of targeted digital advertising; Digital Content, which includes the creation, production and distribution of media in execution of a customer’s marketing campaigns; Research, which includes the development and execution of custom consumer surveys as well as reporting on the insights and analytics that will inform a customer’s development of products and/or communication strategies; and Communications, public affairs and advocacy, which includes consulting services that manage a marketer’s reputation with the public through traditional media, social media, and in-person engagements, as well as utilizing digital channels to mobilize and raise funds from supporters and constituents to support political candidates and issue organizations in the public arena. Revenue is recorded net of sales, use and value added taxes.
In substantially all the Company’s Brands, the performance obligation is to provide marketing and communications services to accomplish the specified engagement with the customer. The Company’s client contracts involve fees based on any one or a combination of the following: an agreed fee for the level of effort expended by the Company’s employees; commissions based on the client’s spending for media purchased from third parties or based on the amounts raised for a client’s political campaign; and when the Company is primarily responsible for the services and controls the third-party vendor services, the costs for these third-party vendor services are included in revenue. Where applicable, the transaction price of a contract is allocated to each distinct performance obligation based on its relative stand-alone selling price, either through an observable price when the service is sold separately or an estimate, predominantly based on an expected cost plus margin, and is recognized as revenue when, or as, the performance obligation is satisfied. Clients typically receive and consume the benefit of the Company’s services as they are performed. Client contracts typically provide that the Company is compensated for services performed to date and allow for cancellation by either party on short notice without penalty.
10
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Many of the Company’s contracts consist of a single performance obligation. 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.
Revenue is predominantly recognized over time, as the services are performed, because the client receives and consumes the benefit of the Company’s performance throughout the contract period, or an asset is created with no alternative use and are contractually entitled to payment for performance to date in the event the client terminates the contract for convenience. For these over time contracts, other than when the Company has a stand-ready obligation to perform services in the form of a retainer or when its providing online subscription-based hosted services, revenue is generally recognized over time using input measures that correspond to the level of staff effort expended to satisfy the performance obligation, in certain instances, using the right to invoice practical expedient. 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 using a time-based measure resulting in a straight-line revenue recognition. For client contracts where the Company is providing online subscription-based hosted services, it recognizes revenue ratably over the contract term. Occasionally, there may be changes in the client service requirements during the term of a contract and the changes could be significant. These changes are typically negotiated as new contracts covering the additional requirements and the associated costs, as well as additional fees for the incremental work to be performed that are negotiated at the stand-alone selling price based on an observable price when the service is sold separately or an estimate, predominantly based on an expected cost plus margin.
For contracts where the transaction price is derived from commissions based on a percentage of purchased media from third parties, the performance obligation is not satisfied until the media is run, and the Company has an enforceable contract providing a right to payment. Accordingly, revenue for commissions is recognized at a point in time.
Some of the Company’s client arrangements include variable consideration provisions, primarily related to certain commissions. Variable consideration for Brands that provide media buying services is recorded to revenue when earned and when the variability is resolved, typically when the media is run.
11
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Principal vs. Agent Considerations
Many of the Company’s Brands incur third-party costs on behalf of clients, including direct costs and incidental, or out-of-pocket costs. Third-party direct costs incurred in connection with the delivery of marketing and communication services primarily include purchased media, studio production services, specialized talent, including artists and other freelance labor, market research and third-party data and other related expenditures.
Out-of-pocket costs primarily include transportation, hotel, meals and telecommunication charges incurred by the Company in the course of providing its services. Billings related to out-of-pocket costs are included in revenue since the Company controls the goods or services prior to delivery to the client.
The inclusion of billings related to third-party direct costs in revenue depends on whether the Company acts as a principal or as an agent in the client arrangement. In certain of the Company’s Brands, such as where it provides media buying services, the Company acts as an agent and arranges, at the client's direction, for third parties to perform certain services. In these cases, the Company does not control the goods or services prior to the transfer to the client. As a result, revenue is recorded net of these costs, equal to the amount retained for the Company’s fee or commission.
In certain Brands the delivery services to its customer requires the Company to utilize certain third-party services, such as production services and data costs. In these situations, the Company controls these third-party services before they are transferred to the client and is responsible for providing the service, or the Company is responsible for directing and integrating third-party vendors to fulfill its performance obligation at the agreed upon contractual price. This also includes the execution of targeted digital advertising campaigns because the Company controls the advertising inventory before it is transferred to its clients and bears sole responsibility for fulfillment of the advertising promise, and the Company has full discretion in establishing prices. When the Company acts as principal, it includes billable amounts related to third-party costs in the transaction price and records revenue at the gross amount billed, including out-of-pocket costs, consistent with the manner that the Company recognizes revenue for the underlying services contract.
Income Taxes
The Company is a limited liability company classified as a disregarded entity for U.S. federal income tax purposes. As such, the Company is not subject to taxes from a U.S. federal income tax perspective. Rather, federal taxable income or loss is included in the federal income tax return of the Member. The provision for income taxes recorded in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes U.S. federal and state income taxes for certain of the Company’s corporations and foreign taxes for its foreign subsidiaries.
Income taxes are accounted for in accordance with ASC 740, Income Taxes (“ASC 740”). Following this method, deferred tax assets and liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the year in which the temporary differences are expected to reverse. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the period that such tax rate changes are enacted. A valuation allowance on deferred tax assets is recorded if, based on the available evidence, it is “more likely than not” that some portion or all deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient taxable income during the carryback or carryforward periods applicable in each stated tax jurisdiction. In assessing the realizability of deferred tax assets, the Company considers both positive and negative evidence. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. The Company present net deferred tax assets and liabilities as noncurrent in its Condensed Consolidated Balance Sheets.
12
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Leases
The Company has various rental agreements in place to lease office space, with several of these leases containing annual rate escalations.
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 calculating the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. Lease payments included in the measurement of the lease liability are comprised of noncancelable lease payments, 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. There were no impairment losses related to right-of-use lease assets for the three and six months ended June 30, 2021 and 2020.
Lease costs are recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 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.
As an accounting policy, the Company has elected not to apply the recognition requirements to short-term leases and elected the practical expedient not to separate non-lease components from lease components for its leases of office space where the Company is a lessee which comprises majority of the Company’s leases. The Company also elected to apply the package of practical expedients available for existing contracts which allowed it to carry forward its historical assessments of: (i) whether a contract is or contains a lease, (ii) the classification of existing leases, and (iii) whether previously capitalized costs continue to qualify as initial indirect costs.
Some of the Company’s leases contain variable lease 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 variable lease payments occur. The Company has no leases that contain variable lease payments based on an index or rate.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) (“ASU 2019-12”). The update removes certain exceptions to the general principles in Topic 740 and simplifies accounting for income taxes in certain areas of Topic 740 by clarifying and amending existing guidance. On January 1, 2021, the Company adopted ASU 2019-12. The new standard does not have a material effect on the Company’s condensed consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815, which clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. On January 1, 2021, the Company adopted ASU 2020-01. The new standard does not have a material effect on the Company’s condensed consolidated financial statements.
13
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recently Issued Accounting Pronouncements not yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset within the scope of Topics 960 through 965 on plan accounting. This amended guidance is effective for the Company beginning January 1, 2023. The Company is evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and in January 2021 subsequently issued ASU 2021-01 (“ASU 2021-01”), which refines the scope of Topic 848. These ASUs 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. Adoption of the expedients and exceptions is permitted upon issuance of ASU 2020-04 through December 31, 2022. The Company is evaluating the impact of the adoption of this guidance on the Company’s condensed consolidated financial statements and disclosures.
| 3. | Revenue |
The Company’s revenue is primarily derived from the provision of marketing and communications services which includes digital marketing, digital content, research and communications, public affairs and advocacy.
Disaggregated Revenue
Certain clients may engage with the Company in various geographic locations, across multiple disciplines, and through multiple Brands. The Company has historically focused on regions in North America, the largest market for its services globally. The Company has also continued to expand its global footprint to support clients looking for assistance with growing their businesses in new markets and regions, or through strategic acquisitions in offshore businesses. The Company’s Brands are principally located in the United States and the United Kingdom, and 20 other countries around the world.
14
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents revenue disaggregated by geography (in thousands):
| For
the Three Months Ended June 30, | For
the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Country: | ||||||||||||||||
| United States | $ | 183,358 | $ | 146,466 | $ | 350,105 | $ | 307,358 | ||||||||
| United Kingdom | 12,070 | 5,383 | 16,775 | 13,754 | ||||||||||||
| All other (each country individually less than 5% of total revenue) | 14,132 | 10,482 | 23,922 | 25,761 | ||||||||||||
| Total Revenue | $ | 209,560 | $ | 162,331 | $ | 390,802 | $ | 346,873 | ||||||||
Contract Assets and Contract Liabilities
Timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets consist of fees and reimbursable outside vendor costs incurred on behalf of clients. Unbilled service fees were $43.2 million and $30.6 million as of June 30, 2021 and December 31, 2020, respectively, and are included in Accounts receivable, net on the Condensed Consolidated Balance Sheets. Outside vendor costs incurred on behalf of clients which have yet to be invoiced were $16.0 million and $11.1 million as of June 30, 2021 and December 31, 2020, respectively, and are included on the 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 consists of fees billed to customers in excess of fees recognized as revenue, that are expected to be collected from the customer, and the Company has a remaining performance obligation to fulfil. Contract liabilities, included in Advanced billings on the Company’s Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 were $70.0 million and $66.4 million, respectively. Further, there were no material balances included in the contract liabilities balance as of December 31, 2020 that were not recognized as revenue for the three and six months ended June 30, 2021.
Changes in Expenditures billable to clients and Advanced billings for the three and six months ended June 30, 2021, and 2020 were not materially impacted by write offs, impairment losses or any other factors.
In certain arrangements, the Company purchases media it does not control on behalf of its customers as their agent or pay other third parties on behalf of its customers for services that the Company does not control. The Company does not include in revenue the amounts it bills to customers related to such third parties and does not consider these amounts to be contract liabilities. As of June 30, 2021, and December 31, 2020, the Company had $3.0 million and $4.8 million, respectively, included in Advanced billings, with an amount in equal value included in Accounts receivable, net, on its Condensed Consolidated Balance Sheets.
The Company has elected the practical expedient to not disclose information about remaining performance obligations that have original expected durations of one year or less. Most of the Company’s contracts are for periods of one year or less. For those contracts with a term of more than one year, the Company had approximately $7.6 million of unsatisfied performance obligations as of June 30, 2021, of which the Company expects to recognize approximately 82% in the next twelve months, and 18% in the periods after June 30, 2022.
15
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 4. | Leases |
Lessee
The Company leases office space in North America, Europe, Asia, South America, 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 2021 through 2031. The Company’s finance leases are immaterial.
The Company’s leases include options to extend or renew the lease through 2035. 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.
As of June 30, 2021, the Company had no operating leases for which the commencement date has not yet occurred.
The discount rate used for leases accounted for under ASC 842 is the Company’s collateralized credit adjusted borrowing rate.
The following table presents lease costs and other quantitative information (in thousands):
| For
the Three Months Ended June 30, | For
the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Lease cost: | ||||||||||||||||
| Operating lease costs | $ | 6,221 | $ | 6,120 | $ | 11,309 | $ | 12,200 | ||||||||
| Short-term lease costs | 17 | 607 | 434 | 1,179 | ||||||||||||
| Variable lease costs | 884 | 887 | 1,937 | 2,031 | ||||||||||||
| Sublease rental income | (972 | ) | (961 | ) | (1,931 | ) | (1,880 | ) | ||||||||
| Total lease costs | $ | 6,150 | $ | 6,653 | $ | 11,749 | $ | 13,530 | ||||||||
| Additional information: | ||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities for operating leases | ||||||||||||||||
| Operating cash flows | $ | 7,763 | $ | 5,210 | $ | 13,364 | $ | 10,320 | ||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | - | $ | 1,833 | $ | - | $ | 1,833 | ||||||||
| Weighted average remaining lease term – Operating leases | 4.71 years | 4.70 years | 4.71 years | 4.70 years | ||||||||||||
| Weighted average discount rate – Operating leases | 3.67 | % | 4.04 | % | 3.67 | % | 4.04 | % | ||||||||
Operating lease expense is included in office and general expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company’s lease expense for leases with a term of 12 months or less is immaterial.
16
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents minimum future rental payments under the Company’s leases, and a reconciliation to the corresponding lease liability as of June 30, 2021 (in thousands):
| Maturity Analysis | ||||
| Remainder of 2021 | $ | 11,635 | ||
| 2022 | 18,023 | |||
| 2023 | 17,803 | |||
| 2024 | 11,469 | |||
| 2025 | 8,241 | |||
| 2026 and thereafter | 9,689 | |||
| Total | 76,860 | |||
| Less: Present value discount | 8,146 | |||
| Lease liability | $ | 68,714 | ||
Lessor
From time to time, the Company enters into sublease arrangements both with unrelated third parties and with its partner brands. These leases are classified as operating leases and expire between 2022 through 2024. Sublease income is recognized over the lease term on a straight-line basis. Currently, the Company subleases office space in North America and Europe. The Company elected to apply the practical expedient to combine lease and non-lease components to the lessor contracts.
The following table presents minimum future rental payments due to be received under the Company’s leases where it is a lessor (in thousands):
| Maturity Analysis | ||||
| Remainder of 2021 | $ | 2,559 | ||
| 2022 | 3,352 | |||
| 2023 | 939 | |||
| 2024 | 274 | |||
| 2025 | 19 | |||
| $ | 7,143 | |||
| 5. | Acquisitions |
The Company completed three business acquisitions in 2020. For certain of these acquisitions the Fund completed the business acquisition and contributed the net assets to the Company. The results of each acquired business are included in the Company’s results of operations from the acquisition date.
2020 Acquisitions
On February 14, 2020, SKDKnickerbocker (“SKDK”), a subsidiary of the Company, acquired Sloane & Company (“Sloane”) from an affiliate of MDC for $24.4 million of total consideration. Total consideration included a cash payment of $18.9 million made by the Fund which was accounted for as a non-cash contribution for the purposes of the Company’s Consolidated Statement of Cash Flows and Statement of Changes in Equity, the acquisition date fair value of the contingent deferred acquisition consideration of $4.8 million, and $0.7 million of cash paid by the Company. Refer to Note 10 – Commitments and Contingencies for further detail on the contingent deferred acquisition consideration. Sloane is an industry-leading strategic communications firm, based out of New York. Sloane will extend SKDK’s current suite of services and allow for the expansion into the capital markets and special situations verticals. MDC is considered a related party to the Company, refer to Note 17 – Related Party Transactions for further detail. Sloane is included in the Company’s SKDK Brand, which is part of its Communications, Public Affairs and Advocacy reportable segment.
17
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On August 14, 2020, Code and Theory, a subsidiary of the Company, acquired Kettle Solutions, LLC (“Kettle”) for $5.4 million of total consideration. Total consideration included a cash payment of $4.9 million, plus an additional $0.5 million due upon the finalization of Kettle’s working capital accounts, as outlined in the purchase agreement. The $0.5 million is included in Deferred acquisition consideration on the Condensed Consolidated Balance Sheets. The purchase agreement also offers the previous owners of Kettle an additional $11.9 million in deferred consideration and is dependent on Kettle reaching contractually defined operating goals in 2020, 2021, 2022 and 2023. The Company considers the additional $11.9 million as contingent compensation, refer to Note 10 – Commitments and Contingencies for further detail. Kettle is an industry recognized web design and content creation firm that assists its customers in developing and executing marketing campaigns, based out of New York. Kettle is included in the Company’s Code and Theory Brand, which is part of its Digital - Marketing reportable segment.
On October 30, 2020, Code & Theory, a subsidiary of the Company, acquired Truelogic Software, LLC, Ramenu S.A., and Polar Bear Development S.R.L. (collectively referred to as “Truelogic”), for $17.3 million of total consideration. Total consideration included a cash payment of $8.9 million, the acquisition date fair value of the contingent deferred acquisition consideration of $7.9 million, and an additional $0.5 million due upon the finalization of Truelogic’s working capital accounts, as outlined in the purchase agreement. Refer to Note 10 – Commitments and Contingencies for further detail on the contingent deferred acquisition consideration. The assets acquired and liabilities assumed have been recorded at fair value as of the date of acquisition. Truelogic is a software development firm based in Buenos Aires that assists customers in sourcing top South American engineering talent and developing small-scale software projects. Truelogic is included in the Company’s Code and Theory Brand, which is part of its Digital - Marketing reportable segment.
The following table summarizes the purchase price as of the date of each acquisition (in thousands):
| 2020 | ||||
| Name | Purchase Price | |||
| Sloane | $ | 24,416 | ||
| Kettle | 5,402 | |||
| Truelogic | 17,300 | |||
| $ | 47,118 | |||
18
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of each acquisition (in thousands):
| 2020 | ||||||||||||||||
| Sloane | Kettle | Truelogic | Total | |||||||||||||
| Cash, cash equivalents and restricted cash | $ | - | $ | 49 | $ | 90 | $ | 139 | ||||||||
| Accounts receivable and other current assets | 2,768 | 2,732 | 2,958 | 8,458 | ||||||||||||
| Other noncurrent assets | - | 172 | 10 | 182 | ||||||||||||
| Intangible assets | 5,900 | 1,930 | 9,500 | 17,330 | ||||||||||||
| Property and equipment | 72 | 58 | 50 | 180 | ||||||||||||
| Right-of-use assets – operating leases | - | 533 | 201 | 734 | ||||||||||||
| Accounts payable and other current liabilities | (469 | ) | (552 | ) | (1,063 | ) | (2,084 | ) | ||||||||
| Advanced billings | (130 | ) | (310 | ) | (429 | ) | (869 | ) | ||||||||
| Operating lease liabilities | - | (533 | ) | (201 | ) | (734 | ) | |||||||||
| Goodwill | 16,275 | 1,323 | 6,184 | 23,782 | ||||||||||||
| Total net assets acquired | $ | 24,416 | $ | 5,402 | $ | 17,300 | $ | 47,118 | ||||||||
Goodwill recognized on the Sloane, Kettle and Truelogic acquisitions is fully-deductible for income tax purposes.
The following table reports the fair value of intangible assets acquired, including the corresponding weighted average amortization periods, as of the date of each acquisition (in thousands, except years):
| 2020 | ||||||||||||||||||
| Weighted Average Amortization | ||||||||||||||||||
| Period | Sloane | Kettle | Truelogic | Total | ||||||||||||||
| Customer relationships | 10 years | $ | 4,600 | $ | 1,600 | $ | 9,100 | $ | 15,300 | |||||||||
| Tradenames and trademarks | 11 years | 1,300 | 330 | 400 | 2,030 | |||||||||||||
| Total | $ | 5,900 | $ | 1,930 | $ | 9,500 | $ | 17,330 | ||||||||||
19
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the total revenue and net income included in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) from the date of each acquisition (in thousands):
| Three
Months Ended June 30, 2020 | Six
Months Ended June 30, 2020 | |||||||
| Revenue | $ | 3,509 | $ | 5,636 | ||||
| Net income | (426 | ) | 52 | |||||
Pro Forma Financial Information (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the 2020 acquisitions as if they had occurred as of January 1, 2020. 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 (in thousands):
| Three
Months Ended June 30, 2020 | Six
Months Ended June 30, 2020 | |||||||
| Revenue | $ | 167,185 | $ | 356,246 | ||||
| Net income | 4,844 | 17,561 | ||||||
Transaction costs for the three and six months ended June 30, 2021 and 2020, which are included in Office and general expenses in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss), were immaterial.
| 6. | Accounts Receivable, Net |
Accounts receivable, net consisted of the following (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Trade receivables | $ | 155,206 | $ | 198,930 | ||||
| Unbilled receivables | 43,187 | 30,570 | ||||||
| Related party receivables | 3,181 | 1,342 | ||||||
| Total accounts receivable | 201,574 | 230,842 | ||||||
| Less: Allowance for doubtful accounts | (4,753 | ) | (5,109 | ) | ||||
| Total accounts receivable, net | $ | 196,821 | $ | 225,733 | ||||
20
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 7. | Investments |
Investments consisted of the following (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Finn Partners | ||||||||
| Preferred shares | $ | - | $ | 12,033 | ||||
| Emerald Research Group | ||||||||
| Call option | - | 360 | ||||||
| Wolfgang | ||||||||
| Equity interest | 1,865 | 1,863 | ||||||
| Total investments | $ | 1,865 | $ | 14,256 | ||||
As of December 31, 2020, the Preferred shares investment is comprised of the Company’s interest in Series B preferred shares of Finn Partners. The preferred shares had a cost basis of $10.0 million, accrued non-cash dividends at a simple rate of 6% annually on a cost basis. They were redeemable to cash in the amount of the cost-plus accrued interest any time after February 28, 2021 or upon a liquidation event. These preferred shares also were convertible to common shares of Finn Partners at any time until February 28, 2021 using a conversion ratio of 1% per $1.0 million of preferred shares held including accrued dividends. The conversion feature was not bifurcated and was clearly and closely related to the host instrument, preferred shares. Management determined that the preferred shares were a debt-like financial instrument and should be accounted for as available-for-sale securities at their fair market value at each reporting period. On March 11, 2021, the Company transferred its ownership in the Preferred shares to the Fund, who redeemed the shares for cash in line with the option described above. This transaction is treated as a nil and $13.0 million non-cash distribution on the Company’s Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2021. The Company recognized a gain of nil and $1.2 million within other income, net on its Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2021 related to this transaction.
The call option represents the Company’s right to purchase additional equity interests in Emerald Research Group (“Emerald”) during a certain pre-determined time horizon. The Company accounts for the option at fair value, at each reporting date.
Equity interest is primarily comprised of a 20% interest in Wolfgang LLC (“Wolfgang”), where the Company concluded it has significant influence. This investment is accounted for as an equity method investment.
21
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 8. | Goodwill and Intangible Assets, net |
Goodwill
The following tables summarizes goodwill for each of the Company’s reportable segments (in thousands):
| Reportable Segment | December
31, 2020 | Acquisitions | Currency Translation | June
30, 2021 | ||||||||||||
| Digital – Marketing | $ | 168,849 | $ | - | $ | 131 | $ | 168,980 | ||||||||
| Digital – Content | 85,392 | - | 609 | 86,001 | ||||||||||||
| Research – Technology | 23,817 | - | - | 23,817 | ||||||||||||
| Research – Corporate | 19,151 | - | - | 19,151 | ||||||||||||
| Communications, Public Affairs & Advocacy | 49,533 | - | (1 | ) | 49,532 | |||||||||||
| All Other | 4,983 | - | 5 | 4,988 | ||||||||||||
| Total | $ | 351,725 | $ | - | $ | 744 | $ | 352,469 | ||||||||
Intangibles Assets, net
Intangible assets, net consisted of the following (in thousands):
| June 30, 2021 | ||||||||||||
| Gross
Carrying Amount | Accumulated Amortization | Net | ||||||||||
| Customer relationships | $ | 129,243 | $ | (54,851 | ) | $ | 74,392 | |||||
| Tradenames and trademarks | 119,104 | (37,755 | ) | 81,349 | ||||||||
| Advertiser relationships | 1,939 | (1,779 | ) | 160 | ||||||||
| Airline relationships | 12,188 | (8,377 | ) | 3,811 | ||||||||
| Association relationships | 11,500 | (1,425 | ) | 10,075 | ||||||||
| Noncompete arrangements | 4,025 | (3,211 | ) | 814 | ||||||||
| Other | 3,211 | (2,682 | ) | 529 | ||||||||
| Total | $ | 281,210 | $ | (110,080 | ) | $ | 171,130 | |||||
December 31, 2020 | ||||||||||||
| Gross
Carrying Amount | Accumulated Amortization | Net | ||||||||||
| Customer relationships | $ | 129,086 | $ | (47,003 | ) | $ | 82,083 | |||||
| Tradenames and trademarks | 118,647 | (32,431 | ) | 86,216 | ||||||||
| Advertiser relationships | 1,911 | (1,435 | ) | 476 | ||||||||
| Airline relationships | 12,013 | (6,755 | ) | 5,258 | ||||||||
| Association relationships | 11,500 | (1,106 | ) | 10,394 | ||||||||
| Noncompete arrangements | 4,005 | (2,980 | ) | 1,025 | ||||||||
| Other | 2,893 | (2,310 | ) | 583 | ||||||||
| Total | $ | 280,055 | $ | (94,020 | ) | $ | 186,035 | |||||
22
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 9. | Accruals and other liabilities |
Accruals and other liabilities consisted of the following (in thousands):
June 30, 2021 | December
31, 2020 | |||||||
| Accrued expenses | $ | 15,877 | $ | 14,910 | ||||
| Accrued salaries and related expenses | 8,999 | 11,908 | ||||||
| Accrued bonuses | 14,779 | 22,149 | ||||||
| Accrued media and related expenses | 27,517 | 9,311 | ||||||
| Accrued airline fees | 8,184 | 6,948 | ||||||
| Taxes payable | 5,026 | 10,149 | ||||||
| Other current liabilities | 7,238 | 14,187 | ||||||
| Total accruals and other liabilities | $ | 87,620 | $ | 89,562 | ||||
| 10. | Commitments and Contingencies |
Revenue and Profit-Sharing Commitments
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.
The table below provides the estimated future minimum commitments under non-cancellable agreements as of June 30, 2021 (in thousands):
| Future Minimum Commitments | ||||
| Remainder of 2021 | $ | 8,318 | ||
| 2022 | 17,322 | |||
| 2023 | 13,267 | |||
| 2024 | 9,289 | |||
| $ | 48,196 | |||
Legal Proceedings
Currently, and from time to time, the Company and its businesses are involved in litigation incidental to the conduct of its business. The Company is currently neither party to any lawsuit nor proceeding that, in its opinion, is likely to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Deferred Acquisition Consideration
Scout Marketing LLC (“Scout”)
On April 19, 2017, as part of its acquisition, Scout agreed to a deferred acquisition consideration arrangement with the former principals of the seller to be paid in three installments within 150 days of December 31, 2018, 2020 and 2021, respectively. This compensation arrangement is contingent on the principals’ continued employment with Scout and adherence to noncompete arrangements through each respective distribution date. The amounts to be distributed are stipulated in the purchase agreement and are based upon certain financial performance measures of Scout from the period January 1, 2017 through December 31, 2021.
23
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company determines the amount of deferred acquisition consideration expense and the related deferred acquisition consideration liability on a systematic method which matches the formulas of the specific earnout periods of the original Scout purchase agreement. The Company recorded a liability of $0.7 million and $0.3 million, all of which is considered a noncurrent liability, in deferred acquisition consideration on the Condensed Consolidated Balance Sheet as of June 30, 2021 and December 31, 2020, respectively. For the three and six months ended June 30, 2021, the Company recorded $0.1 million and $0.4 million as compensation expense in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). For the three and six months ended June 30, 2020, the financial performance measures of Scout were determined not to be met, and accordingly the Company recorded no deferred acquisition consideration expense on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss), related to the Scout arrangement. The maximum deferred acquisition consideration under the contract if all financial performance measures are met is $38.4 million.
MediaCurrent Interactive Solutions LLC (“MediaCurrent”)
The Company incurred an obligation to make contingent earn-out payments to the former shareholders of MediaCurrent Interactive Solutions LLC, a wholly owned subsidiary of Code and Theory LLC, based upon the achievement of certain metrics as defined by the terms of the acquisition agreement, earned through the fiscal year ended December 31, 2019. This arrangement was determined to represent post-acquisition compensation expense rather than purchase consideration related to the business combination. On January 15, 2020, the Company completed the contingent payment of $0.5 million as required under the acquisition agreement.
Rhythm
On January 2, 2019, as part of the acquisition, the Company entered into a deferred acquisition consideration arrangement with the former owners of Rhythm based upon continued employment with Rhythm and the achievement of certain minimum financial targets in 2019, 2020, 2021, 2022 and 2023. The Company’s maximum exposure related to the deferred acquisition consideration is $1.2 million on an annual basis. The payment for a respective year, if the conditions are determined to be achieved, is due no later than 195 days after the end of the respective fiscal period. This arrangement was determined to represent post-acquisition compensation expense rather than purchase consideration related to the business combination. As of June 30, 2021, the Company had $0.3 million, including $0.1 million as a noncurrent liability, in deferred acquisition consideration on the Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2020 and as of December 31, 2020, the financial performance measures of Rhythm were determined not to be met, and accordingly the Company recorded no deferred acquisition consideration liability on the Condensed Consolidated Balance Sheets and no related compensation expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), related to the Rhythm arrangement.
Sloane
The Company incurred an obligation to make two contingent earn-out payments to the former shareholders of Sloane based upon the achievement of certain operating goals in 2020 and 2021, as defined in the arrangement. The payments, if the operating goal is determined to be achieved, is due no later than March 31, 2021 and 2022, respectively. This arrangement was determined to represent deferred acquisition consideration rather than contingent compensation expense. The Company recorded an initial liability of $4.8 million, which represents the fair value of the consideration upon the acquisition of Sloane. As of December 31, 2020, the Company had $7.1 million in deferred acquisition consideration on the Condensed Consolidated Balance Sheets. On March 30, 2021, the Fund completed the contingent payment of $7.1 million to Sloane as required under the arrangement. This payment is treated as a non-cash contribution in the Company’s Condensed Consolidated Statement of Cash Flows and Condensed Consolidated Statement of Changes in Equity.
24
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Kettle
The Company incurred an obligation to make contingent earn-out payments to the former shareholders of Kettle, a wholly-owned subsidiary of Code and Theory, LLC, based upon the achievement of contractually defined operating goals in 2020, 2021, 2022 and 2023. The payments, if the operating goal is determined to be achieved, is due no later than June 30, 2021, 2022, 2023 and 2024, respectively. This arrangement was determined to represent post-acquisition compensation expense rather than purchase consideration related to the business combination. As of June 30, 2021, and December 31, 2020, the Company had $5.0 million and $2.1 million, respectively, including $1.7 million and nil, respectively, as a noncurrent liability, in deferred acquisition consideration on the Condensed Consolidated Balance Sheets.
Truelogic
The Company incurred an obligation to make contingent earn-out payments to the former shareholders of Truelogic based upon the achievement of certain operating goals in 2020, 2021, 2022, and 2023, as defined in the arrangement. This arrangement was determined to represent deferred acquisition consideration rather than contingent compensation expense. The Company recorded an initial liability of $7.9 million, which represents the fair value of the consideration upon the acquisition of Truelogic. As of June 30, 2021, and December 31, 2020, the Company had $10.3 million and $8.4 million, respectively, including $5.0 million and $5.0 million, respectively, as a noncurrent liability, in deferred acquisition consideration on the Condensed Consolidated Balance Sheets. The maximum deferred acquisition consideration under the contract if all financial performance measures are met is $15.0 million.
The Current portion of deferred acquisition consideration consisted of the following (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Sloane | $ | - | $ | 7,080 | ||||
| Kettle | 3,343 | 2,110 | ||||||
| Truelogic | 5,317 | 3,389 | ||||||
| Rhythm | 107 | - | ||||||
| Total current portion of deferred acquisition consideration | $ | 8,767 | $ | 12,579 | ||||
The Long-term portion of deferred acquisition consideration consisted of the following (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Truelogic | $ | 5,022 | $ | 5,028 | ||||
| Kettle | 1,676 | - | ||||||
| Scout | 669 | 240 | ||||||
| Rhythm | 149 | - | ||||||
| Total long-term portion of deferred acquisition consideration | $ | 7,516 | $ | 5,268 | ||||
25
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 11. | Long-Term Debt |
Stagwell Marketing Group Credit Agreement with JPMorgan Chase
On November 18, 2019, the Company entered into a new debt agreement (“JPM Syndicated Facility”) with a syndicate of banks led by JPMorgan Chase Bank, N.A (“JPM”). The JPM Syndicated Facility consists of a five-year revolving credit facility of $265.0 million (“JPM Revolver”) with the right to be increased by an additional $150.0 million provided additional commitments are obtained. On March 18, 2020, the Company increased the commitments on the JPM Revolver by $60.0 million to $325.0 million.
The JPM Revolver offers the Company the ability to draw borrowings denoted in British Pound Sterling. As of June 30, 2021, and December 31, 2020, the Company had $31.7 million and $30.7 million, respectively, in borrowings that were held by its foreign subsidiaries in the United Kingdom.
A portion of the JPM Revolver in an amount not to exceed $10.0 million is available for the issuance of standby letters of credit, of which $7.1 million and $5.5 million is outstanding as of June 30, 2021 and December 31, 2020, respectively. The purpose of the borrowings was to refinance the Company’s previous indebtedness that was held by certain subsidiaries of the Company.
On November 13, 2020, the Company entered into a Second Amendment to its JPM Syndicated Facility (“Second Amendment”) in contemplation of the Proposed MDC Transaction, where the Company amended the following terms: (i) the definition of Adjusted LIBOR is the mathematical calculation of LIBOR for a period equal to 1 month, 3 month or 6 months, multiplied by a fraction of the federal funds effective rate, (ii) the definition of the Alternate Base Rate (“ABR”) is the greatest of (a) the prime rate of interest announced from time to time by the Wall Street Journal, (b) the federal funds effective rate plus half of 0.5% and (c) Adjusted LIBOR for a one-month period plus 1.0%, and in the event (a), (b) or (c) result in an interest rate of less than 1.5%, the interest rate for the period is set to 1.5%, and (iii) the maturity date of the JPM Revolver is November 18, 2024, subject to the refinancing or termination of debt facilities held by MDC ninety-one days prior to their respective maturity dates. The Second Amendment also included a waiver for certain clauses related to legal entity restructuring activities that did not have any bearing on the Company’s covenant ratios, nor the Company’s ability to make further draws on its JPM Revolver in 2020.
The obligations under the JPM Syndicated Facility are senior in priority to all other obligations of the Company and are collateralized by substantially all its assets, including but not limited to, its subsidiaries.
Voluntary prepayments are permitted in whole or in part with prior written notice, but without premium or penalty. The facility matures on November 18, 2024. There are no required payments for the facility until its maturity. Additionally, the Company must meet certain financial and nonfinancial covenants on an ongoing basis. The financial covenant the Company needs to satisfy is a total leverage ratio, which may not (calculated without giving effect to earn-out payments) be greater than 4.25 to 1.0. The ratio is calculated quarterly on a trailing 12-month basis.
As of June 30, 2021 and December 31, 2020, the Company was in compliance with all covenants contained in the JPM Syndicated Facility, and it expects to be in compliance for the following twelve-month period.
26
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On November 13, 2020, the Company, JPM as administrative agent, and a group of lenders entered into a term loan agreement (“JPM Credit Agreement”) that provided the Company with a Delayed Draw Term Loan A in an aggregate principal amount of $90.0 million (“DD Term Loan A”). The DD Term Loan A will mature on November 13, 2023, provided that if the MDC Proposed Transaction is not consummated within thirty days of the draw of the DD Term Loan A, the maturity date will be thirty-one days after the draw. Proceeds of the borrowing under the DD Term Loan A will be used to partially fund a distribution by the Company prior to the closing of the Proposed MDC Transaction. The Company may elect that borrowings in respect of the DD Term Loan A bear interest at an annual rate equal to either ABR or Adjusted LIBOR, as defined in the JPM Credit Agreement, plus a margin of 2% or 3%, respectively. The DD Term Loan A is payable in quarterly installments of principal and interest. Interest is calculated on the first Business Day after a draw on the DD Term Loan A, with principal payments due at a rate of 0.625% per quarter until November 13, 2021, at a rate of 1.25% thereafter, with the remaining balance due upon maturity. As of June 30, 2021 and December 31, 2020, the Company had not made any draws on its DD Term Loan A (see Note 18). The capitalized deferred financing costs associated with the DD Term Loan A of $0.9 million and $1.1 million are recorded in other assets on the Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020, respectively.
The Company also owns an interest rate swap maturing April 2022 with Bank of America to convert $12.7 million of its variable rate debt as of June 30, 2021 to a fixed rate of 2.7%. The fair value of the swap was $0.2 million and $0.4 million and is included in Accruals and other liabilities on the Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020, respectively.
The following table represents the Company’s outstanding debt balances (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Revolver | $ | 187,698 | $ | 201,636 | ||||
| Term Debt | 497 | 994 | ||||||
| Total revolver and term debt | 188,195 | 202,630 | ||||||
| Debt issuance costs | (3,379 | ) | (3,612 | ) | ||||
| Total revolver and term debt, net | 184,816 | 199,018 | ||||||
| Less: Current maturities of long-term debt | (497 | ) | (994 | ) | ||||
| Long-term debt, net | $ | 184,319 | $ | 198,024 | ||||
Total interest expense for the three months ended June 30, 2021 and 2020 on the JPM Syndicated Facility was $1.8 million and $1.6 million, respectively and $3.6 million and $2.9 million for the six months ended June 30, 2021 and 2020, respectively. The weighted average interest rate on the JPM Syndicated Facility as of June 30, 2021 and 2020, was 3.14% and 2.29%, respectively.
Total amortized debt issuance costs, which is included in Interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), for the three months ended June 30, 2021 and 2020 was $0.3 million and $0.1 million, respectively and $0.4 million and $0.2 million for the six months ended June 30, 2021 and 2020, respectively.
27
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 12. | Noncontrolling Interest and Redeemable Noncontrolling Interest |
Noncontrolling Interest
The Company’s noncontrolling interest (“NCI”) in certain subsidiaries are summarized in the following table (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||||||||||
| NCI Percentage Ownership | NCI Equity
Value | NCI Percentage Ownership | NCI Equity Value | |||||||||||||
| Code and Theory | 8.5 | % | $ | 3,168 | 8.5 | % | $ | 2,979 | ||||||||
| Stagwell Technologies | 44.0 | % | 11,232 | 44.0 | % | 11,941 | ||||||||||
| Emerald Research Group | - | - | 40.0 | % | 207 | |||||||||||
| Targeted Victory | 40.0 | % | 16,547 | 40.0 | % | 24,660 | ||||||||||
| Observatory | 8.1 | % | - | 8.1 | % | - | ||||||||||
| Total | $ | 30,947 | $ | 39,787 | ||||||||||||
Redeemable Noncontrolling Interest
The Company’s redeemable noncontrolling interests relate to its shareholding in Volanti Media (Holdings) Ltd (“INK”), through its consolidated subsidiary, Travel Content Ltd. (“TCL”), in Code and Theory, LLC (“Code and Theory”), through its consolidated subsidiary, Stagwell Performance Marketing & Digital Transformation, LLC (“Stagwell Digital”), and Emerald Research Group, LLC (“Emerald”) through its consolidated subsidiary, Harris Insights and Analytics, LLC (“Harris Insights and Analytics”).
INK
The noncontrolling shareholders’ ability to redeem their shares is subject to the occurrence of certain events and the satisfaction of certain conditions, specifically employment termination conditions and the related notices. As of June 30, 2021, and December 31, 2020, the Company determined the redemption option available to the noncontrolling shareholders were not currently redeemable, and in accordance with ASC 480, Distinguishing Liabilities from Equity were not adjusted to its estimated redemption value.
Code and Theory
Code and Theory has one noncontrolling shareholder that owns a put option, which if exercised would require the Company to redeem their shares, after customary closing conditions as outlined in the shareholders agreement. There are no limitations or restrictions on the noncontrolling shareholder’s ability to exercise the put option. In accordance with ASC 480, Distinguishing Liabilities from Equity, the put option is considered to be currently redeemable, and is measured at the greater of its estimated redemption value and accumulated profits and losses allocated to the noncontrolling interest in accordance with ASC 810, Consolidation.
Emerald
Emerald has noncontrolling shareholders that own a put option, which if exercised would require the Company to redeem their shares, after customary closing conditions as outlined in the shareholders agreement. There are no limitations or restrictions on the noncontrolling shareholder’s ability to exercise the put option. In accordance with ASC 480, Distinguishing Liabilities from Equity, the put option is considered to be currently redeemable, and is measured at the greater of its estimated redemption value and accumulated profits and losses allocated to the noncontrolling interest in accordance with ASC 810, Consolidation.
28
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following tables present the changes in redeemable noncontrolling interests (in thousands):
| Amount | ||||
| Beginning Balance as of December 31, 2020 | $ | 604 | ||
| Net loss attributable to redeemable noncontrolling interests | (915 | ) | ||
| Changes in redemption value | 400 | |||
| Ending Balance as of March 31, 2021 | $ | 89 | ||
| Net loss attributable to redeemable noncontrolling interests | (156 | ) | ||
| Changes in redemption value | 2,232 | |||
| Conversion of noncontrolling interest to a redeemable noncontrolling interest | 461 | |||
| Ending Balance as of June 30, 2021 | $ | 2,626 | ||
| 13. | Fair Value Measurements |
The Company evaluates the fair value of certain assets and liabilities using the fair value hierarchy. Fair value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. In determining the fair value, the Company uses valuation techniques that require it to maximize the use of observable inputs and minimize the use of unobservable inputs. As a basis for considering such assumptions, the Company applies the three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 Observable inputs such as quoted prices in active markets;
Level 2 Inputs other than quoted prices in active markets that are observable either directly or indirectly;
Level 3 Unobservable inputs of which there is little or no market data, which require the Company to develop its own assumptions.
Financial Instruments Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial instruments measured at fair value on a recurring basis,
and indicates the fair value hierarchy of each instrument:
| June 30, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Deferred acquisition consideration | $ | - | $ | - | $ | 10,339 | $ | 10,339 | ||||||||
| Interest rate swap | - | - | 236 | 236 | ||||||||||||
29
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Call Options | $ | - | $ | - | $ | 360 | $ | 360 | ||||||||
| Preferred Shares | - | - | 12,033 | 12,033 | ||||||||||||
| Liabilities | ||||||||||||||||
| Deferred acquisition consideration | - | - | 15,497 | 15,497 | ||||||||||||
| Interest rate swap | - | - | 416 | 416 | ||||||||||||
The decrease in the Interest rate swap was related to its change in fair market value as of June 30, 2021.
The Company owned preferred shares in Finn Partners at December 31, 2020. These shares were determined by management to be available-for-sale investments and are recorded at fair value at each reporting period. These preferred shares are considered to be Level 3 fair value measurements since they utilize unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions. The Company determines fair value of preferred shares utilizing an option pricing model. Key assumptions include enterprise value and future growth rates of Finn Partners. On March 11, 2021, the Company transferred its ownership in the Preferred shares to the Fund. This transaction is treated as a $13.0 million non-cash distribution on the Company’s Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2021.
The summary of fair value changes of the preferred shares held by the Company are presented below (in thousands):
| Amount | ||||
| Beginning Balance as of December 31, 2020 | $ | 12,033 | ||
| Interest earned on investment | 113 | |||
| Change in fair market value | 854 | |||
| Distribution | (13,000 | ) | ||
| Ending Balance as of March 31, 2021 and June 30, 2021 | $ | - | ||
The Company incurred an obligation to make contingent deferred acquisition consideration payments to the former shareholders of Sloane and Truelogic that are recorded at fair value at each reporting period. Refer to Note 10 – Commitments and Contingencies for further detail. The earn-out payments are recorded at fair value at each reporting period and are considered to be Level 3 in the fair value hierarchy as they utilize unobservable inputs for which there is little or no market data and requires the Company to develop its own assumptions. The Company determines fair value of options utilizing a Monte Carlo simulation model. Key assumptions include the term of the earn-out payments and the future growth rates of Sloane and Truelogic.
The summary of fair value changes of the contingent deferred acquisition consideration is presented below (in thousands):
30
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| Amount | ||||
| Beginning Balance as of December 31, 2020 | $ | 15,497 | ||
| Change in fair market value | 2,154 | |||
| Payment of deferred acquisition consideration | (7,080 | ) | ||
| Ending Balance as of March 31, 2021 | $ | 10,571 | ||
| Change in fair market value | 268 | |||
| Payment of deferred acquisition consideration | (500 | ) | ||
| Ending Balance as of June 30, 2021 | $ | 10,339 | ||
Due to the short-term nature, the carrying values of cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, and accruals and other liabilities approximate fair value.
Financial Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The carrying amount of the Company’s long-term debt closely approximates its fair value as of June 30, 2021 and December 31, 2020 due to its variable interest rates. The fair value is based on quoted market prices in markets that are not active and is classified as Level 2 within the fair value hierarchy.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Certain non-financial assets and liabilities are recorded at fair value on a nonrecurring basis and accordingly are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment. These assets and liabilities include goodwill, intangible assets, property and equipment, other noncurrent assets and other noncurrent liabilities (Level 3 fair value assessments) and right-of-use lease assets (a Level 2 fair value assessment). As of June 30, 2021, and December 31, 2020 the Company has not recognized an impairment on these non-financial assets and liabilities.
| 14. | Employee Benefit Plans |
Defined Contribution Plan
The Company’s US based businesses maintain 401(k) plans (collectively, the “401(k)”), which provide for tax-deferred contributions of employees’ salaries. Each eligible employee may elect to contribute up to the maximum amount allowed by the Code of the employee’s annual compensation to 401(k). The Company may match a percentage of employee contributions to 401(k). The total matching contributions funded to the 401(k) were $0.9 million and $0.8 million for the three months ended June 30, 2021 and 2020, respectively and $1.9 million and $1.5 million for the six months ended June 30, 2021 and 2020, respectively. Total matching contributions to US based businesses were recorded as part of Cost of services sold and Office and general expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company’s UK based businesses operate a defined contribution plan that complies with the local laws in that country. The plan provides a tax deferred contribution to the employees’ salaries, limited to a maximum annual amount established by the relevant government body of the specific country. The Company’s businesses provide for a matching contribution that meets the minimum percent requirement. The total matching contributions made by the Company’s UK businesses totaled $0.3 million and $0.5 million for the three months ended June 30, 2021 and 2020, respectively and $0.6 million for both the six months ended June 30, 2021 and 2020. Total contributions to UK based businesses were recorded as part of Cost of services sold and Office and general expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
31
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Long-Term Equity Incentive Plan
The Company established the Long-Term Equity Incentive Plan (the “Equity Plan”) as a means for providing long term incentives for certain key officers and members of Brand management. These individuals are eligible to earn nonvoting equity interests in their respective companies. The Equity Plan provides the Brands key officers and members of management with an opportunity to participate in the distribution of the future profits of the Company by granting profit interest units and other incentive awards. The vesting of the awards is typically conditioned amongst other things upon occurrence of an Initial Public Offering (“IPO”) or other qualified liquidity events (“change in control events”). As of June 30, 2021 and December 31, 2020, the Company determined that it is not probable that the change in control events will occur and, as such, did not recognize a contingent compensation expense on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2021 and 2020, and did not recognize a liability on the Condensed Consolidated Balance Sheets as of June 30, 2021, and December 31, 2020.
| 15. | Income Taxes |
The Company’s 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 income tax expense for the three months ended June 30, 2021 of $3.4 million (on pre-tax income of $22.0 million resulting in an effective tax rate of 15.2%) compared to an expense of $0.1 million (on pre-tax income of $5 million resulting in an effective tax rate 2.7%) for the three months ended June 30, 2020.
The difference in effective tax rate of 15.2% in the three months ended June 30, 2021 as compared to 2.7% in same period in 2020 results from an increase in the pre-tax income of taxable entities and a decrease in the pre-tax losses not benefited for purposes of the effective tax rate calculation.
The Company had income tax expense for the six months ended June 30, 2021 of $4 million (on pre-tax income of $27.3 million resulting in an effective tax rate of 14.8%) compared to an expense of $0.6 million (on pre-tax income of $17.9 million resulting in an effective tax rate of 3.3%) for the six months ended June 30, 2020.
The difference in effective tax rate of 14.8% in the six months ended June 30, 2021 as compared to 3.3% in same period in 2020 results from an increase in the pre-tax income of taxable entities and a decrease in the pre-tax losses not benefited for purposes of the effective tax rate calculation.
| 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”) to make decisions regarding resource allocation for the segment and assess its performance. After performing this analysis, the Company determined that each of its Brands are an operating segment.
32
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Once its operating segments were identified, the Company performed an analysis to determine if aggregation of operating segments is applicable under ASC 280, Segment Reporting. This determination is based on a quantitative analysis of historic and projected long-term results of operations for each operating segment, together with a qualitative assessment to determine if operating segments have similar economic and operating characteristics.
The CODM uses Adjusted EBITDA (defined below) as a key metric, to evaluate the operating and financial performance, identify trends, develop projections and make strategic business decisions for each of the reportable segments.
Adjusted EBITDA is defined as Net income before taxes and equity in (losses) earnings of unconsolidated affiliates, plus depreciation and amortization, interest expense, deferred acquisition consideration adjustments, and other items, net. Other items, net includes items such as acquisition-related expenses, other non-recurring items and other restructuring costs.
The six reportable segments that resulted from applying the aggregation criteria are discussed below. The Company also report results, as further detailed below, for the “Corporate” group.
| · | Digital - Marketing: includes Brands that support the delivery of content, commerce, service and sales using online channels. These Brands create websites, back-end systems and other digital environments allowing consumers to engage with Brands using search engine optimization, bots, search engine marketing, influencer & affiliate marketing, email marketing, customer relationship management and programmatic advertising. Brands include Code and Theory, Forward PMX Group, MMI Agency and Stagwell Technologies; |
| · | Digital - Content: includes Brands that create online and offline content supported by ad sales to help clients target niche B2B audience and general consumers. Brands include Multi-View, INK and Observatory; |
| · | Research - Technology: includes a single Brand, National Research Group, which conducts qualitative and quantitative research among consumers on behalf of theatrical, television, streaming content creators, gaming companies and technology companies to attract and engage consumers; |
| · | Research - Corporate: includes Brands that conducts qualitative and quantitative research among consumers and B2B audiences to help companies understand their purchase intent habits and trends to aid in marketing decisions and product development, views of brand and corporate reputation and the use of research for public release. Brands include Harris Insights and Analytics and HarrisX; |
| · | Communications, Public Affairs and Advocacy: includes Brands that provides strategic communications through traditional media relations, social media and in-person engagements, as well as utilizing digital channels to mobilize and raise funds from supporters and constituents to support political candidates and issue organizations in the public arena. Brands include SKDK, Targeted Victory and Wye Communications; |
| · | All Other: includes Brands that create, produce, and promote advertising through traditional and digital channels, provides public relations, online reputation and digital privacy solutions for individuals and businesses. Brands include Scout, Reputation Defender and Collect, Understand and Engage (“CUE”); and |
| · | Corporate: Corporate includes expenses incurred by the Company’s corporate function. These costs primarily consist of office and general expenses, salaries and related employee-related expenses that are not fully allocated to the operating segments. These costs include salaries, long-term incentives, bonuses and other miscellaneous benefits for corporate office employees, corporate office expenses, professional fees related to financial statement audits and legal, information technology and other consulting services that are engaged through the Company’s corporate office, and depreciation incurred on its corporate office. |
33
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The tables below provide summarized financial information for each of the Company’s reportable segments (in thousands):
| For
the Three Months Ended June 30, | For
the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Total Revenue: | ||||||||||||||||
| Digital – Marketing | $ | 76,324 | $ | 50,995 | $ | 142,955 | $ | 101,543 | ||||||||
| Digital - Content | 33,278 | 23,651 | 61,293 | 64,352 | ||||||||||||
| Research - Technology | 21,933 | 11,907 | 37,272 | 28,217 | ||||||||||||
| Research – Corporate | 17,770 | 12,847 | 34,345 | 25,161 | ||||||||||||
| Communications, Public Affairs & Advocacy | 48,580 | 52,423 | 91,880 | 104,662 | ||||||||||||
| All Other | 11,675 | 10,507 | 23,057 | 22,938 | ||||||||||||
| Total Revenue | $ | 209,560 | $ | 162,330 | $ | 390,802 | $ | 346,873 | ||||||||
| Adjusted EBITDA: | ||||||||||||||||
| Digital – Marketing | $ | 16,663 | $ | 8,540 | $ | 28,047 | $ | 14,511 | ||||||||
| Digital – Content | 1,337 | (2,237 | ) | (460 | ) | (1,249 | ) | |||||||||
| Research - Technology | 6,010 | 2,342 | 9,683 | 6,130 | ||||||||||||
| Research – Corporate | 3,372 | 1,883 | 5,961 | 3,063 | ||||||||||||
| Communications, Public Affairs & Advocacy | 10,047 | 9,023 | 18,056 | 19,118 | ||||||||||||
| All Other | 1,668 | 1,420 | 2,244 | 1,236 | ||||||||||||
| Corporate | (379 | ) | (753 | ) | (971 | ) | (960 | ) | ||||||||
| Total Adjusted EBITDA | $ | 38,718 | $ | 20,218 | $ | 62,560 | $ | 41,849 | ||||||||
| Reconciliation to Income before taxes and equity in earnings of unconsolidated affiliates: | ||||||||||||||||
| Depreciation and amortization | (10,381 | ) | (10,108 | ) | (21,331 | ) | (19,864 | ) | ||||||||
| Other (expense) income, net | (486 | ) | (691 | ) | 122 | 2,336 | ||||||||||
| Interest expense, net | (1,935 | ) | (1,976 | ) | (3,286 | ) | (2,887 | ) | ||||||||
| Deferred acquisition consideration adjustments | (2,098 | ) | (1,121 | ) | (6,034 | ) | (1,121 | ) | ||||||||
| Other items, net | (1,808 | ) | (1,306 | ) | (4,749 | ) | (2,424 | ) | ||||||||
| Income before taxes and equity in earnings of unconsolidated affiliates | 22,010 | 5,016 | 27,282 | 17,889 | ||||||||||||
34
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| Depreciation and amortization: | ||||||||||||||||
| Digital – Marketing | $ | 3,710 | $ | 3,282 | $ | 7,439 | $ | 6,510 | ||||||||
| Digital – Content | 3,190 | 2,953 | 6,338 | 6,006 | ||||||||||||
| Research – Technology | 640 | 502 | 1,271 | 989 | ||||||||||||
| Research – Corporate | 651 | 559 | 1,192 | 1,130 | ||||||||||||
| Communications, Public Affairs & Advocacy | 1,395 | 1,573 | 2,978 | 2,756 | ||||||||||||
| All Other | 310 | 760 | 1,143 | 1,516 | ||||||||||||
| Corporate | 485 | 479 | 970 | 957 | ||||||||||||
| Total Depreciation and amortization | $ | 10,381 | $ | 10,108 | $ | 21,331 | $ | 19,864 | ||||||||
The table below provides a summary of the Company’s long-lived assets, comprising of fixed assets, goodwill and intangibles assets, and right-of-use assets – operating leases, net of applicable accumulated depreciation and amortization, by geographic region (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Property and equipment, net | ||||||||
| United States | $ | 32,592 | $ | 31,130 | ||||
| United Kingdom | 5,250 | 4,484 | ||||||
| Total | $ | 37,842 | $ | 35,614 | ||||
| Goodwill and Intangible assets, net | ||||||||
| United States | $ | 415,716 | $ | 426,539 | ||||
| United Kingdom | 107,883 | 111,221 | ||||||
| Total | $ | 523,599 | $ | 537,760 | ||||
| Right-of-use assets – operating leases | ||||||||
| United States | $ | 41,400 | $ | 50,092 | ||||
| United Kingdom | 6,358 | 7,660 | ||||||
| Total | $ | 47,758 | $ | 57,752 | ||||
The 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.
| 17. | Related Party Transactions |
The Stagwell Group engaged certain its Brands to provide services for the Stagwell Group for interagency customers (collectively referred to as “Related Party Work”). The Company recorded $0.6 million and $1.1 million of related party revenue for the three and six months ended June 30, 2020, respectively, and $0.1 million and $0.2 million of cost of service paid to the Stagwell Group for the three and six months ended June 30, 2020, respectively, in connection with such Related Party Work. The Company did not recognize any related party revenue or cost of services paid to the Stagwell Group for the three and six months ended June 30, 2021.
The Fund from time to time makes additional equity investments in the Company. The investment may be either cash or noncash in the form of its interest in companies acquired by the Fund.
35
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Noncash contributions are recorded in Member’s equity at the value of the actual cash the Fund paid for the asset. Stagwell Media made noncash investments in the Company of $1.9 million and $64.3 million, during the three months ended June 30, 2021 and 2020, respectively, and $12.1 million and $83.2 million, during the six months ended June 30, 2021 and 2020, respectively. On March 11, 2021, the Fund received a Noncash distribution of $13.0 million for the transfer of the Company’s ownership in the Finn Partners Preferred shares. Additionally, the Company made cash distributions to the Fund of $11.2 million and $68.0 million for the three months ended June 30, 2021 and 2020, respectively, and $26.2 million and $93.9 million for the six months ended June 30, 2021 and 2020, respectively.
The Company made cash distributions to noncontrolling interests of $0.1 million and $11.0 million for the three months and six months ended June 30, 2021, respectively. There were no cash distributions to noncontrolling interests for the three and six months ended June 30, 2020.
A loan receivable due from an affiliate of one of the Company's Brands is included within other current assets on its Condensed Consolidated Balance Sheets was $3.6 million and $3.4 million as of June 30, 2021 and December 31, 2020, respectively. The Company recognized $0.1 million and $0.2 million of interest income within interest expense, net on its Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2021, respectively.
During the three and six months ended June 30, 2021, the Company recognized $1.1 million and $3.1 million, respectively, in revenue for providing marketing services to a client, in which one of the Company’s Brand partners holds an executive leadership position. As of June 30, 2021, $3.8 million was due from the client for the services provided. No activity related to this arrangement occurred during the three or six months ended June 30, 2020.
During the three and six months ended June 30, 2021, the Company paid $0.3 million and $0.6 million, respectively, in data management commissions to a vendor, in which family members of one of the Company’s Brand partners hold executive leadership positions. As of June 30, 2021, $0.3 million was due to the vendor for services provided.
In the ordinary course of business, the Company enters into transactions with MDC. MDC is considered a related party due to: i) an affiliate of the Stagwell Group owning a minority ownership in MDC, and ii) the manager of the Stagwell Group, Mark Penn, is also the Chief Executive Officer and Chairman of the Board of Directors of MDC.
In October 2019, the Company entered into an arrangement with an affiliate of MDC, in which the Company and the affiliate will collaborate to provide various services to a client of the affiliate. As of June 30, 2021 and December 31, 2020, $0.6 million and $1.3 million, respectively, was due from the affiliate for services provided. For the three months ended June 30, 2021 and 2020, and for the six months ended June 30, 2021 and 2020, the Company recognized $0.7 million, $0.3 million, $1.1 million and $0.8 million, respectively, in revenue under the arrangement.
In January 2020, the Company entered into an arrangement with an affiliate of MDC to develop advertising technology for the affiliate. Under the arrangement, the Company recognized $0.2 million and $0.5 million of revenue for the three and six months ended June 30, 2020, respectively. No activity related to this arrangement occurred during the three or six months ended June 30, 2021. As of June 30, 2021 and December 31, 2020, an immaterial amount was owed to the Company.
In January 2020, the Company entered into an arrangement with an MDC affiliate whereby this affiliate performed media planning, buying and reporting services on behalf of the Company’s client.
36
Stagwell Marketing Group LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company owed the MDC affiliate nil and $30.1 million as of June 30, 2021 and December 31, 2020, respectively.
In May 2020, the Company entered into an arrangement with an affiliate of MDC, in which the affiliate will provide media planning, buying and reporting services. Under the arrangement, the Company recognized $0.3 million and $0.5 million, respectively, for the three and six months June 30, 2021 and $0.1 million in fees for the three and six months ended June 30, 2020. As of June 30, 2021 and December 31, 2020, $0.3 million and $0.2 million, respectively, was due to the affiliate for services provided.
In November 2020, the Company entered into an arrangement with an affiliate of MDC, in which the MDC affiliate provided event management services. As of June 30, 2021, and December 31, 2020 nil and $0.1 million, respectively, was due to the affiliate for services provided. This arrangement was accounted for on a pass-through basis, whereby the Company recognized a net zero amount of revenue and costs on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2021.
In January 2021, the Company entered into an arrangement with an affiliate of MDC. Under this arrangement, the Company owed the MDC affiliate $0.6 million for providing media planning, buying and reporting services to the Company and its clients as of June 30, 2021.
For the three and six months ended June 30, 2020, the Company paid an MDC affiliate nil and $1.4 million on behalf of a client for media buying, planning and reporting services. The arrangement was accounted for on a pass-through basis, whereby the Company recognized a net zero amount of revenue and costs on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). No activity related to this arrangement occurred during the three or six months ended June 30, 2021.
The Company entered into an 11-year lease agreement with an affiliate of MDC that commenced in May 2021. Under this arrangement, the Company has recorded a $6.3 million right-of-use asset and operating lease liability as of June 30, 2021. Rent expense recorded for the three and six months ended June 30, 2021 was $0.1 million.
| 18. | Subsequent Events |
Subsequent events have been evaluated through October 12, 2021, the date these condensed consolidated financial statements were available for issuance.
Issuance of Preferred Stock
On July 7, 2021, Stagwell Technologies issued shares of its Series C Preferred stock to its existing stockholders in exchange for total proceeds of $1.0 million.
MDC Transaction
The MDC shareholder vote occurred on July 26, 2021 and the Proposed Transaction closed on August 2, 2021 to form Stagwell, Inc. Stagwell Inc. is the parent of Midas Opco Holdings, LLC, who wholly owns the Company and sister entity Maxxcom, LLC.
Purchase of Noncontrolling Interest
As contemplated within the Proposed MDC Transaction, and conditioned on the closing of the Proposed MDC Transaction planned for August 2, 2021, the Company acquired 8.1% of the noncontrolling interest in Observatory, 8.5% of the noncontrolling interest in Code and Theory, and 13.3% of Targeted Victory on August 2, 2021. The noncontrolling interest purchase price was based upon the closing stock price on the date of the Proposed MDC Transaction, which was $5.42.
DD Term Loan A
On August 2, 2021, in connection with the MDC Transaction closing the Company drew down on the full amount of the DD Term Loan A and repaid the amount as part of the credit agreement described below.
Combined Credit Agreement
On August 2, 2021, the Company, Midas Opco Holdings, LLC and Maxxcom, LLC entered into an Amended and Restated Credit Agreement (“Combined Credit Agreement”) with JPM to increase commitments on the existing JPM Revolver by $175 million to $500 million. The Combined Credit Agreement consists of a $500 million senior secured revolving credit facility with a five year maturity and contains sub-limits for revolving loans and letters of credit of $50 million for loans denominated in pound sterling or euros. The Combined Credit Agreement also includes an accordion feature under which the borrowers may request, subject to lender approval and certain conditions, to increase the amount of the lenders’ commitments to an aggregate amount not to exceed $650 million.
Borrowings under the Combined Credit Agreement bear interest at a rate equal to, at our option, (i) the greater of (a) the prime rate of interest announced from time to time by JPMorgan Chase Bank, N.A., (b) the federal funds effective rate from time to time plus 0.50% and (c) the LIBOR rate plus 1%, in each case, plus the applicable margin at that time (the “ABR”) or (ii) the LIBOR rate plus the applicable margin at that time (the “Eurodollar”).
The Company must meet certain financial and nonfinancial covenants on an ongoing basis. The financial covenant the Company needs to satisfy is a total leverage ratio on the last day of any fiscal quarter of 4.75 to 1.0 through and including December 31, 2021, 4.50 to 1.0 from March 22, 2022 through and including December 31, 2022 and 4.25 to 1.0 from March 31, 2023 and thereafter.
Line of Credit
On August 2, 2021, the Company, Maxxcom, LLC and Midas Opco Holdings, LLC, as borrowers, and JPMorgan Chase Bank, N.A. entered into an unsecured uncommitted line of credit in the aggregate amount of $30,000,000 to be used to meet the Borrower’s normal short term working capital needs. The Line of Credit expires on the earlier of (1) September 1, 2021 and (2) the consummation of this offering. As of the date of this offering circular, there were no amounts outstanding under the Line of Credit.
Distribution
On August 2, 2021, in connection with the Proposed Transaction, the Company made a distribution of $164.2 million to Stagwell Media.
Equity Compensation
On August 2, 2021, in connection with the Proposed Transaction, the Company granted 7.3 million units in Stagwell Friends and Family LLC, a member of Midas Opco Holdings, LLC, to certain executives and employees of the Company that immediately vested. The total compensation charge recorded for these awards was $39.7 million.
Sale of Reputation Defender
On September 15, 2021, the Company sold Reputation Defender for approximately $40 million.
37
Exhibit 99.3
Unaudited Pro Forma Condensed Combined Financial Information
Introduction
On August 2, 2021, Stagwell Inc. (the “Company”) consummated the previously announced combination of MDC Partners Inc. (“MDC”) and certain subsidiaries of Stagwell Media LP (“Stagwell Media”) pursuant to that certain Transaction Agreement, dated as of December 21, 2020, as amended on June 4, 2021 and July 8, 2021 (the “Transaction Agreement”), by and among Stagwell Media, MDC, New MDC LLC (“New MDC”) and Midas Merger Sub 1 LLC (“Merger Sub”) (the transactions contemplated by the Transaction Agreement, the “Transactions”). The Stagwell Subject Entities comprise Stagwell Marketing Group LLC (“Stagwell Marketing”) and its direct and indirect subsidiaries. In this Unaudited Pro Forma Condensed Combined Financial Information, the Stagwell Subject Entities are referred to as “Stagwell”.
In respect of the Transactions, the acquired assets and assumed liabilities, together with acquired processes and employees, represent a business as defined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The Transactions will be accounted for as a reverse acquisition using the acquisition method of accounting, pursuant to FASB Topic 805-10, Business Combinations, with MDC treated as the legal acquirer and Stagwell treated as the accounting acquirer. In identifying Stagwell as the acquiring entity for accounting purposes, MDC and Stagwell took into account a number of factors, including the relative voting rights and the corporate governance structure of the Company. Stagwell 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 (“Stagwell OpCo”) of 69.55% ownership of Stagwell 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, will be recorded at their respective fair value as of the date the Transactions were completed.
The following unaudited pro forma condensed combined financial information gives effect to the Transactions. The unaudited Pro Forma Condensed Combined Balance Sheet is presented as if the Transactions had occurred on June 30, 2021. The unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2020 and six months ended June 30, 2021 are presented as if the Transactions had occurred on January 1, 2020, the beginning of the earliest period presented. The unaudited pro forma condensed combined financial information is based on the historical consolidated financial statements of Stagwell and MDC, and the assumptions and adjustments set forth in the accompanying explanatory notes. This unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting where Stagwell is considered the acquirer of MDC for accounting purposes. See “Note 2 — Basis of Pro Forma Presentation” below.
The unaudited pro forma condensed combined financial information for the Transactions has been developed from Stagwell’s and MDC’s historical financial statements. The information should be read together with MDC’s and Stagwell’s respective audited and unaudited financial statements and related notes, which for MDC are contained in the MDC’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and Quarterly Reports for the quarterly periods ended March 31, 2021 and June 30, 2021 and for Stagwell are included as exhibits to the Form 8-K/A to which this information is an exhibit and to the original Form 8-K dated August 2, 2021. The acquisition of MDC will be accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805. The pro forma adjustments are based on preliminary estimates of the fair value of the assets acquired and liabilities assumed and information available as of the date of the Form 8-K/A to which this information is an exhibit. Certain valuations and assessments, including valuations of property, plant and equipment, contingent consideration, other intangible assets as well as the assessment of the tax positions and tax rates of the combined business, are in process and will not be completed until subsequent to the date of the Form 8-K/A to which this information is an exhibit. The estimated fair values assigned in this unaudited pro forma condensed combined financial information are preliminary and represent the current best estimate of fair value and are subject to revision.
On August 2, 2021, an aggregate of 179,970,051 shares of the Company’s Class C common stock were issued to Stagwell Media in exchange for $1,800 (the “Stagwell New MDC Contribution”). The Class C common stock does not participate in the earnings of the Company. Additionally, an aggregate of 179,970,051 Stagwell 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, or the purchase price, in the unaudited pro forma condensed combined financial information is estimated to be approximately $426.4 million. The purchase consideration consists of approximately 79 million shares of the Company’s Class A and B common stock and common stock equivalents based on a per share price of $5.42.
Accounting Treatment for the Transactions and Related Pro Forma Adjustments
As previously noted, the Transactions are being accounted for as a reverse acquisition using the acquisition method of accounting, pursuant to ASC 805, with MDC treated as the legal acquirer and Stagwell treated as the accounting acquirer. 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. As explained in more detail in the accompanying notes to the unaudited pro forma condensed combined financial statements, the total purchase price to acquire MDC has been allocated to the assets acquired and assumed liabilities of MDC based upon preliminary estimated fair values at the date of acquisition, as if the acquisition had occurred on June 30, 2021. The fair value of the acquired assets and assumed liabilities as of the date of acquisition are based on preliminary estimates assisted, in part, by a third-party valuation expert. The estimates are subject to change upon the finalization of appraisals and other valuation analyses, which are expected to be completed no later than one year from the date of acquisition. Although the completion of the valuation activities may result in asset and liability fair values that are different from the preliminary estimates included herein, it is not expected that those differences would alter the understanding of the impact of this transaction on the consolidated financial position and results of operations of the Company.
In connection with the Transactions, the Company, Stagwell Media and Stagwell Opco entered into the Tax Receivable Agreement, pursuant to which the Company agreed to pay Stagwell Media 85% of the cash savings, if any, with respect to U.S. federal, state, and local income tax or franchise tax that the Company actually realizes as a result of (a) any increases in tax basis attributable to redemptions or exchanges by Stagwell Media of Stagwell OpCo common units for shares of the Company’s Class A common stock or cash (an “Exchange”) and (b) tax benefits related to imputed interest deemed to be paid by the Company. as a result of the Tax Receivable Agreement. The Company expects to benefit from the remaining 15% of cash savings, if any, that are realized. Due to the uncertainty in the amount and timing of future Exchanges, the unaudited pro forma consolidated financial information assumes that no Exchanges have occurred and therefore no increases in tax basis in the Company’s assets or other tax benefits that may be realized thereunder have been assumed in the unaudited pro forma consolidated financial information. However, if all of the Stagwell OpCo common units subject to the Tax Receivable Agreement were so redeemed or exchanged, the Company would recognize a deferred tax asset of approximately $114 million and a liability of approximately $97 million, payable over the 15-year period from the assumed date of such Exchanges, assuming (i) all Exchanges occurred on the same day at $5.42 per share; (ii) a constant combined corporate tax rate of 28%; (iii) the Company will have sufficient taxable income to fully utilize the tax benefits in the year the related tax deduction arises; and (iv) no material changes in tax law. The actual amount of deferred tax assets and related liabilities that the Company will recognize will differ based on, among other things, the timing of the Exchanges, the price of shares of the Company’s Class A common stock at the time of the exchange, and the tax rates then in effect.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 2021
(In thousands)
Assets | Stagwell Marketing Historical | MDC Partners Inc. Historical |
Transaction Adjustment |
Pro | ||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 73,450 | $ | 108,280 | $ | (66,334 | ) | (5a) | $ | 115,396 | ||||||
| Accounts receivable, less allowance for doubtful accounts | 196,821 | 426,841 | — | 623,662 | ||||||||||||
| Expenditures billable to clients | 15,909 | 16,793 | — | 32,702 | ||||||||||||
| Other current assets | 37,701 | 31,312 | — | 69,013 | ||||||||||||
| Total current assets | 323,881 | 583,226 | (66,334 | ) | 840,773 | |||||||||||
| Fixed assets, at cost, less accumulated depreciation | 37,842 | 81,191 | — | 119,003 | ||||||||||||
| Right of use assets – operating leases | 53,997 | 198,556 | 149,396 | (5b) | 401,949 | |||||||||||
| Goodwill | 352,469 | 671,542 | 579,602 | (5c) | 1,603,613 | |||||||||||
| Other intangible assets, net | 171,130 | 29,405 | 780,495 | (5d) | 981,030 | |||||||||||
| Deferred tax assets | — | — | — | (5e) | — | |||||||||||
| Other assets | 4,443 | (4a) | 23,258 | — | 27,701 | |||||||||||
| Total assets | 943,762 | 1,587,178 | 1,443,159 | 3,974,099 | ||||||||||||
Liabilities, Redeemable Non-Controlling Interests and Shareholders’ Equity (Deficit) | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | 108,734 | 158,136 | — | 266,870 | ||||||||||||
| Accruals and other current liabilities | 88,117 | (4b) | 250,070 | 86,325 | (5f) | 424,512 | ||||||||||
| Advance billings | 70,049 | 211,248 | — | 281,297 | ||||||||||||
| Current portion of lease liabilities – operating leases | 19,280 | 41,400 | 14,000 | (5b) | 74,680 | |||||||||||
| Current portion of deferred acquisition consideration | 8,767 | 59,612 | — | 68,379 | ||||||||||||
| Total current liabilities | 294,947 | 720,466 | 100,325 | 1,115,738 | ||||||||||||
| Long-term debt | 184,319 | 935,072 | 146,910 | (5g) | 1,266,301 | |||||||||||
| Long-term portion of deferred acquisition consideration | 7,516 | 8,056 | (3,158 | ) | (5h) | 12,414 | ||||||||||
| Long-term lease liabilities – operating leases | 49,435 | 231,811 | 60,741 | (5b) | 341,987 | |||||||||||
| Other liabilities | 23,577 | (4c) | 74,826 | 32,525 | (5i) | 130,928 | ||||||||||
| Total liabilities | 559,794 | 1,970,231 | 337,343 | 2,867,368 | ||||||||||||
| Redeemable Noncontrolling Interests | 2,626 | 24,639 | 6,191 | (5j) | 33,456 | |||||||||||
| Commitments, contingencies and guarantees | ||||||||||||||||
| Shareholders’ deficit: | ||||||||||||||||
| Convertible preference shares | — | 152,746 | 57,234 | (5k) | 209,980 | |||||||||||
| Common shares and other paid-in capital | 345,777 | (4d) | 97,783 | (231,044 | ) | (5k) | 212,516 | |||||||||
| Accumulated equity (deficit) | 3,906 | (698,635 | ) | 658,824 | (5l) | (35,905 | ) | |||||||||
| Accumulated other comprehensive (loss) income | 712 | (4d) | 39 | (39 | ) | (5l) | 712 | |||||||||
| Shareholders’ Capital (Deficit) | 350,395 | (448,067 | ) | 484,975 | 387,303 | |||||||||||
| Noncontrolling interests | 30,947 | 40,375 | 614,650 | (5k) | 685,972 | |||||||||||
| Total Shareholders’ Capital (Deficit) | 381,342 | (407,692 | ) | 1,099,625 | 1,073,275 | |||||||||||
| Total Liabilities, Redeemable Noncontrolling Interests and Shareholders’ Equity (Deficit) | $ | 943,762 | $ | 1,587,178 | $ | 1,441,159 | $ | 3,974,099 | ||||||||
See the accompanying notes to the unaudited pro forma condensed combined financial statements
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Six Months Ended June 30, 2021
(In thousands, except share and per share amounts)
| Stagwell Marketing Group LLC Historical | MDC Partners Inc. Historical | Transaction adjustments | Pro Forma Combined | |||||||||||||||
| Revenue | ||||||||||||||||||
| Services | $ | 390,802 | $ | 653,190 | $ | — | $ | 1,043,992 | ||||||||||
| Operating expenses: | ||||||||||||||||||
| Cost of services sold | 234,073 | 411,332 | — | (6 | a) | 645,405 | ||||||||||||
| Office and general expenses | 104,952 | 164,492 | 1,889 | (6 | b) | 271,333 | ||||||||||||
| Depreciation and amortization | 21,331 | 16,181 | 28,887 | (6 | c) | 66,399 | ||||||||||||
| Impairment and other losses | — | 875 | — | 875 | ||||||||||||||
| 360,356 | 592,880 | 30,776 | 984,012 | |||||||||||||||
| Operating income | 30,446 | 60,310 | (30,776 | ) | 59,980 | |||||||||||||
| Other income (expenses) | ||||||||||||||||||
| Interest expense and finance charges, net | (3,286 | ) | (38,577 | ) | — | (6 | d) | (41,863 | ) | |||||||||
| Foreign exchange gain (loss) | — | 3,982 | (5,285 | ) | (6 | e) | (1,303 | ) | ||||||||||
| Other, net | 122 | 1,456 | — | 1,578 | ||||||||||||||
| (3,164 | ) | (33,139 | ) | (5,285 | ) | (41,588 | ) | |||||||||||
| Income before income taxes and equity in earnings of non-consolidated affiliates | 27,282 | 27,171 | (36,062 | ) | 18,391 | |||||||||||||
| Income tax expense | 4,021 | 2,689 | (3,455 | ) | (6 | f) | 3,255 | |||||||||||
| Income before equity in earnings of non-consolidated affiliates | 23,261 | 24,482 | (32,607 | ) | 15,136 | |||||||||||||
| Equity in earnings (losses) of non-consolidated affiliates | 1 | (644 | ) | — | (643 | ) | ||||||||||||
| Net income | 23,262 | 23,838 | (32,607 | ) | 14,493 | |||||||||||||
| Net income attributable to the noncontrolling interest | (1,552 | ) | (12,722 | ) | 7,926 | (6 | g) | (6,348 | ) | |||||||||
| Net income (loss) attributable to Company | 21,710 | 11,116 | (24,681 | ) | 8,145 | |||||||||||||
| Accretion on and net income allocated to convertible preference shares | — | (8,540 | ) | — | (8,540 | ) | ||||||||||||
| Net income (loss) attributable to Company common shareholders | $ | 21,710 | $ | 2,576 | $ | (24,681 | ) | $ | (395 | ) | ||||||||
| Earnings per share: | ||||||||||||||||||
| Net income per share: | ||||||||||||||||||
| Basic | 0.03 | (0.01 | )(6h) | |||||||||||||||
| Diluted | 0.03 | (0.01 | )(6h) | |||||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||
| Basic | 74,240,447 | — | (6 | i) | 74,240,447 | |||||||||||||
| Diluted | 77,001,526 | — | (6 | i) | 77,001,526 | |||||||||||||
See the accompanying notes to the unaudited pro forma condensed combined financial statements
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Twelve Months Ended December 31, 2020
(In thousands, except share and per share amounts)
Stagwell Marketing Group LLC Historical |
MDC Partners Inc. Historical |
Transaction adjustments |
Pro Forma Combined | |||||||||||||||
| Revenue | ||||||||||||||||||
| Services | $ | 888,032 | $ | 1,199,011 | $ | — | $ | 2,087,043 | ||||||||||
| Cost of services sold | 571,588 | 769,899 | 65,751 | (6 | a) | 1,407,238 | ||||||||||||
| Office and general expenses | 191,679 | 341,565 | 22,874 | (6 | b) | 556,118 | ||||||||||||
| Depreciation and amortization | 41,025 | 36,905 | 54,958 | (6 | c) | 132,888 | ||||||||||||
| Impairment and other losses | — | 96,399 | — | 96,399 | ||||||||||||||
| 804,292 | 1,244,768 | 143,584 | 2,192,644 | |||||||||||||||
| Operating income | 83,740 | (45,757 | ) | (143,584 | ) | (105,601 | ) | |||||||||||
| Interest expense and finance charges, net | (6,223 | ) | (62,163 | ) | (13,794 | ) | (6 | d) | (82,180 | ) | ||||||||
| Foreign exchange gain (loss) | — | (982 | ) | (3,421 | ) | (6 | e) | (4,403 | ) | |||||||||
| Other, net | (177 | ) | 20,500 | — | 20,323 | |||||||||||||
| (6,400 | ) | (42,645 | ) | (17,215 | ) | (66,260 | ) | |||||||||||
| Income before income taxes and equity in earnings of non-consolidated affiliates | 77,340 | (88,402 | ) | (160,799 | ) | (171,861 | ) | |||||||||||
| Income tax expense | 5,937 | 116,555 | (63,185 | ) | (6 | f) | 59,307 | |||||||||||
| Income before equity in earnings of non-consolidated affiliates | 71,403 | (204,957 | ) | (97,614 | ) | (231,168 | ) | |||||||||||
| Equity in earnings (losses) of non-consolidated affiliates | 58 | (2,240 | ) | — | (2,182 | ) | ||||||||||||
| Net income | 71,461 | (207,197 | ) | (97,614 | ) | (233,350 | ) | |||||||||||
| Net income attributable to the noncontrolling interest | (15,105 | ) | (21,774 | ) | 211,057 | (6 | g) | 174,178 | ||||||||||
| Net income (loss) attributable to Company | 56,356 | (228,971 | ) | 113,443 | (59,172 | ) | ||||||||||||
| Accretion on and net income allocated to convertible preference shares | — | (14,179 | ) | — | (14,179 | ) | ||||||||||||
| Net income (loss) attributable to Company common shareholders | $ | 56,356 | $ | (243,150 | ) | $ | 113,443 | $ | (73,351 | ) | ||||||||
| Earnings per share: | ||||||||||||||||||
| Net income per share: | ||||||||||||||||||
| Basic | (3.34 | ) | (1.01 | )(6h) | ||||||||||||||
| Diluted | (3.34 | ) | (1.01 | )(6h) | ||||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||
| Basic | 72,862,178 | — | (6 | i) | 72,862,178 | |||||||||||||
| Diluted | 72,862,178 | — | (6 | i) | 72,862,178 | |||||||||||||
See the accompanying notes to the unaudited pro forma condensed combined financial statements
1. Description of the Transaction
As part of the reorganization of the Company in connection with the Transactions, Stagwell OpCo converted into a limited liability company that holds the Company’s operating assets. Following the reorganization, (i) and to which Stagwell Media contributed to Stagwell OpCo the equity interests of the Stagwell Subject Entities in exchange for 179,970,051 Stagwell Opco common units, and (ii) Stagwell Media contributed to the Company an aggregate amount of cash equal to $1,800 in exchange for 179,970,051 shares of the Company’s Class C common stock. Stagwell was deemed to be the accounting acquirer under ASC 805 and thus MDC’s acquired assets and assumed liabilities are measured at their fair value.
The purchase price allocation has been derived from estimates of the fair value of the tangible and intangible assets and liabilities of MDC, using established valuation techniques. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially affect the Company’s results of operations. The total purchase price has been allocated on a preliminary basis to identifiable assets acquired and liabilities assumed, based upon valuation procedures performed to date. As of the date of the Form 8-K/A to which this information is an exhibit, the valuation studies performed to determine the fair value of the assets acquired and liabilities assumed and the related allocations of purchase price are preliminary. The final determination of the fair values of the identifiable tangible and intangible assets acquired and liabilities assumed may differ from the amounts reflected in the pro forma purchase price allocation, and any differences may be material. The purchase price allocation will be finalized as soon as practicable within the measurement period, but in no event later than one year following the acquisition date.
2. Basis of Pro Forma Presentation
Basis of Preparation of the Pro Forma Information
The unaudited pro forma condensed combined financial information has been prepared in accordance with Regulation S-X Article 11, as amended by SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses. In accordance with Release No. 33-10786, the unaudited condensed combined pro forma balance sheet and statements of operations reflect transaction accounting adjustments, as well as other adjustments deemed to be directly related to the Transactions, irrespective of whether or not such adjustment is deemed to be recurring.
The unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the Transactions. The unaudited Pro Forma Condensed Combined Balance Sheet is presented as if the Transactions had occurred on June 30, 2021. The unaudited Pro Forma Condensed Combined Statement of Operations for the six months ended June 30, 2021 and year ended December 31, 2020 are presented as if the Transactions had occurred on January 1, 2020. This pro forma information is provided for informational purposes only and is based on available information and reasonable assumptions. The pro forma information does not purport to represent what the actual consolidated results of operations or the consolidated financial position of the Company would have been if the Transactions had occurred on the dates indicated, nor is it necessarily indicative of the future consolidated results of operations or consolidated financial position of the Company. The actual financial position and results of operations of the Company may differ, perhaps significantly, from the pro forma amounts reflected herein due to a variety of factors, including access to additional information as management completes its review of the acquisition accounting.
Accounting for the Transaction
The accompanying unaudited pro forma condensed combined financial statements give effect to the Transactions. The unaudited pro forma condensed combined financial information is based on the historical consolidated financial statements of Stagwell Marketing and MDC, as well as the assumptions and adjustments set forth in these notes. Adjustments reflected in the unaudited pro forma condensed combined financial statements include the balance sheet and statement of operations impacts of the application of the acquisition method of accounting in accordance with ASC 805. Adjustments also reflect the impact that discrete transactions directly related to the Transactions have had or will have on the results of operations and financial condition of the Company.
ASC 805 requires the allocation of purchase 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 determination of the fair value of the identifiable assets acquired and liabilities assumed upon consummation of the Transactions, as well as the allocation of the estimated consideration to these identifiable assets and liabilities, is preliminary as of the date that the unaudited pro forma condensed combined financial information has been prepared. Accordingly, the fair values of the identifiable assets acquired and liabilities assumed may be revised as additional information becomes available and is evaluated. Since the unaudited pro forma condensed combined financial information has been prepared based upon preliminary estimates of consideration and the fair values of the identifiable assets acquired and liabilities assumed from MDC, the actual amounts eventually recorded in connection with acquisition accounting, including the identifiable intangibles and goodwill, could differ materially from the information presented. However, the Company’s management believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Transactions, including the application of the acquisition method of accounting, based on information available at the time. Management further believes that the pro forma adjustments give appropriate effect to the assumptions that have been made and those assumptions have been properly applied.
3. Calculation of Purchase Price and Preliminary Allocation of Estimated Fair Value of Assets Acquired and Liabilities Assumed
The equity portion of the purchase price is based on an MDC share price of $5.42 on the date of closing of the Transactions. The total acquisition purchase price was $426,397.
The purchase price is allocated to the underlying assets acquired and liabilities assumed based on their respective fair values, with any excess purchase price allocated to goodwill. The purchase price was allocated as follows:
| Fair value of consideration transferred | $ | 426,397 | ||||||
| Cash and cash equivalents acquired | $ | 108,280 | ||||||
| Net identifiable tangible assets acquired | 579,395 | |||||||
| Right of use assets acquired | 347,952 | |||||||
| Net identifiable intangible assets acquired | 809,900 | |||||||
| Estimated Fair value of total assets acquired (net of Goodwill) | $ | 1,845,527 | ||||||
| Accrued expenses and other current liabilities | 705,779 | |||||||
| Operating lease liability – current and non-current | 347,952 | |||||||
| Debt | 991,982 | |||||||
| Deferred acquisition consideration | 64,510 | |||||||
| Other long-term liabilities | 161,011 | |||||||
| Redeemable non-controlling interests | 30,830 | |||||||
| Preferred shares | 209,980 | |||||||
| Non-controlling interests | 158,230 | |||||||
| Estimated Fair value of total liabilities and non-controlling interests assumed | $ | 2,670,274 | ||||||
| Estimated Fair value of net assets acquired | $ | (824,747 | ) | |||||
| Goodwill | $ | 1,251,144 |
4. Condensing of Stagwell’s Historical Balance Sheet Information Impacting the Pro Forma Balance Sheet of the Company
Stagwell Balance Sheet Reclassification Adjustments:
Certain balances within Stagwell’s historical balance sheet were combined to align with presentation of MDC. The following is a summary of the condensing adjustments included in the unaudited pro forma condensed combined balance sheet (in thousands):
| (a) | Combines investments of $1,865 and other noncurrent assets of $2,578 historically recorded separately on Stagwell’s balance sheet. |
| (b) | Combines $497 of current maturities of long-term debt with $87,620 of accruals and other liabilities historically recorded separately on Stagwell’s balance sheet. |
| (c) | Combines the historical deferred tax liability balance of $16,232 and other noncurrent liabilities of $7,345 historically reported separately on Stagwell’s balance sheet. | |
| (d) | Separates the historical balance of Stagwell’s accumulated other comprehensive income of $712. |
5. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The following summarizes and provides explanations for the pro forma adjustments included in the unaudited pro forma condensed combined balance sheet presented as of June 30, 2021:
| (a) | The adjustment of $66,334 reflects the proceeds from the draw down of $90,000 under Stagwell’s revolving credit agreement, more than offset by a $156,334 dividend distribution to Stagwell shareholders immediately prior to the closing of the Transactions. |
| (b) | Adjustments reflect the net effects of remeasuring MDC’s right-of-use assets and lease liabilities in connection with the application of acquisition accounting. The following table summarizes the net impact of the adjustment: |
Historical MDC Balance(i) |
Opening Balance Sheet Amount(ii) | Pro forma Purchase Accounting Adjustment | ||||||||||
| Operating right-of-use asset(iii) | $ | 198,556 | $ | 347,952 | $ | 149,396 | ||||||
| Operating lease liability, current(iii) | $ | 41,400 | $ | 55,400 | $ | 14,000 | ||||||
| Operating lease liability, net of current portion(iii) | $ | 231,811 | $ | 292,552 | $ | 60,741 | ||||||
| (i) | Amounts reported as historical MDC balances. |
| (ii) | Refer to Note 3 for a preliminary allocation of acquisition accounting, inclusive of the amounts at which MDC’s leases will be recorded to the opening balance sheet. |
| (iii) | Adjustments to record the right-of-use asset and lease liability balances based upon amounts determined upon the application of acquisition accounting (see Note 6b below for additional information). |
| (c) | Adjustment recorded to reflect the preliminary amount of goodwill resulting from the excess of purchase consideration paid over the fair value of the net assets acquired, as if the acquisition occurred as of June 30, 2021. Refer to Note 3 for details regarding the allocation of purchase consideration and the calculation of Goodwill resulting from the Transactions. The amount of Goodwill ultimately recognized in acquisition price accounting at the acquisition closing date will differ from amount shown in the unaudited pro forma condensed combined financial statements due to changes to certain of MDC’s reported current asset and liability balances. Goodwill resulting from the acquisition is not amortized and will be assessed for impairment at least annually. |
Historical MDC Balance |
Opening | Pro
forma | ||||||||||
| Goodwill | $ | 671,542 | $ | 1,251,144 | $ | 579,602 | ||||||
| (d) | Adjustment recorded to reflect acquired identifiable intangible assets, consisting of tradenames and customer relationships, at their fair values in connection with the application of acquisition accounting. Management has performed a preliminary valuation analysis to determine the fair value of each of the identifiable intangible assets using the “income approach.” Application of the income approach requires management to forecast the expected future cash flows attributable to the intangible assets, which are then discounted to their present value. |
The following table summarizes the estimated fair values of the identifiable intangible assets acquired upon consummation of the Transactions, the estimated useful lives of the identifiable intangible assets and the amount by which MDC’s historical intangible asset balance was adjusted on a pro forma basis to reflect the identifiable intangible assets at their fair value:
| Estimated fair value | Estimated useful life in years | |||||||
| Trade Names | $ | 98,000 | 10 | |||||
| Customer Relationships | 711,900 | 6-15(i) | ||||||
| Total Acquired Intangible Assets | $ | 809,900 | ||||||
| MDC’s historical intangible asset balances | (29,405 | ) | ||||||
| Pro forma Adjustment | $ | 780,495 | ||||||
Customer relationship useful lives vary based on specific customer data at the reporting unit level. MDC has assigned useful lives to the individual intangible assets based on the underlying cash flows expected from each reporting unit’s customer base.
The preliminary estimates of fair value and estimated useful lives could differ from the amounts ultimately determined upon completion of the valuation analysis, and the difference could have a material effect on the accompanying unaudited pro forma condensed combined financial statements.
| (e) | No change to historical deferred tax asset balance. See adjustment 5(i) for additional information. |
| (f) | The adjustment of $86,325 includes: |
| • | Transaction costs of $11,325 incurred by MDC |
| • | Tax liability of $50,000 for Canadian Capital Gains tax and Exit tax related to the MDC’s Redomiciliation into the U.S. from Canada |
| • | Liability of $25,000 to recognize amount payable in connection with the redemption of a portion of MDC’s preferred shares |
| (g) | The adjustment of $146,910 reflects the amount due for Stagwell’s draw down of $90,000 under its revolving credit agreement and an increase of $56,910 to reflect MDC’s debt at fair value. |
| (h) | The adjustment of $3,158 is to reflect the preliminary fair value of deferred acquisition consideration associated with MDC’s legacy acquisitions. The Monte Carlo simulation (the “MC Simulation”) method was utilized to calculate the fair value of the deferred acquisition consideration. The basis of a MC Simulation involves assigning multiple values to the base case projected cash flows by applying a volatility factor to the cash flows based on market inputs and company specific transactions to achieve multiple results and then to average the results to obtain an estimate. Multiple scenarios were modeled under the MC Simulation method to estimate the payment(s) in connection with the contractual deferred acquisition consideration formula and discounted at a rate of approximately 5% to estimate the fair value of the obligation. The discount rate utilized was derived from the risk-free rate increased by the base credit spread of MDC’s 7.50% senior notes due 2024, initially issued in the principal amount of $900,000 (the “Senior Notes”), plus a premium for the subordinated position of the obligation. |
| (i) | The adjustment of $32,525 to reflect the deferred tax liability impact of the Transactions. The deferred tax liability impact associated with the Transactions was determined by multiplying the temporary difference associated with the Company’s investment in Stagwell OpCo and other tax attributes retained by the Company at the applicable combined statutory rates (including the state statutory rate net of U.S. federal benefit), taking into consideration the changes to the book carrying value of MDC’s applicable assets and liabilities as part of acquisition accounting and the related impact of the Stagwell OpCo Contribution. |
| (j) | The adjustment of $6,191 is to reflect the preliminary fair value of redeemable noncontrolling interest where the noncontrolling interest holder has the right to sell its interest to the Company at a prescribed contractual formula. The MC Simulation method in combination with Scenario Based Analysis (“SBA”) was utilized to calculate the fair value of the redeemable non-controlling interest liability. The MC Simulation method involves assigning multiple values to the base case projected cash flows by applying a volatility factor to the cash flows based on market inputs and company specific transactions to achieve multiple results and then to average the results to obtain an estimate. The SBA is used to measure the fair value under various exercise periods to select the optimal scenario that yielded the highest fair value. The highest average expected value was discounted at a rate of approximately 5% to estimate the final fair value. The discount rate utilized was derived from the risk-free rate increased by the base credit spread of the Senior Notes plus a premium for the subordinated position of the obligation. |
| (k) | The adjustments to convertible preference shares, common shares and other paid-in capital and Noncontrolling interests is equal to the sum of the following components: |
| 5(k)i | 5(k)ii | 5(k)iii | 5(k)iv | 5(k)v | 5(k)vi | Total Adjustments | |||||||||||||||||
| Convertible preference shares | $ | 57,234 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 57,234 | 5(k) | ||||||||
| Common shares and other paid-in capital | $ | 328,614 | $ | (156,334 | ) | $ | 3,707 | $ | 44,788 | $ | 53,660 | $ | (505,479 | ) | $ | (231,044 | ) | 5(k) | |||||
| Noncontrolling interests | $ | 109,171 | $ | — | $ | — | $ | — | $ | — | $ | 505,479 | $ | 614,650 | 5(k) |
5(k) i
| • | The adjustment to the Convertible preference shares of $57,234 is to recognize MDC’s preferred shares at their estimated fair value of $209,980. The MC Simulation method was utilized to calculate the fair value of the preference shares. |
| • | The adjustment to Common shares and other paid-in capital of $328,614 is to recognize the MDC common shares at their estimated fair value of $426,397. The fair value of the shares was estimated as the common shares and common share equivalents outstanding utilizing the share price of $5.42. |
| • | The adjustment of $109,171 represents an increase of $117,855 to noncontrolling interests to recognize noncontrolling interest at their estimated fair value of $158,230, partially offset by the reduction of $8,684 of noncontrolling interest carrying value in connection with Stagwell’s acquisition of noncontrolling interest in certain subsidiaries it did not previously own. The fair value of noncontrolling interests begins with the determination of the fair value of each respective entity that has a minority interest holder. The fair value of each entity was determined using both a discounted cash flow analysis and the guideline public company method. The discount rates utilized for the discounted cash flow analysis of each entity ranged from approximately 11% to 20%. Once the fair value of each entity was determined, the fair value of the noncontrolling interest was determined by multiplying the fair value of the respective entity by the minority interest percent of ownership. |
5(k) ii
| • | The adjustment of $156,334 is to reflect a dividend distribution made to Stagwell Media immediately prior to the closing of the Transactions. |
5(k) iii
| • | The adjustment of $3,707 is to reflect a capital contribution by Stagwell Media to Stagwell Marketing for the payment of transaction costs on its behalf. |
5(k) iv
| • | The adjustment of $44,788 represents an increase of $36,104 for stock compensation for awards granted to Stagwell Marketing’s employees associated with the Transactions (see Note 6a below) and $8,684 associated with Stagwell’s acquisition of noncontrolling interest in certain subsidiaries it did not previously own. |
5(k) v
| • | The adjustment of $53,660 is to reflect the decrease in the Company’s deferred tax liability in connection with the formation of Stagwell OpCo as a partnership, recorded at the blended federal and state statutory tax rate of 27.7%. |
5(k) vi
| • | The adjustment of $505,479 is to reflect a decrease in Common Share and other paid-in capital and an increase in noncontrolling interest to recognize the opening noncontrolling interest balance of Stagwell, as defined in the Amended and Restated Stagwell OpCo LLC Agreement. The adjustment is as follows: |
| Stagwell’s historical equity | $ | 350,395 | ||||||
| Proforma adjustment – 5(k)ii | (156,334 | ) | ||||||
| Proforma adjustment – 5(k)iv | (44,788 | ) | ||||||
| Proforma adjustment – 5(l) | (36,104 | ) | ||||||
| Stagwell’s proforma equity | $ | 202,745 | ||||||
| MDC’s historical shareholders’ deficit | $ | (448,067 | ) | |||||
| Proforma adjustment – 5(k)i | 57,234 | |||||||
| Proforma adjustment – 5(k)i | 328,614 | |||||||
| Proforma adjustment – 5(k)v | 53,660 | |||||||
| Proforma adjustment – 5(l) | 698,635 | |||||||
| Proforma adjustment – 5(l) | (39 | ) | ||||||
| MDC’s total equity | 690,037 | |||||||
| Stagwell OpCo net assets | $ | 892,782 | ||||||
| Tax attributes retained by the Company | 43,945 | |||||||
| MDC Series 4 Preferred Shares – Cumulative liquidation preference | (130,690 | ) | ||||||
| MDC Series 6 Preferred Shares – Cumulative liquidation preference | (79,290 | ) | ||||||
| 726,747 | ||||||||
| Stagwell’s estimated ownership percentage of the Stagwell OpCo common units | 69.55 | % | ||||||
| Stagwell – Noncontrolling interest | $ | 505,479 |
The net tax attributes of $43,945 retained by the Company consist of deferred tax assets relating to U.S. corporate tax losses and tax credits retained by the Company of $40,780 and deferred tax liabilities attributable to the Company’s investment in Stagwell OpCo of $84,725. The liquidation preference of the MDC Series 4 Preferred Shares and MDC Canada Series 6 Preferred Shares accreted at 8.0% per annum, compounded quarterly.
| (l) | The adjustment of $658,785 is to remove MDC’s historical shareholders’ deficit of $698,635 and historical accumulated comprehensive income of $(39) in connection with acquisition accounting and a reduction of $36,104 to reflect compensation expense associated with stock awards granted to Stagwell Marketing’s employees and $3,707 to reflect the expense associated with Stagwell’s transaction costs. |
6. Adjustments to Unaudited Pro Forma Condensed Combined Statement of Operations
The following analysis summarizes and provides explanations for the pro forma adjustments included in the unaudited pro forma condensed combined statements of operations presented for six months ended June 30, 2021 and twelve months ended December 31, 2020.
| (a) | The adjustment of $65,751 for the twelve months ended December 31, 2020 is to recognize non-recurring compensation expense for new and/or modified awards to brand employees of Stagwell that were issued at the closing of the Transactions. There is no adjustment for the six months ended June 30, 2021. |
The awards previously issued were a combination of equity awards subject to ASC 718 and profit sharing/ performance bonus awards subject to ASC 710. In both cases, the awards were not considered probable of vesting and no prior compensation expense was recognized.
A total of approximately 12 million units of a limited liability company wholly owned by Stagwell were issued, which are exchangeable for shares of the Company’s Class A common stock. Approximately 7 million units vested immediately upon the closing of the Transactions and approximately 5 million will vest over a six-month service period.
The compensation expense is calculated as the number of units multiplied by the share price of the Class A common stock of $5.42, which is considered the grant date fair value of all the awards and in accordance with the accounting treatment for modified and/or new awards under ASC 718.
| (b) | The adjustment of $1,889 for the six months ended June 30, 2021 is related to an increase in rent expense to $35,914 from $34,025 as reported in MDC’s historical statement of operations. The adjustment of $22,874 for the twelve months ended December 31, 2020 is a result of the recognition of non-recurring transaction costs of $11,325 for MDC and $10,978 for Stagwell as well as an increase in rent expense of $571 to $71,828 from $71,257 as reported in MDC’s historical statement of operations. The increase in rent expense results from the remeasurement of MDC’s leases as the accounting acquiree, as required by ASC 842, Leases. The lease liabilities are measured at the present value of the remaining lease payments reflecting the current discount rate, as if the lease were a new lease at the acquisition date. The remaining lease payments are those expected over the balance of the lease term with the commencement date being the acquisition date. The right-of-use assets were measured at the same amount as the lease liability and was not adjusted to reflect any favorable or unfavorable current market terms as compared to the existing contractual lease agreements as such amount was immaterial. The weighted average remaining lease term of the leases is approximately 7 years. The weighted average discount rate used in connection with the remeasurement of the lease liabilities was approximately 4%, which was derived based on the incremental borrowing rate applicable to the lessee. The incremental borrowing rate is determined by adjusting the lessee’s unsecured borrowing rate associated with the term of the lease for full collateralization as well as the impact of certain economic environments, if necessary. |
| (c) | The adjustments of $28,887 and $54,958 for the six months ended June 30, 2021 and twelve months ended December 31, 2020, respectively, reflect the net effect impact on depreciation and amortization in connection with acquisition accounting. The adjustment results from removing the intangible asset amortization expense recorded in MDC’s historical statement of operations of $4,222 and $11,260 for the six months ended June 30, 2021 and twelve months ended December 31, 2020, respectively, and recording the new amortization expense of $33,109 and $66,218 for the six months ended June 30, 2021 and twelve months ended December 31, 2020, respectively, for the tradenames and customer relationship intangible assets. |
Pro forma amortization expense has been recorded based upon the following preliminary fair values and estimated useful lives assigned to the tradenames and acquired customer relationship intangible assets:
| Estimated Fair Value |
Estimated Useful Life (Years) |
Amortization Expense June 30, 2020 |
Amortization Expense December 31, 2020 |
|||||||||||||
| Trade names and Trademarks | $ | 98,000 | 10 | $ | 4,900 | $ | 9,800 | |||||||||
| Customer Relationships | 711,900 | 6-15 | 28,209 | 56,418 | ||||||||||||
| $ | 809,900 | $ | 33,109 | $ | 66,218 | |||||||||||
| (d) | The adjustment of $13,794 for the twelve months ended December 31, 2020 consists of incremental interest expense for MDC in connection with the Consent Solicitation Consideration paid to holders of the Senior Notes and a 100 basis point increase in the interest rate of the Senior Notes. The Consent Solicitation Consideration of $17,405 is amortized on a straight-line basis through May 2024, the maturity date of the Senior Notes. |
| (e) | The adjustments of $5,285 and $3,421 for the six months ended June 30, 2021 and twelve months ended December 31, 2020, respectively, reflect the reversal of a foreign exchange gain in connection with MDC’s domestication to the United States from Canada. The adjustment gives effect to the change in functional currency of MDC from the Canadian Dollar to the U.S. Dollar. |
| (f) | The adjustments of $3,455 and $63,185 for the six months ended June 30, 2021 and twelve months ended December 31, 2020, respectively, reflect the tax impact of acquisition accounting and other proforma adjustments and is the sum of the following components: |
| 6(f)i | 6(f)ii | 6(f)iii | 6(f)iv | Total | ||||||||||||||||
| Income Tax Expense – June 30, 2021 | $ | (8,463 | ) | $ | — | $ | 4,649 | $ | 3,591 | $ | (3,455 | ) | ||||||||
| Income Tax Expense – December 31, 2020 | $ | (146,293 | ) | $ | (14,558 | ) | $ | 50,954 | $ | 46,712 | $ | (63,185 | ) |
6(f) i
| • | The adjustments of $8,463 and $146,293 for the six months ended June 30, 2021 and twelve months ended December 31, 2020, respectively, represent the tax impact of acquisition accounting adjustments recorded at the blended federal and state statutory tax rate of 27.5% and 27.7% as follows: |
| o | a tax benefit of $0 and $130,911 for the reversal of the valuation allowance for deferred tax assets that are expected to be realizable for the Company. |
| o | a tax benefit of $7,944 and $15,224 for the additional book amortization expense from recording of MDC intangible assets at fair value. |
| o | a tax benefit of $519 and $158 for the additional rent expense from remeasurement of MDC leases. |
6(f) ii
| • | The adjustments of $0 and $14,558 for the six months ended June 30, 2021 and twelve months ended December 31, 2020, respectively, consist of the tax benefits for the following Transaction related expenses recorded at the blended federal and state statutory tax rate of 27.5% and 27.7% as follows: |
| o | a tax benefit of $0 and $8,212 for stock-based compensation awards vesting to Stagwell employees post-merger (see note 6(a) for additional information regarding the stock compensation charge). |
| o | a tax benefit of $0 and $5,017 for additional interest expense related to consent fees of $0 and $5,094 and additional 1% interest coupon paid to holders of $870 million principal amount of Senior Notes. |
| o | a tax benefit of $0 and $3,137 for transaction related professional fees. |
| o | a tax expense of $0 and $1,808 for the change in net income attributable to noncontrolling interest of $6,527. |
6(f) iii
| • | The adjustments of $4,649 and $50,954 for the six months ended June 30, 2021 and twelve months ended December 31, 2020, respectively, represent additional tax expense resulting from the allocation of profits and losses in proportion to the Stagwell/MDC ownership interests in Stagwell OpCo as follows: |
| o | the reversal of an income tax expense of $5,815 and income tax benefit of $44,886 calculated as 69.55% (Stagwell Media’s ownership interest in Stagwell OpCo’s common units received in the Transactions) of $30,404 profit and $232,978 loss consisting of the total profit and losses of MDC’s historical financial results plus proforma adjustments for the passthrough entities attributable to common units multiplied by the blended statutory tax rate of 27.5% and 27.7%. |
| o | income tax expense of $1,166 and $6,068 for the six months ended June 30, 2021 and twelve months ended December 31, 2020, respectively, calculated as 30.45% (MDC shareholders’ ownership interest in Stagwell OpCo) of $13,926 and $71,943 of profits in Stagwell’s historical passthrough entities multiplied by the blended statutory tax rate of 27.5% and 27.7%. |
6(f) iv
| • | The adjustment of $3,591 for the six months ended June 30, 2021 represents the tax impact of the change in tax expense attributable to combining the Stagwell historic, MDC historic and proforma adjustments at the blended statutory tax rate of 27.5% to determine the combined annual effective income tax rate and its impact on the determination of the tax expense for the period. |
| • | The adjustment of $46,712 for the twelve months ended December 31, 2020 represents the net tax impact of MDC’s redomiciliation into the U.S. from Canada as follows: |
| o | tax expense of $50,000 attributable to Canadian capital gains tax and exit tax |
| o | a tax benefit of $947 due to the reversal of foreign exchange gains recorded at the blended federal and state statutory tax rate of 27.7% |
| o | a tax benefit of $4,697 due to the elimination of U.S. Base Erosion and Avoidance Tax (“BEAT”) related to intercompany interest payments |
| o | additional U.S. tax expense of $2,356 for Global Intangible Low-Taxed Income (“GILTI”) related to former Canadian Controlled Foreign Corporations transferred to the U.S. in the redomiciliation. |
| (g) | The adjustments of $7,926 for the six months ended June 30, 2021 and $211,057 for the twelve months ended December 31, 2020 are to recognize the noncontrolling interest of Stagwell calculated as follows: |
June 30, 2021 | December 31, 2020 | |||||||
| MDC historical net income/(loss) | $ | 11,116 | $ | (228,971 | ) | |||
| Stagwell historical net income/(loss) | 21,710 | 56,356 | ||||||
| Combined historical net income/(loss) | 32,826 | (172,615 | ) | |||||
| Proforma adjustments | (32,607 | ) | (97,614 | ) | ||||
| Stagwell OpCo net income/(loss) – Proforma | 219 | (270,229 | ) | |||||
| Adjustments (see below): | ||||||||
| Preferred Shares – Accretion | (8,540 | ) | (14,179 | ) | ||||
| Reversal of tax benefit of Stagwell OpCo passthrough loss allocated to the Company | (1,363 | ) | (9,653 | ) | ||||
| Stagwell OpCo net income/loss attributable to common units – Proforma | (9,684 | ) | (294,061 | ) | ||||
| Stagwell ownership % | 69.55 | % | 69.55 | % | ||||
| Noncontrolling Interest – Stagwell | $ | (6,736 | ) | $ | (204,530 | ) | ||
| Proforma adjustment – purchase of noncontrolling interest | (1,190 | ) | (6,527 | ) | ||||
| Proforma adjustment – 6(g) | $ | (7,926 | ) | $ | (211,057 | ) | ||
| Preferred Shares – Accretion | ||||||||
| Series 4 Preferred Units – Accretion | $ | 5,896 | $ | 9,789 | ||||
| Series 6 Preferred Units – Accretion | 2,644 | 4,390 | ||||||
| Total | $ | 8,540 | $ | 14,179 | ||||
| Reversal of tax benefit of Stagwell passthrough loss allocated to the Company | ||||||||
| Stagwell OpCo – pre-tax loss of passthroughs | $ | 4,958 | $ | 34,849 | ||||
| Tax rate | 27.5 | % | 27.7 | % | ||||
| Total | $ | 1,363 | $ | 9,653 | ||||
| (h) | Amount reflects pro forma basic and diluted loss per share calculated using the Company’s pro forma loss and pro forma weighted average number of shares outstanding. |
| (i) | Adjustments reflect pro forma basic and diluted weighted average shares outstanding calculated as follows: |
| Basic shares | Diluted shares | |||||||
June 30, 2021 | June 30, 2021 | |||||||
| MDC – as previously reported | 74,240,447 | 77,001,526 | ||||||
| Issuance of equity consideration shares(i) | — | — | ||||||
| Stagwell – adjusted for pro forma presentation | 74,240,447 | 77,001,526 | ||||||
| Basic shares December 31, 2020 | Diluted shares December 31, 2020 | |||||||
| MDC – as previously reported | 72,862,178 | 72,862,178 | ||||||
| Issuance of equity consideration shares (i) | — | — | ||||||
| Stagwell - adjusted for pro forma presentation | 72,862,178 | 72,862,178 | ||||||
Shares exchanged for Stagwell net assets upon completion of the Transactions do not participate in the earnings of the Company. As such, basic earnings per share is not affected for the shares of the Company’s Class C common stock issued in connection with the Stagwell New MDC Contribution. This assumption is consistent with the assumption that the Transactions were consummated as of January 1, 2020 for purposes of preparing the unaudited pro forma combined statements of operations.