NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
Stagwell Inc. (the “Company,” “we,” or “Stagwell”), incorporated under the laws of Delaware, conducts its business through its networks and their Brands (“Brands”), which provide marketing and business solutions that realize the potential of combining data and creativity. Stagwell’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment.
The accompanying consolidated financial statements include the accounts of Stagwell and its subsidiaries. Stagwell has prepared the unaudited consolidated interim financial statements included herein in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting interim financial information on Form 10-Q. Accordingly, pursuant to these rules, the footnotes do not include certain information and disclosures. The preparation of financial statements in conformity with GAAP requires us to make judgments, assumptions and estimates about current and future results of operations and cash flows that affect the amounts reported and disclosed. Actual results could differ from these estimates and assumptions. The consolidated results for interim periods are not necessarily indicative of results for the full year and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”).
The accompanying financial statements reflect all adjustments, consisting of normal recurring accruals, which in the opinion of management are necessary for a fair statement, in all material respects, of the information contained therein. Intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.
We recorded an out-of-period adjustment in the first quarter of 2023 which should have been reflected in the prior year financial statements. The impact of the adjustment is to allocate Accumulated other comprehensive loss to noncontrolling interest shareholders. As a result of the correction, Noncontrolling interests and Accumulated other comprehensive loss declined by approximately $24.0 million, but did not impact Total Shareholders’ Equity as of March 31, 2023. In addition, the adjustment was reflected within other comprehensive for the quarter ended March 31, 2023. There was no impact to net income in the annual or interim periods within the year ended December 31, 2022. The Company evaluated the impact of the out-of-period adjustment and concluded that this error was not material to the current period or any of its previously issued financial statements.
Recent Developments
In March 2023, the Company’s board of directors (the “Board”) adopted the 2022 Employee Stock Purchase Plan (the “ESPP”), which will be submitted for approval at the Company’s annual meeting of shareholders in June 2023. If the ESPP is approved, a total of 3.0 million shares of Class A common stock, par value $.001 per share (the “Class A Common Stock”) will be reserved for sale under the ESPP to eligible employees as defined in the plan. Under the ESPP, eligible employees can elect to withhold up to 15% of their earnings, up to certain maximums, to purchase shares of Class A Common Stock on certain plan-defined dates. The purchase price for each offering period is 92.5% of the fair market value of shares of Class A Common Stock at the end of the offering period. The plan is considered compensatory resulting in the fair value of the discount being expensed over the service period.
On May 4, 2023, the Company amended its Credit Agreement (as defined in Note 7 of the Notes included herein). Among other things, the amendment increased the limit of borrowing from $500.0 million to $640.0 million. All other substantive terms of the credit agreement remain unchanged.
On May 9, 2023, the Company agreed to repurchase approximately 23.3 million shares from AlpInvest Partners at a share price of $6.43, for an aggregate total value of approximately $150.0 million. Stagwell Media LP, a shareholder in Stagwell Inc. and AlpInvest are engaged in advanced negotiations to redeem AlpInvest’s remaining interests in Stagwell Media LP., subject to final documentation. Upon completion of these transactions, AlpInvest Partners will no longer be an investor in Stagwell Inc.
2. Acquisitions
2022 Acquisitions
Acquisition of Brand New Galaxy
On April 19, 2022, the Company acquired Brand New Galaxy (“BNG”), for approximately $20.9 million of cash consideration, as well as contingent consideration up to a maximum value of $50.0 million. The contingent consideration is due upon meeting certain future earnings targets through 2024, with approximately 67% payable in cash and 33% payable in shares of Class A Common Stock.
The consideration has been allocated to the assets acquired and assumed liabilities of BNG based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. The preliminary purchase price allocation is as follows:
| | | | | | | | |
| | Amount |
| | (dollars in thousands) |
| Cash and cash equivalents | | $ | 2,766 | |
| Accounts receivable | | 10,147 | |
| Other current assets | | 671 | |
| Fixed assets | | 1,587 | |
| Identifiable intangible assets | | 12,740 | |
| Other assets | | 1,583 | |
| Accounts payable | | (4,771) | |
| Accruals and other liabilities | | (6,880) | |
| Advance billings | | (1,159) | |
| Other liabilities | | (3,642) | |
| Net assets assumed | | 13,042 | |
| Goodwill | | 24,643 | |
| Purchase price consideration | | $ | 37,685 | |
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributable to the assembled workforce of BNG. Goodwill of $24.6 million was assigned to the Brand Performance Network reportable segment. The majority of the goodwill is non-deductible for income tax purposes.
Intangible assets consist of trade names, customer relationships and developed technology. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is approximately ten years. The following table presents the details of identifiable intangible assets acquired:
| | | | | | | | | | | | | | |
| | Estimated Fair Value | | Estimated Useful Life in Years |
| | (dollars in thousands) |
| Customer relationships | | $ | 6,150 | | | 10 |
| Trade names | | 5,500 | | | 10 |
| Developed technology | | 1,090 | | | 7 |
| Total acquired intangible assets | | $ | 12,740 | | | |
The purchase price accounting is not yet final as the Company may still make adjustments due to changes in working capital.
Pro Forma Financial Information
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | (dollars in thousands) |
| Revenue | | $ | 650,628 | |
| Net income | | 32,876 | |
Revenue and net income attributable to BNG, included within the three months ended March 31, 2023 Unaudited Consolidated Statements of Operations was $6.6 million and $1.0 million, respectively.
Acquisition of TMA Direct, Inc.
On May 31, 2022, the Company acquired approximately 87% of TMA Direct, Inc. (“TMA Direct”) for approximately $17.2 million of cash consideration and approximately $0.5 million of deferred acquisition payments. The Company was also granted an option to purchase the remaining 13% minority interest in TMA Direct for up to approximately $13.3 million.
The consideration has been allocated to the assets acquired and assumed liabilities of TMA Direct based upon estimated fair values, with any excess purchase price allocated to goodwill. The purchase price allocation is as follows:
| | | | | | | | |
| | Amount |
| | (dollars in thousands) |
| Accounts receivable | | $ | 582 | |
| Other current assets | | 669 | |
| Identifiable intangible assets | | 13,200 | |
| Accounts payable | | (379) | |
| Other liabilities | | (270) | |
| Noncontrolling interests | | (2,667) | |
| Net assets assumed | | 11,135 | |
| Goodwill | | 6,569 | |
| Purchase price consideration | | $ | 17,704 | |
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributable to the assembled workforce of TMA Direct. Goodwill of $6.6 million was assigned to the Communications Network reportable segment. The majority of the goodwill is deductible for income tax purposes.
Intangible assets consist of trade names and customer relationships. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is ten years. The following table presents the details of identifiable intangible assets acquired:
| | | | | | | | | | | | | | |
| | Fair Value | | Estimated Useful Life in Years |
| | (dollars in thousands) |
| Customer relationships | | $ | 11,400 | | | 10 |
| Trade names | | 1,800 | | | 10 |
| Total acquired intangible assets | | $ | 13,200 | | | |
Pro Forma Financial Information
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | (dollars in thousands) |
| Revenue | | $ | 644,909 | |
| Net income | | 34,341 | |
Revenue and net loss attributable to TMA Direct, included within the three months ended March 31, 2023 Unaudited Consolidated Statements of Operations was $2.6 million and less than $0.1 million, respectively.
Acquisition of Maru Group Limited Ltd.
On October 3, 2022, the Company acquired Maru Group Limited Ltd. (“Maru”) for approximately £23.0 million (approximately $25.8 million) in cash consideration.
The consideration has been allocated to the assets acquired and assumed liabilities of Maru based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. The preliminary purchase price allocation is as follows:
| | | | | | | | |
| | Amount |
| | (dollars in thousands) |
| Cash and cash equivalents | | $ | 1,033 | |
| Accounts receivable | | 7,374 | |
| Other current assets | | 899 | |
| Fixed assets | | 157 | |
| Identifiable intangible assets | | 14,300 | |
| Other assets | | 1,920 | |
| Accounts payable | | (4,087) | |
| Accruals and other liabilities | | (9,154) | |
| Advance billings | | (6,462) | |
| Other liabilities | | (3,591) | |
| Net assets assumed | | 2,389 | |
| Goodwill | | 23,404 | |
| Purchase price consideration | | $ | 25,793 | |
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributable to the assembled workforce of Maru and the expected growth related to new customer relationships and geographic expansion. Goodwill of $23.4 million was assigned to the All Other reportable segment. The goodwill is partially deductible for income tax purposes.
Intangible assets consist of trade names, customer relationships, and developed technology. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is approximately eight years. The following table presents the details of identifiable intangible assets acquired:
| | | | | | | | | | | | | | |
| | Estimated Fair Value | | Estimated Useful Life in Years |
| | (dollars in thousands) |
| Customer relationships | | $ | 4,900 | | | 10 |
| Trade names | | 4,000 | | | 10 |
| Developed technology | | 5,400 | | | 2-7 |
| Total acquired intangible assets | | $ | 14,300 | | | |
Pro Forma Financial Information
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | (dollars in thousands) |
| Revenue | | $ | 653,375 | |
| Net Income | | 28,110 | |
Revenue and net loss attributable to Maru, included within the three months ended March 31, 2023 Unaudited Consolidated Statements of Operations was $8.9 million and $2.2 million, respectively.
Acquisition of Wolfgang, LLC.
On October 3, 2022, the Company acquired the remaining 80% interest that it did not already own in Wolfgang, LLC., (“Wolfgang”) for approximately $3.8 million in cash consideration and 175 thousand shares of Class A Common Stock with a fair value of $1.2 million, subject to post-closing adjustments.
The consideration has been allocated to the assets acquired and assumed liabilities of Wolfgang based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. The preliminary purchase price allocation is as follows:
| | | | | | | | |
| | Amount |
| | (dollars in thousands) |
| Cash and cash equivalents | | $ | 1,606 | |
| Accounts receivable | | 1,180 | |
| Other current assets | | 100 | |
| Identifiable intangible assets | | 1,055 | |
| Other assets | | 46 | |
| Current liabilities | | (278) | |
| Net assets assumed | | 3,709 | |
| Goodwill | | 2,451 | |
| Purchase price consideration including fair value of previously owned interest | | $ | 6,160 | |
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributable to the assembled workforce of Wolfgang. Goodwill of $2.5 million was assigned to the Integrated Agencies Network reportable segment. The majority of the goodwill is deductible for income tax purposes.
Intangible assets consist of customer relationships. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is five years. The following table presents the details of identifiable intangible assets acquired:
| | | | | | | | | | | | | | |
| | Estimated Fair Value | | Estimated Useful Life in Years |
| | (dollars in thousands) |
| Customer relationships | | $ | 1,055 | | | 5 |
| Total acquired intangible assets | | $ | 1,055 | | | |
Pro Forma Financial Information
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | (dollars in thousands) |
| Revenue | | $ | 647,309 | |
| Net income | | 34,482 | |
Revenue and net income attributable to Wolfgang, included within the three months ended March 31, 2023 Unaudited Consolidated Statements of Operations was $1.1 million and $0.2 million, respectively.
Acquisition of Epicenter Experience LLC.
On October 3, 2022, the Company acquired the assets of Epicenter Experience LLC., (“Epicenter”) for approximately $9.9 million in cash consideration, subject to post-closing adjustments, as well as contingent consideration up to a maximum value of $5.0 million. The contingent consideration is subject to meeting certain future earnings targets through 2024 and can be paid up to 25% in shares of Class A Common Stock.
The consideration has been allocated to the assets acquired and assumed liabilities of Epicenter based upon preliminary estimated fair values. The preliminary purchase price allocation is as follows:
| | | | | | | | |
| | Amount |
| | (dollars in thousands) |
| Accounts receivable | | $ | 901 | |
| Other current assets | | 45 | |
| Identifiable intangible assets | | 7,300 | |
| Accounts payable | | (148) | |
| Other current liabilities | | (650) | |
| Net assets assumed | | 7,448 | |
| Goodwill | | 4,416 | |
| Purchase price consideration | | $ | 11,864 | |
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributable to the assembled workforce of Epicenter. Goodwill of $4.4 million was assigned to the All Other reportable segment. The majority of the goodwill is deductible for income tax purposes.
The intangible asset acquired was developed technology. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is five years. The following table presents the details of identifiable intangible assets acquired:
| | | | | | | | | | | | | | |
| | Estimated Fair Value | | Estimated Useful Life in Years |
| | (dollars in thousands) |
| Developed technology | | $ | 7,300 | | | 5 |
| Total acquired intangible assets | | $ | 7,300 | | | |
Pro Forma Financial Information
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | (dollars in thousands) |
| Revenue | | $ | 643,885 | |
| Net income | | 33,483 | |
Revenue and net income attributable to Epicenter, included within the three months ended March 31, 2023 Unaudited Consolidated Statements of Operations was $1.1 million and $0.6 million, respectively.
Other Acquisitions
On July 12, 2022, the Company acquired PEP Group Holdings B.V., an omnichannel content creation and adaption production company for approximately $0.5 million in cash consideration, subject to post-closing adjustments, as well as contingent consideration up to a maximum value of €2.6 million. The contingent consideration is subject to meeting certain future earnings targets through 2025.
On July 15, 2022, the Company acquired Apollo Program II Inc., a real-time artificial intelligence-powered software-as-a-service platform, for approximately $2.3 million in cash consideration, subject to post-closing adjustments, as well as guaranteed deferred payments of $1.0 million and $1.5 million on or prior to July 1, 2023 and July 1, 2024, respectively.
2022 Purchases of Noncontrolling Interests
On April 1, 2022, the Company acquired the remaining interest in Hello Design, LLC (“Hello Design”) that it did not already own for an aggregate purchase price of $4.6 million, comprised of a closing cash payment of $3.6 million and a contingent deferred acquisition payment of $1.0 million. The contingent deferred payment was based on the financial results of the underlying business through the end of 2022 with the payment due in 2023.
3. Revenue
Disaggregated Revenue Data
The Company provides a broad range of services to a large base of clients across the full spectrum of verticals globally. The primary source of revenue is from Brand arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses. Certain clients may engage with the Company in various geographic locations, across multiple disciplines, and through multiple Brands. Representation of a client rarely means that Stagwell handles marketing communications for all Brands or product lines of the client in every geographical location. The Company’s Brands often cooperate with one another through referrals and the sharing of both services and expertise, which enables Stagwell to service clients’ varied marketing needs by crafting custom integrated solutions. Additionally, the Company maintains separate, independent operating companies to enable it to effectively manage potential conflicts of interest by representing competing clients across the Stagwell network.
The following table presents revenue disaggregated by our principal capabilities for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, |
| Principal Capabilities | Reportable Segment | | | | | | 2023 | | 2022 | | |
| | | | | | | (dollars in thousands) | | |
| Digital Transformation | All segments | | | | | | $ | 190,319 | | | $ | 210,809 | | | |
| Creativity and Communications | All segments | | | | | | 261,354 | | | 279,242 | | | |
| Performance Media and Data | Brand Performance Network, All Other | | | | | | 109,488 | | | 99,776 | | | |
| Consumer Insights and Strategy | Integrated Agencies Network, All Other | | | | | | 61,283 | | | 53,076 | | | |
| | | | | | | $ | 622,444 | | | $ | 642,903 | | | |
Stagwell has historically largely focused where the Company was founded in North America, the largest market for its services in the world. The Company has expanded its global footprint to support clients in international markets. Stagwell’s Brands are located in the United States and United Kingdom, and more than 32 other countries around the world. Historically, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which included discretionary components that are easier to reduce in the short term than other operating expenses.
The following table presents revenue disaggregated by geography for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| Geographical Location | Reportable Segment | | | | | | 2023 | | 2022 | | |
| | | | | | | (dollars in thousands) | | |
| United States | All | | | | | | $ | 507,092 | | | $ | 537,231 | | | |
| United Kingdom | All | | | | | | 41,271 | | | 39,813 | | | |
| Other | All | | | | | | 74,081 | | | 65,859 | | | |
| | | | | | | $ | 622,444 | | | $ | 642,903 | | | |
Contract Assets and Liabilities
Contract assets consist of fees and reimbursable outside vendor costs incurred on behalf of clients when providing advertising, marketing and corporate communications services that have not yet been invoiced to clients. Unbilled service fees were $170.8 million and $116.4 million at March 31, 2023 and December 31, 2022, respectively, and are included as a component of Accounts receivable, net on the Unaudited Consolidated Balance Sheets. Outside vendor costs incurred on behalf of clients which have yet to be invoiced were $97.6 million and $93.1 million at March 31, 2023 and December 31, 2022, respectively, and are included on the Unaudited 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 represent advanced billings to customers for fees and reimbursements of third-party costs, whether we act as principal or agent. Such fees and reimbursements of third-party costs are classified as Advance billings on the Company’s Unaudited Consolidated Balance Sheets. In arrangements in which we are acting as an agent, the recognition related to the contract liability is presented on a net basis within the Unaudited Consolidated Statements of Operations. Advance billings at March 31, 2023 and December 31, 2022 were $334.9 million and $337.0 million, respectively. The decrease in Advance billings of $2.1 million for the three months ended March 31, 2023 was primarily driven by $234.0 million of revenues recognized that were included in the Advance billings balances as of December 31, 2022 and reductions due to the incurrence of third-party costs, partially offset by cash payments received or due in advance of satisfying our performance obligations.
Changes in the contract asset and liability balances during the three months ended March 31, 2023 were not materially impacted by write offs, impairment losses or any other factors.
Unsatisfied Performance Obligations
The majority of our contracts are for periods of one year or less. For those contracts with a term of more than one year, we had approximately $90.8 million of unsatisfied performance obligations as of March 31, 2023 of which we expect to recognize approximately 61% in 2023, 33% in 2024 and 6% in 2025.
4. Income (Loss) Per Share
The following table sets forth the computations of basic and diluted income (loss) per common share for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | |
| | | | | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| Income Per Share - Basic | | | | | (amounts in thousands, except per share amounts) |
| Numerator: | | | | | | | |
| Net income (loss) | | | | | $ | (5,017) | | | $ | 33,622 | |
| | | | | | | |
| Net (income) loss attributable to Class C shareholders | | | | | 3,165 | | | (17,721) | |
Net (income) loss attributable to other equity interest holders | | | | | 2,295 | | | (3,226) | |
| Net (income) loss attributable to noncontrolling and redeemable noncontrolling interests | | | | | 5,460 | | | (20,947) | |
| | | | | | | |
| Net income attributable to Stagwell Inc. common shareholders | | | | | $ | 443 | | | $ | 12,675 | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted Average number of common shares outstanding | | | | | 125,199 | | | 122,285 | |
| | | | | | | |
| Income Per Share - Basic | | | | | $ | 0.00 | | | $ | 0.10 | |
| | | | | | | |
Income (Loss) Per Share - Diluted | | | | | | | |
| Numerator: | | | | | | | |
| Net income attributable to Stagwell Inc. common shareholders | | | | | $ | 443 | | | $ | 12,675 | |
| Net income (loss) attributable to Class C shareholders | | | | | (3,165) | | | 17,721 | |
| | | | | $ | (2,722) | | | $ | 30,396 | |
| | | | | | | |
| Denominator: | | | | | | | |
| Basic - Weighted Average number of common shares outstanding | | | | | 125,199 | | | 122,285 | |
| | | | | | | |
| Stock appreciation right awards | | | | | 1,929 | | | 2,041 | |
| Restricted share and restricted unit awards | | | | | 1,769 | | | 2,786 | |
| Class A Shares | | | | | 128,897 | | | 127,112 | |
| Class C shares | | | | | 160,909 | | | 170,372 | |
| Dilutive - Weighted average number of common shares outstanding | | | | | 289,806 | | | 297,484 | |
| | | | | | | |
| Income (Loss) Per Share - Diluted | | | | | $ | (0.01) | | | $ | 0.10 | |
| | | | | | | |
Restricted stock awards of 0.7 million and 1.0 million as of March 31, 2023 and 2022, respectively, were excluded from the computation of diluted loss per common share because the performance contingencies necessary for vesting were not met as of the reporting date.
5. Deferred Acquisition Consideration
Deferred acquisition consideration on the Unaudited Consolidated Balance Sheets consists of deferred obligations related to contingent and fixed purchase price payments, and contingent and fixed retention payments tied to continued employment of specific personnel. Contingent deferred acquisition consideration is recorded at the acquisition date fair value and adjusted at each reporting period within Office and general expenses on the Unaudited Consolidated Statements of Operations.
The following table presents changes in contingent deferred acquisition consideration, measured at fair value on a recurring basis using significant unobservable inputs, and a reconciliation to the amounts reported on the Unaudited Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| (dollars in thousands) |
| Beginning balance | $ | 161,323 | | | $ | 222,369 | |
| Payments | — | | | (73,963) | |
Adjustments to deferred acquisition consideration (1) | 4,088 | | | (12,779) | |
| Additions | — | | | 26,594 | |
| Currency translation adjustment and other | 273 | | | (898) | |
| | | |
Ending balance (2) | $ | 165,684 | | | $ | 161,323 | |
| | | |
| | | |
(1) Adjustment to deferred acquisition consideration contains fair value changes from the Company’s initial estimates of deferred acquisition payments.
(2) The contingent and fixed deferred acquisition consideration obligation was $71.8 million and $93.9 million as of March 31, 2023 and $68.9 million and $92.4 million as of December 31, 2022. In addition, $51.5 million of the deferred acquisition consideration is expected to be settled in the Company’s shares of Class A Common Stock.
6. Leases
The Company leases office space in North America, Europe, Asia, South America, Africa, and Australia. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. These leases are classified as operating leases and expire between years 2023 through 2034. The Company’s finance leases are immaterial.
Lease costs are recognized in the Unaudited Consolidated Statements of Operations over the lease term on a straight-line basis. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset.
Some of the Company’s leases include options to extend or renew the leases through 2044. The renewal and extension options are not included in the lease term as the Company is not reasonably certain that it will exercise its option.
From time to time, the Company enters into sublease arrangements with unrelated third parties. These leases are classified as operating leases and expire between years 2023 through 2032. Sublease income is recognized over the lease term on a straight-line basis. Currently, the Company subleases office space in North America and Europe.
As of March 31, 2023, the Company entered into two operating leases for which the commencement date has not yet occurred primarily because of the premises being prepared for occupancy by the landlord. Accordingly, these two leases represent an obligation of the Company that is not reflected within the Unaudited Consolidated Balance Sheets as of March 31, 2023. The aggregate future liability related to these leases is approximately $5.1 million.
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 for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 | | |
| Lease Cost: | | | | | (dollars in thousands) | | |
| Operating lease cost | | | | | $ | 19,578 | | $ | 14,016 | | |
| Variable lease cost | | | | | 4,561 | | 5,160 | | |
| Sublease rental income | | | | | (3,052) | | (3,276) | | |
| Total lease cost | | | | | $ | 21,087 | | $ | 15,900 | | |
| Additional information: | | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities for operating leases | | | | | | | | | |
| Operating cash flows | | | | | $ | 22,347 | | $ | 22,781 | | |
| | | | | | | | | |
| Right-of-use lease assets obtained in exchange for operating lease liabilities and other non-cash adjustments | | | | | $ | 2,135 | | $ | 14,162 | | |
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| | | | | | | | | |
| | | | | | | | | |
As of March 31, 2023, the weighted average remaining lease term (in years) and weighted average discount rate were 6.3 and 4.6%, respectively.
Operating lease expense is included in Office and general expenses in the Unaudited Consolidated Statements of Operations. The Company’s lease expense for leases with a term of 12 months or less is immaterial.
The following table presents minimum future rental payments under the Company’s leases as of March 31, 2023 and their reconciliation to the corresponding lease liabilities:
| | | | | |
| | Maturity Analysis |
| (dollars in thousands) |
| Remaining 2023 | $ | 68,803 | |
| 2024 | 78,098 | |
| 2025 | 60,457 | |
| 2026 | 45,148 | |
| 2027 | 40,652 | |
| Thereafter | 120,424 | |
| Total | 413,582 | |
| Less: Present value discount | (58,665) | |
| Lease liability | $ | 354,917 | |
7. Debt
As of March 31, 2023 and December 31, 2022, the Company’s indebtedness was comprised as follows:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| (dollars in thousands) |
Credit Agreement | $ | 150,000 | | | $ | 100,000 | |
5.625% Notes | 1,100,000 | | | 1,100,000 | |
| Debt issuance costs | (14,719) | | | (15,293) | |
| Total long-term debt | $ | 1,235,281 | | | $ | 1,184,707 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Interest expense related to long-term debt included in Interest expense, net on the Unaudited Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022 was $18.3 million and $18.3 million, respectively.
The amortization of debt issuance costs included in Interest expense, net on the Unaudited Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022 was $0.6 million and $0.6 million, respectively.
Revolving Credit Agreement
The Company is party to a credit agreement with a syndicate of banks consisting of a $500.0 million senior secured revolving credit facility with a five-year maturity (the “Credit Agreement”) as of March 31, 2023. See Note 1 of the Notes included herein for additional information related to the amendment to the Credit Agreement.
The Credit Agreement contains sub-limits for revolving loans denominated in pounds and euros not to exceed the U.S. dollar equivalent of $50.0 million in pounds and $50.0 million in euros and $100.0 million in the aggregate. Additionally, the Credit Agreement contains a $15.0 million sub-limit for letters of credit denominated in pounds or euros. It also includes an accordion feature under which the Company may request, subject to lender approval and certain conditions, to increase the amount of the commitments to an aggregate amount not to exceed $650.0 million.
Borrowings pursuant to the Credit Agreement bear interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the prime rate of interest in effect on such day, (b) the federal funds effective rate plus 0.50% and (c) the Secured Overnight Financing Rate, plus ) and ii) 1% in each case, plus the applicable margin (calculated based on the Company’s Total Leverage Ratio, as defined in the Credit Agreement) at that time.
Advances under the Credit Agreement may be prepaid in whole or in part from time to time without penalty or premium. The Credit Agreement commitment may be reduced by the Company from time to time. Principal amounts outstanding under the Credit Agreement are due and payable in full at maturity within five years of the date of the Credit Agreement.
The Credit Agreement contains a number of financial and nonfinancial covenants and is guaranteed by substantially all of our present and future subsidiaries, subject to customary exceptions. The Company was in compliance with all covenants as of March 31, 2023.
A portion of the Credit Agreement in an amount not to exceed $50.0 million is available for the issuance of standby letters of credit. As of March 31, 2023 and December 31, 2022, the Company had issued undrawn outstanding letters of credit of $24.6 million and $25.3 million, respectively.
Senior Notes
The Company had $1.1 billion aggregate principal amount of 5.625% senior notes (“5.625% Notes”) outstanding as of March 31, 2023. The 5.625% Notes are due August 15, 2029 and bear interest of 5.625% to be paid on February 15 and August 15 of each year, commencing on February 15, 2022.
The 5.625% Notes are guaranteed on a senior unsecured basis by substantially all of the Company’s subsidiaries. The 5.625% Notes rank (i) equally in right of payment with all of the Company’s or any guarantor’s existing and future unsubordinated indebtedness, (ii) senior in right of payment to the Company’s or any guarantor’s existing and future subordinated indebtedness, (iii) effectively subordinated to any of the Company’s or any guarantor’s existing and future secured indebtedness to the extent of the collateral securing such indebtedness, including the Credit Agreement, and (iv) structurally subordinated to all existing and future liabilities of the Company’s subsidiaries that are not guarantors.
Our obligations under the 5.625% Notes are unsecured and are effectively junior to our secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company, and any existing and future subsidiary guarantors, including all of the capital stock of each restricted subsidiary.
The Company may, at its option, redeem the 5.625% Notes in whole at any time or in part from time to time, on and after August 15, 2024 at a redemption price of 102.813% of the principal amount thereof if redeemed during the twelve-month period beginning on August 15, 2024, at a redemption price of 101.406% of the principal amount thereof if redeemed during the twelve-month period beginning on August 15, 2025 and at a redemption price of 100% of the principal amount thereof if redeemed on August 15, 2026 and thereafter. Prior to August 15, 2024, the Company may, at its option, redeem some or all of the 5.625% Notes at a price equal to 100% of the principal amount of the 5.625% Notes plus a “make whole” premium and accrued and unpaid interest. The Company may also redeem, at its option, prior to August 15, 2024, up to 40% of the 5.625% Notes with the net proceeds from one or more equity offerings at a redemption price of 105.625% of the principal amount thereof.
If the Company experiences certain kinds of changes of control (as defined in the indenture), holders of the 5.625% Notes may require the Company to repurchase any 5.625% Notes held by them at a price equal to 101% of the principal amount of the 5.625% Notes plus accrued and unpaid interest. In addition, if the Company sells assets under certain circumstances, it must offer to repurchase the 5.625% Notes at a price equal to 100% of the principal amount of the 5.625% Notes plus accrued and unpaid interest.
The indenture includes covenants that, among other things, restrict the Company’s ability and the ability of its restricted subsidiaries (as defined in the indenture) to incur or guarantee additional indebtedness; pay dividends on or redeem or
repurchase the capital stock of the Company; make certain types of investments; create restrictions on the payment of dividends or other amounts from the Company’s restricted subsidiaries; sell assets; enter into transactions with affiliates; create liens; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of the Company’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The 5.625% Notes are also subject to customary events of default, including cross-payment default and cross-acceleration provisions. The Company was in compliance with all covenants as of March 31, 2023.
8. Noncontrolling and Redeemable Noncontrolling Interests
Noncontrolling Interests
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as Noncontrolling interests within Shareholder’s Equity in the Unaudited Consolidated Balance Sheets. Where the incremental purchase may be required of the Company, the amounts are recorded as Redeemable noncontrolling interests in mezzanine equity in the Unaudited Consolidated Balance Sheets at their estimated acquisition date redemption value and adjusted at each reporting period for changes to their estimated redemption value through Retained earnings (but not less than their initial redemption value), except for foreign currency translation adjustments.
The following table presents net income (loss) attributable to noncontrolling interests between holders of Class C common stock, par value $0.00001 per share (the “Class C Common Stock”) and other equity interest holders for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 | | |
| | | | | (dollars in thousands) | | |
Net income (loss) attributable to Class C shareholders | | | | | $ | (3,165) | | | $ | 17,721 | | | |
Net income attributable to other equity interest holders | | | | | 248 | | | 816 | | | |
Net income (loss) attributable to noncontrolling interests | | | | | $ | (2,917) | | | $ | 18,537 | | | |
The following table presents noncontrolling interests between holders of Class C Common Stock and other equity interest holders as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| (dollars in thousands) |
| Noncontrolling interest of Class C shareholders | $ | 401,427 | | | $ | 428,406 | |
| Noncontrolling interest of other equity interest holders | 30,412 | | | 33,691 | |
| Total noncontrolling interests | $ | 431,839 | | | $ | 462,097 | |
Redeemable Noncontrolling Interests
The following table presents changes in redeemable noncontrolling interests:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| (dollars in thousands) |
| Beginning balance | $ | 39,111 | | | $ | 43,364 | |
| Redemptions | (2,923) | | | (4,222) | |
| | | |
| Changes in redemption value | (1,076) | | | (8,711) | |
| | | |
| Net income (loss) attributable to redeemable noncontrolling interests | (2,543) | | | 8,135 | |
| Other | (52) | | | 545 | |
| Ending balance | $ | 32,517 | | | $ | 39,111 | |
The noncontrolling shareholders’ ability to exercise any such option right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise and specific employment termination conditions. In addition, these rights cannot be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the related amounts during 2023 to 2027. It is not determinable, at this time, if or when the owners of these rights will exercise all or a portion of these rights.
The redeemable noncontrolling interest of $32.5 million as of March 31, 2023, consists of $28.7 million, assuming that the subsidiaries perform over the relevant periods at their current profit levels, and $3.8 million upon termination of such owner’s employment with the applicable subsidiary or death.
These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. There is no related impact on the Company’s income per share calculations.
Comprehensive Loss Attributable to Noncontrolling and Redeemable Noncontrolling Interests
For the three months ended March 31, 2023, comprehensive loss attributable to the noncontrolling and redeemable noncontrolling interests was $26.7 million, which consists of $5.5 million of net loss and $21.3 million of other comprehensive loss.
9. Commitments, Contingencies, and Guarantees
Legal Proceedings. The Company’s operating entities are involved in legal proceedings of various types. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.
Guarantees. Generally, the Company has indemnified the purchasers of certain assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying unaudited consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
Commitments. At March 31, 2023, the Company had $24.6 million of undrawn letters of credit outstanding.
The Company entered into two operating leases for which the commencement date has not yet occurred as of March 31, 2023. See Note 6 of the Notes included herein for additional information.
In the ordinary course of business, the Company may enter into long-term, non-cancellable contracts with partner associations that include revenue or profit-sharing commitments related to the provision of its services. These contracts may also include provisions that require the partner associations to meet certain performance targets prior to any obligation to the Company. As of March 31, 2023, the Company estimates its future minimum commitments under these non-cancellable agreements to be: $6.4 million, $5.8 million, $5.4 million, $3.9 million, $3.2 million and $7.8 million for the remainder of 2023, 2024, 2025, 2026, 2027, and thereafter, respectively.
10. Share Capital
On March 1, 2023, the Board authorized an extension and a $125.0 million increase in the size of the Company’s stock repurchase program (the “Repurchase Program”) to an aggregate of $250.0 million, with any previous purchases under the Repurchase Program continuing to count against that limit. The Repurchase Program, as amended, will expire on March 1, 2026.
Under the Repurchase Program, share repurchases may be made at our discretion from time to time in open market transactions at prevailing market prices, including through trading plans that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions, regulatory requirements, the availability of funds, and other considerations we deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directors will review the Repurchase Program periodically and may authorize adjustments of its terms.
During the three months ended March 31, 2023, there were 2.6 million shares of Class A Common Stock repurchased under the Repurchase Program at an aggregate value, excluding fees, of $17.9 million. These were purchased at an average price of $6.91 per share. The remaining value of shares of Class A Common Stock permitted to be repurchased under the Repurchase Program was $180.4 million as of March 31, 2023.
On May 9, 2023, the Company agreed to repurchase approximately 23.3 million shares from AlpInvest Partners at a share price of $6.43, for an aggregate total value of approximately $150.0 million. See Note 1 of the Notes included herein for additional information regarding the repurchase.
The authorized and outstanding share capital of the Company is below:
Class A Common Stock
There are 1.0 billion shares of Class A Common Stock authorized, of which 129.8 million shares were issued and outstanding as of March 31, 2023. Each share of Class A Common Stock carries one vote and entitles its holder to dividends equal to or greater than each share of Class B Common Stock, as defined below.
Class B Common Stock
There are 5.0 thousand shares of Class B common stock, par value $0.001 per share (the “Class B Common Stock”) authorized, of which 2.3 thousand shares were issued and outstanding as of March 31, 2023. Each share of Class B Common Stock carries twenty votes each, and is convertible at any time at the option of the holder into one share of Class A Common Stock.
Class C Common Stock
There are 250.0 million shares of Class C Common Stock authorized, of which 160.9 million shares were issued and outstanding as of March 31, 2023. Each share of Class C Common Stock carries one vote and does not represent an economic interest in the Company. Each share of Class C Common Stock is paired with a corresponding common unit of Stagwell Global LLC ("OpCo") (each such paired share of Class C Common Stock and common unit of OpCo, a “Paired Unit”). Each holder of Paired Units may, at its option, exchange such Paired Units for shares of Class A Common Stock on a one-to-one basis (i.e., one Paired Unit for one share of Class A Common Stock).
There were no Paired Units exchanged during the three months ended March 31, 2023.
11. Fair Value Measurements
A fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. The hierarchy for observable and unobservable inputs used to measure fair value into three broad levels are described below:
•Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
•Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
•Level 3 - Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Financial Instruments that are not Measured at Fair Value on a Recurring Basis
The following table presents certain information for our financial liability that is not measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value |
| (dollars in thousands) |
| 5.625% Notes | $ | 1,100,000 | | | $ | 962,500 | | | $ | 1,100,000 | | | $ | 902,000 | |
The fair value of this instrument is based on quoted market prices in markets that are not active. Therefore, this debt is classified as Level 2 within the fair value hierarchy.
Financial Instruments Measured at Fair Value on a Recurring Basis
Contingent deferred acquisition consideration (Level 3 fair value measurement) is initially recorded at the acquisition date fair value and adjusted at each reporting period. The estimated liability is determined in accordance with models of each business’ future performance, including revenue growth and free cash flows. These models are dependent upon significant assumptions, such as the growth rate of the earnings of the relevant subsidiary during the contractual period and the discount rate. These growth rates are consistent with the Company’s long-term forecasts. As of March 31, 2023, the discount rate used to measure these liabilities was 5.2%.
As these estimates require the use of assumptions about future performance, which are uncertain at the time of estimation, the fair value measurements presented on the Unaudited Consolidated Balance Sheets are subject to material uncertainty.
See Note 5 of the Notes included herein for additional information regarding contingent deferred acquisition consideration.
As of March 31, 2023 and December 31, 2022, the carrying amount of the Company’s financial instruments, including cash, cash equivalents, accounts receivable and accounts payable, approximated fair value because of their short-term maturity.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Certain non-financial assets are measured at fair value on a nonrecurring basis, primarily goodwill, intangible assets (Level 3 fair value measurements) and right-of-use lease assets (Level 2 fair value measurement). Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment.
The Company did not recognize an impairment of goodwill, intangible assets or right-of-use lease assets for the three months ended March 31, 2023.
12. Supplemental Information
Stock Based Awards
Stock-based compensation recognized for awards authorized under the Company’s employee stock incentive plans during the three months ended March 31, 2023 and 2022 was $7.4 million and $7.2 million, respectively. This increase was included as a component of stock-based compensation in Office and general expenses and Cost of services within the Unaudited Consolidated Statements of Operations.
Certain of the Company’s subsidiaries grant awards to their employees providing them with an equity interest in the respective subsidiary (the “profits interests awards”). The awards generally provide the employee the right, but not the obligation, to sell their profits interest in the subsidiary to the Company based on a performance-based formula and, in certain cases, receive a profit share distribution. The profits interests awards are settled in cash and the corresponding liability was $24.9 million and $21.0 million at March 31, 2023 and December 31, 2022, respectively, and is included as a component of Accruals and other liabilities and Other liabilities on the Unaudited Consolidated Balance Sheets. Stock-based compensation recognized for these awards was $4.6 million and $0.7 million for the three months ended March 31, 2023 and 2022, respectively. This was included as a component of stock-based compensation in Cost of services within the Unaudited Consolidated Statements of Operations.
Transfer of Accounts Receivable
The Company transfers certain of its trade receivable assets to third parties under agreements to sell certain of its accounts receivables. Per the terms of these agreements, the Company surrenders control over its trade receivables upon transfer.
The trade receivables transferred to the third parties were $82.0 million and $7.5 million for the three months ended March 31, 2023 and 2022, respectively. The amount collected and due to the third parties under these arrangements was $2.4 million as of March 31, 2023 and $5.7 million as of December 31, 2022. Fees for these arrangements were recorded in Office and general expenses in the Unaudited Consolidated Statements of Operations and totaled $1.3 million and less than $0.1 million for the three months ended March 31, 2023 and 2022, respectively.
Current Expected Credit Losses
The Company adopted ASC 326, Current Expected Credit Losses, on January 1, 2023, which requires the measurement and recognition of expected credit losses using a current expected credit loss model. The allowance for credit losses on expected future uncollectible accounts receivable is estimated considering forecasts of future economic conditions in addition to information about past events and current conditions. The adoption resulted in an increase in the allowance for accounts receivables and a decrease to opening Retained Earnings of $2.1 million, of which $1.2 million was subsequently allocated to noncontrolling interests. These amounts are presented within the “Other” line on the Statement of Shareholders’ Equity.
13. Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in interim periods.
The Company had an income tax expense for the three months ended March 31, 2023 of $2.4 million (on a pre-tax loss of $2.4 million resulting in an effective tax rate of (99.1)%) compared to income tax expense of $3.2 million (on pre-tax income of $35.8 million resulting in an effective tax rate of 8.9%) for the three months ended March 31, 2022.
The difference in the effective tax rate of (99.1)% in the three months ended March 31, 2023, as compared to 8.9% in the three months ended March 31, 2022, is due to the pre-tax loss, an increase in valuation allowance, and an increase in uncertain tax positions in 2023.
It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may decrease by up to $2.6 million based on expected settlements.
Tax Receivables Agreement
In connection with the Tax Receivable Agreement (“TRA”), the Company is required to make cash payments to Stagwell Media LP (“Stagwell Media”) equal to 85% of certain U.S. federal, state and local income tax or franchise tax savings, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) increases in the tax basis of OpCo’s assets resulting from exchanges of Paired Units (defined in Note 10) for shares of Class A Common Stock or cash, as applicable, and (ii) certain other tax benefits related to us making payments under the TRA. The TRA liability is an estimate and actual amounts payable under the TRA could differ from this estimate.
In the first quarter of 2022, the Company had its first exchange of Paired Units for shares of Class A Common Stock and recorded its initial TRA liability. Further exchanges were made in subsequent quarters in 2022. No exchanges were made in the first quarter of 2023. As of March 31, 2023, the Company has recorded a TRA liability of $28.7 million and an associated deferred tax asset of $33.8 million.
14. Related Party Transactions
In the ordinary course of business, the Company enters into transactions with related parties, including its affiliates. The transactions may range in the nature and value of services underlying the arrangements. The following table presents significant related party transactions where a third party receives services from the Company:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Total Transaction Value | | | | | Revenue | | Due From
Related Party |
| | | | | | | Three Months Ended March 31, | | March 31,
2023 | | December 31,
2022 |
| Services | | | | | | | | | 2023 | | 2022 | | | | |
| | | | (dollars in thousands) |
Marketing and advertising services (1) | | | | Continuous (7) | | | | | | $ | 694 | | | $ | — | | | | | $ | 1,043 | | | $ | 1,029 | |
Marketing and advertising services (2) | | | | $3,576 and Continuous (7) | | | | | | 378 | | | 564 | | | | | 5,939 | | | 4,831 | |
Marketing and website development services (3) | | | | $5,884 and Continuous (7) | | | | | | 778 | | | 2,468 | | | | | — | | | 488 | |
Polling services (4) | | | | $1,123 | | | | | | 89 | | | 48 | | | | | — | | | 280 | |
Polling services (5) | | | | $683 | | | | | | 39 | | | — | | | | | 158 | | | — | |
Polling services (6) | | | | $3,450 | | | | | | — | | | 164 | | | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | $ | 1,978 | | | $ | 3,244 | | | | | $ | 7,140 | | | $ | 6,628 | |
(1) A member of the Company’s board of directors holds an executive leadership position or is on the board of directors of the client.
(2) Brands’ partners and executives either hold a key leadership position in or are on the board of directors of the client.
(3) Client has a significant interest in the Company.
(4) A family member of the Company’s Chief Executive Officer holds a key leadership position in the client.
(5) A family member of the Company’s President holds a key leadership position in the client.
(6) Founder of the client has significant interest in the Company.
(7) Certain of the contractual arrangements within these transactions were entered into for an indefinite term and are invoiced as services are provided, while others have a fixed definitive contract value.
In 2019, a Brand entered into a loan agreement with a third party who holds a minority interest in the Brand. The loan receivable of $3.1 million and $3.6 million due from the third party is included within Other current assets in the Company’s Unaudited Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022, respectively. The Company recognized $0.1 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively, of interest income within Interest expense, net on its Unaudited Consolidated Statements of Operations. In addition, in 2021, the Brand entered into an arrangement to obtain sales and management services from the same third party. Under the arrangement, the Brand has incurred $0.2 million and $0.1 million of related party expense for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023 and December 31, 2022, $0.8 million and $1.4 million, respectively, was due to the third party.
In 2022, the Company made loans to three employees of a subsidiary each in the amount of approximately $0.9 million, together with interest on the unpaid principal balance at a fixed interest rate equal to 3.5% per annum, compounding quarterly. The cash from the loan was used by the employees to purchase the noncontrolling interest of 13.3% in TMA Direct.
15. Segment Information
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Mark Penn, Chief Executive Officer and Chairman, to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative
analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
The CODM uses Adjusted EBITDA (defined below) as a key metric, to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions. Adjusted EBITDA is defined as Net income excluding non-operating income or expense to achieve operating income, plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, and other items. Other items include restructuring costs, acquisition-related expenses, and non-recurring items.
The Company made changes to its internal management and reporting structure in the first quarter of 2023, resulting in an update to our reportable segments (Networks). The change in reportable segments was that Mono, previously in the Integrated Agencies Network, is now within Allison & Partners in the Communications Network, and Storyline (a Brand specializing in research and survey generation), previously in the Communications Network, is now within Constellation in the Integrated Agencies Network. Periods presented prior to the first quarter of 2023 have been recast to reflect the reclassification of certain reporting units (Brands) between operating segments.
The Company has three reportable segments as follows: “Integrated Agencies Network,” “Brand Performance Network” and the “Communications Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described throughout the Notes included herein.
•The Integrated Agencies Network includes five operating segments: the Anomaly Alliance, Constellation, the Doner Partner Network, Code and Theory, and National Research Group. The operating segments offer an array of complementary services spanning our core capabilities of Digital Transformation, Performance Media & Data, Consumer Insights & Strategy, and Creativity & Communications. The Brands included in the operating segments that comprise the Integrated Agencies Network reportable segment are as follows: Anomaly Alliance (Anomaly, Concentric and Scout (Brands)), Constellation (72andSunny, Colle McVoy, Hunter, Instrument, Redscout, Team Enterprises, Storyline, and Harris Insights), the Doner Partner Network (Doner, KWT Global, Harris X, Veritas, and Yamamoto (Brands)), Code and Theory (Code and Theory and Y Media Labs) and National Research Group.
These operating segments share similar characteristics related to (i) the nature of their services; (ii) the type of clients and the methods used to provide services; and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these operating segments may occasionally compete with each other for new business or have business move between them.
•The Brand Performance Network (“BPN”) is comprised of a single operating segment. BPN includes a unified media and data management structure with omnichannel media placement, creative media consulting, influencer and business-to-business marketing capabilities. Our Brands in this segment aim to provide scaled creative performance through developing and executing sophisticated omnichannel campaign strategies leveraging significant amounts of consumer data. BPN’s Brands provide media solutions such as audience analysis, media planning, and buying across a range of digital and traditional platforms (out-of-home, paid search, social media, lead generation, programmatic, television, broadcast, among others) and includes multichannel Brands Assembly, Brand New Galaxy, Crispin Porter Bogusky, Forsman & Bodenfors, Goodstuff, MMI Agency, digital creative & transformation consultancy Gale, B2B specialist Multiview, Observatory, Vitro, CX specialists Kenna, and travel media experts Ink.
•The Communications Network reportable segment is comprised of a single operating segment, our specialist network that provides advocacy, strategic corporate communications, investor relations, public relations, online fundraising and other services to both corporations and political and advocacy organizations and consists of our Allison & Partners, SKDK, and Targeted Victory brands.
•All Other consists of the Company’s digital innovation group and Stagwell Marketing Cloud, including Maru and Epicenter, and products such as PRophet and ARound.
•Corporate consists of corporate office expenses incurred in connection with the strategic resources provided to the operating segments, as well as certain other centrally managed expenses that are not fully allocated to the operating segments. These office and general expenses include (i) salaries and related expenses for corporate office employees, including employees dedicated to supporting the operating segments, (ii) occupancy expenses relating to properties occupied by all corporate office employees, (iii) other office and general expenses including professional fees for the financial statement audits and other public company costs, and (iv) certain other professional fees managed by the corporate office. Additional expenses managed by the corporate office that are directly related to the operating segments are allocated to the appropriate reportable segment and the All Other category.
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 | | |
| | | | | (dollars in thousands) | | |
| Revenue: | | | | | |
| Integrated Agencies Network | | | | | $ | 329,792 | | | $ | 348,751 | | | |
| Brand Performance Network | | | | | 213,340 | | | 197,787 | | | |
| Communications Network | | | | | 66,460 | | | 93,255 | | | |
| All Other | | | | | 12,852 | | | 3,110 | | | |
| Total Revenue | | | | | $ | 622,444 | | | $ | 642,903 | | | |
| | | | | | | | | |
| Adjusted EBITDA: | | | | | | | | | |
| Integrated Agencies Network | | | | | $ | 59,385 | | | $ | 68,888 | | | |
| Brand Performance Network | | | | | 23,421 | | | 31,248 | | | |
| Communications Network | | | | | 4,013 | | | 16,438 | | | |
| All Other | | | | | (3,805) | | | (124) | | | |
| Corporate | | | | | (10,792) | | | (15,038) | | | |
| Total Adjusted EBITDA | | | | | $ | 72,222 | | | $ | 101,412 | | | |
| | | | | | | | | |
| Depreciation and amortization | | | | | $ | (33,477) | | | $ | (31,204) | | | |
| Impairment and other losses | | | | | — | | | (557) | | | |
| Stock-based compensation | | | | | (12,004) | | | (8,021) | | | |
| Deferred acquisition consideration | | | | | (4,088) | | | (1,897) | | | |
| Other items, net | | | | | (6,420) | | | (5,073) | | | |
Total Operating Income | | | | | $ | 16,233 | | | $ | 54,660 | | | |
| | | | | | | | | |
| Other Income (expenses): | | | | | | | | | |
| Interest expense, net | | | | | $ | (18,189) | | | $ | (18,729) | | | |
| Foreign exchange, net | | | | | (670) | | | (306) | | | |
| Other, net | | | | | 220 | | | 156 | | | |
| Income (loss) before income taxes and equity in earnings of non-consolidated affiliates | | | | | (2,406) | | | 35,781 | | | |
| Income tax expense | | | | | 2,384 | | | 3,189 | | | |
| Income (loss) before equity in earnings of non-consolidated affiliates | | | | | (4,790) | | | 32,592 | | | |
| Equity in income (loss) of non-consolidated affiliates | | | | | (227) | | | 1,030 | | | |
| Net income (loss) | | | | | (5,017) | | | 33,622 | | | |
| Net (income) loss attributable to noncontrolling and redeemable noncontrolling interests | | | | | 5,460 | | | (20,947) | | | |
| Net income attributable to Stagwell Inc. common shareholders | | | | | $ | 443 | | | $ | 12,675 | | | |
The Company’s CODM does not use segment assets to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
See Note 3 of the Notes included herein for a summary of the Company’s revenue by geographic region for the three months ended March 31, 2023 and 2022.
