UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022March 31, 2023
or
| | | | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission File Number: 001-13718
Stagwell Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| Delaware | | 86-1390679 |
(State or other jurisdiction of
incorporation or organization) | | (IRS Employer Identification No.) |
| | | | |
One World Trade Center, Floor 65
| | |
| New York, | New York | | 10007 |
| (Address of principal executive offices) | | (Zip Code) |
(646) 429-1800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Class A Common Stock, par value $0.001 per share | STGW | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated Filer | ☐ | Accelerated Filer | ☒ |
| Non-accelerated Filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of common shares outstanding as of October 28, 2022May 3, 2023, was 130,785,623129,689,614 shares of Class A Common Stock 3,946 shares of Class B Common Stock, and 164,375,682160,909,058 shares of Class C Common Stock.
STAGWELL INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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| | | Page |
| | PART I. FINANCIAL INFORMATION | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| | PART II. OTHER INFORMATION | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | | |
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EXPLANATORY NOTE
On December 21, 2020, MDC Partners Inc. (“MDC”) and Stagwell Media LP (“Stagwell Media”) announced that they had entered into an agreement, providing for the combination of MDC with the operating businesses and subsidiaries of Stagwell Media (the “Stagwell Subject Entities”) (the “Transaction Agreement”). The Stagwell Subject Entities comprised Stagwell Marketing Group LLC (“Stagwell Marketing” or “SMG”) and its direct and indirect subsidiaries.
On August 2, 2021 (the “Closing Date”), we completed the combination of MDC and the Stagwell Subject Entities and a series of steps and related transactions (such combination and transactions, the “Transactions”). In connection with the Transactions, among other things, (i) MDC completed a series of transactions pursuant to which it emerged as a wholly owned subsidiary of Stagwell Inc. (“the Company” or “Stagwell”), converted into a Delaware limited liability company and changed its name to Midas OpCo Holdings LLC and subsequently to Stagwell Global LLC (“OpCo”); (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into a Delaware corporation, succeeded MDC as the publicly-traded company and changed its name to Stagwell Inc.
The Transactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the legal acquirer and Stagwell Marketing treated as the accounting acquirer. As a result of the Transactions and the change in our business and operations, under applicable accounting principles, the historical financial results of Stagwell Marketing prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presentedReferences in this Quarterly
Report on Form 10-Q (this “Form 10-Q”) for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions or the financial results of MDC and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021.
References in this Form 10-Q to “Stagwell,” the “Company,” “we,” “us,” and “our” and the “Company” refer (i) with respect to events occurring or periods ending before August 2, 2021, to Stagwell Marketing and its direct and indirect subsidiaries and (ii) with respect to events occurring or periods ending on or after August 2, 2021, to Stagwell Inc. and, unless the context otherwise requires or otherwise is expressly stated, its direct and indirect subsidiaries.
All dollar amounts are stated in U.S. dollars unless otherwise stated.
Note About Forward-Looking Statements
This document contains forward-looking statements. within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s representatives may also make forward-looking statements orally or in writing from time to time. Statements in this document that are not historical facts, including but not limited to, statements about the Company’s beliefs and expectations, future financial performance and future prospects, business and economic trends, potential acquisitions, and estimates of amounts for redeemable noncontrolling interests and deferred acquisition consideration, constitute forward-looking statements. Forward-looking statements, which are generally denoted by words such as “anticipate,” “assume,” “believe,” “continue,” “could,” “create,” “estimate,” “expect,” “focus,” “forecast,” “foresee,” “future,” “guidance,” “intend,” “look,” “may,” “opportunity,” “outlook,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” or the negative of such terms or other variations thereof and terms of similar substance used in connection with any discussion of current plans, estimates and projections are subject to change based on a number of factors, including those outlined in this section.
Forward-looking statements in this document are based on certain key expectations and assumptions made by the Company. Although the management of the Company believes that the expectations and assumptions on which such forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. The material assumptions upon which such forward-looking statements are based include, among others, assumptions with respect to general business, economic and market conditions, the competitive environment, anticipated and unanticipated tax consequences and anticipated and unanticipated costs. These forward-looking statements are based on current plans, estimates and projections, and are subject to change based on a number of factors, including those outlined in this section. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the Company’s control. Therefore, you should not place undue reliance on such statements. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new information or future events, if any.
Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such risk factors include, but are not limited to, the following:
•risks associated with international, national and regional unfavorable economic conditions that could affect the Company or its clients;
•the continued impact of the coronavirus pandemic (“COVID-19”), and evolving strains of COVID-19 on the economy and demand for the Company’s services, which may precipitate or exacerbate other risks and uncertainties;
•inflation and actions taken by central banks to counter inflation;
•the Company’s ability to attract new clients and retain existing clients;
•the impact of a reduction in client spending and changes in client advertising, marketing and corporate communications requirements;
•financial failure of the Company’s clients;
•the Company’s ability to retain and attract key employees;
•the Company’s ability to compete in the markets in which it operates;
•the Company’s ability to achieve its cost saving initiatives;
•the Company’s implementation of strategic initiatives;
•the Company’s ability to remain in compliance with its debt agreements and the Company’s ability to finance its contingent payment obligations when due and payable, including but not limited to those relating to redeemable noncontrolling interests and deferred acquisition consideration;
•the Company’s ability to manage its growth effectively, including the successful completion and integration of acquisitions that complement and expand the Company’s business capabilities;
•the Company’s ability to develop products incorporating new technologies, including augmented reality, artificial intelligence, and virtual reality, and realize benefits from such products;
•an inability to realize expected benefits of the combination of the Company’s business with the business of MDC;
•adverse tax consequences in connection with the Transactions for the Company, its operations and its shareholders, that may differ from the expectations of the Company, including that future changes in tax law, potential increases to corporate tax rates in the United States and disagreements with the tax authorities on the Company’s determination of value and computations of its attributes may result in increased tax costs;
•the occurrence of material Canadian federal income tax (including material “emigration tax”) as a result of the Transactions;
•the Company’s ability to attract new clients and retain existing clients;
•the impact of a reduction in client spending and changes in client advertising, marketing and corporate communications requirements;
•financial failure of the Company’s clients;
•the Company’s ability to retain and attract key employees;
•the Company’s ability to compete in the markets in which it operates;
•the Company’s ability to achieve its cost saving initiatives;
•the Company’s implementation of strategic initiatives;
•the Company’s ability to remain in compliance with its debt agreements and the Company’s ability to finance its contingent payment obligations when due and payable, including but not limited to those relating to redeemable noncontrolling interests and deferred acquisition consideration;
•the Company’s ability to manage its growth effectively, including the successful completion and integration of acquisitions which complement and expand the Company’s business capabilities;
•the Company’sunremediated material weaknesses in internal control over financial reporting and its ability to establish and maintain an effective system of internal control over financial reporting;
•the Company’s ability to protect client data from security incidents or cyberattacks;
•economic disruptions resulting from war and other geopolitical tensions (such as the ongoing military conflict between Russia and Ukraine), terrorist activities and natural disasters;
•stock price volatility; and
•foreign currency fluctuations.
Investors should carefully consider these risk factors, other risk factors described herein,risks and the additional risk factors outlineddescribed in more detail in our Annual Report on Form 10-K for the year ended December 31, 20212022 (our “2021“2022 Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2022,6, 2023, and accessible on the SEC’s website at www.sec.gov, under the caption “Risk Factors,” anand in the Company’s other SEC filings.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)thousands, except per share amounts)
| | | | Three Months
Ended September 30, | | Nine Months
Ended September 30, | | | Three Months Ended March 31, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | |
| Revenue | Revenue | $ | 663,791 | | | $ | 466,634 | | | $ | 1,979,607 | | | $ | 857,436 | | Revenue | | $ | 622,444 | | | $ | 642,903 | | |
| Operating Expenses | Operating Expenses | | Operating Expenses | | | |
| Cost of services | Cost of services | 417,134 | | | 324,782 | | | 1,253,765 | | | 558,856 | | Cost of services | | 413,898 | | | 411,970 | | |
| Office and general expenses | Office and general expenses | 119,186 | | | 121,770 | | | 429,121 | | | 226,720 | | Office and general expenses | | 158,836 | | | 144,512 | | |
| Depreciation and amortization | Depreciation and amortization | 32,207 | | | 24,790 | | | 95,642 | | | 46,122 | | Depreciation and amortization | | 33,477 | | | 31,204 | | |
| Impairment and other losses | Impairment and other losses | 25,211 | | | 14,926 | | | 28,034 | | | 14,926 | | Impairment and other losses | | — | | | 557 | | |
| | 593,738 | | | 486,268 | | | 1,806,562 | | | 846,624 | | | | 606,211 | | | 588,243 | | |
| Operating Income (Loss) | 70,053 | | | (19,634) | | | 173,045 | | | 10,812 | | |
| Operating Income | | Operating Income | | 16,233 | | | 54,660 | | |
| Other income (expenses): | Other income (expenses): | | | | | | | | Other income (expenses): | | | |
| Interest expense, net | Interest expense, net | (19,672) | | | (11,912) | | | (56,552) | | | (15,197) | | Interest expense, net | | (18,189) | | | (18,729) | | |
| Foreign exchange, net | Foreign exchange, net | (3,927) | | | (893) | | | (4,163) | | | (1,955) | | Foreign exchange, net | | (670) | | | (306) | | |
| Other, net | Other, net | 147 | | | 45,621 | | | 182 | | | 46,806 | | Other, net | | 220 | | | 156 | | |
| | (23,452) | | | 32,816 | | | (60,533) | | | 29,654 | | | | (18,639) | | | (18,879) | | |
| Income before income taxes and equity in earnings of non-consolidated affiliates | 46,601 | | | 13,182 | | | 112,512 | | | 40,466 | | |
| Income (loss) before income taxes and equity in earnings of non-consolidated affiliates | | Income (loss) before income taxes and equity in earnings of non-consolidated affiliates | | (2,406) | | | 35,781 | | |
| Income tax expense | Income tax expense | 11,540 | | | 5,183 | | | 20,150 | | | 9,205 | | Income tax expense | | 2,384 | | | 3,189 | | |
| Income before equity in earnings of non-consolidated affiliates | 35,061 | | | 7,999 | | | 92,362 | | | 31,261 | | |
| Income (loss) before equity in earnings of non-consolidated affiliates | | Income (loss) before equity in earnings of non-consolidated affiliates | | (4,790) | | | 32,592 | | |
| Equity in income (loss) of non-consolidated affiliates | Equity in income (loss) of non-consolidated affiliates | 213 | | | (76) | | | 1,053 | | | (75) | | Equity in income (loss) of non-consolidated affiliates | | (227) | | | 1,030 | | |
| Net income | 35,274 | | | 7,923 | | | 93,415 | | | 31,186 | | |
| Net income attributable to noncontrolling and redeemable noncontrolling interests | (24,665) | | | (9,994) | | | (59,668) | | | (10,987) | | |
| Net income (loss) attributable to Stagwell Inc. common shareholders | $ | 10,609 | | | $ | (2,071) | | | $ | 33,747 | | | $ | 20,199 | | |
| Income Per Common Share: | | | | | | | | |
| Net income (loss) | | Net income (loss) | | (5,017) | | | 33,622 | | |
| Net (income) loss attributable to noncontrolling and redeemable noncontrolling interests | | Net (income) loss attributable to noncontrolling and redeemable noncontrolling interests | | 5,460 | | | (20,947) | | |
| Net income attributable to Stagwell Inc. common shareholders | | Net income attributable to Stagwell Inc. common shareholders | | $ | 443 | | | $ | 12,675 | | |
| | Income (loss) Per Common Share: | | Income (loss) Per Common Share: | | | |
| | Basic | Basic | | | | | Basic | | $ | 0.00 | | | $ | 0.10 | | |
| Net income (loss) attributable to Stagwell Inc. common shareholders | $ | 0.08 | | | $ | (0.06) | | | $ | 0.27 | | | $ | (0.06) | | |
| | Diluted | Diluted | | | | | | | | Diluted | | $ | (0.01) | | | $ | 0.10 | | |
| Net income (loss) attributable to Stagwell Inc. common shareholders | $ | 0.08 | | | $ | (0.06) | | | $ | 0.26 | | | $ | (0.06) | | |
| Weighted Average Number of Common Shares Outstanding: | Weighted Average Number of Common Shares Outstanding: | | | | | | | | Weighted Average Number of Common Shares Outstanding: | | | | | |
| Basic | Basic | 125,384 | | | 76,106 | | | 124,710 | | | 76,106 | | Basic | | 125,199 | | | 122,285 | | |
| Diluted | Diluted | 130,498 | | | 76,106 | | | 131,550 | | | 76,106 | | Diluted | | 289,806 | | | 297,484 | | |
See notes to the Unaudited CondensedConsolidated Financial Statements.
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 | | |
| COMPREHENSIVE INCOME (LOSS) | | | | | | | | | |
| Net income (loss) | | | | | $ | (5,017) | | | $ | 33,622 | | | |
| Other comprehensive income (loss) | | | | | | | | | |
| Foreign currency translation adjustment | | | | | 4,425 | | | (5,347) | | | |
| | | | | | | | | |
| Other comprehensive income (loss) | | | | | 4,425 | | | (5,347) | | | |
| Comprehensive income (loss) for the period | | | | | (592) | | | 28,275 | | | |
| Comprehensive (income) loss attributable to the noncontrolling and redeemable noncontrolling interests | | | | | 26,723 | | | (20,947) | | | |
| Comprehensive income attributable to Stagwell Inc. common shareholders | | | | | $ | 26,131 | | | $ | 7,328 | | | |
See notes to the Unaudited Consolidated Financial Statements.
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)BALANCE SHEETS
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| COMPREHENSIVE INCOME (LOSS) | | | | | | | |
| Net income | $ | 35,274 | | | $ | 7,923 | | | $ | 93,415 | | | $ | 31,186 | |
| Other comprehensive income (loss) | | | | | | | |
| Foreign currency translation adjustment | (30,505) | | | 12,537 | | | (59,678) | | | 12,537 | |
| Other comprehensive income (loss) | (30,505) | | | 12,537 | | | (59,678) | | | 12,537 | |
| Comprehensive income for the period | 4,769 | | | 20,460 | | | 33,737 | | | 43,723 | |
| Comprehensive income attributable to the noncontrolling and redeemable noncontrolling interests | (24,665) | | | (9,994) | | | (59,668) | | | (10,987) | |
| Comprehensive income (loss) attributable to Stagwell Inc. common shareholders | $ | (19,896) | | | $ | 10,466 | | | $ | (25,931) | | | $ | 32,736 | |
| | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| | | | |
| ASSETS | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 138,529 | | | $ | 220,589 | |
| Accounts receivable, net | 659,068 | | | 645,846 | |
| Expenditures billable to clients | 97,590 | | | 93,077 | |
| Other current assets | 77,930 | | | 71,443 | |
| Total Current Assets | 973,117 | | | 1,030,955 | |
| Fixed assets, net | 94,839 | | | 98,878 | |
| Right-of-use lease assets - operating leases | 260,763 | | | 273,567 | |
| Goodwill | 1,569,532 | | | 1,566,956 | |
| Other intangible assets, net | 888,455 | | | 907,529 | |
| Other assets | 114,227 | | | 115,447 | |
| Total Assets | $ | 3,900,933 | | | $ | 3,993,332 | |
| LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY | | | |
| Current Liabilities | | | |
| Accounts payable | $ | 308,759 | | | $ | 357,253 | |
| Accrued media | 283,578 | | | 240,506 | |
| Accruals and other liabilities | 152,937 | | | 248,477 | |
| Advance billings | 334,933 | | | 337,034 | |
| Current portion of lease liabilities - operating leases | 75,939 | | | 76,349 | |
| Current portion of deferred acquisition consideration | 94,039 | | | 90,183 | |
| Total Current Liabilities | 1,250,185 | | | 1,349,802 | |
| Long-term debt | 1,235,281 | | | 1,184,707 | |
| Long-term portion of deferred acquisition consideration | 71,645 | | | 71,140 | |
| Long-term lease liabilities - operating leases | 278,978 | | | 294,049 | |
| Deferred tax liabilities, net | 43,023 | | | 40,109 | |
| Other liabilities | 70,371 | | | 69,780 | |
| Total Liabilities | 2,949,483 | | | 3,009,587 | |
| Redeemable Noncontrolling Interests | 32,517 | | | 39,111 | |
| Commitments, Contingencies and Guarantees (Note 9) | | | |
| Shareholders' Equity | | | |
| Common shares - Class A & B | 130 | | | 132 | |
| Common shares - Class C | 2 | | | 2 | |
| | | |
| Paid-in capital | 469,891 | | | 491,899 | |
| Retained earnings | 30,324 | | | 29,445 | |
| Accumulated other comprehensive loss | (13,253) | | | (38,941) | |
| Stagwell Inc. Shareholders' Equity | 487,094 | | | 482,537 | |
| Noncontrolling interests | 431,839 | | | 462,097 | |
| Total Shareholders' Equity | 918,933 | | | 944,634 | |
| Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Equity | $ | 3,900,933 | | | $ | 3,993,332 | |
See notes to the Unaudited Condensed Consolidated Financial Statements.
STAGWELL INC. AND SUBSIDIARIES
CONDENSEDUNAUDITED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS
(amounts in thousands)
| | | | | | | | | | | |
| | September 30,
2022 | | December 31, 2021 |
| | (Unaudited) | | |
| ASSETS | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 165,251 | | | $ | 184,009 | |
| Accounts receivable, net | 725,346 | | | 696,937 | |
| Expenditures billable to clients | 57,873 | | | 63,065 | |
| Other current assets | 71,249 | | | 61,830 | |
| Total Current Assets | 1,019,719 | | | 1,005,841 | |
| Fixed assets, net | 123,128 | | | 118,603 | |
| Right-of-use lease assets - operating leases | 283,974 | | | 311,654 | |
| Goodwill | 1,615,694 | | | 1,652,723 | |
| Other intangible assets, net | 879,049 | | | 937,695 | |
| | | |
| Other assets | 47,784 | | | 29,064 | |
| Total Assets | $ | 3,969,348 | | | $ | 4,055,580 | |
| LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY | | | |
| Current Liabilities | | | |
| Accounts payable | $ | 294,402 | | | $ | 271,769 | |
| Accrued media | 188,344 | | | 237,794 | |
| Accruals and other liabilities | 211,263 | | | 272,533 | |
| Advance billings | 340,675 | | | 361,885 | |
| Current portion of lease liabilities - operating leases | 73,659 | | | 72,255 | |
| Current portion of deferred acquisition consideration | 74,426 | | | 77,946 | |
| Total Current Liabilities | 1,182,769 | | | 1,294,182 | |
| Long-term debt | 1,329,134 | | | 1,191,601 | |
| Long-term portion of deferred acquisition consideration | 85,163 | | | 144,423 | |
| Long-term lease liabilities - operating leases | 308,162 | | | 342,730 | |
| Deferred tax liabilities, net | 103,243 | | | 103,093 | |
| Other liabilities | 70,167 | | | 57,147 | |
| Total Liabilities | 3,078,638 | | | 3,133,176 | |
| Redeemable Noncontrolling Interests | 65,817 | | | 43,364 | |
| Commitments, Contingencies and Guarantees (Note 10) | | | |
| Shareholders' Equity: | | | |
| | | |
| Common shares - Class A & B | 135 | | | 118 | |
| Common shares - Class C | 2 | | | 2 | |
| Paid-in capital | 348,663 | | | 382,893 | |
| Retained earnings (loss) | 6,573 | | | (6,982) | |
| Accumulated other comprehensive loss | (64,956) | | | (5,278) | |
| Stagwell Inc. Shareholders' Equity | 290,417 | | | 370,753 | |
| Noncontrolling interests | 534,476 | | | 508,287 | |
| Total Shareholders' Equity | 824,893 | | | 879,040 | |
| Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Equity | $ | 3,969,348 | | | $ | 4,055,580 | |
| | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| 2023 | | 2022 | | |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | (5,017) | | | $ | 33,622 | | | |
| Adjustments to reconcile net income to cash used in operating activities: | | | | | |
| Stock-based compensation | 12,004 | | | 8,021 | | | |
| Depreciation and amortization | 33,477 | | | 31,204 | | | |
| Impairment and other losses | — | | | 557 | | | |
| | | | | |
| Deferred income taxes | 3,809 | | | (1,350) | | | |
| Adjustment to deferred acquisition consideration | 4,088 | | | 1,897 | | | |
| | | | | |
| Other, net | (1,550) | | | (2,647) | | | |
| Changes in working capital: | | | | | |
| Accounts receivable | (12,425) | | | (70,039) | | | |
| Expenditures billable to clients | (4,173) | | | 11,996 | | | |
| Other assets | (5,986) | | | (6,100) | | | |
| Accounts payable | (51,670) | | | (32,386) | | | |
| Accrued expenses and other liabilities | (54,684) | | | (5,592) | | | |
| Advance billings | (2,986) | | | (17,760) | | | |
| | | | | |
| Net cash used in operating activities | (85,113) | | | (48,577) | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (3,435) | | | (4,760) | | | |
| Acquisitions, net of cash acquired | (220) | | | (935) | | | |
| Capitalized software | (6,735) | | | (1,778) | | | |
| Other | (425) | | | (816) | | | |
| Net cash used in investing activities | (10,815) | | | (8,289) | | | |
| Cash flows from financing activities: | | | | | |
| Repayment of borrowings under revolving credit facility | (426,500) | | | (209,500) | | | |
| Proceeds from borrowings under revolving credit facility | 476,500 | | | 239,000 | | | |
| Shares acquired and cancelled | (8,263) | | | (14,926) | | | |
| Distributions to noncontrolling interests | (10,948) | | | (6,464) | | | |
| Payment of deferred consideration | — | | | (1,581) | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Repurchase of Common Stock | (17,866) | | | — | | | |
| | | | | |
| Net cash provided by financing activities | 12,923 | | | 6,529 | | | |
| Effect of exchange rate changes on cash and cash equivalents | 945 | | | 1,481 | | | |
| Net decrease in cash and cash equivalents | (82,060) | | | (48,856) | | | |
| Cash and cash equivalents at beginning of period | 220,589 | | | 184,009 | | | |
| Cash and cash equivalents at end of period | $ | 138,529 | | | $ | 135,153 | | | |
| | | | | |
| Supplemental Cash Flow Information: | | | | | |
| Cash income taxes paid | $ | 15,107 | | | $ | 6,623 | | | |
| Cash interest paid | 33,459 | | | 30,798 | | | |
| | | | | |
| Non-cash investing and financing activities: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Establishment of a deferred tax asset related to the exchange | — | | | 24,500 | | | |
| Establishment of Tax Receivables Agreement liability | — | | | 20,846 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See notes to the Unaudited Condensed Consolidated Financial Statements.
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| 2022 | | 2021 |
| Cash flows from operating activities: | | | |
| Net income | $ | 93,415 | | | $ | 31,186 | |
| Adjustments to reconcile net income to cash provided by operating activities: | | | |
| Stock-based compensation | 33,410 | | | 53,465 | |
| Depreciation and amortization | 95,642 | | | 46,122 | |
| Impairment and other losses | 28,034 | | | 14,926 | |
| Provision for bad debt expense | 2,681 | | | 1,893 | |
| Deferred income taxes | (1,557) | | | 2,710 | |
| Adjustment to deferred acquisition consideration | (14,420) | | | 9,456 | |
| Gain on sale of asset | — | | | (43,440) | |
| Other | (1,002) | | | 6,998 | |
| Changes in working capital: | | | |
| Accounts receivable | (34,637) | | | (26,095) | |
| Expenditures billable to clients | 5,525 | | | (9,230) | |
| Other assets | 4,100 | | | (14,568) | |
| Accounts payable | 34,630 | | | (37,435) | |
| Accrued expenses and other liabilities | (138,947) | | | (26,668) | |
| Advance billings | (23,017) | | | 16,598 | |
| Deferred acquisition related payments | (10,776) | | | (5,772) | |
| Net cash provided by operating activities | 73,081 | | | 20,146 | |
| Cash flows from investing activities: | | | |
| Capital expenditures | (25,495) | | | (13,666) | |
| Current period acquisitions, net of cash acquired | (37,461) | | | 130,155 | |
| Proceeds from sale of business, net | — | | | 37,232 | |
| Other | (1,328) | | | — | |
| Net cash (used in) provided by investing activities | (64,284) | | | 153,721 | |
| Cash flows from financing activities: | | | |
| Repayment of borrowings under revolving credit facility | (855,000) | | | (535,472) | |
| Proceeds from borrowings under revolving credit facility | 989,500 | | | 408,369 | |
| Shares acquired and cancelled | (14,970) | | | (820) | |
| Distributions to noncontrolling interests and other | (38,486) | | | (19,245) | |
| Payment of deferred consideration | (61,089) | | | — | |
| | | |
| Purchase of noncontrolling interest | (3,600) | | | — | |
| Proceeds from issuance of the 5.625% Notes | — | | | 1,100,000 | |
| Debt issuance costs | — | | | (15,365) | |
| Distributions | — | | | (204,929) | |
| Repurchase of 7.50% Senior Notes | — | | (884,398) | |
| Repurchase of Common Stock | (28,667) | | | — | |
| | | |
| Net cash used in financing activities | (12,312) | | | (151,860) | |
| Effect of exchange rate changes on cash and cash equivalents | (15,243) | | | 1,025 | |
| Net decrease in cash and cash equivalents | (18,758) | | | 23,032 | |
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(amounts in thousands)
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| 2022 | | 2021 |
| Cash and cash equivalents at beginning of period | 184,009 | | | 92,457 | |
| Cash and cash equivalents at end of period | $ | 165,251 | | | $ | 115,489 | |
| | | |
| Supplemental disclosures: | | | |
| Cash income taxes paid | $ | 23,315 | | | $ | 42,346 | |
| Cash interest paid | 61,016 | | | 22,493 | |
| | | |
| Non-cash investing and financing activities: | | | |
| Acquisitions of business | — | | | 426,396 | |
| Acquisitions of noncontrolling interest | — | | | 37,559 | |
| | | |
| Reduction of deferred tax liability related to the exchange of Paired Units | 20,763 | | | — | |
| Establishment of Tax Receivables Agreement liability | 17,649 | | | — | |
| Non-cash contributions | — | | | 12,372 | |
| Non-cash distributions to Stagwell Media LP | — | | | 13,000 | |
| Non-cash payment of deferred acquisition consideration | — | | | 7,080 | |
See notes to the Unaudited Condensed Consolidated Financial Statements.
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended September 30, 2022 |
| | | | | | Common Shares -
Class A & B | | Common Shares -
Class C | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Stagwell Inc. Shareholders' Equity | | Noncontrolling Interests | | Shareholders' Equity |
| | | | | | | Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | |
| Balance at June 30, 2022 | | | | | | | 131,838 | | | $ | 135 | | | 164,427 | | | $ | 2 | | | $ | 368,345 | | | $ | 10,268 | | | $ | (34,451) | | | $ | 344,299 | | | $ | 513,085 | | | $ | 857,384 | |
| Net income | | | | | | | — | | | — | | | — | | | — | | | — | | | 10,609 | | | — | | | 10,609 | | | 21,573 | | | 32,182 | |
| Other comprehensive loss | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (30,505) | | | (30,505) | | | — | | | (30,505) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in redemption value of RNCI | | | | | | | — | | | — | | | — | | | — | | | — | | | (14,658) | | | — | | | (14,658) | | | — | | | (14,658) | |
| Granting of restricted awards | | | | | | | 1,689 | | | 2 | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | — | |
| Shares repurchased and cancelled (withheld for payroll taxes) | | | | | | | (7) | | | (2) | | | — | | | — | | | (44) | | | — | | | — | | | (46) | | | — | | | (46) | |
| Shares forfeited | | | | | | | (3) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares repurchased and cancelled (Approved plan) | | | | | | | (2,025) | | | (2) | | | — | | | — | | | (13,828) | | | — | | | — | | | (13,830) | | | — | | | (13,830) | |
| Stock-based compensation | | | | | | | — | | | — | | | — | | | — | | | 9,583 | | | — | | | — | | | 9,583 | | | — | | | 9,583 | |
| Conversion of shares | | | | | | | 51 | | | 1 | | | (51) | | | — | | | (1) | | | — | | | — | | | — | | | — | | | — | |
| Finalization of MDC acquisition accounting | | | | | | | — | | | — | | | — | | | — | | | (16,294) | | | — | | | — | | | (16,294) | | | 2,301 | | | (13,993) | |
| Other | | | | | | | 1 | | | 1 | | | — | | | — | | | 904 | | | 354 | | | — | | | 1,259 | | | (2,483) | | | (1,224) | |
| Balance at September 30, 2022 | | | | | | | 131,544 | | | $ | 135 | | | 164,376 | | | $ | 2 | | | $ | 348,663 | | | $ | 6,573 | | | $ | (64,956) | | | $ | 290,417 | | | $ | 534,476 | | | $ | 824,893 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Three Months Ended March 31, 2023 |
| | | | | | Common Shares -
Class A & B | | Common Shares -
Class C | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Stagwell Inc. Shareholders' Equity | | Noncontrolling Interests | | Shareholders' Equity |
| | | | | | | | Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | |
| Balance at December 31, 2022 | | | | | | | 131,724 | | | $ | 132 | | | 160,909 | | | $ | 2 | | | $ | 491,899 | | | $ | 29,445 | | | $ | (38,941) | | | $ | 482,537 | | | $ | 462,097 | | | $ | 944,634 | |
| Net income | | | | | | | — | | | — | | | — | | | — | | | — | | | 443 | | | — | | | 443 | | | (2,917) | | | (2,474) | |
| Other comprehensive income | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 25,688 | | | 25,688 | | | (21,263) | | | 4,425 | |
| Distributions to noncontrolling interests | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (8,025) | | | (8,025) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in redemption value of RNCI | | | | | | | — | | | — | | | — | | | — | | | — | | | 1,076 | | | — | | | 1,076 | | | — | | | 1,076 | |
| Restricted awards granted or vested | | | | | | | 1,838 | | | 2 | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | — | |
| Shares repurchased and cancelled (withheld for payroll taxes) | | | | | | | (1,181) | | | (1) | | | — | | | — | | | (8,262) | | | — | | | — | | | (8,263) | | | — | | | (8,263) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares repurchased and cancelled (Approved plan) | | | | | | | (2,585) | | | (3) | | | — | | | — | | | (17,863) | | | — | | | — | | | (17,866) | | | — | | | (17,866) | |
| Stock-based compensation | | | | | | | — | | | — | | | — | | | — | | | 7,392 | | | — | | | — | | | 7,392 | | | — | | | 7,392 | |
| Change in ownership held by Class C holders | | | | | | | — | | | — | | | — | | | — | | | (3,273) | | | — | | | — | | | (3,273) | | | 3,273 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other | | | | | | | — | | | — | | | — | | | — | | | — | | | (640) | | | — | | | (640) | | | (1,326) | | | (1,966) | |
| Balance at March 31, 2023 | | | | | | | 129,796 | | | $ | 130 | | | 160,909 | | | $ | 2 | | | $ | 469,891 | | | $ | 30,324 | | | $ | (13,253) | | | $ | 487,094 | | | $ | 431,839 | | | $ | 918,933 | |
See notes to the Unaudited Condensed Consolidated Financial Statements.
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - (continued)
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Nine Months Ended September 30, 2022 |
| | | | | | Common Shares -
Class A & B | | Common Shares -
Class C | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Stagwell Inc. Shareholders' Equity | | Noncontrolling Interests | | Shareholders' Equity |
| | | | | | | | Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | |
| Balance at December 31, 2021 | | | | | | | 118,252 | | | $ | 118 | | | 179,970 | | | $ | 2 | | | $ | 382,893 | | | $ | (6,982) | | | $ | (5,278) | | | $ | 370,753 | | | $ | 508,287 | | | $ | 879,040 | |
| Net income | | | | | | | — | | | — | | | — | | | — | | | — | | | 33,747 | | | — | | | 33,747 | | | 55,110 | | | 88,857 | |
| Other comprehensive loss | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (59,678) | | | (59,678) | | | — | | | (59,678) | |
| Distributions to noncontrolling interests | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (29,957) | | | (29,957) | |
| Purchases of noncontrolling interests | | | | | | | — | | | — | | | — | | | — | | | (1,000) | | | — | | | — | | | (1,000) | | | (3,600) | | | (4,600) | |
| Acquisition of noncontrolling interest | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,667 | | | 2,667 | |
| Changes in redemption value of RNCI | | | | | | | — | | | — | | | — | | | — | | | | | (20,546) | | | — | | | (20,546) | | | — | | | (20,546) | |
| Granting of restricted awards | | | | | | | 3,678 | | | 4 | | | — | | | — | | | (4) | | | — | | | — | | | — | | | — | | | — | |
| Shares repurchased and cancelled (withheld for payroll taxes) | | | | | | | (2,005) | | | (2) | | | — | | | — | | | (14,970) | | | — | | | — | | | (14,972) | | | — | | | (14,972) | |
| Shares forfeited | | | | | | | (111) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares repurchased and cancelled (Approved plan) | | | | | | | (4,006) | | | (4) | | | — | | | — | | | (28,667) | | | — | | | — | | | (28,671) | | | — | | | (28,671) | |
| Stock-based compensation | | | | | | | — | | | — | | | — | | | — | | | 25,475 | | | — | | | — | | | 25,475 | | | — | | | 25,475 | |
| Conversion of shares | | | | | | | 15,594 | | | 16 | | | (15,594) | | | — | | | (16) | | | — | | | — | | | — | | | — | | | — | |
| Finalization of MDC acquisition accounting | | | | | | | — | | | — | | | — | | | — | | | (16,294) | | | — | | | — | | | (16,294) | | | 2,301 | | | (13,993) | |
| Other | | | | | | | 142 | | | 3 | | | — | | | — | | | 1,246 | | | 354 | | | — | | | 1,603 | | | (332) | | | 1,271 | |
| Balance at September 30, 2022 | | | | | | | 131,544 | | | $ | 135 | | | 164,376 | | | $ | 2 | | | $ | 348,663 | | | $ | 6,573 | | | $ | (64,956) | | | $ | 290,417 | | | $ | 534,476 | | | $ | 824,893 | |
See notes to the Unaudited Condensed Consolidated Financial Statements.
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - (continued)
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
| | Members' capital | | Convertible Preference Shares | | Common Shares -
Class A & B | | Common Shares -
Class C | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Stagwell Inc. Shareholders' Equity | | Noncontrolling Interests | | Shareholders' Equity |
| | | | | | | | | | |
| | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | |
| Balance at June 30, 2021 | $ | 350,395 | | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 350,395 | | | $ | 30,947 | | | $ | 381,342 | |
| Net income prior to reorganization | 3,032 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,032 | | | 70 | | | 3,102 | |
| Other comprehensive loss | (63) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (63) | | | — | | | (63) | |
| Contributions | (11,834) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (11,834) | | | — | | | (11,834) | |
| Distributions | (165,717) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (165,717) | | | — | | | (165,717) | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (934) | | | (934) | |
| Changes in redemption value of RNCI | 2,559 | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,559 | | | — | | | 2,559 | |
| Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 161 | | | 161 | |
| Effect of reorganization | (178,372) | | | 123,849 | | | 209,980 | | | 78,794 | | | 77 | | | 179,970 | | | 2 | | | 110,555 | | | — | | | — | | | 142,242 | | | 636,416 | | | 778,658 | |
| Net income (loss) attributable to Stagwell Inc. | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,545) | | | — | | | (4,545) | | | 6,774 | | | 2,229 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,537 | | | 12,537 | | | — | | | 12,537 | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7,561) | | | (7,561) | |
| Changes in redemption value of RNCI | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,608) | | | — | | | (1,608) | | | — | | | (1,608) | |
| Vesting of restricted awards | — | | | — | | | — | | | 202 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares acquired and cancelled | — | | | — | | | — | | | (12) | | | — | | | — | | | — | | | (820) | | | — | | | — | | | (820) | | | — | | | (820) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 49,895 | | | — | | | — | | | 49,895 | | | — | | | 49,895 | |
| Purchases of NCI | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,679 | | | — | | | — | | | 9,679 | | | (10,450) | | | (771) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 228 | | | — | | | — | | | 228 | | | (173) | | | 55 | |
| Balance at September 30, 2021 | $ | — | | | 123,849 | | | $ | 209,980 | | | 78,984 | | | $ | 77 | | | 179,970 | | | $ | 2 | | | $ | 169,537 | | | $ | (6,153) | | | $ | 12,537 | | | $ | 385,980 | | | $ | 655,250 | | | $ | 1,041,230 | |
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - (continued)
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
| | Members' capital | | Convertible Preference Shares | | Common Shares -
Class A & B | | Common Shares -
Class C | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Stagwell Inc. Shareholders' Equity | | Noncontrolling Interests | | Shareholders' Equity |
| | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | |
| Balance at December 31, 2020 | $ | 358,756 | | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 358,756 | | | $ | 39,787 | | | $ | 398,543 | |
| Net income prior to reorganization | 24,742 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | | | 24,742 | | | 2,693 | | | 27,435 | |
| Other comprehensive loss | (375) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (375) | | | — | | | (375) | |
| Contributions | 250 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 250 | | | — | | | 250 | |
| Distributions | (204,929) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (204,929) | | | — | | | (204,929) | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (11,936) | | | (11,936) | |
| Changes in redemption value of RNCI | (72) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (72) | | | — | | | (72) | |
| Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (300) | | | (300) | |
| Effect of reorganization | (178,372) | | | 123,849 | | | 209,980 | | | 78,794 | | | 77 | | | 179,970 | | | 2 | | | 110,555 | | | — | | | — | | | 142,242 | | | 636,416 | | | 778,658 | |
| Net loss attributable to Stagwell Inc. | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,545) | | | — | | | (4,545) | | | 6,774 | | | 2,229 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,537 | | | 12,537 | | | — | | | 12,537 | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7,561) | | | (7,561) | |
| Changes in redemption value of RNCI | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,608) | | | — | | | (1,608) | | | — | | | (1,608) | |
| Vesting of restricted awards | — | | | — | | | — | | | 202 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares acquired and cancelled | — | | | — | | | — | | | (12) | | | — | | | — | | | — | | | (820) | | | — | | | — | | | (820) | | | — | | | (820) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 49,895 | | | — | | | — | | | 49,895 | | | — | | | 49,895 | |
| Purchases of NCI | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,679 | | | — | | | — | | | 9,679 | | | (10,450) | | | (771) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 228 | | | — | | | — | | | 228 | | | (173) | | | 55 | |
| Balance at September 30, 2021 | $ | — | | | 123,849 | | | $ | 209,980 | | | 78,984 | | | $ | 77 | | | 179,970 | | | $ | 2 | | | $ | 169,537 | | | $ | (6,153) | | | $ | 12,537 | | | $ | 385,980 | | | $ | 655,250 | | | $ | 1,041,230 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | Common Shares -
Class A & B | | Common Shares -
Class C | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Stagwell Inc. Shareholders' Equity | | Noncontrolling Interests | | Shareholders' Equity |
| | Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | |
| Balance at December 31, 2021 | 118,252 | | | $ | 118 | | | 179,970 | | | $ | 2 | | | $ | 382,893 | | | $ | (6,982) | | | $ | (5,278) | | | $ | 370,753 | | | $ | 508,287 | | | $ | 879,040 | |
| Net income attributable to Stagwell Inc. | — | | | — | | | — | | | — | | | — | | | 12,675 | | | — | | | 12,675 | | | 18,537 | | | 31,212 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (5,347) | | | (5,347) | | | — | | | (5,347) | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (705) | | | (705) | |
| Changes in redemption value of RNCI | — | | | — | | | — | | | — | | | — | | | 975 | | | — | | | 975 | | | — | | | 975 | |
| Granting of restricted awards | 1,787 | | | 2 | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | — | |
| Shares acquired and cancelled | (1,998) | | | — | | | — | | | — | | | (14,926) | | | — | | | — | | | (14,926) | | | — | | | (14,926) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 6,714 | | | — | | | — | | | 6,714 | | | — | | | 6,714 | |
| Conversion of shares | 15,155 | | | 15 | | | (15,155) | | | — | | | (15) | | | — | | | — | | | — | | | — | | | — | |
| Other | — | | | — | | | — | | | — | | | (1,364) | | | — | | | — | | | (1,364) | | | 2,246 | | | 882 | |
| Balance at March 31, 2022 | 133,196 | | | $ | 135 | | | 164,815 | | | $ | 2 | | | $ | 373,300 | | | $ | 6,668 | | | $ | (10,625) | | | $ | 369,480 | | | $ | 528,365 | | | $ | 897,845 | |
See notes to the Unaudited Condensed Consolidated Financial Statements.Statements
STAGWELL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, unless otherwise stated)
1. Business and Basis of Presentation
Stagwell Inc. (the “Company”“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 condensed consolidated financial statements include the accounts of Stagwell and its subsidiaries. Stagwell has prepared the unaudited condensed consolidated interim financial statements included herein in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting interim financial information on Form 10-Q. Accordingly, pursuant to these rules, the financial statements have been condensed andfootnotes do not include certain information and disclosures pursuant to these rules.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, 20212022 (“20212022 Form 10-K”).
On December 21, 2020, MDC Partners Inc. (“MDC”) and Stagwell Media LP (“Stagwell Media”) announced that they had entered into the Transaction Agreement, providing for the combination of MDC with the operating businesses and subsidiaries of Stagwell Media (the “Stagwell Subject Entities”). The Stagwell Subject Entities comprised Stagwell Marketing Group LLC (“Stagwell Marketing” or “SMG”) and its direct and indirect subsidiaries.
On August 2, 2021, we completed the previously announced combination of MDC and the operating businesses and subsidiaries of Stagwell Media and a series related transactions (such combination and transactions, the “Transactions”). The Transactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the legal acquirer and Stagwell Marketing treated as the accounting acquirer. The results of MDC are included within the Unaudited Condensed Consolidated Statements of Operations for the period beginning on the date of the acquisition through the end of the respective period presented and the results of SMG are included for the entire period presented. See Note 3 of the Notes included herein for information in connection with the acquisition of MDC.
We continue to monitor the impact on our operations from worldwide events such as the COVID-19 pandemic and evolving strains of COVID-19, as well as the military conflict between Russia and Ukraine, which we do not expect to have a material adverse effect on our operations. Our judgments, assumptions and estimates about the potential effects of such events are reflected in the financial statements. The use of different judgements, assumptions or estimates could have a material impact on our condensed consolidated financial statements.
The accompanying financial statements reflect all adjustments, consisting of normallynormal recurring accruals, which in the opinion of management are necessary for a fair presentation,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 revisedbeen reflected in the presentationprior year financial statements. The impact of Current Liabilitiesthe adjustment is to separately present Accrued media, which was previously included in Accruals andallocate Accumulated other liabilities, of $237,794 as of December 31, 2021.comprehensive loss to noncontrolling interest shareholders. As a result of the accompanying Condensed Consolidated Balance Sheet has been revised to correct this immaterial classification errorcorrection, Noncontrolling interests and Accumulated other comprehensive loss declined by decreasing the previously reported amount for Accruals and other liabilitiesapproximately $24.0 million, but did not impact Total Shareholders’ Equity as of DecemberMarch 31, 2021 by2023. In addition, the $237,794 of Accrued media. This revision hadadjustment was reflected within other comprehensive for the quarter ended March 31, 2023. There was no effect on our previously reported Total Current Liabilities,impact to net income in the annual or on any other previously reported amounts in our consolidated financial statements forinterim periods within the year ended December 31, 2021.
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
On October 3,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 acquired allCompany’s annual meeting of shareholders in June 2023. If the equity interestESPP is approved, a total of Maru Group Limited Ltd, a software experience & insights data platform, for approximately £23,000 in cash, subject to post-closing adjustments.
On October 3, 2022, the Company acquired the remaining 80% interest that it did not already own in Wolfgang, LLC, a creative agency combining consultancy, strategy and technology experience, for approximately $3,750 in cash and $5,250 in3.0 million shares of Stagwell Inc.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 subject to post-closing adjustments.on certain plan-defined dates. The stock paymentpurchase price for each offering period is subject to92.5% of the seller’s continued employment throughout the period, with total shares vesting on July 1, 2025.
On October 3, 2022, the Company acquired the assets of Epicenter Experience LLC, an enterprise software company that leverages mobile and location data to map and sequence complex consumer behavior patterns, for approximately $9,729, subject to post-closing adjustments, as well as contingent consideration up to a maximumfair market value of $5,000. The contingent consideration is based on meeting certain future earnings targets through 2024 and can be paid up to 25% in Stagwellshares of Class A Common Stock.
The purchase price allocations have not yet been completed. The Company will provideStock at the purchase price allocations and pro forma operating resultsend of the combined companyoffering period. The plan is considered compensatory resulting in its Form 10-K for the period of December 31, 2022.
2. New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board, (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, and in January 2021 subsequently issued ASU 2021-01, Facilitationfair value of the Effects of Reference Rate Reform on Financial Reporting, to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective upon issuance, through December 31, 2022. The Combineddiscount being expensed over the service period.
On May 4, 2023, the Company amended its Credit Agreement (as defined in Note 87 of the Notes included herein) is the Company’s only contractual arrangement that referenced LIBOR and is impacted by ASU 2020-04. On April 28, 2022, the Company amended the Combined Credit Agreement.. Among other things, thisthe amendment replaced any referencesincreased the limit of borrowing from $500.0 million to LIBOR with references to$640.0 million. All other substantive terms of the Secured Overnight Financing Rate (“SOFR”). Based on the Company’s assessment,credit agreement remain unchanged.
On May 9, 2023, the Company has electedagreed to apply the optional expedientrepurchase 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 treat the contract modifications as a continuationAlpInvest 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 existing contract. This election does not have a material effect on our results of operations or financial position. See Note 8 of the Notes included herein for information.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 $20,695$20.9 million of cash consideration, as well as contingent consideration up to a maximum value of $50,000.$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 | | $ | 2,7712,766 | |
| Accounts receivable | | 7,63810,147 | |
| Other current assets | | 1,634671 | |
| Fixed assets | | 2,3381,587 | |
IntangibleIdentifiable intangible assets | | 12,41012,740 | |
| Other assets | | 1,4161,583 | |
| Accounts payable | | (6,855)(4,771) | |
| Accruals and other liabilities | | (4,896)(6,880) | |
| Advance billings | | (1,095)(1,159) | |
| Other liabilities | | (3,448)(3,642) | |
| Net assets assumed | | 11,91313,042 | |
| Goodwill | | 25,55224,643 | |
| Purchase price consideration | | $ | 37,46537,685 | |
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributedattributable to the assembled workforce of BNG. Goodwill of $25,552$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 customer relationships.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 |
| Trade Names | | $ | 5,930 | | | 10 |
| Customer Relationships | | 5,390 | | | 11 |
| Other | | 1,090 | | | 7 |
| Total Acquired Intangible Assets | | $ | 12,410 | | | |
| | | | | | | | | | | | | | |
| | 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 (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | 2021 | | 2022 | | 2021 |
| Revenue | | | | $ | 473,539 | | | $ | 1,989,833 | | | $ | 878,610 | |
| Net Income | | | | 7,031 | | | 92,670 | | | 30,495 | |
| | | | | | | | |
| | 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 and nine months ended September 30, 2022 unaudited condensed consolidated statementMarch 31, 2023 Unaudited Consolidated Statements of operations is $5,580Operations was $6.6 million and $11,215, respectively and operating loss was $2,500 and $2,620,$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 $17,247$17.2 million of cash consideration and approximately $457$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 $13,330.
The consideration has been allocated to the assets acquired and assumed liabilities of TMA Direct based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. The preliminary purchase price allocation is as follows:
| | | | | | | | |
| | Amount |
| | (dollars in thousands) |
| Accounts receivable | | $ | 582 | |
| Other current assets | | 669 | |
IntangibleIdentifiable 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 attributedattributable to the assembled workforce of TMA Direct. Goodwill of $6,569$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:
| | | | | | | | | | | | | | |
| | Estimated Fair Value | | Estimated Useful Life in Years |
| Customer Relationships | | $ | 11,400 | | | 10 |
| Trade names | | 1,800 | | | 10 |
| Total Acquired Intangible Assets | | $ | 13,200 | | | |
| | | | | | | | | | | | | | |
| | 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 (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2022 | | 2021 |
| Revenue | | $ | 468,862 | | | $ | 1,983,437 | | | $ | 867,533 | |
| Net Income | | 8,462 | | | 94,768 | | | 34,491 | |
Revenue attributable to TMA Direct, included within the three and nine months ended September 30, 2022 unaudited condensed consolidated statement of operations is $3,774 and $5,026, respectively, and operating income was $1,369 and $1,626, respectively.
Other Acquisitions
On July 12, 2022, the Company acquired PEP Group Holdings B.V. (“PEP Group”), an omnichannel content creation and adaption production company for approximately $521, subject to post-closing adjustments, as well as contingent consideration up to a maximum value of $2,679. The contingent consideration is based on meeting certain future earnings targets through 2025.
On July 15, 2022, the Company acquired Apollo Program II Inc. (“Apollo”), a real-time artificial intelligence-powered software-as-a-service platform, for approximately $2,300, subject to post-closing adjustments, as well as fixed deferred payments of $1,000 and $1,500 on or prior to July 1, 2023 and July 1, 2024, respectively.
The estimates of fair value for the aforementioned acquisitions are subject to change and could be significant. The Company expects to complete the allocation of purchase price as soon as practicable, but no later than one year after the acquisition date.
2021 Acquisitions
Acquisition of MDC
On December 21, 2020, MDC and Stagwell Media announced that they had entered into the Transaction Agreement, providing for the combination of MDC with the operating businesses and subsidiaries of the Stagwell Subject Entities. The Stagwell Subject Entities comprised Stagwell Marketing and its direct and indirect subsidiaries.
On August 2, 2021 (the “Closing Date”), we completed the combination of MDC and the Stagwell Subject Entities and a series of steps and related transactions (such combination and transactions, the “Transactions”). In connection with the Transactions, among other things, (i) MDC completed a series of transactions pursuant to which it emerged as a wholly owned subsidiary of the Company, converted into a Delaware limited liability company and changed its name to Midas OpCo Holdings LLC, and subsequently to Stagwell Global LLC (“OpCo”); (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into a Delaware corporation, succeeded MDC as the publicly-traded company and changed its name to Stagwell Inc.
In respect of the Transactions, the acquired assets and assumed liabilities, together with acquired processes and employees, represent a business as defined in the FASB’s Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The Transactions were accounted for as a reverse acquisition using the acquisition method of accounting, pursuant to ASC Topic 805-10, Business Combinations, with MDC treated as the legal acquirer and SMG treated as the accounting acquirer. In identifying SMG as the acquiring entity for accounting purposes, MDC and SMG took into account a number of factors, including the relative voting rights and the corporate governance structure of the Company. SMG is considered the accounting acquirer since Stagwell Media controls the board of directors of the Company following the Transactions and received an indirect ownership interest in the Company’s only operating subsidiary, OpCo, of 69.55% ownership of OpCo’s common units. However, no single factor was the sole determinant in the overall conclusion that Stagwell is the acquirer for accounting purposes; rather all factors were considered in arriving at such conclusion. Under the acquisition method of accounting, the assets and liabilities of MDC, as the accounting acquiree, were recorded at their respective fair value as of the date the Transactions were completed.
On August 2, 2021, an aggregate of 179,970 shares of the Company’s Class C Common Stock were issued to Stagwell Media in exchange for $1.80 (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 OpCo common units were issued to Stagwell Media in exchange for the equity interests of the Stagwell Subject Entities (the “Stagwell OpCo Contribution”).
The fair value of the purchase consideration is $429,062, consisting of approximately 80,000 shares of the Company’s Class A and B Common Stock and Common Stock equivalents based on a per share price of approximately $5.42, the closing stock price on the date of the combination.
ASC 805 requires the allocation of the purchase price consideration to the fair value of the identified assets acquired and liabilities assumed upon consummation of a business combination. For this purpose, fair value shall be determined in accordance with the fair value concepts defined in ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”). Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value measurements can be highly subjective and can involve a high degree of estimation. The purchase price valuation was completed during the third quarter of 2022.
The purchase price allocation is as follows:
| | | | | | | | |
| | AmountThree Months Ended March 31, 2022 |
| | (dollars in thousands) |
Cash and cash equivalentsRevenue | | $ | 130,197 | |
Accounts receivable | | 398,736 | |
Other current assets | | 41,291 | |
Fixed assets | | 81,343 | |
Right-of-use lease assets - operating leases | | 252,739 | |
Intangible assets | | 810,900 | |
Other assets | | 18,282 | |
Accounts payable | | (139,590) | |
Accruals and other liabilities | | (307,439) | |
Advance billings | | (211,212) | |
Current portion of lease liabilities | | (54,009) | |
Current portion of deferred acquisition consideration | | (53,054) | |
Long-term debt | | (901,736) | |
Revolving credit facility | | (109,954) | |
Long-term portion of deferred acquisition consideration | | (8,056) | |
Long-term portion of lease liabilities | | (283,637) | |
Other liabilities | | (139,026) | |
Redeemable noncontrolling interests | | (25,990) | |
Preferred shares | | (209,980) | |
Noncontrolling interests | | (151,090)644,909 | |
Net liabilities assumedincome | | (861,285) | |
Goodwill | | 1,290,347 | |
Purchase price consideration | | $ | 429,06234,341 | |
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributed to the assembled workforce of MDC. Goodwill of $932,582, $285,396Revenue and $72,369 was assigned to the Integrated Agencies Network, the Brand Performance Network and the Communications Network reportable segments, respectively. The majority of the goodwill is non-deductible for income tax purposes. Goodwill has been reduced from the reported amount as of June 30, 2022 of $1,298,370 primarily to reflect the finalization of the assessment of certain tax positions and the related deferred taxes, as well as the finalization of the valuation of certain assets and liabilities in the Brand Performance Network. There has been no change that impacts the Consolidated Statement of Operations.
Intangible assets consist of trade names and customer relationships. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is thirteen years. The following table presents the details of identifiable intangible assets acquired:
| | | | | | | | | | | | | | |
| | Estimated Fair Value | | Estimated Useful Life in Years |
| Trade Names | | $ | 98,000 | | | 10 |
| Customer Relationships | | 712,900 | | | 6-15 |
| Total Acquired Intangible Assets | | $ | 810,900 | | | |
Pro Forma Financial Information (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
| Revenue | | $ | 568,424 | | | $ | 1,612,399 | |
| | | | |
The pro forma net loss was nominal for the three and nine months ended September 30, 2021.
Revenue attributable to MDC,TMA Direct, included within the three and nine months ended September 30, 2021 unaudited condensed consolidated statementMarch 31, 2023 Unaudited Consolidated Statements of operations is $342,539Operations was $2.6 million and $995,729, respectively and operating income was $17,506 and $77,817,less than $0.1 million, respectively.
Acquisition of GoodStuff HoldingsMaru Group Limited Ltd.
On December 31, 2021,October 3, 2022, the Company acquired GoodStuff HoldingsMaru Group Limited Ltd. (“Goodstuff”Maru”) for approximately £21,000£23.0 million (approximately $28,188) of$25.8 million) in cash consideration as well as contingent consideration up to a maximum of £22,000. consideration.
The cash consideration included an initial payment of £8,000, an excess working capital payment of approximately £9,000 and approximately £4,000 of deferred payments. The contingent consideration is tied to employees’ service and will be recognized as deferred acquisition consideration expense through 2026. Therefore, only the cash consideration has been allocated to the assets acquired and assumed liabilities of GoodstuffMaru 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 | | $ | 30,9851,033 | |
| Accounts receivable | | 28,6857,374 | |
| Other current assets | | 3,207899 | |
| Fixed assets | | 237157 | |
Right-of-use lease assets - operating leases | | 2,060 | |
IntangibleIdentifiable intangible assets | | 14,97414,300 | |
| Other assets | | 551,920 | |
| Accounts payable | | (6,344)(4,087) | |
| Accruals and other liabilities | | (27,353)(9,154) | |
| Advance billings | | (15,956) | |
Current portion of lease liabilities | | (857) | |
Income taxes payable | | (967) | |
Long-term portion of lease liabilities | | (3,744)(6,462) | |
| Other liabilities | | (1,204)(3,591) | |
| Net assets assumed | | 23,7782,389 | |
| Goodwill | | 4,41023,404 | |
| Purchase price consideration | | $ | 28,18825,793 | |
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributedattributable to the assembled workforce of Goodstuff.Maru and the expected growth related to new customer relationships and geographic expansion. Goodwill of $4,410$23.4 million was assigned to the Brand Performance NetworkAll Other reportable segment. The majority of the goodwill is non-deductiblepartially deductible for income tax purposes.
Intangible assets consist of trade names, customer relationships, and customer relationships.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 tenapproximately 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 | | | |
| | | | | | | | | | | | | | |
| | Estimated Fair Value | | Estimated Useful Life in Years |
| Trade Names | | $ | 1,349 | | | 15 |
| Customer Relationships | | 13,625 | | | 10 |
| Total Acquired Intangible Assets | | $ | 14,974 | | | |
Pro Forma Financial Information (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
| Revenue | | $ | 471,406 | | | $ | 872,192 | |
| Net Income | | 8,357 | | | 33,894 | |
| | | | | | | | |
| | 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 $4,600,$4.6 million, comprised of a closing cash payment of $3,600$3.6 million and a contingent deferred acquisition payment of $1,000.$1.0 million. The contingent deferred payment will bewas based on the financial results of the underlying business through the end of 2022 with the payment due in 2023.
2021 Purchases of Noncontrolling Interests
On October 1, 2021, the Company entered into an agreement to purchase the approximate 27% remaining interest of Targeted Victory it did not already own, stipulating the purchase of 13.3% on October 1, 2021 and the remaining 13.3% on July 31, 2023, with the option for the seller to delay the second purchase until July 31, 2025. The purchase price of $73,898 was comprised of a contingent deferred acquisition payment and redeemable noncontrolling interest with estimated present values at the acquisition date of $46,618 and $27,280, respectively. The contingent deferred payment and redeemable noncontrolling interest were based on the financial results of the underlying business through 2025. In addition, at the option of the Company, up to 50% of the total purchase price can be paid in shares of Class A Common Stock and in no event may the purchase price exceed $135,000.
On December 1, 2021, the Company acquired the approximate 27% remaining interest of Concentric it did not already own for an aggregate purchase price of $8,058, comprised of a closing cash payment of $1,581 and contingent deferred acquisition payments with an estimated present value at the acquisition date of $6,477. The contingent deferred payments were based on the financial results of the underlying business through 2022 with final payment due in 2023.
On December 31, 2021, the Company acquired the approximate 49% remaining interest of Instrument it did not already own for an aggregate purchase price of $157,072, comprised of a closing payment of $37,500 in cash and $37,500 in shares of Class A Common Stock and deferred acquisition payments with an estimated present value at the acquisition date of $82,072. The deferred payments are not contingent and will be paid in 2023 and 2024.
4.3. Revenue
The Company’s revenue recognition policies are established in accordance with ASC 606, and accordingly, revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The Stagwell network provides an extensive range of services to our clients, offering a variety of marketing and communication capabilities including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast), public relations services including strategy, editorial, crisis support or issues management, media training, influencer engagement and events management. We also provide media buying and planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast), experiential marketing and application/website design and development.
The primary source of the Company’s revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses, depending on the terms of the client contract. In all circumstances, revenue is only recognized when collection is reasonably assured. Certain of the Company’s contractual arrangements have more than one performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its
relative stand-alone selling price. Stand-alone selling prices are determined based on the prices charged to clients or using expected cost plus margin.
The determination of our performance obligations is specific to the services included within each contract. Based on a client’s requirements within the contract, and how these services are provided, multiple services could represent separate performance obligations or be combined and considered one performance obligation. Contracts that contain services that are not significantly integrated or interdependent, and that do not significantly modify or customize each other, are considered separate performance obligations. Typically, we consider media planning, media buying, creative (or strategy), production and experiential marketing services to be separate performance obligations if included in the same contract as each of these services can be provided on a stand-alone basis, and do not significantly modify or customize each other. Public relations services and application/website design and development are typically each considered one performance obligation as there is a significant integration of these services into a combined output.
Certain of the Company’s contracts consist of a single performance obligation. In these instances, the Company does not consider the underlying activities as separate or distinct performance obligations because its services are highly interrelated, and the integration of the various components is essential to the overall promise to the Company’s customer. In certain of the Company’s client contracts, the performance obligation is a stand-ready obligation because the Company provides a constant level of similar services over the term of the contract.
We typically satisfy our performance obligations over time, as services are performed. Fees for services are typically recognized using input methods (direct labor hours, materials and third-party costs) that correspond with efforts incurred to date in relation to total estimated efforts to complete the contract. To a lesser extent, revenue is recognized using output measures, such as impressions or ongoing reporting. For client contracts when the Company has a stand-ready obligation to perform services on an ongoing basis over the life of the contract, where the scope of these arrangements includes an undefined number of broad activities and there are no significant gaps in performing the services, the Company recognizes revenue ratably using a time-based measure. In addition, for client contracts where the Company is providing online subscription-based hosted services, it recognizes revenue ratably over the contract term. Point in time recognition primarily relates to certain commission-based contracts, which are recognized upon the placement of advertisements in various media when the Company has no further performance obligation.
Revenue is recognized net of sales and other taxes due to be collected and remitted to governmental authorities. The Company’s contracts typically provide for termination by either party within 30 to 90 days. Although payment terms vary by client, they are typically within 30 to 60 days. In addition, the Company generally has the right to payment for all services provided through the end of the contract or termination date.
Within each contract, we identify whether the Company is principal or agent at the performance obligation level. In arrangements where the Company has substantive control over the service before transferring it to the client, and is primarily responsible for integrating the services into the final deliverables, we act as principal. In these arrangements, revenue is recorded at the gross amount billed. Accordingly, for these contracts the Company has included reimbursed expenses in revenue. In other arrangements where a third-party supplier, rather than the Company, is primarily responsible for the integration of services into the final deliverables, and thus the Company is solely arranging for the third-party supplier to provide these services to our client, we generally act as agent and record revenue equal to the net amount retained, when the fee or commission is earned. The role of Stagwell’s agencies under a production services agreement is to facilitate a client’s purchasing of production capabilities from a third-party production company in accordance with the client’s strategy and guidelines. The obligation of Stagwell’s agencies under media buying services is to negotiate and purchase advertising media from a third-party media vendor on behalf of a client to execute its media plan. Typically, we do not obtain control prior to transferring these services to our clients; therefore, we primarily act as agent for production and media buying services.
A small portion of the Company’s contractual arrangements with clients include performance incentive provisions, which allow the Company to earn additional revenues as a result of its performance relative to both quantitative and qualitative goals. Incentive compensation is primarily estimated using the most likely amount method and is included in revenue up to the amount that is not expected to result in a reversal of a significant amount of cumulative revenue recognized. We recognize revenue related to performance incentives as we satisfy the performance obligation to which the performance incentives are related.
Disaggregated Revenue Data
The Company provides a broad range of services to a large base of clients across the full spectrum of verticals globally. The primary source of revenue is from agencyBrand 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 and nine months ended September 30, 2022March 31, 2023 and 2021:2022:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, |
| Principal Capabilities | Principal Capabilities | Reportable Segment | | 2022 | | 2021 | | 2022 | | 2021 | Principal Capabilities | Reportable Segment | | | 2023 | | 2022 | |
| | | | | (dollars in thousands) | |
| Digital Transformation | Digital Transformation | All Segments | | $ | 197,337 | | | $ | 124,268 | | | $ | 606,061 | | | $ | 256,966 | | Digital Transformation | All segments | | | $ | 190,319 | | | $ | 210,809 | | |
| Creativity and Communications | Creativity and Communications | Integrated Agencies Network, Brand Performance Network, Communications Network | | 304,048 | | | 208,424 | | | 890,692 | | | 261,080 | | Creativity and Communications | All segments | | | 261,354 | | | 279,242 | | |
| Performance Media and Data | Performance Media and Data | Brand Performance Network | | 111,548 | | | 88,139 | | | 325,584 | | | 222,186 | | Performance Media and Data | Brand Performance Network, All Other | | | 109,488 | | | 99,776 | | |
| Consumer Insights and Strategy | Consumer Insights and Strategy | Integrated Agencies Network | | 50,858 | | | 45,803 | | | 157,270 | | | 117,204 | | Consumer Insights and Strategy | Integrated Agencies Network, All Other | | | 61,283 | | | 53,076 | | |
| | $ | 663,791 | | | $ | 466,634 | | | $ | 1,979,607 | | | $ | 857,436 | | | | $ | 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 looking for help to grow their businesses in newinternational markets. Stagwell’s Brands are located in the United States and United Kingdom, and more than thirty32 other countries around the world. In the past,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 and nine months ended September 30, 2022March 31, 2023 and 2021:2022:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, |
| Geographical Location | Geographical Location | Reportable Segment | | 2022 | | 2021 | | 2022 | | 2021 | Geographical Location | Reportable Segment | | | 2023 | | 2022 | |
| | | | | (dollars in thousands) | |
| United States | United States | All | | $ | 553,744 | | | $ | 387,662 | | | $ | 1,650,610 | | | $ | 733,038 | | United States | All | | | $ | 507,092 | | | $ | 537,231 | | |
| United Kingdom | United Kingdom | All | | 42,774 | | | 32,218 | | | 125,950 | | | 62,416 | | United Kingdom | All | | | 41,271 | | | 39,813 | | |
| Other | Other | All | | 67,273 | | | 46,754 | | | 203,047 | | | 61,982 | | Other | All | | | 74,081 | | | 65,859 | | |
| | $ | 663,791 | | | $ | 466,634 | | | $ | 1,979,607 | | | $ | 857,436 | | | | $ | 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 $179,878$170.8 million and $116,558$116.4 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, and are included as a component of Accounts receivable, net on the Unaudited Condensed Consolidated Balance Sheets. Outside vendor costs incurred on behalf of clients which have yet to be invoiced were $57,873$97.6 million and $63,065$93.1 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, and are included on the Unaudited Condensed Consolidated Balance Sheets as Expenditures billable to clients. Such amounts are invoiced to clients at various times over the course of providing services.
Contract liabilities consistrepresent advanced billings to customers for fees and reimbursements of fees received fromthird-party costs, whether we act as principal or billed to clients in excess of fees recognized.agent. Such fees and reimbursements of third-party costs are classified as Advance billings presented on the Company’s Unaudited Condensed Consolidated Balance Sheets. In arrangements in which we are acting as an agent, the recognition related to the contract liability is presented on a net basis within the Unaudited Condensed Consolidated Statements of Operations. Advance billings at September 30, 2022March 31, 2023 and December 31, 20212022 were $340,675$334.9 million and $361,885,$337.0 million, respectively. The decrease in the Advance billings balance of $21,210$2.1 million for the ninethree months ended September 30, 2022March 31, 2023 was primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $323,734$234.0 million of revenues recognized that were included in the Advance billings balances as of December 31, 20212022 and reductions due to the incurrence of third-party costs.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 ninethree months ended September 30, 2022March 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 $42,438$90.8 million of unsatisfied performance obligations as of September 30, 2022March 31, 2023 of which we expect to recognize approximately 32% in the remaining quarters of 2022, 56%61% in 2023, 33% in 2024 and 12%6% in 2024.2025.
4. Income (Loss) Per Share
The following table sets forth the computations of basic and diluted income (loss) per common share for the three and nine months ended SeptemberMarch 31, 2023 and 2022:
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, |
| 2022 | | | | 2022 | | |
| Earnings Per Share - Basic | | | | | | | |
| Numerator: | | | | | | | |
| Net income | $ | 35,274 | | | | | $ | 93,415 | | | |
| Net income attributable to Class C shareholders | (19,286) | | | | | (51,027) | | | |
| Net loss attributable to other equity interest holders | (5,379) | | | | | (8,641) | | | |
| Net income attributable to noncontrolling and redeemable noncontrolling interests | (24,665) | | | | | (59,668) | | | |
| Net income attributable to Stagwell Inc. common shareholders | $ | 10,609 | | | | | $ | 33,747 | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted Average number of common shares outstanding | 125,384 | | | | | 124,710 | | | |
| | | | | | | |
| Earnings Per Share - Basic | $ | 0.08 | | | | | $ | 0.27 | | | |
| | | | | | | |
| Earnings Per Share - Diluted | | | | | | | |
| Numerator: | | | | | | | |
| Net income attributable to Stagwell Inc. common shareholders | $ | 10,609 | | | | | $ | 33,747 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Basic - Weighted Average number of common shares outstanding | 125,384 | | | | | 124,710 | | | |
| Dilutive shares: | | | | | | | |
| Stock appreciation rights | 1,837 | | | | | 1,885 | | | |
| Restricted share and restricted unit awards | 3,277 | | | | | 4,955 | | | |
| | | | | | | |
| Diluted - Weighted average number of common shares outstanding | 130,498 | | | | | 131,550 | | | |
| Earnings Per Share - Diluted | $ | 0.08 | | | | | $ | 0.26 | | | |
| | | | | | | | | | | | | | | |
| | | | | | 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 2,3400.7 million and 1.0 million as of September 30,March 31, 2023 and 2022, arerespectively, were excluded from the computation of diluted incomeloss per common share because the performance contingencycontingencies necessary for vesting hadwere not been met as of the reporting date.
The following table sets forth the computations of basic and diluted income per common share for the three and nine months ended September 2021:
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2021 |
| Numerator: | | | |
| Net loss attributable to Stagwell Inc. common shareholders | $ | (4,545) | | | $ | (4,545) | |
| | | |
| Denominator: | | | |
| Weighted average number of common shares outstanding | 76,106 | | | 76,106 | |
| Loss Per Share - Basic & Diluted | $ (0.06) | | $ (0.06) |
| | | |
| Anti-dilutive: | | | |
| Class C shares | 179,970 | | | 179,970 | |
| Stock Appreciation Rights and Restricted Awards | 6,596 | | | 6,596 | |
The combination of MDC and SMG, completed on August 2, 2021, was treated as a reverse acquisition for financial reporting purposes. SMG was treated as the accounting acquirer and MDC as the accounting acquiree. Therefore, under applicable accounting principles, the historical financial results of SMG prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presented in this Form 10-Q for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions or the financial results of MDC and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021.
SMG’s equity structure, prior to the combination with MDC, was a non-unitized single member limited liability company, resulting in all components of equity attributable to the member being reported within Members’ Capital. Given that SMG was a non-unitized single member limited liability company, net income (loss) prior to the combination is not applicable for purposes of calculating earnings per share. Therefore, the net income (loss) in the table above includes the income or loss for the period beginning on the acquisition date through the end of the respective reporting period and as such will not reconcile to the respective amounts presented within the Unaudited Condensed Consolidated Statements of Operations.
6.5. Deferred Acquisition Consideration
Deferred acquisition consideration on the balance sheetUnaudited 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 through operating income.within Office and general expenses on the Unaudited Consolidated Statements of Operations.
The following table presents changes in contingent deferred acquisition consideration, which is measured at fair value on a recurring basis using significant unobservable inputs, and a reconciliation to the amounts reported on the balance sheetsUnaudited Consolidated Balance Sheets as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | | | | | | | | | |
| September 30,
2022 | | December 31, 2021 |
| Beginning balance of contingent payments | $ | 222,369 | | | $ | 17,847 | |
| Payments | (71,865) | | | (12,431) | |
Adjustment to deferred acquisition consideration (1) | (13,793) | | | 18,721 | |
Additions (2) | 24,594 | | | 198,937 | |
| Currency Translation Adjustment | (1,576) | | | — | |
| Other | (140) | | | (705) | |
Ending balance of contingent payments (3) | $ | 159,589 | | | $ | 222,369 | |
| | | |
| | | |
| | | | | | | | | | | |
| 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. Adjustment to deferred acquisition consideration is recorded within Office and general expenses on the Unaudited Condensed Consolidated Statements of Operations.
(2) In 2021, approximately $61,000 of additions representThe contingent and fixed deferred acquisition consideration acquired in connection with the acquisitionobligation was $71.8 million and $93.9 million as of MDC. Approximately $136,000March 31, 2023 and $68.9 million and $92.4 million as of additions represent deferred acquisition consideration acquired in connection with the purchases of noncontrolling interests. See Note 3 of the Notes included herein for additional information related to the purchases of Concentric, Targeted Victory, and Instrument.December 31, 2022. In 2022, approximately 22,014 of additions represent deferred acquisition consideration acquired in connection with the acquisitions of BNG, Apollo, and PEP Group. See Note 3 of the Notes included herein for additional information related to these purchases.
(3) As of September 30, 2022, approximately, $42,356addition, $51.5 million of the deferred acquisition consideration is expected to be settled in the Company’s inshares of Class A Common Stock.
7.6. 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 20222023 through 2034. The Company’s finance leases are immaterial.
The Company’s leasing policies are established in accordance with ASC 842, and accordingly, the Company recognizes on the balance sheet at the time of lease commencement a right-of-use lease asset and a lease liability, initially measured at the present value of the lease payments. Right-of-use lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. All right-of-use lease assets are reviewed for impairment. As the Company’s implicit rate in its leases is not readily determinable, in determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the commencement date. Lease payments included in the measurement of the lease liability are comprised of non-cancellable lease payments, payments based upon an index or rate, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease costs are recognized in the Unaudited Condensed Consolidated Statements of Operations over the lease term on a straight-line basis. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset.
Some of the Company’s leases contain variable lease payments, including payments based upon an index or rate. Variable lease payments based upon an index or rate are initially measured using the index or rate in effect at the lease commencement date and are included within the lease liabilities. Lease liabilities are not remeasured as a result of changes in the index or rate, rather changes in these types of payments are recognized in the period in which the obligation for those payments is incurred. In addition, some of our leases contain variable payments for utilities, insurance, real estate tax, repairs and maintenance, and other variable operating expenses. Such amounts are not included in the measurement of the lease liability and are recognized in the period when the facts and circumstances which the variable lease payments are based upon occur.
Some of the Company’s leases include options to extend or renew the leases through 2044. The renewal and extension options are not included in the lease term as the Company is not reasonably certain that it will exercise its option.
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 20222023 through 2032. Sublease income is recognized over the lease term on a straight-line basis. Currently, the Company subleases office space in North America and Europe.
As of September 30, 2022,March 31, 2023, the Company has entered into onetwo operating leaseleases for which the commencement date has not yet occurred primarily because of the premises is in the process of being prepared for occupancy by the landlord. Accordingly, this one lease representsthese two leases represent an obligation of the Company that is not reflected within the Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022.March 31, 2023. The aggregate future liability related to this leasethese leases is approximately $1,167.$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 and nine months ended September 30, 2022March 31, 2023 and 2021:2022:
| | | | Three Months
Ended September 30, | | Nine Months
Ended September 30, | | | Three Months Ended March 31, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | |
| Lease Cost: | Lease Cost: | | | | | | | | Lease Cost: | | (dollars in thousands) | |
| Operating lease cost | Operating lease cost | $ | 19,966 | | $ | 13,502 | | $ | 54,929 | | $ | 27,779 | Operating lease cost | | $ | 19,578 | | $ | 14,016 | |
| Variable lease cost | Variable lease cost | 4,759 | | 3,230 | | 13,963 | | 5,167 | Variable lease cost | | 4,561 | | 5,160 | |
| Sublease rental income | Sublease rental income | (3,636) | | (2,359) | | (11,128) | | (4,290) | Sublease rental income | | (3,052) | | (3,276) | |
| Total lease cost | Total lease cost | $ | 21,089 | | $ | 14,373 | | $ | 57,764 | | $ | 28,656 | Total lease cost | | $ | 21,087 | | $ | 15,900 | |
| Additional information: | Additional information: | | | | | | | | Additional information: | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities for operating leases | Cash paid for amounts included in the measurement of lease liabilities for operating leases | | Cash paid for amounts included in the measurement of lease liabilities for operating leases | | | |
| Operating cash flows | Operating cash flows | $ | 22,694 | | $ | 16,490 | | $ | 69,827 | | $ | 29,854 | Operating cash flows | | $ | 22,347 | | $ | 22,781 | |
| | Right-of-use lease assets obtained in exchange for operating lease liabilities and other non-cash adjustments | Right-of-use lease assets obtained in exchange for operating lease liabilities and other non-cash adjustments | $ | 5,189 | | $ | 353,984 | | $ | 27,878 | | $ | 353,984 | Right-of-use lease assets obtained in exchange for operating lease liabilities and other non-cash adjustments | | $ | 2,135 | | $ | 14,162 | |
|
As of September 30, 2022,March 31, 2023, the weighted average remaining lease term (in years) and weighted average discount rate were 6.46.3 and 4.3%4.6%, respectively.
Operating lease expense is included in officeOffice and general expenses in the Unaudited Condensed Consolidated Statements of Operations. The Company’s lease expense for leases with a term of 12 months or less is immaterial.
In the three and nine months ended September 30, 2022, the Company recorded a charge of $1,734 and $2,014, respectively, primarily to reduce the carrying value of one of its right-of-use lease assets and related leasehold improvements. This right-of-use lease asset related to an agency within the Integrated Agencies Network. As a result of subleasing the space, the Company evaluated the facts and circumstances related to the use of the assets which indicated that they may not be recoverable. Using the sublease income to develop expected future cash flows, it was determined that the fair value of the asset was less than its carrying value. This impairment charge is included in Impairment and other losses within the Unaudited Condensed Consolidated Statements of Operations.
The following table presents minimum future rental payments under the Company’s leases at September 30, 2022as of March 31, 2023 and their reconciliation to the corresponding lease liabilities:
| | | | Maturity Analysis | | Maturity Analysis |
| Remaining 2022 | $ | 20,551 | | |
| 2023 | 88,697 | | |
| | | (dollars in thousands) |
| Remaining 2023 | | Remaining 2023 | $ | 68,803 | |
| 2024 | 2024 | 75,684 | | 2024 | 78,098 | |
| 2025 | 2025 | 59,203 | | 2025 | 60,457 | |
| 2026 | 2026 | 44,170 | | 2026 | 45,148 | |
| 2027 and thereafter | 158,858 | | |
| 2027 | | 2027 | 40,652 | |
| Thereafter | | Thereafter | 120,424 | |
| Total | Total | 447,163 | | Total | 413,582 | |
| Less: Present value discount | Less: Present value discount | (65,342) | | Less: Present value discount | (58,665) | |
| Lease liability | Lease liability | $ | 381,821 | | Lease liability | $ | 354,917 | |
8.7. Debt
As of September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company’s indebtedness was comprised as follows:
| | | September 30,
2022 | | December 31, 2021 | | March 31,
2023 | | December 31,
2022 |
| Revolving credit facility | $ | 245,000 | | | $ | 110,165 | | |
| | | (dollars in thousands) |
| Credit Agreement | | Credit Agreement | $ | 150,000 | | | $ | 100,000 | |
| 5.625% Notes | 5.625% Notes | 1,100,000 | | | 1,100,000 | | 5.625% Notes | 1,100,000 | | | 1,100,000 | |
| Debt issuance costs | Debt issuance costs | (15,866) | | | (18,564) | | Debt issuance costs | (14,719) | | | (15,293) | |
| Total long-term debt | Total long-term debt | $ | 1,329,134 | | | $ | 1,191,601 | | 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 Condensed Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2023 and 2022 was $19,022$18.3 million and $54,918, respectively, and for the three and nine months ended September 30, 2021 was $9,913 and $15,560,$18.3 million, respectively.
The amortization of debt issuance costs included in Interest expense, net on the Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2023 and 2022 was $573$0.6 million and $1,784, respectively, and for the three and nine months ended September 30, 2021 was $1,623 and $2,092,$0.6 million, respectively.
Revolving Credit Agreement
On November 18, 2019, theThe Company entered intois party to a debtcredit agreement (“JPM Syndicated Facility”) with a syndicate of banks led by JPMorgan Chase Bank, N.A (“JPM”). The JPM Syndicated Facility consistedconsisting of a five-year revolving credit facility of $265,000 (“JPM Revolver”) with the right to be increased by an additional $150,000. On March 18, 2020, the Company increased the commitments on the JPM Revolver by $60,000 to $325,000.
On August 2, 2021, in connection with the closing of the acquisition of MDC, the Company entered into an amended and restated credit agreement (the “Combined Credit Agreement”) with a syndicate of banks led by JPM to increase commitments on the existing JPM Revolver. The Combined Credit Agreement consists of a $500,000$500.0 million senior secured revolving credit facility with a five-year maturity.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 Combined 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 of $50,000 for loans denominated in pounds sterling or euros. It also includes an accordion feature under which the Company may request, subject to lender approval and certain conditions, to increase the amount of the commitments to an aggregate amount not to exceed $650,000.$650.0 million.
On April 28, 2022, the Company amended the Combined Credit Agreement. Among other things, this amendment replaced any references to LIBOR with references to SOFR. Borrowings pursuant to the Combined Credit Agreement as amended, bear interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the prime rate of interest in effect on such day, (b) the federal funds effective rate plus 0.50% and (c) SOFRthe 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 Combined Credit Agreement) at that time. Additionally, the Combined Credit Agreement was amended to remove certain pre-commencement notice provisions for certain acquisitions under $50,000 in the aggregate, increased the amount permitted for certain investments allowed under the Combined Credit Agreement, and, subject to certain conditions, to allow for the repurchase of Stagwell Inc. stock in an amount not to exceed $100,000 in any fiscal year. All other substantive terms of the Combined Credit Agreement remain unchanged.
Prior to April 28, 2022, borrowings under the Combined Credit Agreement bore interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the prime rate of interest announced from time to time by JPM, (b) the federal funds
effective rate from time to time plus 0.50% and (c) the LIBOR rate plus 1%, in each case, plus the applicable margin (calculated based on the Company’s total leverage ratio) at that time or (ii) the LIBOR rate plus the applicable margin (calculated based on the Company’s total leverage ratio) at that time.
Advances under the Combined Credit Agreement may be prepaid in whole or in part from time to time without penalty or premium. The Combined Credit Agreement commitment may be reduced by the Company from time to time. Principal amounts outstanding under the Combined Credit Agreement are due and payable in full at maturity within five years of the date of the Combined Credit Agreement.
If an event of default occurs under the Combined Credit Agreement or any future secured indebtedness, the holders of such secured indebtedness will have a prior right to our assets securing such indebtedness, to the exclusion of the holders of the 5.625% Notes (as defined below), even if we are in default with respect to the 5.625% Notes. In that event, our assets securing such indebtedness would first be used to repay in full all indebtedness and other obligations secured by them (including all amounts outstanding under the Combined Credit Agreement), resulting in all or a portion of our assets being unavailable to satisfy the claims of the holders of the 5.625% Notes and other unsecured indebtedness.
The Combined Credit Agreement contains a number of financial and nonfinancial covenants and is guaranteed by substantially all of our present and future subsidiaries, subject to customary exceptions.
The Company was in compliance with all covenants at September 30, 2022.as of March 31, 2023.
A portion of the Combined Credit Agreement in an amount not to exceed $50,000$50.0 million is available for the issuance of standby letters of credit. At September 30, 2022As of March 31, 2023 and December 31, 2021,2022, the Company had issued undrawn outstanding letters of credit of $24,973$24.6 million and $24,332,$25.3 million, respectively.
Senior Notes
In August 2021, theThe Company issued $1,100,000had $1.1 billion aggregate principal amount of 5.625% senior notes (“5.625% Notes”). A portion outstanding as of the proceeds from the issuance of the 5.625% Notes was used to redeem $870,300 aggregate principal amount of the outstanding 7.50% Senior Notes due 2024 (the “Existing Notes”) for a price of $904,200. This price is equal to 101.625% of the outstanding principal amount of the Existing Notes being redeemed, plus, accrued, and unpaid interest on the principal amount of such Existing Notes. The Company did not recognize a gain or loss on redemption.
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 Combined Credit Agreement, and (iv) structurally subordinated to all existing and future liabilities of the Company’s subsidiaries that are not guarantors.
Our obligations under the 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 Combined Credit Agreement are secured by substantially all of the assets of the Company, and any existing and future subsidiary guarantors, including all of the capital stock of each restricted subsidiary.
The Company may, at its option, redeem the 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 at September 30, 2022.
Interest Rate Swap
The Company had an interest rate swap that matured in April 2022. The fair value of the swap was $77 as of DecemberMarch 31, 2021.2023.
9.8. 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 noncontrollingNoncontrolling interests within Shareholder’s Equity in the equity section of the Company’s Unaudited Condensed Consolidated Balance Sheets. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemableRedeemable 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.
Changes in the Company’s ownership interests in its less than 100% owned subsidiaries during the three and nine months ended September 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Net income (loss) attributable to Stagwell Inc. common shareholders | $ | 10,609 | | | $ | (2,071) | | | $ | 33,747 | | | $ | 20,199 | |
| Transfers from the noncontrolling interest: | | | | | | | |
| Change in Stagwell Inc. Paid-in capital for purchase of redeemable noncontrolling interests and noncontrolling interests | — | | | 9,679 | | | (1,000) | | | 9,679 | |
| Net transfers from noncontrolling interests | — | | | 9,679 | | | (1,000) | | | 9,679 | |
| Change from net income attributable to Stagwell Inc. and transfers to noncontrolling interests | $ | 10,609 | | | $ | 7,608 | | | $ | 32,747 | | | $ | 29,878 | |
The following table presents net income (loss) attributable to noncontrolling interests between holders of Class C sharescommon stock, par value $0.00001 per share (the “Class C Common Stock”) and other equity interest holders for the three and nine months ended September 30, 2022March 31, 2023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to Class C shareholders | $ | 19,286 | | | $ | 2,110 | | | $ | 51,027 | | | $ | 2,110 | |
| Net income attributable to other equity interest holders | 2,287 | | | 7,210 | | | 4,083 | | | 9,833 | |
| Net income attributable to noncontrolling interests | $ | 21,573 | | | $ | 9,320 | | | $ | 55,110 | | | $ | 11,943 | |
| | | | | | | | | | | | | | | | | |
| | | 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 sharesCommon Stock and other equity interest holders as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | | | | | | | | | | | March 31,
2023 | | December 31,
2022 |
| | September 30,
2022 | | December 31, 2021 | | (dollars in thousands) |
| Noncontrolling interest of Class C shareholders | Noncontrolling interest of Class C shareholders | $ | 502,912 | | | $ | 475,373 | | Noncontrolling interest of Class C shareholders | $ | 401,427 | | | $ | 428,406 | |
| Noncontrolling interest of other equity interest holders | Noncontrolling interest of other equity interest holders | 31,564 | | | 32,914 | | Noncontrolling interest of other equity interest holders | 30,412 | | | 33,691 | |
| NCI attributable to noncontrolling interests | $ | 534,476 | | | $ | 508,287 | | |
| Total noncontrolling interests | | Total noncontrolling interests | $ | 431,839 | | | $ | 462,097 | |
Redeemable Noncontrolling Interests
The following table presents changes in redeemable noncontrolling interests:
| | | | | | | | | | | |
| September 30,
2022 | | December 31, 2021 |
| Beginning Balance | $ | 43,364 | | | $ | 604 | |
| Redemptions | (3,511) | | | (15,231) | |
Acquisitions (1) | — | | | 53,270 | |
| Changes in redemption value | 20,546 | | | 3,834 | |
| | | |
| Net income (loss) attributable to redeemable noncontrolling interests | 4,558 | | | (412) | |
| Other | 860 | | | 1,299 | |
| Ending Balance | $ | 65,817 | | | $ | 43,364 | |
(1) As of December 31, 2021, approximately $26,000 represents redeemable noncontrolling interests acquired in connection with the acquisition of MDC. Approximately $27,000 represents redeemable noncontrolling interests acquired in connection with the purchase of the noncontrolling interest of Targeted Victory. See Note 3 of the Notes included herein for additional information related to the purchase of Targeted Victory. | | | | | | | | | | | |
| 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 20222023 to 2025.2027. 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 $65,817$32.5 million as of September 30, 2022,March 31, 2023, consists of $62,197,$28.7 million, assuming that the subsidiaries perform over the relevant periods at their current profit levels, and $3,620$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
10.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.
Deferred Acquisition Consideration and Options to Purchase. See Notes 6 and 9 of the Notes included herein for information regarding potential payments associated with deferred acquisition consideration and the acquisition of noncontrolling shareholders’ ownership interest in subsidiaries.
Guarantees. Generally, the Company has indemnified the purchasers of certain assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying 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 September 30, 2022,March 31, 2023, the Company had $24,973$24.6 million of undrawn letters of credit.credit outstanding.
The Company entered into onetwo operating leaseleases for which the commencement date has not yet occurred as of September 30, 2022.March 31, 2023. See Note 76 of the Notes included herein for additional information.
In the ordinary course of business, the Company may enter into long-term, non-cancellable contracts with partner associations that include revenue or profit-sharing commitments related to the provision of its services. These contracts may also include provisions that require the partner associations to meet certain performance targets prior to any obligation to the Company. As of September 30, 2022,March 31, 2023, the Company estimates its future minimum commitments under these non-cancellable agreements to be: $1,948, $6,558, $2,093, $1,226, $1,008,$6.4 million, $5.8 million, $5.4 million, $3.9 million, $3.2 million and $82$7.8 million for the remainder of 2022, 2023, 2024, 2025, 2026, 2027, and 2027,thereafter, respectively.
11.10. Share Capital
On March 23, 2022,1, 2023, the boardBoard authorized an extension and a $125.0 million increase in the size of directors authorized athe Company’s stock repurchase program (the “Repurchase Program”) to an aggregate of $250.0 million, with any previous purchases under which we may repurchase upthe Repurchase Program continuing to $125,000 of shares of our outstanding Class A common stock.count against that limit. The Repurchase Program, as amended, will expire on March 23, 2025.1, 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, (includingincluding through trading plans that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act),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.
When repurchasing shares, we reduceDuring the value of our Class A Common Stock for the par value of the shares repurchased and account for the difference between the price paid for the Class A Common Stock, excluding fees, and the par value of such stock recorded to Paid-in capital.
As of September 30, 2022,three months ended March 31, 2023, there were 4,0062.6 million shares of Class A Common Stock repurchased under the Repurchase Program at an aggregate value, excluding fees, of $28,671.$17.9 million. These were purchased at an average share price of $7.16$6.91 per share. The remaining value of shares of Class A Common Stock permitted to be repurchased under the Repurchase Program was $96,249$180.4 million as of September 30, 2022.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.below:
Class A Common Stock (“Class A Shares”)
There are 1,000,0001.0 billion shares of Class A Shares authorized. ThereCommon Stock authorized, of which 129.8 million shares were 131,540 Class A Shares issued and outstanding as of September 30, 2022. TheMarch 31, 2023. Each share of Class A Shares carryCommon Stock carries one vote each, with a par value of $0.001, entitledand entitles its holder to dividends equal to or greater than each share of Class B Shares, and convertible at the option of the holder into one Class B Share for each Class A Share after the occurrence of certain events related to an offer to purchase all Class B shares.Common Stock, as defined below.
Class B Common Stock (“Class B Shares”)
There are 55.0 thousand shares of Class B Shares authorized. Therecommon stock, par value $0.001 per share (the “Class B Common Stock”) authorized, of which 2.3 thousand shares were 4 of Class B Shares issued and outstanding as of September 30, 2022. TheMarch 31, 2023. Each share of Class B Shares carryCommon Stock carries twenty votes each, with a par value of $0.001, convertible at any time at the option of the holder into one Class A Share for each Class B Share.
Class C Common Stock (“Class C Shares”)
There are 250,000 shares of Class C Shares authorized. There were 164,376 Class C Shares issued and outstanding as of September 30, 2022. The Class C Shares do not participate in the earnings of the Company and have a par value of $.00001. In 2021, an aggregate of 179,970 OpCo common units were issued to Stagwell Media in exchange for the equity interests of the Stagwell Subject Entities. Each Class C Share, together with the related OpCo common unit, is convertible at any time at the option of the holder into one share of Class A Share. In the nine months ended September 30, 2022, holdersCommon Stock.
Class C Common Stock
There are 250.0 million shares of Class C SharesCommon 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 (the “Paired Units”) exchanged 15,594may, at its option, exchange such Paired Units for the same numbershares of Class A Shares. Approximately 5,000Common 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 into an equal number of Class A Shares triggered an employee tax withholding obligation of $14,900. The Company repurchased approximately 2,000 ofduring the 5,000 Class A Shares issued to the employees to satisfy their employee tax withholding obligation.three months ended March 31, 2023.
12.11. 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 at September 30, 2022as of March 31, 2023 and December 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | September 30, 2022 | | December 31, 2021 |
| | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value |
| | | | | | | |
| 5.625% Notes | 1,100,000 | | | 896,500 | | | 1,100,000 | | | 1,120,900 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
Our long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices in markets that are not active. Therefore, this debt is classified as Level 2 within the fair value hierarchy.
Financial Instruments Measured at Fair Value on a Recurring Basis
Contingent deferred acquisition consideration (Level 3 fair value measurement) is 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 September 30, 2022,March 31, 2023, the discount rate used to measure these liabilities ranged from 4.2% to 6.0%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 Condensed Consolidated Balance Sheets are subject to material uncertainty.
See Note 65 of the Notes included herein for additional information regarding contingent deferred acquisition consideration.
At September 30, 2022As of March 31, 2023 and December 31, 2021,2022, 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 measurement)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 recognized an impairment of goodwill and an impairment of right-of-use lease assets for the three and nine months ended September 30, 2022. The Company did not recognize an impairment of goodwill, intangible assets or right-of-use lease assets infor the three and nine months ended September 30, 2021. See Note 7 of the Notes included herein for additional information regarding right-of-use assets and Note 13 of the Notes included herein for additional information regarding goodwill.March 31, 2023.
13.12. Supplemental Information
SubsidiaryStock 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 itstheir 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 fair value was $32,198 at September 30,March 31, 2023 and December 31, 2022, (Level 3 fair value model),respectively, and is included as a component of Accruals and other liabilities and Other liabilities on the Unaudited Condensed Consolidated Balance Sheets.
Stock-based Compensation
Total stock-based compensation recognized for these awards was $4.6 million and $0.7 million for the ninethree months ended September 30,March 31, 2023 and 2022, respectively. This was $33,410, primarily attributable to $26,288 recognized forincluded as a component of stock-based compensation associated with grantsin Cost of Class A Common Stock and $5,550 recognized for profits interest awards. In the nine months ended September 30, 2022, the Company granted approximately 5,728 share based awards.
Impairment and Other Losses
The Company recognized an impairment and other losses charge of $28,034 for the nine months ended September 30, 2022, primarily related to the impairment of goodwill totaling $23,139. The goodwill impairment was to write-down the carrying value in excess of the fair value at three reporting units, one in the Integrated Agencies Network, one in the Brand Performance Network and oneservices within the All Other category. The expense was recorded within Impairment and other losses on the Unaudited Condensed 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.
AsThe 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 September 30, 2022, the Company assessed whether it was more likely than not that the carrying amountMarch 31, 2023 and $5.7 million as of its reporting units exceeded their fair value. As a result of this assessment, the Company completed a quantitative impairment testDecember 31, 2022. Fees for certain reporting units that resultedthese arrangements were recorded in Office and general expenses in the impairment charge dueUnaudited 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 a combination of changesinformation about past events and current conditions. The adoption resulted in fair value measures such as an increase in interest ratesthe allowance for accounts receivables and a decrease in market multiplesto opening Retained Earnings of comparable public companies, as well as actual performance below previous financial forecasts. The Company uses a combination$2.1 million, of which $1.2 million was subsequently allocated to noncontrolling interests. These amounts are presented within the income approach, which incorporates“Other” line on the useStatement of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. The Company generally applies an equal weighting to the income and market approaches for the impairment test. The income approach and the market approach both require the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.
14.13. 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 September 30, 2022March 31, 2023 of $11,540$2.4 million (on a pre-tax incomeloss of $46,601$2.4 million resulting in an effective tax rate of 24.8%(99.1)%) compared to income tax expense of $5,183$3.2 million (on pre-tax income of $13,182$35.8 million resulting in an effective tax rate of 39.3%8.9%) for the three months ended September 30, 2021.March 31, 2022.
The difference in the effective tax rate of 24.8%(99.1)% in the three months ended September 30, 2022March 31, 2023, as compared to 39.3%8.9% in the three months ended September 30, 2021 was primarily attributableMarch 31, 2022, is due to higher non-deductible sharethe 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 compensation in September 30, 2021, and favorable return to provision adjustments at September 30, 2022, offset in part by the impact of non-deductible goodwill impairments in September 30, 2022.
The Company had an income tax expense for the nine months ended September 30, 2022 of $20,150 (on a pre-tax income of $112,512 resulting in an effective tax rate of 17.9%) compared to income tax expense of $9,205 (on pre-tax income of $40,466 resulting in an effective tax rate of 22.7%) for the nine months ended September 30, 2021.
The difference in the effective tax rate of 17.9% in the nine months ended September 30, 2022 as compared to 22.7% in the nine months ended September 30, 2021 was primarily related to favorable adjustments for share-based compensation vesting and return to provision adjustments at September 30, 2022, offset in part by the impact of non-deductible goodwill impairments in September 30, 2022.
In connection with the finalization of the MDC purchase accounting, the Company finalized its tax basis calculations and adjusted deferred taxes and goodwill.The change in goodwill also impacted the deferred tax liability on Company’s ownership interest in OpCo.This change has been accounted for as an equity transaction resulting in a reduction in paid in capital of $17,303.
Tax Receivables Agreement
In connection with the closing of the Transactions, we entered into the Tax ReceivablesReceivable Agreement (“TRA”) with OpCo and Stagwell Media, pursuant to which we are, 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 11)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 Company accounts forTRA liability is an estimate and actual amounts payable under the TRA in accordance with ASC 450—Contingencies. We will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance and a corresponding reduction to the TRA liability. The amounts to be recorded for both the deferred tax assets and the liability under the TRA will be estimated at the time of any purchase or exchange as a reduction to shareholders’ equity, and the effects of changes in any of our estimates aftercould differ from this date will be included in net income or loss. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income or loss.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 have beenwere made in subsequent quarters in 2022. No exchanges were made in the subsequent quarters.first quarter of 2023. As of September 30, 2022,March 31, 2023, the Company hadhas recorded a TRA liability of $17,649$28.7 million and has recognizedan associated deferred tax benefitsasset of $20,763 as a reduction to the net deferred tax liability on its unaudited condensed consolidated balance sheets in connection with the exchanges of the Paired Units and the projected obligations under the TRA.$33.8 million.
15.14. 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 | | Revenues | | Due From
Related Party |
| | | | | Three Months
Ended September 30, | | Nine Months
Ended September 30, | | September 30,
2022 | | December 31, 2021 |
| Services | | | | | 2022 | | 2021 | | 2022 | | 2021 | | |
Technological (1) | | | | Ongoing arrangement (7) | | $ | 10 | | | $ | 15 | | | $ | 29 | | | $ | 45 | | | $ | 36 | | | $ | 137 | |
Marketing Services (2) | | | | Ongoing arrangement (7) | | 905 | | | 63 | | | 1,388 | | | 155 | | | 1,178 | | | 88 | |
Polling Services (3) | | | | $1,271 | | 201 | | | 224 | | | 779 | | | 343 | | | 140 | | | 70 | |
Marketing and Website Development Services (4) | | | | $5,689 | | 589 | | | 441 | | | 3,512 | | | 441 | | | 333 | | | 502 | |
Marketing and Advertising Services (5) | | | | Ongoing arrangement (7) | | 866 | | | 203 | | | 2,038 | | | 272 | | | 1,800 | | | 4,577 | |
Marketing and Advertising Services (8) | | | | Ongoing arrangement (7) | | 2,064 | | | — | | | 3,315 | | | — | | | 2,041 | | | — | |
Polling Services (6) | | | | $3,800 | | 1,295 | | | — | | | 2,248 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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) Client was founded byA member of the Company’s Chief Executive Officer.
(2) Family memberboard of one of the Brands’ partnersdirectors holds an executive leadership position inor is on the board of directors of the client.
(3) Family members of certain of the Company’s executives hold key leadership positions in the client.
(4) Client has significant interest in the Company.
(5)(2) Brands’ partners and executives either hold a key leadership position in or are on the board of directors of the client.
(6) (3)Founder of the client Client has a significant interest in the Company.
(7)(4) This arrangement was entered into for an indefinite term and is invoiced as services are provided.
(8) A family member of the Company’s board of directorsChief Executive Officer holds an executivea key leadership position in the client.
The following table presents significant related party transactions in which the Company receives services from a third party:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Total Transaction Value | | Expenses | | Due to Related Party |
| | | | | Three Months
Ended September 30, | | Nine Months
Ended September 30, | | September 30,
2022 | | December 31, 2021 |
| Services | | | | | 2022 | | 2021 | | 2022 | | 2021 | | |
Data Management Services (1) | | | | Ongoing arrangement (4) | | $ | 890 | | | $ | 422 | | | $ | 1,705 | | | $ | 1,178 | | | $ | 1,249 | | | $ | 623 | |
Sales and Management Services (2) | | | | Ongoing arrangement (4) | | 703 | | | 88 | | | 1,442 | | | 266 | | | 1,685 | | | 442 | |
Marketing Services (3) | | | | $40 | | — | | | — | | | 40 | | | — | | | 40 | | | — | |
(1)(5) Family member of one of the Brand’s partners holds an executive leadership position in the third party.
(2) Chief Executive Officer of the Brand is a shareholder of the affiliate providing the services.
(3 ) A family member of the Company’s President holds a key leadership position in the client.
(4)(6) This arrangement wasFounder 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 isare invoiced as services are provided.provided, while others have a fixed definitive contract value.
In 2019, a Brand of the Company, entered into a loan agreement with a third party who holds a minority interest in the Brand. The loan receivable of $4,029$3.1 million and $3,784$3.6 million due from the third party is included within Other current assets in the Company’s Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The Company recognized $80$0.1 million and $234$0.1 million for the three and nine months ended September 30,March 31, 2023 and 2022, respectively, and $76 and $227 for the three and nine months ended September 30, 2021, respectively, of interest income within interestInterest expense, net on its Unaudited Condensed Consolidated Statements of Operations.
During 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 and nine months ended September 30, 2021, Stagwell Media made additional non-cash investments inMarch 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 Company of $300 and $12,400, respectively. Additionally, during the three and nine months ended September 30, 2021,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 investmentsfrom the loan was used by the employees to purchase the noncontrolling interest of $1,600. In March 2021, the Company made a non-cash distribution to Stagwell Media of $13,000. Additionally, the Company made cash distributions to Stagwell Media of $165,700 and $191,900 for the three and nine months ended September 30, 2021, respectively.13.3% in TMA Direct.
16.15. 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.
DueThe Company made changes to changes in the Company’sits internal management and reporting structure in the secondfirst quarter of 2022,2023, resulting in an update to our reportable segment results for periodssegments (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 secondfirst quarter of 20222023 have been recast to reflect the reclassification of certain reporting units (brands)(Brands) between operating segments. The changes in reportable segments were that the Forsman & Bodenfors, Observatory, Crispin Porter Bogusky, Bruce Mau and Vitro brands, previously within the Integrated Agencies Network, are now within the Brand Performance Network.
The Company has three reportable segments as follows: “Integrated Agencies Network,” “Brand Performance Network” and the “Communications Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described throughout the Notes to the Unaudited Condensed Consolidated Financial Statements included herein.
•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 brandsBrands included in the operating segments that comprise the Integrated Agencies Network reportable segment are as follows: Anomaly Alliance (Anomaly, Concentric Hunter, Mono, YML and Scout (brands)(Brands)), Constellation (72andSunny, Colle McVoy, Hunter, Instrument, Redscout, Hello Design, Team Enterprises, Storyline, and Harris Insights), the Doner Partner Network (Doner, KWT Global, Harris X, Veritas, Doner North, Northstar, which is currently sunsetting, and Yamamoto (brands)(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”), previously referred to as the “Media Network” reportable segment, is comprised of a single operating segment. BPN includes a unified media and data management structure with omnichannel media placement, creative media consulting, influencer and business-to-business marketing capabilities.
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 combineprovide media buyingsolutions such as audience analysis, media planning, and planningbuying 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 brandsBrands Assembly, Brand New Galaxy, Crispin Porter Bogusky, Forsman & Bodenfors, Bruce Mau Design, Goodstuff, MMI Agency, digital creative & transformation consultancy Gale, B2B specialist Multiview, Observatory, Vitro, CX specialists Kenna, and travel media experts Ink.
•The Communications Network reportable segment is comprised of a single operating segment, our specialist network that provides advocacy, strategic corporate communications, investor relations, public relations, online fundraising and other services to both corporations and political and advocacy organizations and consists of our Allison & Partners, SKDK, (including Sloane & Company), and Targeted Victory brands.
•All Other consists of the Company’s digital innovation group and Stagwell Marketing Cloud, including Maru and Epicenter, and products such as PRophet and Reputation Defender (which was sold in September 2021).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 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenue: | (Dollars in Thousands) |
| Integrated Agencies Network | $ | 367,122 | | | $ | 269,071 | | | $ | 1,095,761 | | | $ | 419,659 | |
| Brand Performance Network | 171,463 | | | 122,826 | | | 563,546 | | | 257,109 | |
| Communications Network | 121,770 | | | 67,348 | | | 311,075 | | | 157,794 | |
| All Other | 3,436 | | | 7,389 | | | 9,225 | | | 22,874 | |
| Total Revenue | $ | 663,791 | | | $ | 466,634 | | | $ | 1,979,607 | | | $ | 857,436 | |
| | | | | | | |
| Adjusted EBITDA: | | | | | | | |
| Integrated Agencies Network | $ | 76,224 | | | $ | 66,063 | | | $ | 215,920 | | | $ | 100,264 | |
| Brand Performance Network | 24,312 | | | 17,664 | | | 89,259 | | | 30,485 | |
| Communications Network | 25,462 | | | 10,312 | | | 58,630 | | | 28,302 | |
| All Other | (363) | | | 419 | | | (972) | | | (1,316) | |
| Corporate | (10,543) | | | (6,940) | | | (35,014) | | | (7,656) | |
| Total Adjusted EBITDA | $ | 115,092 | | | $ | 87,518 | | | $ | 327,823 | | | $ | 150,079 | |
| | | | | | | |
| Depreciation and amortization | $ | (32,207) | | | $ | (24,790) | | | $ | (95,642) | | | $ | (46,122) | |
| Impairment and other losses | (25,211) | | | (14,926) | | | (28,034) | | | (14,926) | |
| Stock-based compensation | (12,258) | | | (53,465) | | | (33,410) | | | (53,465) | |
| Deferred acquisition consideration | 29,789 | | | (3,422) | | | 14,420 | | | (9,456) | |
| Other items, net | (5,152) | | | (10,549) | | | (12,112) | | | (15,298) | |
| Total Operating Income (Loss) | $ | 70,053 | | | $ | (19,634) | | | $ | 173,045 | | | $ | 10,812 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months
Ended September 30, | | Nine Months
Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (Dollars in Thousands) |
| Other Income (expenses): | | | | | | | |
| Interest expense, net | $ | (19,672) | | | $ | (11,912) | | | $ | (56,552) | | | $ | (15,197) | |
| Foreign exchange, net | (3,927) | | | (893) | | | (4,163) | | | (1,955) | |
| Other, net | 147 | | | 45,621 | | | 182 | | | 46,806 | |
| Income before income taxes and equity in earnings of non-consolidated affiliates | 46,601 | | | 13,182 | | | 112,512 | | | 40,466 | |
| Income tax expense | 11,540 | | | 5,183 | | | 20,150 | | | 9,205 | |
| Income before equity in earnings of non-consolidated affiliates | 35,061 | | | 7,999 | | | 92,362 | | | 31,261 | |
| Equity in income (loss) of non-consolidated affiliates | 213 | | | (76) | | | 1,053 | | | (75) | |
| Net income | 35,274 | | | 7,923 | | | 93,415 | | | 31,186 | |
| Net income attributable to noncontrolling and redeemable noncontrolling interests | (24,665) | | | (9,994) | | | (59,668) | | | (10,987) | |
| Net income (loss) attributable to Stagwell Inc. common shareholders | $ | 10,609 | | | $ | (2,071) | | | $ | 33,747 | | | $ | 20,199 | |
| | | | | | | |
| Depreciation and amortization: | | | | | | | |
| Integrated Agencies Network | $ | 18,316 | | | $ | 13,494 | | | $ | 55,206 | | | $ | 18,787 | |
| Brand Performance Network | 8,205 | | | 7,499 | | | 25,044 | | | 18,070 | |
| Communications Network | 2,654 | | | 2,110 | | | 7,718 | | | 5,087 | |
| All Other | 1,206 | | | 493 | | | 2,457 | | | 2,013 | |
| Corporate | 1,826 | | | 1,194 | | | 5,217 | | | 2,165 | |
| Total | $ | 32,207 | | | $ | 24,790 | | | $ | 95,642 | | | $ | 46,122 | |
| | | | | | | |
| Stock-based compensation | | | | | | | |
| Integrated Agencies Network | $ | 5,308 | | | $ | 32,431 | | | $ | 15,044 | | | $ | 32,431 | |
| Brand Performance Network | 2,923 | | | 2,620 | | | 9,152 | | | 2,620 | |
| Communications Network | 671 | | | 15,384 | | | 1,077 | | | 15,384 | |
| All Other | 7 | | | 16 | | | 15 | | | 16 | |
| Corporate | 3,349 | | | 3,014 | | | 8,122 | | | 3,014 | |
| Total | $ | 12,258 | | | $ | 53,465 | | | $ | 33,410 | | | $ | 53,465 | |
The Company’s CODM does not use segment assets to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
See Note 43 of the Notes included herein for a summary of the Company’s revenue by geographic region for the three and nine months ended September 30, 2022March 31, 2023 and 2021.2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis areis based on and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes related thereto included in Part 1, Item 1 of this Form 10-Q. The following discussion and analysis contains forward-looking statements and should be read in conjunction with the disclosures and information contained and referenced under the captions “Note about Forward-Looking Statements” and “Risk Factors” in this Form 10-Q and “Forward-Looking Statements” and “Risk Factors” in our 20212022 Form 10-K. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. A description of the non-GAAP financial measures discussed in this section and reconciliations to the comparable GAAP financial measures are below.
In this section, the terms “Stagwell,” “we,” “us,” “our” and the “Company” refer (i) with respect to events occurring or periods ending before August 2, 2021, to Stagwell Marketing Group LLC and its direct and indirect subsidiaries and (ii) with respect to events occurring or periods ending on or after August 2, 2021, to Stagwell Inc. and its direct and indirect subsidiaries.
References to a “fiscal year” mean the Company’s year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 20222023 means the period beginning January 1, 2022,2023, and ending December 31, 2022)2023).
Executive Summary
Overview
Stagwell conducts its business through its networks, which provide marketing and business solutions that realize the potential of combining data and creativity. Stagwell’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. Stagwell’s differentiation lies in its creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. Stagwell leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The Company’s workstrategy is designedintended to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
Stagwell manages its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are revenue, operating expenses, capital expenditures and the non-GAAP financial measures described below. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) growth from existing clients and the addition of new clients, (iii) growth by principal capability, (iv) growth from currency changes, and (v) growth from acquisitions. In addition to monitoring the foregoing financial indicators, the Company assesses and monitors several non-financial performance indicators relating to the business performance of our networks. These indicators may include a network’s recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the network’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.
We continue to monitorRecent Developments
In March 2023, the impact on our operations from worldwide events such asCompany’s board of directors (the “Board”) adopted the COVID-19 pandemic and evolving strains2022 Employee Stock Purchase Plan (the “ESPP”), which will be submitted for approval at the Company’s annual meeting of COVID-19, as well as the military conflict between Russia and Ukraine, which we do not expect to have a material adverse effect on our operations.shareholders in June 2023. If the impactsESPP is approved, a total of either of the aforementioned events are beyond our expectations, we believe we are well positioned to successfully work through such impacts for the foreseeable future.
Business Combination
On December 21, 2020, MDC and Stagwell Media LP announced that they had entered into the Transaction Agreement, providing for the combination of MDC with the “Stagwell Subject Entities.” The Stagwell Subject Entities comprised Stagwell Marketing and its direct and indirect subsidiaries.
On August 2, 2021 (the “Closing Date”), we completed the Transactions. In connection with the Transactions, among other things, (i) MDC completed a series of transactions pursuant to which it emerged as a wholly owned subsidiary of the Company, converted into OpCo; (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into a Delaware corporation, succeeded MDC as the publicly-traded company and changed its name to Stagwell Inc.
The Transactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the legal acquirer and Stagwell Marketing treated as the accounting acquirer. As a result of the Transactions and the change in our business and operations, under applicable accounting principles, the historical financial results of Stagwell Marketing prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presented in this Form 10-Q for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021, which do not include the financial results of MDC. See Note 3 of the Unaudited Condensed Consolidated Financial Statements included herein for additional information regarding the Transactions.
Recent Developments
On October 3, 2022, the Company acquired all of the equity interest of Maru Group Limited Ltd, a software experience & insights data platform, for approximately £23,000 in cash, subject to post-closing adjustments.
On October 3, 2022, the Company acquired the remaining 80% interest that it did not already own in Wolfgang, LLC, a creative agency combining consultancy, strategy and technology experience, for approximately $3,750 in cash and $5,250 inmillion shares of Stagwell Inc.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 subject to post-closing adjustments.on certain plan-defined dates. The stock paymentpurchase price for each offering period is subject to92.5% of the seller’s continued employment throughout the period, with total shares vesting on July 1, 2025.
On October 3, 2022, the Company acquired the assets of Epicenter Experience LLC, an enterprise software company that leverages mobile and location data to map and sequence complex consumer behavior patterns, for approximately $9,729, subject to post-closing adjustments, as well as contingent consideration up to a maximumfair market value of $5,000. The contingent consideration is based on meeting certain future earnings targets through 2024 and can be paid up to 25% in Stagwellshares of Class A Common Stock.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.
Significant Factors Affecting our Business and Results of Operations
The most significant factors affecting our business and results of operations include national, regional, and local economic conditions, our clients’ profitability, mergers and acquisitions of our clients, changes in top management of our clients and our ability to retain and attract key employees. New business wins and client losses occur due to a variety of factors. The two most significant factors are (i) our clients’ desire to change marketing communication firms, and (ii) the digital and data-driven
products that our brandsBrands offer. A client may choose to change marketing communication firms for several reasons, such as a change in leadership where new management wants to retain an agencya Brand that it may have previously worked with. In addition, if the client is merged or acquired by another company, the marketing communication firm is often changed. Clients also change firms as a result of the firm’s failure to meet marketing performance targets or other expectations in client service delivery.
Seasonality
Historically, we typically generate the highest quarterly revenue during the fourth quarter in each year. In addition, client concentration increases during election years due to the cyclical nature of our advocacy Brands. The highest volumes of retail related consumer marketing increase with the back-to-school season through the end of the holiday season.
Non-GAAP Financial Measures
The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). In addition, the Company has included non-GAAP financial measures and ratios, which management uses to operate the business, which it believes provide useful supplemental information to both management and readers of this report in making period-to-period comparisons in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by GAAP and should not be construed as an alternative to other titled measures determined in accordance with GAAP. The non-GAAP financial measures included are “organic revenue growth or decline,” “Adjusted EBITDA,” and “Adjusted dilutedDiluted EPS.”
“Organic revenue growth” and “organic revenue decline” refer to the positive or negative results, respectively, of subtracting both the foreign exchange and acquisition (disposition) components from total revenue growth. The acquisition (disposition) component is calculated by aggregating prior period revenue for any acquired businesses, less the prior period revenue of any businesses that were disposed of during the current period. The organic revenue growth (decline) component reflects the constant currency impact of (a) the change in revenue of the brandsBrands that the Company has held throughout each of the comparable periods presented, and (b) “Net acquisitions (divestitures).” Net acquisitions (divestitures) consists of (i) for acquisitions during the current year, the revenue effect from such acquisition as if the acquisition had been owned during the equivalent period in the prior year and (ii) for acquisitions during the previous year, the revenue effect from such acquisitions as if they had been owned during that entire year (or the same prior year period as the current reportable period), taking into account their respective pre-acquisition revenues for the applicable periods, and (iii) for dispositions, the revenue effect from such disposition as if they had been disposed of during the equivalent period in the prior year.
Adjusted EBITDA is defined as Net income (loss) attributable to Stagwell Inc. common shareholders excluding non-operating income or expense to achieve operating income (loss), plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, and other items. Other items include restructuring costs, acquisition-related expenses, and non-recurring items.
Adjusted Diluted EPS is defined as (i) Net income (loss) attributable to Stagwell Inc. common shareholders, plus net income (loss) attributable to Class C shareholders, excluding the impact of amortization expense, impairment and other losses, stock-based compensation, deferred acquisition consideration adjustments, discrete tax items, and other items, per dilutedbased on total consolidated amounts, then allocated to Stagwell Inc. common shareholders and Class C shareholders, based on their respective income allocation percentage using a normalized effective income tax rate divided by (ii) (a) the weighted average number of common shares outstanding (if dilutive).plus (b) the weighted average number of shares of Class C common Stock outstanding. Other items includes restructuring costs, acquisition-related expenses, and non-recurring items.
This analysis should be read in conjunction with the interim Unaudited Condensed Consolidated Financial Statements presented in this interim report and the annual Audited Consolidated Financial Statements and Management’s Discussion and Analysis presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). The diluted weighted average shares outstanding include shares of Class C Common Stock as if converted to shares of Class A Common Stock to calculate Adjusted Diluted EPS.
All amounts are in dollars unless otherwise stated. Amounts reported in millions herein are computed based on the amounts in thousands. As a result, the sum of the components, and related calculations, reported in millions may not equal the total amounts due to rounding.
The percentage changes included in the tables hereinin Item 2 herein that are not considered meaningful are presented as “NM.”
Segments
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Mark Penn, Chief Executive Officer and Chairman, to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
The CODM uses Adjusted EBITDA as a key metric, to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions.
DueThe Company made changes to changes in the Company’sits internal management and reporting structure in the secondfirst quarter of 2022,2023, resulting in an update to our reportable segment results for periodssegments (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 secondfirst quarter of 20222023 have been recast to reflect the reclassification of certain reporting units (brands)(Brands) between operating segments. The changes in reportable segments were that the Forsman & Bodenfors, Observatory, Crispin Porter Bogusky, Bruce Mau and Vitro brands, previously within the Integrated Agencies Network, are now within the Stagwell Brand Performance Network.
The Company has three reportable segments as follows: “Integrated Agencies Network,” “Brand Performance Network” and the “Communications Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described throughout the Notes to the Unaudited Condensed Consolidated Financial Statements included herein and Note 2 of the Company’s audited consolidated financial statementsAudited Consolidated Financial Statements included in the 20212022 Form 10-K.
In addition, Stagwell reports its corporate office expenses incurred in connection with the strategic resources provided to the networks, as well as certain other centrally managed expenses that are not fully allocated to the operating segments as Corporate. Corporate provides client and business development support to the networks as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions.
The following discussion focuses on the operating performance of the Company for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 and the financial condition of the Company as of September 30, 2022.March 31, 2023.
Results of Operations:
| | | Three Months
Ended September 30, | | Nine Months
Ended September 30, | | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | |
| | (Dollars in Thousands) | | | (dollars in thousands) |
| Revenue | | |
| Revenue: | | Revenue: | | | |
| Integrated Agencies Network | Integrated Agencies Network | $ | 367,122 | | | $ | 269,071 | | | $ | 1,095,761 | | | $ | 419,659 | | Integrated Agencies Network | | $ | 329,792 | | | $ | 348,751 | | |
| Brand Performance Network | Brand Performance Network | 171,463 | | | 122,826 | | | 563,546 | | | 257,109 | | Brand Performance Network | | 213,340 | | | 197,787 | | |
| Communications Network | Communications Network | 121,770 | | | 67,348 | | | 311,075 | | | 157,794 | | Communications Network | | 66,460 | | | 93,255 | | |
| All Other | All Other | 3,436 | | | 7,389 | | | 9,225 | | | 22,874 | | All Other | | 12,852 | | | 3,110 | | |
| Total Revenue | Total Revenue | $ | 663,791 | | | $ | 466,634 | | | $ | 1,979,607 | | | $ | 857,436 | | Total Revenue | | $ | 622,444 | | | $ | 642,903 | | |
| | Operating Income (Loss) | $ | 70,053 | | | $ | (19,634) | | | $ | 173,045 | | | $ | 10,812 | | |
| Operating Income | | Operating Income | | $ | 16,233 | | | $ | 54,660 | | |
| | Other Income (Expenses) | | |
| Other Income (Expenses): | | Other Income (Expenses): | | | |
| Interest expense, net | Interest expense, net | $ | (19,672) | | | $ | (11,912) | | | $ | (56,552) | | | $ | (15,197) | | Interest expense, net | | (18,189) | | | (18,729) | | |
| Foreign exchange, net | Foreign exchange, net | (3,927) | | | (893) | | | (4,163) | | | (1,955) | | Foreign exchange, net | | (670) | | | (306) | | |
| Other, net | Other, net | 147 | | | 45,621 | | | 182 | | | 46,806 | | Other, net | | 220 | | | 156 | | |
| Income before income taxes and equity in earnings of non-consolidated affiliates | 46,601 | | | 13,182 | | | 112,512 | | | 40,466 | | |
| Income (loss) before income taxes and equity in earnings of non-consolidated affiliates | | Income (loss) before income taxes and equity in earnings of non-consolidated affiliates | | (2,406) | | | 35,781 | | |
| Income tax expense | Income tax expense | 11,540 | | | 5,183 | | | 20,150 | | | 9,205 | | Income tax expense | | 2,384 | | | 3,189 | | |
| Income before equity in earnings of non-consolidated affiliates | 35,061 | | | 7,999 | | | 92,362 | | | 31,261 | | |
| Income (loss) before equity in earnings of non-consolidated affiliates | | Income (loss) before equity in earnings of non-consolidated affiliates | | (4,790) | | | 32,592 | | |
| Equity in income (loss) of non-consolidated affiliates | Equity in income (loss) of non-consolidated affiliates | 213 | | | (76) | | | 1,053 | | | (75) | | Equity in income (loss) of non-consolidated affiliates | | (227) | | | 1,030 | | |
| Net income | 35,274 | | | 7,923 | | | 93,415 | | | 31,186 | | |
| Net income attributable to noncontrolling and redeemable noncontrolling interests | (24,665) | | | (9,994) | | | (59,668) | | | (10,987) | | |
| Net income (loss) attributable to Stagwell Inc. common shareholders | $ | 10,609 | | | $ | (2,071) | | | $ | 33,747 | | | $ | 20,199 | | |
| Net income (loss) | | Net income (loss) | | (5,017) | | | 33,622 | | |
| Net (income) loss attributable to noncontrolling and redeemable noncontrolling interests | | Net (income) loss attributable to noncontrolling and redeemable noncontrolling interests | | 5,460 | | | (20,947) | | |
| Net income attributable to Stagwell Inc. common shareholders | | Net income attributable to Stagwell Inc. common shareholders | | $ | 443 | | | $ | 12,675 | | |
| | Reconciliation to Adjusted EBITDA | | |
| Net income (loss) attributable to Stagwell Inc. common shareholders | $ | 10,609 | | | $ | (2,071) | | | $ | 33,747 | | | $ | 20,199 | | |
| Reconciliation to Adjusted EBITDA: | | Reconciliation to Adjusted EBITDA: | | | |
| Net income attributable to Stagwell Inc. common shareholders | | Net income attributable to Stagwell Inc. common shareholders | | $ | 443 | | | $ | 12,675 | | |
Non-operating items (1) | Non-operating items (1) | 59,444 | | | (17,563) | | | 139,298 | | | (9,387) | | Non-operating items (1) | | 15,790 | | | 41,985 | | |
| Operating income (loss) | 70,053 | | | (19,634) | | | 173,045 | | | 10,812 | | |
| Operating income | | Operating income | | 16,233 | | | 54,660 | | |
| Depreciation and amortization | Depreciation and amortization | 32,207 | | | 24,790 | | | 95,642 | | | 46,122 | | Depreciation and amortization | | 33,477 | | | 31,204 | | |
| Impairment and other losses | Impairment and other losses | 25,211 | | | 14,926 | | | 28,034 | | | 14,926 | | Impairment and other losses | | — | | | 557 | | |
| Stock-based compensation | Stock-based compensation | 12,258 | | | 53,465 | | | 33,410 | | | 53,465 | | Stock-based compensation | | 12,004 | | | 8,021 | | |
| Deferred acquisition consideration | Deferred acquisition consideration | (29,789) | | | 3,422 | | | (14,420) | | | 9,456 | | Deferred acquisition consideration | | 4,088 | | | 1,897 | | |
Other items, net (1) | Other items, net (1) | 5,152 | | | 10,549 | | | 12,112 | | | 15,298 | | Other items, net (1) | | 6,420 | | | 5,073 | | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 115,092 | | | $ | 87,518 | | | $ | 327,823 | | | $ | 150,079 | | Adjusted EBITDA | | $ | 72,222 | | | $ | 101,412 | | |
| (1) Non-operating items includes items within the Statements of Operations, below Operating Income, and above Net income attributable to Stagwell Inc. common shareholders. | (1) Non-operating items includes items within the Statements of Operations, below Operating Income, and above Net income attributable to Stagwell Inc. common shareholders. | (1) Non-operating items includes items within the Statements of Operations, below Operating Income, and above Net income attributable to Stagwell Inc. common shareholders. |
THREE MONTHS ENDED SEPTEMBER 30, 2022MARCH 31, 2023 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2021MARCH 31, 2022
Consolidated Results of Operations
The components of operating results for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change | | 2023 | 2022 | Change |
| | (Dollars in Thousands) | | (dollars in thousands) |
| | $ | | % | | $ | | % |
| Revenue | Revenue | | $ | 663,791 | | | $ | 466,634 | | | $ | 197,157 | | | 42.3 | % | Revenue | | $ | 622,444 | | | $ | 642,903 | | | $ | (20,459) | | | (3.2) | % |
| Operating Expenses | Operating Expenses | | Operating Expenses | |
| Cost of services | Cost of services | | 417,134 | | | 324,782 | | | 92,352 | | | 28.4 | % | Cost of services | | 413,898 | | | 411,970 | | | 1,928 | | | 0.5 | % |
| Office and general expenses | Office and general expenses | | 119,186 | | | 121,770 | | | (2,584) | | | (2.1) | % | Office and general expenses | | 158,836 | | | 144,512 | | | 14,324 | | | 9.9 | % |
| Depreciation and amortization | Depreciation and amortization | | 32,207 | | | 24,790 | | | 7,417 | | | 29.9 | % | Depreciation and amortization | | 33,477 | | | 31,204 | | | 2,273 | | | 7.3 | % |
| Impairment and other losses | Impairment and other losses | | 25,211 | | | 14,926 | | | 10,285 | | | 68.9 | % | Impairment and other losses | | — | | | 557 | | | (557) | | | (100.0) | % |
| | $ | 593,738 | | | $ | 486,268 | | | $ | 107,470 | | | 22.1 | % | | $ | 606,211 | | | $ | 588,243 | | | $ | 17,968 | | | 3.1 | % |
| Operating income (loss) | | $ | 70,053 | | | $ | (19,634) | | | $ | 89,687 | | | NM | |
| Operating Income | | Operating Income | | $ | 16,233 | | | $ | 54,660 | | | $ | (38,427) | | | (70.3) | % |
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
| | (Dollars in Thousands) | | (dollars in thousands) |
| | $ | | % | | $ | | % |
| Net Revenue | Net Revenue | $ | 555,754 | | | $ | 409,328 | | | $ | 146,426 | | | 35.8 | % | Net Revenue | $ | 521,662 | | | $ | 526,637 | | | $ | (4,975) | | | (0.9) | % |
| Billable costs | Billable costs | 108,037 | | | 57,306 | | | 50,731 | | | 88.5 | % | Billable costs | 100,782 | | | 116,266 | | | (15,484) | | | (13.3) | % |
| Revenue | Revenue | 663,791 | | 466,634 | | $ | 197,157 | | | 42.3 | % | Revenue | 622,444 | | 642,903 | | (20,459) | | | (3.2) | % |
| | Billable costs | Billable costs | 108,037 | | | 57,306 | | | 50,731 | | | 88.5 | % | Billable costs | 100,782 | | | 116,266 | | | (15,484) | | | (13.3) | % |
| Staff costs | Staff costs | 351,764 | | | 249,791 | | | 101,973 | | | 40.8 | % | Staff costs | 349,677 | | | 340,638 | | | 9,039 | | | 2.7 | % |
| Administrative costs | Administrative costs | 58,963 | | | 44,635 | | | 14,328 | | | 32.1 | % | Administrative costs | 68,176 | | | 56,294 | | | 11,882 | | | 21.1 | % |
| Unbillable and other costs, net | Unbillable and other costs, net | 29,935 | | | 27,384 | | | 2,551 | | | 9.3 | % | Unbillable and other costs, net | 31,587 | | | 28,293 | | | 3,294 | | | 11.6 | % |
| Adjusted EBITDA | Adjusted EBITDA | 115,092 | | | 87,518 | | | 27,574 | | | 31.5 | % | Adjusted EBITDA | 72,222 | | | 101,412 | | | (29,190) | | | (28.8) | % |
| Stock-based compensation | Stock-based compensation | 12,258 | | | 53,465 | | | (41,207) | | | (77.1) | % | Stock-based compensation | 12,004 | | | 8,021 | | | 3,983 | | | 49.7 | % |
| Depreciation and amortization | Depreciation and amortization | 32,207 | | | 24,790 | | | 7,417 | | | 29.9 | % | Depreciation and amortization | 33,477 | | | 31,204 | | | 2,273 | | | 7.3 | % |
| Deferred acquisition consideration | Deferred acquisition consideration | (29,789) | | | 3,422 | | | (33,211) | | | NM | Deferred acquisition consideration | 4,088 | | | 1,897 | | | 2,191 | | | NM |
| Impairment and other losses | Impairment and other losses | 25,211 | | | 14,926 | | | 10,285 | | | 68.9 | % | Impairment and other losses | — | | | 557 | | | (557) | | | (100.0) | % |
| Other items, net | Other items, net | 5,152 | | | 10,549 | | | (5,397) | | | (51.2) | % | Other items, net | 6,420 | | | 5,073 | | | 1,347 | | | 26.6 | % |
Operating Income (Loss) (1) | $ | 70,053 | | | $ | (19,634) | | | $ | 89,687 | | | NM | |
Operating Income (1) | | Operating Income (1) | $ | 16,233 | | | $ | 54,660 | | | $ | (38,427) | | | (70.3) | % |
| (1) See the Results of Operations section above for a reconciliation of Operating Income to Net Income attributable to Stagwell Inc. common shareholders. | (1) See the Results of Operations section above for a reconciliation of Operating Income to Net Income attributable to Stagwell Inc. common shareholders. | (1) See the Results of Operations section above for a reconciliation of Operating Income to Net Income attributable to Stagwell Inc. common shareholders. |
Revenue
Revenue for the three months ended September 30, 2022March 31, 2023 was $663.8$622.4 million compared to $466.6$642.9 million for the three months ended September 30, 2021, an increaseMarch 31, 2022, a decrease of $197.2$20.5 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Net Revenue - Components of Change | | Change | | Net Revenue - Components of Change | | Change | |
| | Three Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended September 30, 2022 | | Organic | | Total | | Three Months Ended March 31, 2022 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2023 | | Organic | | Total | |
| | (Dollars in Thousands) | | | | | | (dollars in thousands) | | | | | |
| Integrated Agencies Network | Integrated Agencies Network | $ | 237,750 | | | $ | (1,496) | | | $ | 69,871 | | | $ | 7,157 | | | $ | 75,532 | | | $ | 313,282 | | | 3.0 | % | | 31.8 | % | Integrated Agencies Network | $303,666 | | $(2,793) | | $2,465 | | $(10,434) | | $(10,762) | | $292,904 | | (3.4)% | | (3.5)% | |
| Brand Performance Network | Brand Performance Network | 117,568 | | | (3,221) | | | 29,216 | | | 16,909 | | | 42,904 | | | 160,472 | | | 14.4 | % | | 36.5 | % | Brand Performance Network | 155,482 | | (4,118) | | 5,911 | | 5,659 | | 7,452 | | 162,934 | | 3.6% | | 4.8% | |
| Communications Network | Communications Network | 46,615 | | | (211) | | | 8,652 | | | 23,509 | | | 31,950 | | | 78,565 | | | 50.4 | % | | 68.5 | % | Communications Network | 64,379 | | (281) | | 1,069 | | (12,195) | | (11,407) | | 52,972 | | (18.9)% | | (17.7)% | |
| All Other | All Other | 7,395 | | | (54) | | | (4,030) | | | 124 | | | (3,960) | | | 3,435 | | | 1.7 | % | | (53.5) | % | All Other | 3,110 | | (157) | | 9,038 | | 861 | | 9,742 | | 12,852 | | 27.7% | | NM | |
| | $ | 409,328 | | | $ | (4,982) | | | $ | 103,709 | | | $ | 47,699 | | | $ | 146,426 | | | $ | 555,754 | | | 11.7 | % | | 35.8 | % | | $526,637 | | $(7,349) | | $18,483 | | $(16,109) | | $(4,975) | | $521,662 | | (3.1)% | | (0.9)% | |
| Component % change | Component % change | | | (1.2)% | | 25.3% | | | | | | | | | | | Component % change | | | (1.4)% | | 3.5% | | (3.1)% | | (0.9)% | | | | | | | |
For the three months ended September 30, 2022,March 31, 2023, organic net revenue increased $47.7decreased $16.1 million, or 11.7%(3.1)%. OrganicThe decrease in organic revenue grew across all segments. Such growth was primarily attributable to increaseda decline in spending by existing clients, and businessdriven partially by lower advocacy services as compared to higher spending in the first quarter of 2022 associated with new clients.the 2022 elections. The increase in net acquisitionacquisitions (divestitures) was primarily driven by the acquisitions of MDC, Brand New Galaxy (“BNG”), GoodStuff Holdings Limited (“Goodstuff”),BNG and TMA Direct, Inc. (“TMA Direct”).Maru.
The geographic mix in net revenues for the three months ended September 30,March 31, 2023 and 2022 and 2021 iswas as follows:
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| | (Dollars in Thousands) | | (dollars in thousands) |
| United States | United States | $ | 453,160 | | | $ | 337,814 | | United States | $ | 416,581 | | | $ | 429,532 | |
| United Kingdom | United Kingdom | 42,443 | | | 30,194 | | United Kingdom | 40,628 | | | 38,285 | |
| Other | Other | 60,151 | | | 41,320 | | Other | 64,453 | | | 58,820 | |
| Total | Total | $ | 555,754 | | | $ | 409,328 | | Total | $ | 521,662 | | | $ | 526,637 | |
Impairment and Other LossesOperating Income
The Company recognized an impairment and other losses charge of $25,211Operating Income for the three months ended September 30, 2022, primarily related to the impairment of goodwill totaling $23,139. The goodwill impairmentMarch 31, 2023 was to write-down the carrying value in excess of the fair value at three reporting units, one within the Integrated Agencies Network, one within the Brand Performance Network and one within the All Other category. The expense was recorded within Impairment and other losses on the Unaudited Condensed Consolidated Statements of Operations.
As of September 30, 2022, the Company assessed whether it was more likely than not that the carrying amount of its reporting units exceeded their fair value. As a result of this assessment, the Company completed a quantitative impairment test for certain reporting units that resulted in the impairment charge due to a combination of changes in fair value measures such as an increase in interest rates and decrease in market multiples of comparable public companies, as well as actual performance below previous financial forecasts. The Company uses a combination of the income approach, which incorporates the use of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. The Company generally applies an equal weighting to the income and market approaches for the impairment test. The income approach and the market approach both require the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates. These estimates and assumptions may vary between each reporting unit depending on the facts and circumstances specific to that reporting unit. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit. For the tests performed as of September 30, 2022, the discount rate we used for our reporting units tested ranged between 14.0% and 15.5%, and the terminal value growth rate ranged between 1.0% and 3.0%. The terminal value growth rate represents the expected long-term growth rate for our industry, which incorporates the type of services each reporting unit provides as well as the global economy. For the tests performed as of September 30, 2022, the revenue growth rates for our reporting units used in our analysis were between 1.0% and 10.0%. Factors influencing the revenue growth rates include the nature of the services the reporting unit provides for its clients, the geographic locations in which the reporting unit conducts business and the maturity of the reporting unit.
To the extent that (i) there is underperformance in one or more reporting units (ii) a potential recession further disrupts the economic environment impacting the performance or (iii) interest rates continue to rise in response to persistent inflation, the fair value of one or more of the reporting units could fall below their carrying value, resulting in a goodwill impairment charge.
The Company's annual goodwill test as of October 1, 2022 is in process. Based on our initial assessment, the fair value of seven reporting units, with goodwill of approximately $590 million, exceed their carrying value by less than 20%. As we finalize the annual goodwill impairment test, there could be reductions to the fair value of those reporting units, resulting in a goodwill impairment charge.
Operating Income (Loss)
Operating income for the three months ended September 30, 2022 was $70.1$16.2 million compared to operating loss of $19.6$54.7 million for the three months ended September 30, 2021,March 31, 2022, representing a decrease of $38.4 million. The decrease in Operating Income was primarily attributable to a decrease in Revenue and an increase in Cost of $89.7 million.services, Office and general expenses, and Depreciation and amortization.
The three months ended September 30, 2022increase in Cost of services was impacted primarily attributable to an increase in compensation expense, including stock-based compensation, in part due to an increase in headcount, partially offset by lower billable costs associated with providing services.
Stock-based compensation expense increased approximately $4.0 million, primarily driven by an increase in revenuethe value of profits interests awards during the three months ended March 31, 2023.
Office and general expenses dueincreased primarily attributable to the acquisition of MDC, BNG, Goodstuff and TMA Direct, and costs associated with an increaselower occupancy expenses in services provided. Stock-based compensation expense decreased primarily driven by awards issued to employees in the third quarter of 2021, in connection with the acquisition of MDC, that fully vested in the third quarter of 2021 and the first quarter of 2022. 2022 connected with a benefit associated with the initiative to consolidate real estate in New York City as well as an increase in deferred acquisition consideration expense.
Deferred acquisition costs decreasedconsideration increased approximately $2.2 million, primarily asattributable to the result of a decreasechange in the fair value of future earn out payments as a result of lower forecasted financial results. Impairmentassociated with the awards and other losses primarily increased due to the impairment of goodwill and a right-of-use lease assetnew deferred acquisition consideration acquired in the third quarter ofassociation with certain acquisitions occurring in 2022.
Depreciation and amortization was higherexpense increased approximately $2.3 million, primarily dueattributable to the recognition of amortizabledepreciable fixed assets and intangible assets in connection with the acquisitions of MDC, BNG, Goodstuff and TMA Direct. Other items, net decreased due to the reduction of merger-related expenses.occurring in 2022.
Other, net
Other, net for the three months ended September 30, 2022March 31, 2023 was income of $0.1$0.2 million compared to income of $45.6$0.2 million for the three months ended September 30, 2021, representing an decrease of $45.5 million primarily driven by sale of Reputation Defender in the third quarter of 2021.March 31, 2022.
Foreign Exchange, Transaction Gain (Loss)Net
The foreign exchange loss for the three months ended September 30, 2022March 31, 2023 was $3.9$0.7 million compared to a loss of $0.9$0.3 million for the three months ended September 30, 2021.March 31, 2022.
Interest Expense, Net
Interest expense, net for the three months ended September 30, 2022March 31, 2023 was $19.7$18.2 million compared to $11.9$18.7 million for the three months ended September 30, 2021, representing an increase of $7.8 million, primarily driven by a higher level of debt, principally due to amounts outstanding under the Combined Credit Agreement.March 31, 2022.
Income Tax Expense
The Company had an income tax expense for the three months ended September 30, 2022March 31, 2023 of $11.5$2.4 million (on a pre-tax incomeloss of $46.6$2.4 million resulting in an effective tax rate of 24.8%(99.1)%) compared to income tax expense of $5.2$3.2 million (on pre-tax income of $13.2$35.8 million resulting in an effective tax rate of 39.3%8.9%) for the three months ended September 30, 2021.
The difference in the effective tax rate of 24.8%(99.1)% in the three months ended September 30, 2022March 31, 2023 as compared to 39.3%8.9% in the three months ended September 30, 2021March 31, 2022 was primarily attributabledue to higher non-deductible share based compensationthe pre-tax loss, an increase in September 30, 2021,valuation allowance, and favorable return to provision adjustments at September 30, 2022, offsetan increase in part by the impact of non-deductible goodwill impairmentsuncertain tax positions in September 30, 2022.2023.
Noncontrolling and Redeemable Noncontrolling Interests
The effect of noncontrolling and redeemable noncontrolling interests for the three months ended September 30, 2022March 31, 2023 was $24.7a loss of $5.5 million compared to $10.0income of $20.9 million for the three months ended September 30, 2021.March 31, 2022. The $5.5 million loss was primarily attributable to noncontrolling interest losses associated with holders of Class C Common Stock.
Net Income (Loss) Attributable to Stagwell Inc. Common Shareholders
As a result of the foregoing, net income attributable to Stagwell Inc. common shareholders for the three months ended September 30, 2022March 31, 2023 was $10.6$0.4 million compared to net loss attributable to Stagwell Inc. common shareholders of $2.1$12.7 million for the three months ended September 30, 2021.March 31, 2022.
Earnings Per Share
Diluted EPS and adjusted dilutedAdjusted Diluted EPS for the three months ended September 30,March 31, 2023 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | GAAP | | Adjustments(1) | | Non-GAAP |
| | (dollars in thousands, except per share amounts) |
| Net income attributable to Stagwell Inc. common shareholders | | $ | 443 | | | $ | 18,623 | | | $ | 19,066 | |
| Net income (loss) attributable to Class C shareholders | | (3,165) | | | 23,104 | | | 19,939 | |
| Net income (loss) attributable to Stagwell Inc. and Class C and adjusted net income | | $ | (2,722) | | | $ | 41,727 | | | $ | 39,005 | |
| | | | | | |
| Weighted average number of common shares outstanding | | 128,897 | | | | | 128,897 | |
| Weighted average number of common Class C shares outstanding | | 160,909 | | | | | 160,909 | |
| Weighted average number of shares outstanding | | 289,806 | | | | | 289,806 | |
| | | | | | |
| Diluted EPS and Adjusted Diluted EPS | | $ | (0.01) | | | | | $ | 0.13 | |
| | | | | | |
Adjustments to Net Income(1) | | Pre-Tax | | Tax | | Net |
| Amortization | | $ | 26,732 | | | $ | (5,346) | | | $ | 21,386 | |
| | | | | | |
| Stock-based compensation | | 12,004 | | | (2,401) | | | 9,603 | |
| Deferred acquisition consideration | | 4,088 | | | (818) | | | 3,270 | |
| Other items, net | | 6,420 | | | (1,283) | | | 5,137 | |
| Tax adjustments | | — | | | 2,331 | | | 2,331 | |
| | $ | 49,244 | | | $ | (7,517) | | | $ | 41,727 | |
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(1) Adjusted Diluted EPS is defined within the Non-GAAP Financial Measures section of the Executive Summary.
Diluted EPS and Adjusted Diluted EPS for the three months ended March 31, 2022 was as follows:
| | | Reported (GAAP) | | Adjustments | | Reported
(Non-GAAP) | | GAAP | | Adjustments(1) | | Non-GAAP |
| | (Dollars in Thousands) | | (dollars in thousands, except per share amounts) |
| Net income attributable to Stagwell Inc. common shareholders | Net income attributable to Stagwell Inc. common shareholders | | $ | 10,609 | | | $ | 16,159 | | | $ | 26,768 | | Net income attributable to Stagwell Inc. common shareholders | | $ | 12,675 | | | $ | 15,865 | | | $ | 28,540 | |
| Net income attributable to Class C shareholders | | Net income attributable to Class C shareholders | | 17,721 | | | 20,100 | | | 37,821 | |
| Net income attributable to Stagwell Inc. and Class C and adjusted net income | | Net income attributable to Stagwell Inc. and Class C and adjusted net income | | $ | 30,396 | | | $ | 35,965 | | | $ | 66,361 | |
| | Weighted average number of common shares outstanding | | Weighted average number of common shares outstanding | | 297,484 | | | 297,484 | |
| | | Weighted average number of common shares outstanding | | 130,498 | | | 130,498 | | | 130,498 | | |
| Diluted EPS and Adjusted Diluted EPS | | Diluted EPS and Adjusted Diluted EPS | | $ | 0.10 | | | $ | 0.22 | |
| | Adjusted Diluted EPS | | $ | 0.08 | | | $ | 0.12 | | | $ | 0.21 | | |
| | Adjustments to Net Income (loss) attributable to Stagwell Inc. Common shareholders | |
| Pre-Tax | | Tax | | Net | |
| (Dollars in Thousands) | |
Adjustments to Net Income(1) | | Adjustments to Net Income(1) | | Pre-Tax | | Tax | | Net |
| Amortization | Amortization | | $ | 23,814 | | | $ | (4,763) | | | $ | 19,051 | | Amortization | | $ | 24,904 | | | $ | (4,981) | | | $ | 19,923 | |
| Impairment and other losses | Impairment and other losses | | 25,211 | | | (414) | | | 24,797 | | Impairment and other losses | | 557 | | | (111) | | | 446 | |
| Stock-based compensation | Stock-based compensation | | 12,258 | | | (2,452) | | | 9,806 | | Stock-based compensation | | 8,021 | | | (1,604) | | | 6,417 | |
| Deferred acquisition consideration | Deferred acquisition consideration | | (29,789) | | | 5,958 | | | (23,831) | | Deferred acquisition consideration | | 1,897 | | | (379) | | | 1,518 | |
| Other items, net | Other items, net | | 5,152 | | | (1,030) | | | 4,122 | | Other items, net | | 5,073 | | | (985) | | | 4,088 | |
| Discrete tax items | | — | | | 2,680 | | | 2,680 | | |
| Tax adjustments | | Tax adjustments | | — | | | 3,573 | | | 3,573 | |
| | $ | 36,646 | | | $ | (21) | | | $ | 36,625 | | | $ | 40,452 | | | $ | (4,487) | | | $ | 35,965 | |
| | Less: Net income attributable to Class C shareholders | | (20,466) | | |
| Net income attributable to Stagwell Inc. common shareholders | | $ | 16,159 | | |
| | |
(1) Adjusted Diluted EPS is defined within the Non-GAAP Financial Measures section of the Executive Summary.
Adjusted EBITDA
Adjusted EBITDA for the three months ended September 30, 2022March 31, 2023 was $115.1$72.2 million, compared to $87.5$101.4 million for the three months ended September 30, 2021,March 31, 2022, representing an increasea decrease of $27.6$29.2 million, primarily driven by the increase in revenue, partially offset by higher operating expenses.lower Operating Income as discussed above.
Integrated Agencies Network
The components of operating results for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
| | (Dollars in Thousands) | | (dollars in thousands) |
| | $ | | % | | $ | | % |
| Revenue | Revenue | | $ | 367,122 | | | $ | 269,071 | | | $ | 98,051 | | | 36.4 | % | Revenue | | $ | 329,792 | | | $ | 348,751 | | | $ | (18,959) | | | (5.4) | % |
| Operating Expenses | Operating Expenses | | Operating Expenses | |
| Cost of services | Cost of services | | 235,110 | | | 191,812 | | | 43,298 | | | 22.6 | % | Cost of services | | 220,197 | | | 226,118 | | | (5,921) | | | (2.6) | % |
| Office and general expenses | Office and general expenses | | 63,123 | | | 47,901 | | | 15,222 | | | 31.8 | % | Office and general expenses | | 67,424 | | | 58,257 | | | 9,167 | | | 15.7 | % |
| Depreciation and amortization | Depreciation and amortization | | 18,316 | | | 13,494 | | | 4,822 | | | 35.7 | % | Depreciation and amortization | | 18,643 | | | 18,860 | | | (217) | | | (1.2) | % |
| Impairment and other losses | | 1,735 | | | 81 | | | 1,654 | | | NM | |
| | $ | 318,284 | | | $ | 253,288 | | | $ | 64,996 | | | 25.7 | % | |
| Operating income | | $ | 48,838 | | | $ | 15,783 | | | $ | 33,055 | | | NM | |
| | | $ | 306,264 | | | $ | 303,235 | | | $ | 3,029 | | | 1.0 | % |
| Operating Income | | Operating Income | | $ | 23,528 | | | $ | 45,516 | | | $ | (21,988) | | | (48.3) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
| Net Revenue | $ | 313,282 | | | $ | 237,750 | | | $ | 75,532 | | | 31.8 | % |
| Billable costs | 53,840 | | | 31,321 | | | 22,519 | | | 71.9 | % |
| Revenue | 367,122 | | | 269,071 | | | 98,051 | | | 36.4 | % |
| | | | | | | |
| Billable costs | 53,840 | | | 31,322 | | | 22,518 | | | 71.9 | % |
| Staff costs | 194,057 | | | 134,428 | | | 59,629 | | | 44.4 | % |
| Administrative costs | 25,592 | | | 19,594 | | | 5,998 | | | 30.6 | % |
| Unbillable and other costs, net | 17,409 | | | 17,664 | | | (255) | | | (1.4) | % |
| Adjusted EBITDA | 76,224 | | | 66,063 | | | 10,161 | | | 15.4 | % |
| Stock-based compensation | 5,308 | | | 32,431 | | | (27,123) | | | (83.6) | % |
| Depreciation and amortization | 18,316 | | | 13,494 | | | 4,822 | | | 35.7 | % |
| Deferred acquisition consideration | 841 | | | 3,422 | | | (2,581) | | | (75.4) | % |
| Impairment and other losses | 1,735 | | | 81 | | | 1,654 | | | NM |
| Other items, net | 1,186 | | | 852 | | | 334 | | | 39.2 | % |
| Operating Income | $ | 48,838 | | | $ | 15,783 | | | $ | 33,055 | | | NM |
` | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 | | Change |
| (dollars in thousands) |
| | | | | $ | | % |
| Net Revenue | $ | 292,904 | | | $ | 303,666 | | | $ | (10,762) | | | (3.5) | % |
| Billable costs | 36,888 | | | 45,085 | | | (8,197) | | | (18.2) | % |
| Revenue | 329,792 | | | 348,751 | | | (18,959) | | | (5.4) | % |
| | | | | | | |
| Billable costs | 36,888 | | | 45,085 | | | (8,197) | | | (18.2) | % |
| Staff costs | 187,693 | | | 192,096 | | | (4,403) | | | (2.3) | % |
| Administrative costs | 29,166 | | | 25,609 | | | 3,557 | | | 13.9 | % |
| Unbillable and other costs, net | 16,660 | | | 17,073 | | | (413) | | | (2.4) | % |
| Adjusted EBITDA | 59,385 | | | 68,888 | | | (9,503) | | | (13.8) | % |
| Stock-based compensation | 8,198 | | | 5,073 | | | 3,125 | | | 61.6 | % |
| Depreciation and amortization | 18,643 | | | 18,860 | | | (217) | | | (1.2) | % |
| Deferred acquisition consideration | 5,991 | | | (1,325) | | | 7,316 | | | NM |
| | | | | | | |
| Other items, net | 3,025 | | | 764 | | | 2,261 | | | NM |
| Operating Income | $ | 23,528 | | | $ | 45,516 | | | $ | (21,988) | | | (48.3) | % |
Revenue
Revenue for the three months ended September 30, 2022March 31, 2023 was $367.1$329.8 million compared to $269.1$348.8 million for the three months ended September 30, 2021, an increaseMarch 31, 2022, a decrease of $98.1$19.0 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Net Revenue - Components of Change | | Change | | Net Revenue - Components of Change | | Change |
| | Three Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended September 30, 2022 | | Organic | | Total | | Three Months Ended March 31, 2022 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2023 | | Organic | | Total |
| | (Dollars in Thousands) | | | | | | (dollars in thousands) | | | | |
| Integrated Agencies Network | Integrated Agencies Network | $ | 237,750 | | | $ | (1,496) | | | $ | 69,871 | | | $ | 7,157 | | | $ | 75,532 | | | $ | 313,282 | | | 3.0 | % | | 31.8 | % | Integrated Agencies Network | $303,666 | | $(2,793) | | $2,465 | | $(10,434) | | $(10,762) | | $292,904 | | (3.4)% | | (3.5)% |
| Component % change | Component % change | | (0.6)% | | 29.4% | | Component % change | | (0.9)% | | 0.8% | | (3.4)% | | (3.5)% | |
The increasedecline in organic net revenue was primarily attributable to increaseddecreased spending by existing and new clients primarily driven by creative, digital transformation and consumer insights services. The increase in net acquisitions (divestitures) was primarily driven by the acquisition of MDC.
The increase in expenses was primarily driven by the impact of the acquisition of MDC and costs associated with an increase in services provided. Deferred acquisition consideration decreased as a result of payments made during 2022. Depreciation and amortization increased primarily due to the recognition of amortizable intangible assets following the acquisition of MDC. Stock-based compensation expense decreased primarily driven by awards issued to employeesclients in the third quarter of 2021technology sector who withheld spending in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022. Impairment and other losses resulted from the impairment of one right-of-use lease asset and associated leasehold improvements.2023.
Operating incomeIncome
Operating Income for the three months ended March 31, 2023 was $23.5 million compared to $45.5 million for the three months ended March 31, 2022, representing a decrease of $22.0 million. The decrease in Operating Income was primarily attributable to a decrease in Revenue and Cost of services, and an increase in Office and general expenses.
The decrease in Cost of services was primarily attributable to an increase in compensation expense, including stock-based compensation, in part due to an increase in headcount, partially offset by lower billable costs associated with providing services.
Stock-based compensation expense increased approximately $3.1 million, primarily attributable to an increase in the value of profits interests awards.
Office and general expenses increased primarily attributable to an increase in deferred acquisition consideration expense and an increase in severance expense.
Deferred acquisition consideration increased approximately $7.3 million, primarily attributable to an increase in fair value associated with certain of the instruments and a Brand that had a significant reduction in fair value in the first quarter of 2022 for which the final payment was made in Q2 2022.
Operating Income and Adjusted EBITDA were higher,lower, driven by an increasethe decrease in revenues, partially offset byrevenue and higher expenses as detailed above.
Brand Performance Network
The components of operating results for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
| | (Dollars in Thousands) | | (dollars in thousands) |
| | $ | | % | | $ | | % |
| Revenue | Revenue | | $ | 171,463 | | | $ | 122,826 | | | $ | 48,637 | | | 39.6 | % | Revenue | | $ | 213,340 | | | $ | 197,787 | | | $ | 15,553 | | | 7.9 | % |
| Operating Expenses | Operating Expenses | | Operating Expenses | |
| Cost of services | Cost of services | | 105,298 | | | 68,559 | | | 36,739 | | | 53.6 | % | Cost of services | | 139,249 | | | 123,400 | | | 15,849 | | | 12.8 | % |
| Office and general expenses | Office and general expenses | | 47,386 | | | 39,620 | | | 7,766 | | | 19.6 | % | Office and general expenses | | 52,140 | | | 47,592 | | | 4,548 | | | 9.6 | % |
| Depreciation and amortization | Depreciation and amortization | | 8,205 | | | 7,499 | | | 706 | | | 9.4 | % | Depreciation and amortization | | 8,244 | | | 8,196 | | | 48 | | | 0.6 | % |
| Impairment and other losses | Impairment and other losses | | 7,494 | | | 14,846 | | | (7,352) | | | (49.5) | % | Impairment and other losses | | — | | | 557 | | | (557) | | | (100.0) | % |
| | $ | 168,383 | | | $ | 130,524 | | | $ | 37,859 | | | 29.0 | % | | $ | 199,633 | | | $ | 179,745 | | | $ | 19,888 | | | 11.1 | % |
| Operating income (loss) | | $ | 3,080 | | | $ | (7,698) | | | $ | 10,778 | | | NM | |
| Operating Income | | Operating Income | | $ | 13,707 | | | $ | 18,042 | | | $ | (4,335) | | | (24.0) | % |
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
|
| 2022 | | 2021 | | Change |
| 2023 | | 2022 | | Change |
| | (Dollars in Thousands) | | (dollars in thousands) |
| | $ | | % | | $ | | % |
| Net Revenue | Net Revenue | $ | 160,472 | | | $ | 117,568 | | | $ | 42,904 | | | 36.5 | % | Net Revenue | $ | 162,934 | | | $ | 155,482 | | | $ | 7,452 | | | 4.8 | % |
| Billable costs | Billable costs | 10,991 | | | 5,258 | | | 5,733 | | | NM | Billable costs | 50,406 | | | 42,305 | | | 8,101 | | | 19.1 | % |
| Revenue | Revenue | 171,463 | | | 122,826 | | | 48,637 | | | 39.6 | % | Revenue | 213,340 | | | 197,787 | | | 15,553 | | | 7.9 | % |
| | Billable costs | Billable costs | 10,991 | | | 5,258 | | | 5,733 | | | NM | Billable costs | 50,406 | | | 42,305 | | | 8,101 | | | 19.1 | % |
| Staff costs | Staff costs | 102,925 | | | 73,020 | | | 29,905 | | | 41.0 | % | Staff costs | 104,596 | | | 96,024 | | | 8,572 | | | 8.9 | % |
| Administrative costs | Administrative costs | 20,798 | | | 18,007 | | | 2,791 | | | 15.5 | % | Administrative costs | 23,082 | | | 17,040 | | | 6,042 | | | 35.5 | % |
| Unbillable and other costs, net | Unbillable and other costs, net | 12,437 | | | 8,877 | | | 3,560 | | | 40.1 | % | Unbillable and other costs, net | 11,835 | | | 11,170 | | | 665 | | | 6.0 | % |
| Adjusted EBITDA | Adjusted EBITDA | 24,312 | | | 17,664 | | | 6,648 | | | 37.6 | % | Adjusted EBITDA | 23,421 | | | 31,248 | | | (7,827) | | | (25.0) | % |
| Stock-based compensation | Stock-based compensation | 2,923 | | | 2,620 | | | 303 | | | 11.6 | % | Stock-based compensation | 657 | | | 1,260 | | | (603) | | | (47.9) | % |
| Depreciation and amortization | Depreciation and amortization | 8,205 | | | 7,499 | | | 706 | | | 9.4 | % | Depreciation and amortization | 8,244 | | | 8,196 | | | 48 | | | 0.6 | % |
| Deferred acquisition consideration | Deferred acquisition consideration | 1,444 | | | — | | | 1,444 | | | 100.0 | % | Deferred acquisition consideration | (1,179) | | | 2,132 | | | (3,311) | | | NM |
| Impairment and other losses | Impairment and other losses | 7,494 | | | 14,846 | | | (7,352) | | | (49.5) | % | Impairment and other losses | — | | | 557 | | | (557) | | | (100.0) | % |
| Other items, net | Other items, net | 1,166 | | | 397 | | | 769 | | | NM | Other items, net | 1,992 | | | 1,061 | | | 931 | | | 87.7 | % |
| Operating Income (Loss) | $ | 3,080 | | | $ | (7,698) | | | $ | 10,778 | | | NM | |
| Operating Income | | Operating Income | $ | 13,707 | | | $ | 18,042 | | | $ | (4,335) | | | (24.0) | % |
Revenue
Revenue for the three months ended September 30, 2022March 31, 2023 was $171.5$213.3 million compared to $122.8$197.8 million for the three months ended September 30, 2021,March 31, 2022, an increase of $48.6$15.6 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Net Revenue - Components of Change | | Change | | Net Revenue - Components of Change | | Change |
| | Three Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended September 30, 2022 | | Organic | | Total | | Three Months Ended March 31, 2022 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2023 | | Organic | | Total |
| | (Dollars in Thousands) | | | | | | (dollars in thousands) | | | | |
| Brand Performance Network | Brand Performance Network | $ | 117,568 | | | $ | (3,221) | | | $ | 29,216 | | | $ | 16,909 | | | $ | 42,904 | | | $ | 160,472 | | | 14.4 | % | | 36.5 | % | Brand Performance Network | $155,482 | | $(4,118) | | $5,911 | | $5,659 | | $7,452 | | $162,934 | | 3.6% | | 4.8% |
| Component % change | Component % change | | (2.7)% | | 24.9% | | Component % change | | (2.6)% | | 3.8% | | 3.6% | | 4.8% | |
The increase in organic net revenue was primarily attributable to new clients and increased spending by existing clients. The increase in net acquisitions (divestitures) was primarily driven by the acquisitionsacquisition of MDC, GoodStuff,BNG.
Operating Income
Operating Income for the three months ended March 31, 2023 was $13.7 million compared to $18.0 million for the three months ended March 31, 2022, representing a decrease of $4.3 million. The decrease in Operating Income was primarily attributable to an increase in Revenue, more than offset by an increase in Costs of services and BNG.Office and general expenses.
The increase in expensesCost of services was primarily driven by the impact of the acquisitions of MDC, BNGattributable to higher billable and Goodstuff andstaff costs associated with an increase inproviding services provided. Deferred acquisition consideration increased primarilyas well as due to the assumptionacquisition of additional liabilitiesBNG.
Office and general expenses increased primarily attributable to lower occupancy expenses in connectionthe first quarter of 2022 connected with a benefit associated with the acquisitions of BNG and Goodstuff. Impairment and other losses decreased as a result of the write-down of certain trade names that were no longerinitiative to consolidate real estate in use in the third quarter of 2021, partially offset by the impairment of goodwill in the third quarter of 2022.
Operating income (loss) and Adjusted EBITDA increasedNew York City, higher staff costs due to an increase in revenues, partially offsetheadcount, and a decrease in deferred acquisition expense.
Deferred acquisition consideration decreased approximately $3.3 million primarily attributable to the reduction in fair value in the first quarter of 2023 associated with a certain Brand that was acquired in the second quarter of 2022.
Operating Income and Adjusted EBITDA were lower driven by higher expenses as detailed above.above, partially offset by higher revenue.
Communications Network
The components of operating results for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
| | (Dollars in Thousands) | | (dollars in thousands) |
| | $ | | % | | $ | | % |
| Revenue | Revenue | | $ | 121,770 | | | $ | 67,348 | | | $ | 54,422 | | | 80.8 | % | Revenue | | $ | 66,460 | | | $ | 93,255 | | | $ | (26,795) | | | (28.7) | % |
| Operating Expenses | Operating Expenses | | Operating Expenses | |
| Cost of services | Cost of services | | 75,573 | | | 59,550 | | | 16,023 | | | 26.9 | % | Cost of services | | 46,881 | | | 60,829 | | | (13,948) | | | (22.9) | % |
| Office and general expenses | Office and general expenses | | (10,355) | | | 12,559 | | | (22,914) | | | NM | Office and general expenses | | 17,217 | | | 16,907 | | | 310 | | | 1.8 | % |
| Depreciation and amortization | Depreciation and amortization | | 2,654 | | | 2,110 | | | 544 | | | 25.8 | % | Depreciation and amortization | | 2,713 | | | 2,560 | | | 153 | | | 6.0 | % |
| | | $ | 67,872 | | | $ | 74,219 | | | $ | (6,347) | | | (8.6) | % | | $ | 66,811 | | | $ | 80,296 | | | $ | (13,485) | | | (16.8) | % |
| Operating income (loss) | | $ | 53,898 | | | $ | (6,871) | | | $ | 60,769 | | | NM | |
| Operating Income (Loss) | | Operating Income (Loss) | | $ | (351) | | | $ | 12,959 | | | $ | (13,310) | | | NM |
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
|
| 2022 | | 2021 | | Change |
| 2023 | | 2022 | | Change |
| | (Dollars in Thousands) | | (dollars in thousands) |
| | $ | | % | | $ | | % |
| Net Revenue | Net Revenue | $ | 78,565 | | | $ | 46,615 | | | $ | 31,950 | | | 68.5 | % | Net Revenue | $ | 52,972 | | | $ | 64,379 | | | $ | (11,407) | | | (17.7) | % |
| Billable costs | Billable costs | 43,205 | | | 20,733 | | | 22,472 | | | NM | Billable costs | 13,488 | | | 28,876 | | | (15,388) | | | (53.3) | % |
| Revenue | Revenue | 121,770 | | | 67,348 | | | 54,422 | | | 80.8 | % | Revenue | 66,460 | | | 93,255 | | | (26,795) | | | (28.7) | % |
| | Billable costs | Billable costs | 43,205 | | | 20,732 | | | 22,473 | | | NM | Billable costs | 13,488 | | | 28,876 | | | (15,388) | | | (53.3) | % |
| Staff costs | Staff costs | 44,197 | | | 30,171 | | | 14,026 | | | 46.5 | % | Staff costs | 40,077 | | | 40,826 | | | (749) | | | (1.8) | % |
| Administrative costs | Administrative costs | 8,836 | | | 5,331 | | | 3,505 | | | 65.7 | % | Administrative costs | 8,756 | | | 7,068 | | | 1,688 | | | 23.9 | % |
| Unbillable and other costs, net | Unbillable and other costs, net | 70 | | | 802 | | | (732) | | | (91.3) | % | Unbillable and other costs, net | 126 | | | 47 | | | 79 | | | NM |
| Adjusted EBITDA | Adjusted EBITDA | 25,462 | | | 10,312 | | | 15,150 | | | NM | Adjusted EBITDA | 4,013 | | | 16,438 | | | (12,425) | | | (75.6) | % |
| Stock-based compensation | Stock-based compensation | 671 | | | 15,384 | | | (14,713) | | | (95.6) | % | Stock-based compensation | 507 | | | (243) | | | 750 | | | NM |
| Depreciation and amortization | Depreciation and amortization | 2,654 | | | 2,110 | | | 544 | | | 25.8 | % | Depreciation and amortization | 2,713 | | | 2,560 | | | 153 | | | 6.0 | % |
| Deferred acquisition consideration | Deferred acquisition consideration | (32,074) | | | — | | | (32,074) | | | (100.0) | % | Deferred acquisition consideration | 539 | | | 1,090 | | | (551) | | | (50.6) | % |
| | Other items, net | Other items, net | 313 | | | (311) | | | 624 | | | NM | Other items, net | 605 | | | 72 | | | 533 | | | NM |
| Operating Income (Loss) | Operating Income (Loss) | $ | 53,898 | | | $ | (6,871) | | | $ | 60,769 | | | NM | Operating Income (Loss) | $ | (351) | | | $ | 12,959 | | | $ | (13,310) | | | NM |
Revenue
Revenue for the three months ended September 30, 2022March 31, 2023 was $121.8$66.5 million compared to $67.3$93.3 million for the three months ended September 30, 2021, an increaseMarch 31, 2022, a decrease of $54.4$26.8 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Net Revenue - Components of Change | | Change | | Net Revenue - Components of Change | | Change |
| | Three Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended September 30, 2022 | | Organic | | Total | | Three Months Ended March 31, 2022 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2023 | | Organic | | Total |
| | (Dollars in Thousands) | | | | | | (dollars in thousands) | | | | |
| Communications Network | Communications Network | $ | 46,615 | | | $ | (211) | | | $ | 8,652 | | | $ | 23,509 | | | $ | 31,950 | | | $ | 78,565 | | | 50.4 | % | | 68.5 | % | Communications Network | $64,379 | | $(281) | | $1,069 | | $(12,195) | | $(11,407) | | $52,972 | | (18.9)% | | (17.7)% |
| Component % change | Component % change | | (0.5)% | | 18.6% | | Component % change | | (0.4)% | | 1.7% | | (18.9)% | | (17.7)% | |
The increasedecline in organic net revenue was attributable to increaseddecreased spending, by existing and new clients, primarily driven by higher public relations as well asdue to lower advocacy services as these are typicallycompared to higher during election years. The increasespending in net acquisitions (divestitures) was driven by the acquisition of MDC and TMA Direct.
The increase in expenses was driven by the impact from the acquisitions of MDC and TMA Direct and costs associated with an increase in services provided. Deferred acquisition consideration decreased due to the purchase of the remaining interest we did not already own in one of our Brands on October 1, 2021. In the third quarter of 2022, the fair value of the deferred acquisition consideration liability associated with this Brand was reduced as a result of a decrease in the fair value. Stock-based compensation expense decreased primarily driven by awards issued to employees in the third quarter of 2021 in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022.2022 associated with the 2022 elections.
Operating income (loss)Income (Loss)
Operating Loss for the three months ended March 31, 2023 was $0.4 million compared to Operating Income of $13.0 million for the three months ended March 31, 2022, representing a decrease of $13.3 million. The decrease in Operating Income was primarily attributable to a decrease in Revenue and a less than offsetting decrease in Costs of services.
The decrease in Cost of services was primarily attributable to a decrease in billable costs associated with providing services.
Operating Loss and the decrease in Adjusted EBITDA were driven by an increase in revenues,lower revenue partially offset by higherlower expenses as detailed above.
All Other
The components of operating results for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
| | (Dollars in Thousands) | | (dollars in thousands) |
| | $ | | % | | $ | | % |
| Revenue | Revenue | | $ | 3,436 | | | $ | 7,389 | | | $ | (3,953) | | | (53.5) | % | Revenue | | $ | 12,852 | | | $ | 3,110 | | | $ | 9,742 | | | NM |
| Operating Expenses | Operating Expenses | | Operating Expenses | |
| Cost of services | Cost of services | | 1,153 | | | 3,286 | | | (2,133) | | | (64.9) | % | Cost of services | | 7,680 | | | 1,623 | | | 6,057 | | | NM |
| Office and general expenses | Office and general expenses | | 2,653 | | | 3,701 | | | (1,048) | | | (28.3) | % | Office and general expenses | | 7,746 | | | 1,619 | | | 6,127 | | | NM |
| Depreciation and amortization | Depreciation and amortization | | 1,206 | | | 493 | | | 713 | | | NM | Depreciation and amortization | | 1,948 | | | 501 | | | 1,447 | | | NM |
| Impairment and other losses | | 15,982 | | | (1) | | | 15,983 | | | NM | |
| | $ | 20,994 | | | $ | 7,479 | | | $ | 13,515 | | | NM | |
| Operating loss | | $ | (17,558) | | | $ | (90) | | | $ | (17,468) | | | NM | |
| | | $ | 17,374 | | | $ | 3,743 | | | $ | 13,631 | | | NM |
| Operating Loss | | Operating Loss | | $ | (4,522) | | | $ | (633) | | | $ | (3,889) | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
| Net Revenue | $ | 3,435 | | | $ | 7,395 | | | $ | (3,960) | | | (53.5) | % |
| Billable costs | 1 | | | (6) | | | 7 | | | NM |
| Revenue | 3,436 | | | 7,389 | | | (3,953) | | | (53.5) | % |
| | | | | | | |
| Billable costs | 1 | | | (6) | | | 7 | | | NM |
| Staff costs | 2,750 | | | 4,994 | | | (2,244) | | | (44.9) | % |
| Administrative costs | 1,029 | | | 1,950 | | | (921) | | | (47.2) | % |
| Unbillable and other costs, net | 19 | | | 32 | | | (13) | | | (40.6) | % |
| Adjusted EBITDA | (363) | | | 419 | | | (782) | | | NM |
| Stock-based compensation | 7 | | | 16 | | | (9) | | | (56.3) | % |
| Depreciation and amortization | 1,206 | | | 493 | | | 713 | | | NM |
| | | | | | | |
| Impairment and other losses | 15,982 | | | (1) | | | 15,983 | | | NM |
| Other items, net | — | | | 1 | | | (1) | | | (100.0) | % |
| Operating Loss | $ | (17,558) | | | $ | (90) | | | $ | (17,468) | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 | | Change |
| (dollars in thousands) |
| | | | | $ | | % |
| Net Revenue | $ | 12,852 | | | $ | 3,110 | | | $ | 9,742 | | | NM |
| | | | | | | |
| Revenue | 12,852 | | | 3,110 | | | 9,742 | | | NM |
| | | | | | | |
| | | | | | | |
| Staff costs | 10,487 | | | 2,536 | | | 7,951 | | | NM |
| Administrative costs | 3,195 | | | 695 | | | 2,500 | | | NM |
| Unbillable and other costs, net | 2,975 | | | 3 | | | 2,972 | | | NM |
| Adjusted EBITDA | (3,805) | | | (124) | | | (3,681) | | | NM |
| Stock-based compensation | 32 | | | 8 | | | 24 | | | NM |
| Depreciation and amortization | 1,948 | | | 501 | | | 1,447 | | | NM |
| Deferred acquisition consideration | (1,263) | | | — | | | (1,263) | | | (100.0) | % |
| | | | | | | |
| | | | | | | |
| Operating Loss | $ | (4,522) | | | $ | (633) | | | $ | (3,889) | | | NM |
Revenue
Revenue for the three months ended September 30, 2022March 31, 2023 was $3.4$12.9 million compared to $7.4$3.1 million for the three months ended September 30, 2021, a decreaseMarch 31, 2022, an increase of $4.0$9.7 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended September 30, 2022March 31, 2023 compared to the three months ended September 30, 2021March 31, 2022 were as follows:
| | | Net Revenue - Components of Change | | Change | | Net Revenue - Components of Change | | Change |
| | Three Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended September 30, 2022 | | Organic | | Total | | Three Months Ended March 31, 2022 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2023 | | Organic | | Total |
| | (Dollars in Thousands) | | | | | | (dollars in thousands) | | | | |
| All Other | All Other | $ | 7,395 | | | $ | (54) | | | $ | (4,030) | | | $ | 124 | | | $ | (3,960) | | | $ | 3,435 | | | 1.7 | % | | (53.5) | % | All Other | $3,110 | | $(157) | | $9,038 | | $861 | | $9,742 | | $12,852 | | 27.7% | | NM |
| Component % change | Component % change | | (0.7)% | | (54.5)% | | Component % change | | (5.0)% | | NM | | 27.7% | | NM | |
The decrease related to net acquisitions (divestitures) was primarily attributable to the sale of Reputation Defender in the third quarter of 2021.
The increase in impairment and other losses was driven by the impairment of goodwill.
Increases in operating loss and decreases in Adjusted EBITDA were driven by a decrease in revenues and an increase in expenses, primarily driven by the sale of Reputation Defender and the impairment of goodwill.
Corporate
The components of operating results for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
| Staff costs | $ | 7,835 | | | $ | 7,178 | | | $ | 657 | | | 9.2 | % |
| Administrative costs | 2,708 | | | (247) | | | 2,955 | | | NM |
| Unbillable and other costs, net | — | | | 9 | | | (9) | | | 100.0 | % |
| Adjusted EBITDA | (10,543) | | | (6,940) | | | (3,603) | | | 51.9 | % |
| Stock-based compensation | 3,349 | | | 3,014 | | | 335 | | | 11.1 | % |
| Depreciation and amortization | 1,826 | | | 1,194 | | | 632 | | | 52.9 | % |
| | | | | | | |
| Other items, net | 2,487 | | | 9,610 | | | (7,123) | | | (74.1) | % |
| Operating Loss | $ | (18,205) | | | $ | (20,758) | | | $ | 2,553 | | | (12.3) | % |
Operating expenses increased primarily in connection with an increase in stock-based compensation expense as a result of awards issued in the first quarter of 2022, partially offset by the reduction of professional fees and other merger-related expenses associated with the acquisition of MDC.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2021
Consolidated Results of Operations
The components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | 2021 | Change |
| | (Dollars in Thousands) |
| | | | | | $ | | % |
| Revenue | | $ | 1,979,607 | | | $ | 857,436 | | | $ | 1,122,171 | | | NM |
| Operating Expenses | | | | | | | | |
| Cost of services | | 1,253,765 | | | 558,856 | | | 694,909 | | | NM |
| Office and general expenses | | 429,121 | | | 226,720 | | | 202,401 | | | 89.3 | % |
| Depreciation and amortization | | 95,642 | | | 46,122 | | | 49,520 | | | NM |
| Impairment and other losses | | 28,034 | | | 14,926 | | | 13,108 | | | 87.8 | % |
| | $ | 1,806,562 | | | $ | 846,624 | | | $ | 959,938 | | | NM |
| Operating income | | $ | 173,045 | | | $ | 10,812 | | | $ | 162,233 | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
| Net Revenue | $ | 1,638,707 | | | $ | 749,246 | | | $ | 889,461 | | | NM |
| Billable costs | 340,900 | | | 108,190 | | | 232,710 | | | NM |
| Revenue | 1,979,607 | | 857,436 | | $ | 1,122,171 | | | NM |
| | | | | | | |
| Billable costs | 340,900 | | | 108,190 | | | 232,710 | | | NM |
| Staff costs | 1,041,870 | | | 459,482 | | | 582,388 | | | NM |
| Administrative costs | 181,606 | | | 83,950 | | | 97,656 | | | NM |
| Unbillable and other costs, net | 87,408 | | | 55,735 | | | 31,673 | | | 56.8 | % |
| Adjusted EBITDA | 327,823 | | | 150,079 | | | 177,744 | | | NM |
| Stock-based compensation | 33,410 | | | 53,465 | | | (20,055) | | | (37.5) | % |
| Depreciation and amortization | 95,642 | | | 46,122 | | | 49,520 | | | NM |
| Deferred acquisition consideration | (14,420) | | | 9,456 | | | (23,876) | | | NM |
| Impairment and other losses | 28,034 | | | 14,926 | | | 13,108 | | | 87.8 | % |
| Other items, net | 12,112 | | | 15,298 | | | (3,186) | | | (20.8) | % |
Operating Income (1) | $ | 173,045 | | | $ | 10,812 | | | $ | 162,233 | | | NM |
| | | | | | | |
(1) See the Results of Operations section above for a reconciliation of Operating Income to Net Income attributable to Stagwell Inc. common shareholders. |
Revenue
Revenue for the nine months ended September 30, 2022 was $1,979.6 million compared to $857.4 million for the nine months ended September 30, 2021, an increase of $1,122.2 million.
Net Revenue
The components of the fluctuations inOrganic net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change | | |
| Nine Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Nine Months Ended September 30, 2022 | | Organic | | Total | | | | |
| (Dollars in Thousands) | | | | | | | | |
| Integrated Agencies Network | $ | 384,263 | | | $ | 636 | | | $ | 459,820 | | | $ | 88,999 | | | $ | 549,455 | | | $ | 933,718 | | | 23.2 | % | | NM | | | | |
| Brand Performance Network | 236,837 | | | (5,527) | | | 174,707 | | | 81,811 | | | 250,991 | | | 487,828 | | | 34.5 | % | | NM | | | | |
| Communications Network | 105,272 | | | (211) | | | 50,529 | | | 52,347 | | | 102,665 | | | 207,937 | | | 49.7 | % | | 97.5 | % | | | | |
| All Other | 22,874 | | | (164) | | | (14,971) | | | 1,485 | | | (13,650) | | | 9,224 | | | 6.5 | % | | (59.7) | % | | | | |
| $ | 749,246 | | | $ | (5,266) | | | $ | 670,085 | | | $ | 224,642 | | | $ | 889,461 | | | $ | 1,638,707 | | | 30.0 | % | | NM | | | | |
| Component % change | | | (0.7)% | | 89.4% | | | | | | | | | | | | | | |
For the nine months ended September 30, 2022, organic net revenue increased $224.6 million, or 30.0%. There was organic revenue growth across all segments, primarily attributable to increased spending by existing clients and business with new clients.remained relatively flat. The increase in net acquisitions (divestitures) was primarily driven by an $8.9 million increase in revenue from the acquisitionsacquisition of MDC, BNG, TMA Direct and Goodstuff.Maru.
The geographic mix in net revenues for the nine months ended September 30, 2022 and 2021 is as follows:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| | 2022 | | 2021 |
| (Dollars in Thousands) |
| United States | $ | 1,333,571 | | | $ | 632,307 | |
| United Kingdom | 122,798 | | | 60,392 | |
| Other | 182,338 | | | 56,547 | |
| Total | $ | 1,638,707 | | | $ | 749,246 | |
Impairment and Other Losses
The Company recognized an impairment and other losses charge of $28,034 for the nine months ended September 30, 2022, primarily related to the impairment of goodwill totaling $23,139. The goodwill impairment was to write-down the carrying value in excess of the fair value at three reporting units, one within the Integrated Agencies Network, one within the Brand Performance Network and one within the All Other category. The expense was recorded within Impairment and other losses on the Unaudited Condensed Consolidated Statements of Operations. See the Consolidated Results of OperationsOperating Loss for the three months ended September 30, 2022, above, for additional information regarding our goodwill impairment assessment.
In addition, in the three and nine months ended September 30, 2022, the Company recorded a charge of $2,014 primarily to reduce the carrying value of one of its right-of-use lease assets and related leasehold improvements. This right-of-use lease asset related to an agency within the Integrated Agencies Network. As a result of subleasing the space, the Company evaluated the facts and circumstances related to the use of the assets which indicated that they may not be recoverable. Using the sublease income to develop expected future cash flows, itMarch 31, 2023 was determined that the fair value of the asset was less than its carrying value. This impairment charge is included in Impairment and other losses within the Unaudited Condensed Consolidated Statements of Operations.
Operating Income
Operating income for the nine months ended September 30, 2022 was $173.0$4.5 million compared to $10.8$0.6 million for the ninethree months ended September 30, 2021,March 31, 2022, representing an increase of $162.2$3.9 million.
The increase in Operating income for the nine months ended September 30, 2022Loss was impacted primarily attributable to an increase in Revenue, more than offset by an increase in revenueCost of services and expensesOffice and general expenses.
The increase in Cost of services was primarily attributable to higher staff costs associated with providing services and due to the acquisitionsacquisition of MDC, BNG, TMA DirectMaru.
Office and Goodstuff and costs associated withgeneral expenses increased primarily attributable to an increase in services provided. Stock-based compensation expense decreased, primarily driven by awards issued to employees in the third quarter of 2021, in connectionassociated with the acquisition of MDC, that fully vested in the third quarter of 2021Maru.
Operating Loss and the first quarter of 2022, partially offset by awards issueddecrease in the first quarter of 2022. Deferred acquisition consideration decreased primarily due to the assumption of additional liabilities in connection with the acquisitions of MDC, BNG, TMA Direct and Goodstuff, more than offset by the negative change in fair value associated with a Brand in which the deferred acquisition consideration liability originated from the purchase of the remaining interest we did not already own in the fourth quarter of 2021. Depreciation and amortization was higher primarily due to the recognition of amortizable intangible assets in connection with the acquisitions of MDC, BNG, TMA Direct and Goodstuff. Impairment and other losses primarily increased due to the impairment of goodwill and a right-of-use lease asset in the third quarter of 2022.
Other, net
Other, net, for the nine months ended September 30, 2022 was income of $0.18 million, compared to income of $46.8 million for the nine months ended September 30, 2021.
Foreign Exchange Transaction Gain (Loss)
The foreign exchange loss for the nine months ended September 30, 2022 was $4.2 million compared to a loss of $2.0 million for the nine months ended September 30, 2021.
Interest Expense, Net
Interest expense, net, for the nine months ended September 30, 2022 was $56.6 million compared to $15.2 million for the nine months ended September 30, 2021, representing an increase of $41.4 million, primarily driven by a higher level of debt in connection with the acquisition of MDC.
Income Tax Expense
The Company had an income tax expense for the nine months ended September 30, 2022 of $20.2 million (on a pre-tax income of $112.5 million resulting in an effective tax rate of 17.9%) compared to income tax expense of $9.2 million (on pre-tax income of $40.5 million resulting in an effective tax rate of 22.7%) for the nine months ended September 30, 2021.
The difference in the effective tax rate of 17.9% in the nine months ended September 30, 2022 as compared to 22.7% in the nine months ended September 30, 2021 was primarily related to favorable adjustments for share based compensation vesting and return to provision adjustments at September 30, 2022, offset in part by the impact of non-deductible goodwill impairments in September 30, 2022.
Noncontrolling and Redeemable Noncontrolling Interests
The effect of noncontrolling and redeemable noncontrolling interests for the nine months ended September 30, 2022 was $59.7 million compared to $11.0 million for the nine months ended September 30, 2021.
Net Income (Loss) Attributable to Stagwell Inc. Common Shareholders
As a result of the foregoing, net income attributable to Stagwell Inc. common shareholders for the nine months ended September 30, 2022 was $33.7 million compared to net income attributable to Stagwell Inc. common shareholders of $20.2 million for the nine months ended September 30, 2021.
Earnings Per Share
Diluted EPS and adjusted diluted EPS for the nine months ended September 30, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Reported (GAAP) | | Adjustments | | Reported
(Non-GAAP) |
| | (Dollars in Thousands) |
| Net income attributable to Stagwell Inc. common shareholders | | $ | 33,747 | | | $ | 50,815 | | | $ | 84,562 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Weighted average number of common shares outstanding | | 131,550 | | | 131,550 | | | 131,550 | |
| | | | | | |
| Adjusted Diluted EPS | | $ | 0.26 | | | $ | 0.39 | | | $ | 0.64 | |
| | | | | | |
| | | | | | |
| Adjustments to Net Income (loss) attributable to Stagwell Inc. Common shareholders |
| | Pre-Tax | | Tax | | Net |
| | (Dollars in Thousands) |
| Amortization | | $ | 70,541 | | | $ | (14,108) | | | $ | 56,433 | |
| Impairment and other losses | | 28,034 | | | (979) | | | 27,055 | |
| Stock-based compensation | | 33,410 | | | (6,682) | | | 26,728 | |
| Deferred acquisition consideration | | (14,420) | | | 2,884 | | | (11,536) | |
| Other items, net | | 12,112 | | | (2,422) | | | 9,690 | |
| Discrete tax items | | — | | | 6,805 | | | 6,805 | |
| | $ | 129,677 | | | $ | (14,502) | | | $ | 115,175 | |
| | | | | | |
| Less: Net income attributable to Class C shareholders | | | | | | (64,360) | |
| Net income attributable to Stagwell Inc. common shareholders | | | | | | $ | 50,815 | |
Adjusted EBITDA
Adjusted EBITDA for the nine months ended September 30, 2022 was $327.8 million, compared to $150.1 million for the nine months ended September 30, 2021, representing an increase of $177.7 million, driven by the increase in revenue, partially offset by higher operating expenses and the impact of the acquisitions of MDC, GoodStuff, TMA Direct and BNG.
Integrated Agencies Network
The components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 | | Change |
| | (Dollars in Thousands) |
| | | | | | $ | | % |
| Revenue | | $ | 1,095,761 | | | $ | 419,659 | | | $ | 676,102 | | | NM |
| Operating Expenses | | | | | | | | |
| Cost of services | | 708,921 | | | 278,971 | | | 429,950 | | | NM |
| Office and general expenses | | 194,362 | | | 83,588 | | | 110,774 | | | NM |
| Depreciation and amortization | | 55,206 | | | 18,787 | | | 36,419 | | | NM |
| Impairment and other losses | | 2,519 | | | 81 | | | 2,438 | | | NM |
| | $ | 961,008 | | | $ | 381,427 | | | $ | 579,581 | | | NM |
| Operating income | | $ | 134,753 | | | $ | 38,232 | | | $ | 96,521 | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
| Net Revenue | $ | 933,718 | | | $ | 384,263 | | | $ | 549,455 | | | NM |
| Billable costs | 162,043 | | | 35,396 | | | 126,647 | | | NM |
| Revenue | 1,095,761 | | | 419,659 | | | 676,102 | | | NM |
| | | | | | | |
| Billable costs | 162,043 | | | 35,396 | | | 126,647 | | | NM |
| Staff costs | 583,299 | | | 213,617 | | | 369,682 | | | NM |
| Administrative costs | 82,889 | | | 31,434 | | | 51,455 | | | NM |
| Unbillable and other costs, net | 51,610 | | | 38,948 | | | 12,662 | | | 32.5 | % |
| Adjusted EBITDA | 215,920 | | | 100,264 | | | 115,656 | | | NM |
| Stock-based compensation | 15,044 | | | 32,431 | | | (17,387) | | | (53.6) | % |
| Depreciation and amortization | 55,206 | | | 18,787 | | | 36,419 | | | NM |
| Deferred acquisition consideration | 5,697 | | | 9,456 | | | (3,759) | | | (39.8) | % |
| Impairment and other losses | 2,519 | | | 81 | | | 2,438 | | | NM |
| Other items, net | 2,701 | | | 1,277 | | | 1,424 | | | NM |
| Operating Income | $ | 134,753 | | | $ | 38,232 | | | $ | 96,521 | | | NM |
Revenue
Revenue for the nine months ended September 30, 2022 was $1,095.8 million compared to $419.7 million for the nine months ended September 30, 2021, an increase of $676.1 million.
Net Revenue
The components of the fluctuations in net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change |
| Nine Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Nine Months Ended September 30, 2022 | | Organic | | Total |
| (Dollars in Thousands) | | | | |
| Integrated Agencies Network | $ | 384,263 | | | $ | 636 | | | $ | 459,820 | | | $ | 88,999 | | | $ | 549,455 | | | $ | 933,718 | | | 23.2 | % | | NM |
| Component % change | | | 0.2% | | NM | | | | | | | | | | |
The growth in organic net revenue was primarily attributable to increased spending by existing and new clients, primarily driven by creative, digital transformation and consumer insights services. The increase in net acquisitions (divestitures) was primarily driven by the acquisition of MDC.
The increase in expenses was primarily driven by the impact of the acquisition of MDC and costs associated with an increase in services provided. Stock-based compensation expense decreased primarily driven by awards issued to employees in the third quarter of 2021 in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022. Depreciation and amortization grew due to the recognition of amortizable intangible assets primarily in connection with the acquisition of MDC. Impairment and other losses increased primarily due to the impairment of a right-of-use lease asset in the third quarter of 2022.
Operating income and Adjusted EBITDA were higher driven by an increase in revenues, partially offset by higher expenses as detailed above.
Brand Performance Network
The components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 | | Change |
| | (Dollars in Thousands) |
| | | | | | $ | | % |
| Revenue | | $ | 563,546 | | | $ | 257,109 | | | $ | 306,437 | | | NM |
| Operating Expenses | | | | | | | | |
| Cost of services | | 341,796 | | | 147,735 | | | 194,061 | | | NM |
| Office and general expenses | | 152,668 | | | 82,432 | | | 70,236 | | | 85.2 | % |
| Depreciation and amortization | | 25,044 | | | 18,070 | | | 6,974 | | | 38.6 | % |
| Impairment and other losses | | 8,051 | | | 14,846 | | | (6,795) | | | (45.8) | % |
| | $ | 527,559 | | | $ | 263,083 | | | $ | 264,476 | | | NM |
| Operating income (loss) | | $ | 35,987 | | | $ | (5,974) | | | $ | 41,961 | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
| Net Revenue | $ | 487,828 | | | $ | 236,837 | | | $ | 250,991 | | | NM |
| Billable costs | 75,718 | | | 20,272 | | | 55,446 | | | NM |
| Revenue | 563,546 | | | 257,109 | | | 306,437 | | | NM |
| | | | | | | |
| Billable costs | 75,718 | | | 20,272 | | | 55,446 | | | NM |
| Staff costs | 301,233 | | | 153,389 | | | 147,844 | | | 96.4 | % |
| Administrative costs | 61,840 | | | 36,762 | | | 25,078 | | | 68.2 | % |
| Unbillable and other costs, net | 35,496 | | | 16,201 | | | 19,295 | | | NM |
| Adjusted EBITDA | 89,259 | | | 30,485 | | | 58,774 | | | NM |
| Stock-based compensation | 9,152 | | | 2,620 | | | 6,532 | | | NM |
| Depreciation and amortization | 25,044 | | | 18,070 | | | 6,974 | | | 38.6 | % |
| Deferred acquisition consideration | 7,349 | | | — | | | 7,349 | | | 100.0 | % |
| Impairment and other losses | 8,051 | | | 14,846 | | | (6,795) | | | (45.8) | % |
| Other items, net | 3,676 | | | 923 | | | 2,753 | | | NM |
| Operating Income (Loss) | $ | 35,987 | | | $ | (5,974) | | | $ | 41,961 | | | NM |
Revenue
Revenue for the nine months ended September 30, 2022 was $563.5 million compared to $257.1 million for the nine months ended September 30, 2021, an increase of $306.4 million.
Net Revenue
The components of the fluctuations in net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change |
| Nine Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Nine Months Ended September 30, 2022 | | Organic | | Total |
| (Dollars in Thousands) | | | | |
| Brand Performance Network | $ | 236,837 | | | $ | (5,527) | | | $ | 174,707 | | | $ | 81,811 | | | $ | 250,991 | | | $ | 487,828 | | | 34.5 | % | | NM |
| Component % change | | | (2.3)% | | 73.8% | | | | | | | | | | |
The increase in organic net revenue was primarily attributable to new clients and increased spending by existing clients. The increase in net acquisitions (divestitures) was primarily driven by the acquisitions of MDC, Goodstuff and BNG.
The increase in expenses was primarily driven by the impact of the acquisitions of MDC, BNG and Goodstuff and costs associated with an increase in services provided. Deferred acquisition consideration increased primarily due to the assumption of additional liabilities in connection with the acquisitions of MDC, Goodstuff and BNG. Stock-based compensation expense increased, primarily driven by share based awards issued to employees in the first quarter of 2022 as well as increases in the fair value of profits interest awards in 2022. Depreciation and amortization expense increased primarily due to the recognition of amortizable intangible assets in connection with the acquisitions of MDC, Goodstuff and BNG. Impairment and other losses of $14.8 million for the nine months ended September 30, 2021 relates to the write-down of certain trade names no longer in use, compared to impairment and other losses for the nine months ended September 30, 2022 of $8.1 million which relates to the impairment of goodwill.
Operating income (loss) and Adjusted EBITDA were driven by an increase in revenues, partiallyhigher revenue, more than offset by higher expenses as detailed above.
Communications Network
The components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 | | Change |
| | (Dollars in Thousands) |
| | | | | | $ | | % |
| Revenue | | $ | 311,075 | | | $ | 157,794 | | | $ | 153,281 | | | 97.1 | % |
| Operating Expenses | | | | | | | | |
| Cost of services | | 198,843 | | | 119,147 | | | 79,696 | | | 66.9 | % |
| Office and general expenses | | 27,642 | | | 25,674 | | | 1,968 | | | 7.7 | % |
| Depreciation and amortization | | 7,718 | | | 5,087 | | | 2,631 | | | 51.7 | % |
| | | | | | | | |
| | $ | 234,203 | | | $ | 149,908 | | | $ | 84,295 | | | 56.2 | % |
| Operating income | | $ | 76,872 | | | $ | 7,886 | | | $ | 68,986 | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
| Net Revenue | $ | 207,937 | | | $ | 105,272 | | | $ | 102,665 | | | 97.5 | % |
| Billable costs | 103,138 | | | 52,522 | | | 50,616 | | | 96.4 | % |
| Revenue | 311,075 | | | 157,794 | | | 153,281 | | | 97.1 | % |
| | | | | | | |
| Billable costs | 103,138 | | | 52,522 | | | 50,616 | | | 96.4 | % |
| Staff costs | 125,834 | | | 67,296 | | | 58,538 | | | 87.0 | % |
| Administrative costs | 23,200 | | | 9,523 | | | 13,677 | | | NM |
| Unbillable and other costs, net | 273 | | | 151 | | | 122 | | | 80.8 | % |
| Adjusted EBITDA | 58,630 | | | 28,302 | | | 30,328 | | | NM |
| Stock-based compensation | 1,077 | | | 15,384 | | | (14,307) | | | (93.0) | % |
| Depreciation and amortization | 7,718 | | | 5,087 | | | 2,631 | | | 51.7 | % |
| Deferred acquisition consideration | (27,466) | | | — | | | (27,466) | | | (100.0) | % |
| | | | | | | |
| Other items, net | 429 | | | (55) | | | 484 | | | NM |
| Operating Income | $ | 76,872 | | | $ | 7,886 | | | $ | 68,986 | | | NM |
Revenue
Revenue for the nine months ended September 30, 2022 was $311.1 million compared to $157.8 million for the nine months ended September 30, 2021, an increase of $153.3 million.
Net Revenue
The components of the fluctuations in net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change |
| Nine Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Nine Months Ended September 30, 2022 | | Organic | | Total |
| (Dollars in Thousands) | | | | |
| Communications Network | $ | 105,272 | | | $ | (211) | | | $ | 50,529 | | | $ | 52,347 | | | $ | 102,665 | | | 207,937 | | | 49.7 | % | | 97.5 | % |
| Component % change | | | (0.2)% | | 48.0% | | | | | | | | | | |
The increase in organic net revenue was primarily attributable to increased spending by existing and new clients, primarily driven by higher public relations as well as advocacy services, as these are typically higher during election years. The increase in net acquisitions (divestitures) was driven by the acquisitions of MDC and TMA Direct.
The increase in expenses was primarily driven by the impact from the acquisitions of MDC and TMA Direct and costs associated with an increase in services provided. Deferred acquisition consideration decreased primarily due to the reduction in fair value associated with the deferred acquisition consideration assumed in connection with the purchase of the remaining interest in one of our Brands on October 1, 2021. Stock-based compensation expense decreased primarily driven by awards issued to employees in the third quarter of 2021 in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022. Depreciation and amortization increased primarily due to the recognition of amortizable intangible assets in connection with the acquisitions of MDC and TMA Direct.
Operating income and Adjusted EBITDA were driven by an increase in revenues and lower expenses as detailed above.
All Other
The components of operating results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 | | Change |
| | (Dollars in Thousands) |
| | | | | | $ | | % |
| Revenue | | $ | 9,225 | | | $ | 22,874 | | | $ | (13,649) | | | (59.7) | % |
| Operating Expenses | | | | | | | | |
| Cost of services | | 4,205 | | | 11,850 | | | (7,645) | | | (64.5) | % |
| Office and general expenses | | 6,029 | | | 12,357 | | | (6,328) | | | (51.2) | % |
| Depreciation and amortization | | 2,457 | | | 2,013 | | | 444 | | | 22.1 | % |
| Impairment and other losses | | 17,464 | | | (1) | | | 17,465 | | | NM |
| | $ | 30,155 | | | $ | 26,219 | | | $ | 3,936 | | | 15.0 | % |
| Operating loss | | $ | (20,930) | | | $ | (3,345) | | | $ | (17,585) | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
| Net Revenue | $ | 9,224 | | | $ | 22,874 | | | $ | (13,650) | | | (59.7) | % |
| Billable costs | 1 | | | — | | | 1 | | | 100.0 | % |
| Revenue | 9,225 | | | 22,874 | | | (13,649) | | | (59.7) | % |
| | | | | | | |
| Billable costs | 1 | | | — | | | 1 | | | 100.0 | % |
| Staff costs | 7,950 | | | 14,855 | | | (6,905) | | | (46.5) | % |
| Administrative costs | 2,217 | | | 8,918 | | | (6,701) | | | (75.1) | % |
| Unbillable and other costs, net | 29 | | | 417 | | | (388) | | | (93.0) | % |
| Adjusted EBITDA | (972) | | | (1,316) | | | 344 | | | (26.1) | % |
| Stock-based compensation | 15 | | | 16 | | | (1) | | | (6.3) | % |
| Depreciation and amortization | 2,457 | | | 2,013 | | | 444 | | | 22.1 | % |
| | | | | | | |
| Impairment and other losses | 17,464 | | | (1) | | | 17,465 | | | NM |
| Other items, net | 22 | | | 1 | | | 21 | | | NM |
| Operating Loss | $ | (20,930) | | | $ | (3,345) | | | $ | (17,585) | | | NM |
Revenue
Revenue for the nine months ended September 30, 2022 was $9.2 million compared to $22.9 million for the nine months ended September 30, 2021, a decrease of $13.6 million.
Net Revenue
The components of the fluctuations in net revenue for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change |
| Nine Months Ended September 30, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Nine Months Ended September 30, 2022 | | Organic | | Total |
| (Dollars in Thousands) | | | | |
| All Other | $ | 22,874 | | | $ | (164) | | | $ | (14,971) | | | $ | 1,485 | | | $ | (13,650) | | | $ | 9,224 | | | 6.5 | % | | (59.7) | % |
| Component % change | | | (0.7)% | | (65.4)% | | | | | | | | | | |
The increase in organic net revenue was attributable to services at the central innovations group.
The decrease related to net acquisitions (divestitures) was primarily attributable to the sale of Reputation Defender in the third quarter of 2021.
The increases in operating loss and decrease in Adjusted EBITDA were primarily driven by a decrease in revenues and expenses due to the sale of Reputation Defender, and an increase in impairment and other losses due to the impairment of goodwill in the third quarter of 2022.
Corporate
The components of operating results for the ninethree months ended September 30, 2022March 31, 2023 compared to the ninethree months ended September 30, 2021March 31, 2022 were as follows:
| | | Nine Months Ended September 30, | | Three Months Ended March 31, |
|
| 2022 | | 2021 | | Change |
| 2023 | | 2022 | | Change |
| | (Dollars in Thousands) | | (dollars in thousands) |
| | $ | | % | | $ | | % |
| Staff costs | Staff costs | $ | 23,554 | | | $ | 10,325 | | | $ | 13,229 | | | NM | Staff costs | $ | 6,824 | | | $ | 9,156 | | | $ | (2,332) | | | (25.5) | % |
| Administrative costs | Administrative costs | 11,460 | | | (2,687) | | | 14,147 | | | NM | Administrative costs | 3,977 | | | 5,882 | | | (1,905) | | | (32.4) | % |
| Unbillable and other costs, net | Unbillable and other costs, net | — | | | 18 | | | (18) | | | (100.0) | % | Unbillable and other costs, net | (9) | | | — | | | (9) | | | (100.0) | % |
| Adjusted EBITDA | Adjusted EBITDA | (35,014) | | | (7,656) | | | (27,358) | | | NM | Adjusted EBITDA | (10,792) | | | (15,038) | | | 4,246 | | | (28.2) | % |
| Stock-based compensation | Stock-based compensation | 8,122 | | | 3,014 | | | 5,108 | | | NM | Stock-based compensation | 2,610 | | | 1,923 | | | 687 | | | 35.7 | % |
| Depreciation and amortization | Depreciation and amortization | 5,217 | | | 2,165 | | | 3,052 | | | NM | Depreciation and amortization | 1,929 | | | 1,087 | | | 842 | | | 77.5 | % |
| | Other items, net | Other items, net | 5,284 | | | 13,152 | | | (7,868) | | | (59.8) | % | Other items, net | 798 | | | 3,176 | | | (2,378) | | | (74.9) | % |
| Operating Loss | Operating Loss | $ | (53,637) | | | $ | (25,987) | | | $ | (27,650) | | | NM | Operating Loss | $ | (16,129) | | | $ | (21,224) | | | $ | 5,095 | | | (24.0) | % |
Operating expenses increased primarily in connection withLoss for the acquisitionthree months ended March 31, 2023 was $16.1 million compared to $21.2 million for the three months ended March 31, 2022, representing a decrease of MDC. In addition, stock-based compensation expense increased, primarily driven by awards issued to employees$5.1 million. The decrease in the first quarter ofOperating Loss was primarily attributable to lower staff costs, professional fees, and merger related costs incurred in 2022.
Liquidity and Capital Resources:
The following table provides summary information about the Company’s liquidity position:
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
| (Dollars in Thousands) |
| Net cash provided by operating activities | $ | 73,081 | | | $ | 20,146 | |
| Net cash (used in) provided by investing activities | (64,284) | | | 153,721 | |
| Net cash used in financing activities | (12,312) | | | (151,860) | |
We continue to monitor the impact on our liquidity from worldwide events such as the COVID-19 pandemic and evolving strains of COVID-19, as well as the military conflict between Russia and Ukraine, which we do not expect to have a material adverse effect on our liquidity. If the impacts of either of the aforementioned events are beyond our expectations, we believe we are well positioned to work through such impacts for the foreseeable future. | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (dollars in thousands) |
| Net cash used in operating activities | $ | (85,113) | | | $ | (48,577) | |
| Net cash used in investing activities | (10,815) | | | (8,289) | |
| Net cash provided by financing activities | 12,923 | | | 6,529 | |
The Company had cash and cash equivalents of $165.3$138.5 million and $184.0$220.6 million as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The Company expects to maintain sufficient cash and/or available borrowings to fund operations for the next twelve months.months and subsequent periods. The Company has historically maintained and expanded its business using cash generated from operating activities, funds available under its revolving credit agreement, and other initiatives, such as obtaining additional debt and equity financing. On September 30, 2022,March 31, 2023, the Company had $245.0$150.0 million of borrowings outstanding, $25.0$24.6 million of outstanding and undrawn letters of credit resulting in $230.0$325.4 million available under its $500.0 million Combined Credit Agreement (as defined and discussed in Note 87 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein).
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.
On March 1, 2023, the Board authorized an extension and a $125.0 million increase in the size of our 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. 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. The Board will review the Repurchase Program periodically and may authorize adjustments of its terms. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice.
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 Company’s obligations extending beyond twelve months primarily consist of deferred acquisition consideration payments, purchases of noncontrolling interests, subsidiary awards, capital expenditures, scheduled lease obligation payments, and interest payments on borrowings under the Company’s 5.625% Notes (as defined in Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein) and Combined Credit Agreement. The Company expects to make estimated cash payments in the future to satisfy obligations under the Tax Receivables Agreement (“TRA”) (see Note 1413 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional details). The amount and timing of payments are contingent on the Company achieving certain tax savings, if any, that we actually realize, or in certain circumstances are deemed to realize as a result of (i) increases in the tax basis of OpCo’s assets resulting from exchanges of Paired Units (each as defined in Note 1110 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein) for shares of the Company’s Class A Common Stock or cash, as applicable, and (ii) certain other tax benefits related to the Company making payments under the TRA. Based on the current outlook, the Company believes future cash flows from operations, together with the Company’s existing cash balance and availability of funds under the Combined Credit Agreement,
will be sufficient to meet the Company’s anticipated cash needs for the next twelve months.months and subsequent periods. The Company’s ability to make scheduled deferred acquisition consideration payments, to make principal and interest payments, to refinance indebtedness or to fund planned capital expenditures or other obligations will depend on future performance, which is subject to general economic conditions, the competitive environment and other factors, including those described in this Form 10-Q and in the Company’s other SEC filings.
On March 23, 2022, the board of directors authorized a stock repurchase program (the “Repurchase Program”) under which we may repurchase up to $125 million of shares of our outstanding Class A Common Stock. The Repurchase Program will expire on March 23, 2025.
Under the Repurchase Program, share repurchases may be made at our discretion from time to time in open market transactions at prevailing market prices (including through trading plans that may be adopted in accordance with Rule 10b5-1 of the Exchange Act), in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions, regulatory requirements, the availability of funds, and other considerations we deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directors will review the Repurchase Program periodically and may authorize adjustments of its terms.
As of September 30, 2022, there were 4.0 million shares of Class A Common Stock repurchased under the Repurchase Program at an aggregate value, excluding fees, of $28.7 million. These were purchased at an average share price of $7.16 per share. The remaining value of shares of Class A Common Stock permitted to be repurchased under the Repurchase Program was $96.2 million as of September 30, 2022.
Cash Flows
Operating Activities
Cash flows provided byused in operating activities for the ninethree months ended September 30,March 31, 2023, were $85.1 million, primarily driven by unfavorable working capital requirements, including the timing of media supplier payments, partially offset by earnings.
Cash flows used in operating activities for the three months ended March 31, 2022, were $73.1$48.6 million, primarily driven by earnings, partiallymore than offset by unfavorable working capital requirements, including the timing of media supplier payments.
Cash flows provided by operating activities for the nine months ended September 30, 2021 were $20.1 million, primarily driven by earnings, partially offset by unfavorable working capital requirements.
Investing Activities
Cash flows used in investing activities were $64.3$10.8 million for the ninethree months ended September 30,March 31, 2023, primarily driven by $3.4 million in capital expenditures and $6.7 million in capitalized software costs.
Cash flows used in investing activities were $8.3 million for the three months ended March 31, 2022, primarily driven by $37.5 million in acquisitions and $25.5$4.8 million in capital expenditures.
Cash flows provided by investing activities were $153.7expenditures and $1.8 million for the nine months ended September 30, 2021, primarily driven by the addition of $130.2 million of cash from MDC cash in connection with the acquisition of MDC, and $37.2 million from the sale of Reputation Defender, partially offset by capital expenditures of $13.7 million.capitalized software costs.
Financing Activities
During the ninethree months ended September 30, 2022,March 31, 2023, cash flows used inprovided by financing activities were $12.3$12.9 million, primarily driven by $134.5$50.0 million in net borrowings under the Combined Credit Agreement, more thanCompany’s revolving credit agreement, partially offset primarily by $61.1total stock repurchases of $26.2 million of deferred acquisition consideration payments, $38.5 million ofand distributions to noncontrolling interests $28.7 million in stock repurchases under the Repurchase Program, and $15.0 million related to shares acquired and cancelled in connection with the vesting of stock awards.$10.9 million.
During the ninethree months ended September 30, 2021,March 31, 2022, cash flows used inprovided by financing activities were $151.9$6.5 million, which primarily consisted of $884.4 million for the repurchase of the Company’s 7.50% Senior Notes due 2024, $127.1driven by $29.5 million in net paymentsborrowings under the Company’s previous revolving credit agreement, $19.2partially offset by total stock repurchases of $14.9 million inand distributions to minority interest holders, and distributionsnoncontrolling interests of $204.9 million to Stagwell Media, offset by receipt of $1.1 billion from the issuance of the 5.625% Notes.$6.5 million.
Total Debt
Debt, net of debt issuance costs, as of September 30, 2022March 31, 2023, was $1,329.1$1,235.3 million as compared to $1,191.6$1,184.7 million outstanding at December 31, 2021.2022. See Note 87 to the Unaudited Condensed Consolidated Financial Statements included herein for information regarding the Company’s 5.625% Notes, and the Combined Credit Agreement, which provides for a $500.0 million senior secured revolving credit facility with a five-year maturity. See Note 1 of the Notes included herein for additional information related to the amendment to the Credit Agreement.
The Company is currently in compliance with all of the terms and conditions of the Combined Credit Agreement, and management believes, based on its current financial projections, that the Company will be in compliance with its covenants over the next twelve months.
If the Company loses all or a substantial portion of its lines of credit under the Combined Credit Agreement, or if the Company uses the maximum available amount under the agreement, it will be required to seek other sources of liquidity. If the Company were unable to find these sources of liquidity, for example through an equity offering or access to the capital markets, the Company’s ability to fund its working capital needs and any contingent obligations with respect to acquisitions and redeemable noncontrolling interests would be adversely affected.
On April 28, 2022, the Company amended the Combined Credit Agreement. Among other things, this amendment replaced any references to LIBOR with references to SOFR. Borrowings pursuant to the Combined Credit Agreement, as amended, bear interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the prime rate of interest in effect on such day, (b) the federal funds effective rate plus 0.50% and (c) SOFR plus 1% in each case, plus the applicable margin (calculated based on the Company’s Total Leverage Ratio, as defined in the Combined Credit Agreement) at that time. Additionally, the Combined Credit Agreement was amended to remove certain pre-commencement notice provisions for certain acquisitions under $50 million in the aggregate, to increase the amount permitted for certain investments allowed under the Combined Credit Agreement, and, subject to certain conditions, to allow for the repurchase of Stagwell Inc. stock in an amount not to exceed $100 million in any fiscal year. All other substantive terms of the Combined Credit Agreement remain unchanged.
Pursuant to the Combined Credit Agreement, the Company must maintain a Total Leverage Ratio (as defined in the Combined Credit Agreement) below a threshold established in the Combined Credit Agreement. For the period ended September 30, 2022,March 31, 2023, the Company’s calculation of each of this ratio, and the maximum permitted under the Combined Credit Agreement, respectively, were calculated based on the trailing twelve months as follows:
| | | | | |
| September 30, 2022March 31, 2023 |
| Total Leverage Ratio | 2.832.79 |
| Maximum per covenant | 4.504.25 |
These ratios and measures are not based on GAAP and are not presented as alternative measures of operating performance or liquidity. Some of these ratios and measures include, among other things, pro forma adjustments for acquisitions, one-time charges, and other items, as defined in the Combined Credit Agreement. They are presented here to demonstrate compliance with the covenants in the Combined Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company.
Material Cash Requirements
The Company’s AgenciesBrands enter into contractual commitments with media providers and agreements with production companies on behalf of its clients at levels that exceed the revenue from services. Some of our agenciesBrands purchase media for clients and act as an agent for a disclosed principal. These commitments are included in Accounts payable and Accruals and other liabilitiesAccrued media when the media services are delivered by the media providers. Stagwell takes precautions against default on payment for these services including the procurement of credit insurance and has historically had a very low incidence of default. Stagwell is still exposed to the risk of significant uncollectible receivables from our clients. The risk of a material loss could significantly increase in periods of severe economic downturn.
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments. See Note 65 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional information regarding contingent deferred acquisition consideration. As of March 31, 2023, approximately $51.5 million of the deferred acquisition consideration is expected to be settled in shares of Class A Common Stock.
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity. See Note 98 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional information regarding noncontrolling interests and redeemable noncontrolling interests.
Certain of the Company’s subsidiaries grant awards to their employees providing them with an equity interest in the respective subsidiary (the “profits interests awards”). The awards generally provide the employee the right, but not the obligation, to sell its interest in the subsidiary to the Company based on a performance-based formula and, in certain cases, receive a profit share distribution.
The Company intends to finance the cash portion of these contingent payment obligations using available cash from operations, borrowings under the Combined Credit Agreement (or any refinancings thereof), and, if necessary, through the incurrence of additional debt and/or issuance of additional equity. The ultimate amount payable in the future relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised.
Critical Accounting PoliciesEstimates
See the Company’s 20212022 Form 10-K for information regarding the Company’s critical accounting policies.estimates.
Website Access to Company Reports and Information
Stagwell Inc. is the successor SEC registrant to MDC Partners Inc. Stagwell Inc.’s Internet website address is www.stagwellglobal.com. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Exchange Act, will be made available free of charge through the Company’s website as soon as reasonably practical after those reports are electronically filed with, or furnished to, the SEC. The Company announces material information to the public through a variety of means, including filings with the SEC, press releases, public conference calls, and its website. The Company uses these channels, as well as social media, including its Twitter account (@stagwell) and its LinkedIn page (https://www.linkedin.com/company/stagwell/), to communicate with investors and the public about the Company, its products and services, and other matters. Therefore, investors, the media, and others interested in the Company are encouraged to review the information the Company makes public in these locations, as such information could be deemed to be material information. Information on or that can be accessed through the Company’s websites or these social media channels is not part of this Form 10-Q, and the inclusion of the Company’s website addresses and social media channels are inactive textual references only.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company is exposed to market risk related to interest rates, foreign currencies and impairment risk.
Debt Instruments: At September 30, 2022,March 31, 2023, the Company’s debt obligations consisted of amounts outstanding under its Combined Credit Agreement and the 5.625% Notes. The 5.625% Notes bear a fixed 5.625% interest rate. The revolving credit agreement bears interest at variable rates based upon the Secured Overnight Financing Rate (“SOFR”),SOFR, EURIBOR, and SONIA depending on the duration of the borrowing product. The Company’s ability to obtain the required bank syndication commitments depends in part on conditions in the bank market at the time of syndication.
On April 28, 2022, the Company amended the Combined Credit Agreement. This amendment replaced references to LIBOR with references to SOFR. With regard to our variable rate debt, a 10% increase or decrease in interest rates would not be material tochange our annual interest expense or cash flows.by $1.1 million.
Foreign Exchange: While the Company primarily conducts business in markets that use the U.S. dollar, the Canadian dollar, the Euro and the British Pound, its non-U.S. operations transact business in numerous different currencies. The Company’s results of operations are subject to risk from the translation to the U.S. dollar of the revenue and expenses of its non-U.S. operations. The effects of currency exchange rate fluctuations on the translation of the Company’s results of operations are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 2 of the Company’s audited consolidated financial statementsAudited Consolidated Financial Statements included in the 20212022 Form 10-K. For the most part, revenues and expenses incurred related to the non-U.S. operations are denominated in their functional currency. This reduces the impact that fluctuations in exchange rates will have on profit margins. Translation of intercompany debt, which is not intended to be repaid, is included in cumulative translation adjustments. Translation of current intercompany balances are included in net income (loss). The Company generally does not enter into foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
Impairment Risk: For the ninethree months ended September 30, 2022,March 31, 2023, the Company recognized andid not recognize any impairment charge of $23,139related to write-downgoodwill, right-of-use leases or intangible assets. See the carrying value of goodwillSignificant Accounting Policies section in excessthe “Notes to Consolidated Financial Statements” of the fair value. The Company reviews goodwillCompany’s 2022 Form 10-K for information related to impairment annually as of October 1st of each year or more frequently if indicatorstesting for Goodwill, Right-of-use lease assets and long lived assets and the risk of potential impairment exist.
The Company’s annual goodwill test as of October 1, 2022 ischarges in process. To the extent that (i) there is underperformance in one or more reporting units (ii) a potential recession further disrupts the economic environment impacting the performance or (iii) interest rates continue to rise in response to persistent inflation, the fair value of one or more of the reporting units could fall below their carrying value, resulting in a goodwill impairment charge.
In addition, in the nine months ended September 30, 2022, the Company recorded an impairment charge of $2,014 primarily to reduce the carrying value of one of its right-of-use lease assets and related leasehold improvements.
future periods. See the Critical Accounting Estimates section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 2021 Form 10-K for information related to impairment testing and the risk of potential impairment charges in future periods.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensureprovide reasonable assurance that information required to be includeddisclosed in our SEC reports that we file or submit under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the applicable time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer
(“CEO”), who is our principal executive officer, and Chief Financial Officer (“CFO”), who is our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives. However, our disclosure controls and procedures are designed to provide reasonable assurances of achieving our control objectives.
We conducted an evaluation, under the supervision and with the participation of our management, including our CEO, CFO and management Disclosure Committee, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
Based on that evaluation, and in light of the material weaknesses identified in our internal control over financial reporting as disclosed in our Form 10-K for the fiscal year ended December 31, 2021,2022, our CEO and CFO concluded that, as of September 30, 2022,March 31, 2023, our disclosure controls and procedures were not effective at a reasonable assurance level.effective.
Changes in Internal Control Over Financial Reporting
Material Weakness Remediation Plan and Status
The Company identifiedmade progress with the remediation of these material weaknesses in itsand continued to execute on the previously communicated remediation activities through March 31, 2023:
•Continued to emphasize at the executive management level, the importance of internal controlscontrol over financial reporting, as well as the integrity of December 31, 2021 as described in its 2021 Form 10-K. The Company has finalized its remediation plan and has executedour financial statements throughout the following remediation activities through September 30, 2022:Company.
•Hired a Senior Vice President of Sarbanes-Oxley Act (“SOX”)reporting directly to the Chief Financial OfficerCFO with the appropriate level of knowledge and experience to lead the development and execution of the remediation plan.
•Established a SOX Steering Committee, that monitors and advises with respect to the remediation plan.plan and progress.
•Enhanced communications with the Audit Committee of the Board of Directors for increased oversight. The Company also continues to formally reportsreport quarterly to the Audit Committee regarding progress against the remediation plan.
•Designed and implemented controls over the risk assessment process that includes detailed qualitative and quantitative factors to identify and assess risks and implement or modify controls in response to those risks.
•Assessed the current state of the entire system of internal control, including information technology systems and controls, at the consolidated and entitybrand levels. The results of this assessment have allowed management to identifyenhance existing business processes and control activities and assess the necessary remediation activities to address the outstanding material weaknesses.adequacy of its resources.
•Appointed third-party consultants and additional staff to assist in the design and implementation of business process andImplemented new controls across our information technology control activities, enhancementenvironment including general controls related to access, change management and segregation of existing business process and information technology control activities, and assessment of the size and structure of its staff.duties.
•Conducted a detailed qualitative, quantitative,Redesigned and fraud risk assessment.strengthened control activities over reconciliations including enhanced review and approval controls.
•ConductedImproved monitoring of internal control over financial reporting by designing and enhancing management review controls.
•Formalized internal control policies and procedures and conducted multiple SOX trainings toin-depth training with control owners throughout the Company.
The Company ishas also undergoing acontinued to roll out its finance transformation initiative, which involves a phased deployment of new enterprise resource planning and human resource information systems and a shared service platform.
During the three-months ended March 31, 2023, management continued to evaluate our internal control processes and remediate gaps in design of internal controls in line with the previously disclosed remediation plan and timeline. The Companymeasures that we are taking are subject to continued testing, ongoing senior management review, as well as audit committee oversight. We will continue executingconsider the above remediation activities through the end of the first quarter of 2023 with the goal of having the system of internal control designed and in operation from March 31, 2023. However, the material weaknesses will notto be consideredfully remediated untilonce the system of internal control has operatedapplicable controls operate for a sufficient period of time and results ofour management has concluded, through testing, by management conclude the internalthat these controls are operating effectively. The Company will provide an update onWe may also conclude that additional measures may be required to remediate the progressmaterial weaknesses in our internal control over financial reporting, which may necessitate further internal control changes.
Change in Internal Control Over Financial Reporting
Other than the changes discussed above in connection with our implementation of itsthe remediation plan, throughoutthere were no other changes in our internal control over financial reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the fiscal year.Exchange Act) that occurred during our most recent quarter, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we are involved in various legal proceedings. We do not currently expect that these proceedings will have a material adverse effect on our results of operations, cash flows or financial position.
Item 1A. Risk Factors
There have been no material changes to the risk factors in Part I, Item 1A “Risk Factors” of our 20212022 Form 10-K. These risks could materially and adversely affect our business, results of operations, financial condition, cash flows, projected results and future prospects. These risks are not exclusive and additional risks to which we are subject include the factors listed under “Note About Forward-Looking Statements” and the risks described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
In the three months ended September 30, 2022,March 31, 2023, the Company granted 327,9743,556 shares of Class A Common Stock in transactions exempt from registration under Section 4(a)(2) of the Securities Act. Of these, 27,974The shares of Class A Common Stock were granted to employeesan employee as inducement for employment, and 300,000 were issued as payments in lieu of cash for the Company’s obligation to make deferred payments as part of the purchase price for a prior acquisition and therefore did not result in any proceeds to the Company.employment. The Company received no cash proceeds and no commissions were paid to any person in connection with the issuance of thethese shares.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
On March 23, 2022,1, 2023, the boardBoard authorized an extension and a $125.0 million increase in the size of directors authorized a stock repurchase program (the “Repurchase Program”) under whichthe Repurchase Program. Under the Repurchase Program, as amended, we may repurchase up to $125,000,000an aggregate of $250.0 million outstanding shares of our outstanding Class A Common Stock.Stock, with any previous purchases under the Repurchase Program continuing to count against that limit. The Repurchase Program will expire on March 23, 2025.1, 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 Exchange Act), in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions, regulatory requirements, the availability of funds, and other considerations we deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directorsThe Board will review the Repurchase Program periodically and may authorize adjustments of its terms. Pursuant to its Combined Credit Agreement (as defined and discussed in Note 7 of the Notes included herein) and the indenture governing the 5.625% Notes, the Company is currently limited as to the dollar value of shares it may repurchase in the open market.
The following table details our monthly shares repurchased during the thirdfirst quarter of 2022:2023 and the approximate dollar value of shares that may yet be purchased pursuant to the Repurchase Program:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program |
| 7/1/2022 - 7/31/2022 | | 6,525 | | | $ | 6.93 | | | $ | — | | | $ | 110,119,330 | |
| 8/1/2022 - 8/31/2022 | | 1,160,025 | | | 6.78 | | | 1,160,025 | | | 102,260,248 | |
| 9/1/2022 - 9/30/2022 | | 864,741 | | | 6.97 | | | 864,536 | | | 96,249,317 | |
| Total | | 2,031,291 | | | $ | 6.89 | | | $ | 2,024,561 | | | $ | 96,249,317 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program |
| 1/1/2023 - 1/31/2023 | | 1,544,375 | | | $ | 6.56 | | | 1,156,022 | | | $ | 65,458,469 | |
| 2/1/2023 - 2/28/2023 | | 1,365,091 | | | $ | 7.06 | | | 1,066,967 | | | $ | 57,987,710 | |
| 3/1/2023 - 3/31/2023 | | 856,812 | | | $ | 9.09 | | | 361,802 | | | $ | 180,391,911 | |
| Total | | 3,766,278 | | | $ | 7.57 | | | 2,584,791 | | | $ | 180,391,911 | |
(1) Includes 6,7301,181,487 shares repurchased to settle employee tax withholding obligations related to the vesting of restricted stock awards.awards and restricted stock units.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On November 2, 2022, our boardMay 4, 2023, certain subsidiaries of directors approved a new form of indemnification agreement (the “Indemnification Agreement”) to beStagwell Inc., entered into Amendment No. 4 to the Amended and Restated Credit Agreement (the “Amendment”), by and among Stagwell Marketing Group LLC, Stagwell Global LLC and Maxxcom LLC
(together, the “Borrowers”), the other Loan Parties, Lenders and Issuing Banks (each as defined therein) party thereto and JPMorgan ChaseBank, N.A., as Administrative Agent thereunder. The Amendment amends that certain Amended and Restated Credit Agreement, dated as of August 2, 2021, as heretofore amended or modified from time to time and as further amended by the Company with its directors, executive officersAmendment (the “Credit Agreement”), by and among the Borrowers, the other Loan Parties, Lenders and Issuing Banks party thereto, and the Administrative Agent.
The Amendment amends the Credit Agreement, effective as of May 4, 2023, to, among other things, (i) provide additional revolving commitments under the Credit Agreement in an aggregate principal amount of $140.0 million; (ii) permit restricted payments for share repurchases or redemptions from certain other key employees (each, an “Indemnitee”). The Indemnification Agreement replaces the Company’s existing form of indemnification agreement and was primarily adopted to update the governing law from the lawsstockholders of the ProvinceCompany in an aggregate principal amount of Ontarioup to $150.0 million, subject to certain limitations; (iii) permit certain investments and financings with respect to Borrowers’ business related to a suite of software-as-a-service and data-as-a-service technology solutions for in-house marketers and exclude, in some instances, such businesses from having the federal laws of Canada applicable thereinobligation to the laws of the State of Delaware. As is the caseprovide a guaranty and security; and (iv) make any other changes or modifications as agreed with the Company’s previous form of indemnification agreement, the Indemnification Agreement requires the Company to indemnify the Indemnitee to the fullest extent permitted by law.lenders.
The foregoing summary of the Indemnification AgreementAmendment does not purport to be complete and is subject to, and qualified in its entirety by, reference to the full text of the IndemnificationCredit Agreement, the form ofas amended, which is filedattached hereto as Exhibit 10.2 hereto10.3 and is incorporated herein by reference.
Item 6. Exhibits
The exhibits required by this item are listed on the Exhibit Index.
EXHIBIT INDEX
| | | | | | | | |
| Exhibit No. | | Description |
| | Second Amended and Restated Certificate of Incorporation of Stagwell Inc., as amended(incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K filed on March 17, 2022). amended. * |
| | Amended and Restated Bylaws of Stagwell Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed on August 2, 2021). |
| | Stagwell Inc. Second AmendedStock Appreciation Rights Agreement by and Restated 2016 Stock Incentive Planbetween the Company and Mark Penn, dated as of March 1, 2023 (incorporated by reference to Exhibit 4.310.9.3 to the Company’s Form S-810-K filed on June 14, 2022)March 6, 2023). |
| | |
| | |
| | †Stock Repurchase Agreement, dated May 9, 2023, between Stagwell Inc. and the entities listed on Schedule I thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 9, 2023). |
| | FormAmended and Restated Credit Agreement, dated as of Indemnification Agreement with DirectorsAugust 2, 2021, as amended, among Stagwell Marketing Group LLC, Stagwell Global LLC, Maxxcom LLC, the other Borrowers and Officers.Loan Parties party thereto, the Lenders and other parties party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent. * |
| | Certification by Chief Executive Officer pursuant to Rules 13a - 14(a) and 15d - 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | Certification by Chief Financial Officer pursuant to Rules 13a - 14(a) and 15d - 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | Certification by Chief Executive Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| | Certification by Chief Financial Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| 101 | | Interactive Data File, for the period ended September 30, 2022.March 31, 2023. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.* |
| 104 | | Cover Page Interactive Data File. The cover page XBRL tags are embedded within the inline XBRL document and are included in Exhibit 101.* |
* Filed herewith.
** Furnished herewith
† Indicates management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| STAGWELL INC. |
| |
| /s/ Mark Penn |
| Mark Penn |
| Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
November 7, 2022May 9, 2023 |
| |
| /s/ Frank Lanuto |
| Frank Lanuto |
| Chief Financial Officer (Principal Financial Officer) |
November 7, 2022May 9, 2023 |
| |
