Advantage Solutions Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS ADVANTAGE SOLUTIONS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, December 31, (in thousands, except share and per share data) 2022 2021 ASSETS Current assets Cash and cash equivalents $ 123,560 $ 164,622 Restricted cash 17,381 16,015 Accounts receivable, net of allowance for expected credit losses of $ 14,730 and $ 15,916 , respectively 776,760 797,677 Prepaid expenses and other current assets 189,702 126,000 Total current assets 1,107,403 1,104,314 Property and equipment, net 66,961 63,696 Goodwill 2,204,046 2,206,004 Other intangible assets, net 2,237,132 2,287,514 Investments in unconsolidated affiliates 126,886 125,158 Other assets 96,598 67,582 Total assets $ 5,839,026 $ 5,854,268 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Current portion of long-term debt $ 14,955 $ 14,397 Accounts payable 220,052 277,366 Accrued compensation and benefits 140,478 139,157 Other accrued expenses 176,502 164,133 Deferred revenues 52,543 50,467 Total current liabilities 604,530 645,520 Long-term debt, net of current portion 2,027,650 2,028,882 Deferred income tax liabilities 489,873 483,165 Warrant liability 6,747 22,189 Other long-term liabilities 105,607 92,218 Total liabilities 3,234,407 3,271,974 Commitments and contingencies (Note 9) Redeemable noncontrolling interest 1,849 1,893 Equity attributable to stockholders of Advantage Solutions Inc. Common stock, $ 0.0001 par value, 3,290,000,000 shares authorized; 318,393,829 and 316,963,552 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively 32 32 Additional paid in capital 3,379,350 3,373,278 Accumulated deficit ( 847,642 ) ( 866,607 ) Loans to Karman Topco L.P. ( 6,345 ) ( 6,340 ) Accumulated other comprehensive loss ( 3,090 ) ( 4,479 ) Treasury stock, at cost; 1,610,014 shares as of March 31, 2022 and December 31, 2021 ( 12,567 ) ( 12,567 ) Total equity attributable to stockholders of Advantage Solutions Inc. 2,509,738 2,483,317 Nonredeemable noncontrolling interest 93,032 97,084 Total stockholders’ equity 2,602,770 2,580,401 Total liabilities, redeemable noncontrolling interest, and stockholders’ equity $ 5,839,026 $ 5,854,268 See Notes to the Condensed Consolidated Financial Statements. 3 ADVANTAGE SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended March 31, (in thousands, except share and per share data) 2022 2021 Revenues $ 914,808 $ 791,021 Cost of revenues (exclusive of depreciation and amortization shown separately below) 785,943 653,339 Selling, general, and administrative expenses 48,073 40,481 Depreciation and amortization 57,768 59,613 Total operating expenses 891,784 753,433 Operating income 23,024 37,588 Other (income) expenses: Change in fair value of warrant liability ( 15,442 ) 5,526 Interest expense, net 11,883 30,865 Total other (income) expenses ( 3,559 ) 36,391 Income before income taxes 26,583 1,197 Provision for income taxes 9,049 1,743 Net income (loss) 17,534 ( 546 ) Less: net loss attributable to noncontrolling interest ( 1,431 ) ( 430 ) Net income (loss) attributable to stockholders of Advantage Solutions Inc. 18,965 ( 116 ) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 1,389 ( 2,420 ) Total comprehensive income (loss) attributable to stockholders of Advantage Solutions Inc. $ 20,354 $ ( 2,536 ) Net income (loss) per common share: Basic $ 0.06 $ ( 0.00 ) Diluted $ 0.06 $ ( 0.00 ) Weighted-average number of common shares: Basic 317,784,656 317,601,345 Diluted 318,721,082 317,601,345 See Notes to the Condensed Consolidated Financial Statements. 4 ADVANTAGE SOLUTIONS INC. CONDENSED CONSOL IDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Accumulated Advantage Common Stock Treasury Stock Additional Loans Other Solutions Inc. Nonredeemable Total Paid-in Accumulated to Comprehensive Stockholders' Noncontrolling Stockholders' Shares Amount Shares Amount Capital Deficit Topco Income (Loss) Equity Interests Equity (in thousands, except share data) Balance at January 1, 2022 316,963,552 $ 32 1,610,014 $ ( 12,567 ) $ 3,373,278 $ ( 866,607 ) $ ( 6,340 ) $ ( 4,479 ) $ 2,483,317 $ 97,084 $ 2,580,401 Comprehensive income (loss) Net income (loss) — — — — — 18,965 — — 18,965 ( 1,441 ) 17,524 Foreign currency translation adjustments — — — — — — — 1,389 1,389 ( 2,611 ) ( 1,222 ) Total comprehensive income (loss) — — — — 20,354 ( 4,052 ) 16,302 Interest on loans to Karman Topco L.P. — — — — — — ( 5 ) — ( 5 ) ( 5 ) Equity-based compensation of Topco — — — — ( 2,795 ) — — — ( 2,795 ) — ( 2,795 ) Shares issued under 2020 Employee Stock Purchase Plan 242,427 — — — 1,653 — — — 1,653 — 1,653 Shares issued under 2020 Incentive Award Plan 1,187,850 — — — — — — — — — — Stock-based compensation expense — — — — 7,214 — — — 7,214 — 7,214 Balance at March 31, 2022 318,393,829 $ 32 1,610,014 $ ( 12,567 ) $ 3,379,350 $ ( 847,642 ) $ ( 6,345 ) $ ( 3,090 ) $ 2,509,738 $ 93,032 $ 2,602,770 Accumulated Advantage Common Stock Additional Loans Other Solutions Inc. Nonredeemable Total Paid-in Accumulated to Comprehensive Stockholders' Noncontrolling Stockholders' Shares Amount Capital Deficit Topco Income (Loss) Equity Interests Equity (in thousands, except share data) Balance at January 1, 2021 318,425,182 $ 32 $ 3,348,546 $ ( 921,101 ) $ ( 6,316 ) $ 674 $ 2,421,835 $ 96,954 $ 2,518,789 Comprehensive loss Net loss — — — ( 116 ) — — ( 116 ) ( 430 ) ( 546 ) Foreign currency translation adjustments — — — — — ( 2,420 ) ( 2,420 ) ( 710 ) ( 3,130 ) Total comprehensive loss ( 2,536 ) ( 1,140 ) ( 3,676 ) Interest on loans to Karman Topco L.P. — — — — ( 6 ) — ( 6 ) — ( 6 ) Equity-based compensation of Topco — — ( 4,049 ) — — — ( 4,049 ) — ( 4,049 ) Shares issued under 2020 Incentive Award Plan 24,784 — — — — — — — — Stock-based compensation expense — — 9,886 — — — 9,886 — 9,886 Balance at March 31, 2021 318,449,966 $ 32 $ 3,354,383 $ ( 921,217 ) $ ( 6,322 ) $ ( 1,746 ) $ 2,425,130 $ 95,814 $ 2,520,944 See Notes to the Condensed Consolidated Financial Statements. 5 ADVANTAGE SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31, (in thousands) 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 17,534 $ ( 546 ) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities Noncash interest expense, net ( 18,704 ) ( 3,084 ) Depreciation and amortization 57,768 59,613 Change in fair value of warrant liability ( 15,442 ) 5,526 Fair value adjustments related to contingent consideration 2,134 ( 584 ) Deferred income taxes 7,235 1,793 Equity-based compensation of Topco ( 2,795 ) ( 4,049 ) Stock-based compensation 7,771 9,886 Equity in earnings of unconsolidated affiliates ( 4,181 ) ( 1,513 ) Distribution received from unconsolidated affiliates — 150 Loss on disposal of property and equipment — 1,566 Loss on divestiture 2,850 — Changes in operating assets and liabilities, net of effects from purchases of businesses: Accounts receivable, net 18,931 ( 781 ) Prepaid expenses and other assets ( 69,356 ) ( 25,916 ) Accounts payable ( 56,898 ) ( 7,779 ) Accrued compensation and benefits 1,808 ( 18,349 ) Deferred revenues 2,446 2,538 Other accrued expenses and other liabilities 24,944 11,416 Net cash (used in) provided by operating activities ( 23,955 ) 29,887 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of businesses, net of cash acquired ( 1,800 ) ( 14,034 ) Purchase of property and equipment ( 10,439 ) ( 5,247 ) Net cash used in investing activities ( 12,239 ) ( 19,281 ) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under lines of credit 9,337 8,773 Payments on lines of credit ( 8,967 ) ( 59,604 ) Principal payments on long-term debt ( 3,325 ) ( 3,510 ) Proceeds from issuance of common stock 1,653 — Holdback payments ( 715 ) ( 173 ) Net cash used in financing activities ( 2,017 ) ( 54,514 ) Net effect of foreign currency changes on cash ( 1,485 ) ( 2,234 ) Net change in cash, cash equivalents and restricted cash ( 39,696 ) ( 46,142 ) Cash, cash equivalents and restricted cash, beginning of period 180,637 219,966 Cash, cash equivalents and restricted cash, end of period $ 140,941 $ 173,824 SUPPLEMENTAL CASH FLOW INFORMATION Purchase of property and equipment recorded in accounts payable and accrued expenses $ 1,403 $ 869 See Notes to the Condensed Consolidated Financial Statements. 6 ADVANTAGE SOLUTIONS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Significant Accounting Policies Advantage Solutions Inc. (“Advantage” or the “Company”) is a provider of outsourced solutions to consumer goods companies and retailers. The Company’s Class A common stock is listed on the Nasdaq Global Select Market under the symbol “ADV” and warrants to purchase the Class A common stock at an exercise price of $ 11.50 per share are listed on the Nasdaq Global Select Market under the symbol “ADVWW”. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. The unaudited condensed consolidated financial statements do not include all of the information required by accounting principles generally accepted in the United States (“GAAP”). The Condensed Consolidated Balance Sheet at December 31, 2021 was derived from the audited Consolidated Balance Sheet at that date and does not include all the disclosures required by GAAP. In the opinion of management, all adjustments which are of a normal recurring nature and necessary for a fair statement of the results as of March 31, 2022 and for the three months ended March 31, 2022 and 2021 have been reflected in the condensed consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2021 and the related footnotes thereto. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. COVID-19 Pandemic Beginning in March 2020 and continuing through the first quarter of 2021, the Company's services experienced the effects from reductions in client spending due to the economic impact related to the COVID-19 pandemic. While mixed by services and geography, the spending reductions impacted all of the Company's services and markets. Globally, the most impacted services were the Company's experiential services. Most services began to recover in April 2021, and the recovery has continued through the first quarter of 2022. Impact of the War in Ukraine The Company has a minority interest in a European company that has majority-ownership interests in local agencies in Russia. During the first quarter of 2022, the war in Ukraine resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affect the cross-border operations of businesses operating in Russia. In addition, Russian regulators have imposed currency restrictions and regulations that created uncertainty regarding the Company's ability to recover its investment in operations in Russia, as well as the Company's ability to exercise control or influence involving operations by the local agencies in Russia. As a result, the Company intends to use its influence to cause the European company to dispose of its ownership interests in the local agencies in Russia. Accordingly, the Company recorded pretax charges of $ 2.8 million in the first quarter of 2022, primarily consisting of its proportionate share of the net investment in its Russian interest in “Selling, general, and administrative expenses” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) . Recent Accounting Standards Recent Accounting Standards Adopted by the Company On January 1, 2022, the Company adopted Accounting Standards Update ("ASU") No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own 7 Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) , which simplifies accounting for convertible instruments by removing major separation models required under current GAAP, simplifies the contract settlement assessment for equity classification, requires the use of the if-converted method for all convertible instruments in the diluted earnings per share calculation and expands disclosure requirements. The adoption of this accounting standard, under the full retrospective method, did not have a material impact on the Company's condensed consolidated financial statements and use of the if-converted method did not have an impact on the Company's overall earnings per share calculation. On January 1, 2022, the Company adopted ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force) . The guidance clarifies certain aspects of the current guidance to promote consistency among reporting of an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance is applied prospectively to all modifications or exchanges that occur on or after the date of adoption and the adoption of this accounting standard did not have a material impact on the Company's condensed consolidated financial statements. On January 1, 2022, the Company adopted ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance . This update requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The amendments should be applied either (1) prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or (2) retrospectively to those transactions. The adoption of this accounting standard did not have a material impact on the Company's condensed consolidated financial statements. Accounting Standards Recently Issued but Not Yet Adopted by the Company In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This guidance provides optional expedients and exceptions for GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate if certain criteria are met. The amendments in this update are effective for reporting periods that include or are subsequent to March 12, 2020 and must be applied prospectively to contract modifications and hedging relationships through December 31, 2022. The Company continues to evaluate the impact of this guidance and may apply other applicable elections as additional changes in the market occur. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this update. The Company is evaluating the potential impact of this adoption on its consolidated financial statements. All other new accounting pronouncements issued, but not yet effective or adopted have been deemed to be not relevant to the Company and, accordingly, are not expected to have a material impact once adopted. 8 2. Revenue Recognition The Company recognizes revenue when control of promised goods or services are transferred to the client in an amount that reflects the consideration that the Company expects to be entitled to in exchange for such goods or services. Substantially all of the Company’s contracts with clients involve the transfer of a service to the client, which represents a performance obligation that is satisfied over time because the client simultaneously receives and consumes the benefits of the services provided. In most cases, the contracts consist of a performance obligation that is comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). For these contracts, the Company allocates the ratable portion of the consideration based on the services provided in each period of service to such period. Revenues related to the sales segment are primarily recognized in the form of commissions, fee-for-service, or on a cost-plus basis for providing headquarter relationship management, analytics, insights and intelligence services, administrative services, retail merchandising services, retailer client relationships and in-store media programs, and digital technology solutions (which include business intelligence solutions, e-commerce services, and content services). Marketing segment revenues are primarily recognized in the form of fee-for-service (including retainer fees, fees charged to clients based on hours incurred, project-based fees, or fees for executing in-person consumer engagements or experiences, which engagements or experiences the Company refers to as “events”), commissions, or on a cost-plus basis for providing experiential marketing, shopper and consumer marketing services, private label development and digital, social, and media services. The Company disaggregates revenues from contracts with clients by reportable segment. Revenues within each segment are further disaggregated between brand-centric services and retail-centric services. Brand-centric services are centered on providing solutions to support manufacturers’ sales and marketing strategies. Retail-centric services are centered on providing solutions to retailers. Disaggregated revenues were as follows: Three Months Ended March 31, 2022 2021 (in thousands) Sales brand-centric services $ 329,356 $ 293,531 Sales retail-centric services 262,613 240,793 Total sales revenues 591,969 534,324 Marketing brand-centric services 113,574 116,982 Marketing retail-centric services 209,265 139,715 Total marketing revenues 322,839 256,697 Total revenues $ 914,808 $ 791,021 Contract liabilities represent deferred revenues which are cash payments that are received in advance of the Company’s satisfaction of the applicable obligation and are included in Deferred revenues in the Condensed Consolidated Balance Sheets. Deferred revenues are recognized as revenues when the related services are performed for the client. Revenues recognized during t he three months ended March 31, 2022 that were included in Deferred revenues as of December 31, 2021 were $ 21.6 million . Revenues recognized during the three months ended March 31, 2021 that were included in Deferred revenues as of December 31, 2020 were $ 26.1 million. 9 3 . Goodwill and Intangible Assets Changes in goodwill for the three months ended March 31, 2022 are as follows: Sales Marketing Total (in thousands) Balance at January 1, 2021 $ 1,462,378 $ 700,961 $ 2,163,339 Acquisitions 32,087 13,315 45,402 Measurement period adjustments 179 ( 1,043 ) ( 864 ) Foreign exchange translation effects ( 1,873 ) — ( 1,873 ) Balance at December 31, 2021 $ 1,492,771 $ 713,233 $ 2,206,004 Acquisitions 347 — 347 Measurement period adjustments 52 — 52 Foreign exchange translation effects ( 2,357 ) — ( 2,357 ) Balance at March 31, 2022 $ 1,490,813 $ 713,233 $ 2,204,046 Accumulated impairment losses related to goodwill were $ 652.0 million as of March 31, 2022 and 2021. The following tables set forth information for intangible assets: March 31, 2022 (amounts in thousands) Weighted Average Useful Life Gross Carrying Value Accumulated Amortization Net Carrying Value Finite-lived intangible assets: Client relationships 14 years $ 2,479,182 $ 1,203,811 $ 1,275,371 Trade names 9 years 137,544 81,087 56,457 Developed technology 5 years 13,260 8,825 4,435 Covenant not to compete 5 years 6,100 5,231 869 Total finite-lived intangible assets 2,636,086 1,298,954 1,337,132 Indefinite-lived intangible assets: Trade names 900,000 — 900,000 Total other intangible assets $ 3,536,086 $ 1,298,954 $ 2,237,132 December 31, 2021 (amounts in thousands) Weighted Average Useful Life Gross Carrying Value Accumulated Amortization Net Carrying Value Finite-lived intangible assets: Client relationships 14 years $ 2,480,167 $ 1,158,732 $ 1,321,435 Trade names 8 years 138,206 78,355 59,851 Developed technology 5 years 13,260 8,206 5,054 Covenant not to compete 5 years 6,100 4,926 1,174 Total finite-lived intangible assets 2,637,733 1,250,219 1,387,514 Indefinite-lived intangible assets: Trade names 900,000 — 900,000 Total other intangible assets $ 3,537,733 $ 1,250,219 $ 2,287,514 Accumulated impairment losses related to indefinite-lived intangibles assets were $ 580.0 million as of March 31, 2022 and December 31, 2021. 10 Amortization expense was $ 50.3 million and $ 49.4 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, estimated future amortization expenses of the Company’s existing intangible assets are as follows: (in thousands) Remainder of 2022 $ 148,570 2023 195,306 2024 193,928 2025 187,863 2026 183,833 Thereafter 427,632 Total amortization expense $ 1,337,132 4 . Debt March 31, December 31, (in thousands) 2022 2021 Term Loan Facility $ 1,308,438 $ 1,311,750 Notes 775,000 775,000 Government loans for COVID-19 relief 4,943 5,212 Other 1,758 1,113 Total long-term debt 2,090,139 2,093,075 Less: current portion 14,955 14,397 Less: debt issuance costs 47,534 49,796 Long-term debt, net of current portion $ 2,027,650 $ 2,028,882 As of March 31, 2022, the Company had $ 1.3 billion of debt outstanding under the Term Loan Facility (as defined below in this Quarterly Report) and $ 775.0 million of debt outstanding under the Notes (as defined below in this Quarterly Report) with maturity dates of October 28, 2027 and November 15, 2028 , respectively. The Company was in compliance with all of its affirmative and negative covenants under the Term Loan Facility and Notes as of March 31, 2022. In addition, the Company is required to repay the principal under the Term Loan Facility in the greater amount of its excess cash flow, as such term is defined in the agreement governing the Term Loan Facility, or $ 13.3 million, per annum, in quarterly payments. The Company made the minimum quarterly principal payments of $ 3.3 million during the three months ended March 31, 2022 and 2021, respectively. No payments under the excess cash flow calculation were required in such periods. 5. Fair Value of Financial Instruments The Company measures fair value based on the prices 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 are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. 11 The following table sets forth the Company’s financial assets and liabilities measured on a recurring basis at fair value, categorized by input level within the fair value hierarchy. March 31, 2022 (in thousands) Fair Value Level 1 Level 2 Level 3 Assets measured at fair value Derivative financial instruments $ 31,197 $ — $ 31,197 $ — Total assets measured at fair value $ 31,197 $ — $ 31,197 $ — Liabilities measured at fair value Warrant liability $ 6,747 $ — $ 6,747 $ — Contingent consideration liabilities 60,904 — — 60,904 Total liabilities measured at fair value $ 67,651 $ — $ 6,747 $ 60,904 December 31, 2021 (in thousands) Fair Value Level 1 Level 2 Level 3 Assets measured at fair value Derivative financial instruments $ 10,164 $ — $ 10,164 $ — Total assets measured at fair value $ 10,164 $ — $ 10,164 $ — Liabilities measured at fair value Derivative financial instruments $ 385 $ — $ 385 $ — Warrant liability 22,189 — — 22,189 Contingent consideration liabilities 58,366 — — 58,366 Total liabilities measured at fair value $ 80,940 $ — $ 385 $ 80,555 Interest Rate Cap Agreements The Company had interest rate cap contracts with an aggregate notional value of principal of $ 650.0 million and $ 2.2 billion as of March 31, 2022 and December 31, 2021, respectively, from various financial institutions to manage the Company’s exposure to interest rate movements on variable rate credit facilities. As of March 31, 2022, the aggregate fair value of the Company’s outstanding interest rate caps represented an outstanding net asset of $ 31.2 million. As of December 31, 2021, the aggregate fair value of the Company’s outstanding interest rate caps represented an outstanding net asset of $ 10.2 million and an outstanding net liability of $ 0.4 million. As of March 31, 2022, $ 31.2 million of fair value of the Company’s outstanding interest rate caps were included in “Prepaid expenses and other current assets” in the Condensed Consolidated Balance Sheets with changes in fair value recognized as a component of “Interest expense, net” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). As of December 31, 2021, $ 10.2 million and $ 0.4 million of the Company’s fair value of outstanding interest rate caps were included in “Prepaid expenses and other current assets” and “Other accrued expenses” in the Consolidated Balance Sheets, respectively, with changes in fair value recognized as a component of “Interest expense, net” in the Consolidated Statements of Operations and Comprehensive Income (Loss). During the three months ended March 31, 2022 and 2021, the Company recorded a gain of $ 21.0 million and $ 5.4 million, respectively, within Interest expense, net, related to changes in the fair value of its derivative instruments. Forward Contracts As of March 31, 2022, the Company had open euro forward contracts to hedge foreign currency exposure on a total of € 17.4 million with maturities in fiscal year 2022. As of December 31, 2021, the Company had no open euro forward contracts. During the three months ended March 31, 2022 and 2021, the changes in fair value of the forward contracts were immaterial for both periods. 12 Warrant Liability As of March 31, 2022 and December 31, 2021, 7,333,333 private placement warrants, which were owned by Conyers Park II Sponsor LLC (“CP Sponsor”), remained outstanding at fair value of $ 6.7 million and $ 22.2 million, respectively. The warrant liability was remeasured to fair value with adjustment of $ 15.4 million and $ 5.5 million reflected in “Change in fair value of warrant liability” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) during the three months ended March 31, 2022 and 2021, respectively. The warrant liability is stated at fair value at each reporting period with the change in fair value recorded on the Consolidated Statement of Operations and Comprehensive Income (Loss) until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The Company previously valued its private placement warrants using a Black-Scholes Model. The private placement warrants were classified as Level 3 at the initial measurement date due to the use of unobservable inputs. They are now Level 2. As of March 31, 2022, based on the period of time the public warrants have now been trading, the Company determined the fair value of the liability classified private placement warrants by approximating the value with the share price of the public warrants as of March 31, 2022, which is inherently less subjective and judgmental given it is based on observable inputs. Therefore, the value of the private placement warrants are now measured at an indirectly observable quoted price in active markets for the public warrants. Transfers to/from Levels 1, 2 and 3 are recognized at the end of the reporting period in which a change in valuation technique or methodology occurs. Contingent Consideration Liabilities Each reporting period, the Company measures the fair value of its contingent liabilities by evaluating the significant unobservable inputs and probability weightings using Monte Carlo simulations. Any resulting decreases or increases in the fair value result in a corresponding gain or loss reported in “Selling, general, and administrative expenses” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). As of March 31, 2022, the maximum potential payment outcomes were $ 283.7 million. The following table summarizes the changes in the carrying value of estimated contingent consideration liabilities: March 31, (in thousands) 2022 2021 Beginning of the period $ 58,366 $ 45,901 Fair value of acquisitions 510 2,692 Changes in fair value 2,134 ( 584 ) Measurement period adjustments — ( 1,181 ) Foreign exchange translation effects ( 106 ) 13 End of the period $ 60,904 $ 46,841 13 Long-term Debt The following table sets forth the carrying values and fair values of the Company’s financial liabilities measured on a recurring basis, categorized by input level within the fair value hierarchy: (in thousands) Carrying Value Fair Value (Level 2) Balance at March 31, 2022 Term Loan Facility $ 1,308,438 $ 1,396,921 Notes 775,000 841,581 Government loans for COVID-19 relief 4,943 5,246 Other 1,758 1,758 Total long-term debt $ 2,090,139 $ 2,245,506 (in thousands) Carrying Value Fair Value (Level 2) Balance at December 31, 2021 Term Loan Facility $ 1,311,750 $ 1,406,552 Notes 775,000 894,611 Government loans for COVID-19 relief 5,212 5,615 Other 1,113 1,113 Total long-term debt $ 2,093,075 $ 2,307,891 6 . Related Party Transactions Overlapping Directors Nine members of the board of directors of the Company serve as a member of the board of directors of eight clients of the Company. The information below details the Company’s financial relationships with those clients as of and for the periods indicated: Revenues Accounts Receivable March 31, As of March 31, As of December 31, (in thousands) 2022 2021 2022 2021 Client 1 $ 375 $ — $ 151 $ 176 Client 2 134 217 138 190 All other clients 351 2,761 196 170 Total $ 860 $ 2,978 $ 485 $ 536 Investment in Unconsolidated Affiliates During the three months ended March 31, 2022 and 2021, the Company recognized revenues of $ 3.8 million and $ 4.7 million, respectively, from a parent company of an unconsolidated affiliate. Accounts receivable from this client were $ 2.0 million and $ 2.4 million as of March 31, 2022 and December 31, 2021, respectively. 7 . Income Taxes The Company’s effective tax rates were 34.0 % and 145.6 % for the three months ended March 31, 2022 and 2021, respectively. The effective tax rate is based upon the estimated income or loss before taxes for the year, by jurisdiction, and adjusted for estimated permanent tax adjustments. The fluctuation in the Company’s effective tax rate was primarily due to the three month pretax book income differences and the application of the shortfall of $ 1.1 million of stock-based compensation for the three months ended March 31, 2022. 14 8. Segments The Company’s operations are organized into two reportable segments: sales and marketing. The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the chief operating decision maker (i.e., the Company’s Chief Executive Officer) in deciding how to allocate resources and in assessing performance. Through the Company’s sales segment, the Company serves as a strategic intermediary between consumer goods manufacturers and retailer partners and performs critical merchandizing services on behalf of both consumer goods manufacturers and retail partners. Through the Company’s marketing segment, the Company develops and executes marketing programs for manufacturers and retailers. These reportable segments are organized by the types of services provided, similar economic characteristics, and how the Company manages its business. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; therefore, no additional information is produced or included herein. The Company and its chief operating decision maker evaluate performance based on revenues and operating income. (in thousands) Sales Marketing Total Three Months Ended March 31, 2022 Revenues $ 591,969 $ 322,839 $ 914,808 Depreciation and amortization $ 40,969 $ 16,799 $ 57,768 Operating income $ 18,973 $ 4,051 $ 23,024 Three Months Ended March 31, 2021 Revenues $ 534,324 $ 256,697 $ 791,021 Depreciation and amortization $ 42,564 $ 17,049 $ 59,613 Operating income $ 35,148 $ 2,440 $ 37,588 9. Commitments and Contingencies Litigation The Company is involved in various legal matters that arise in the ordinary course of its business. Some of these legal matters purport or may be determined to be class and/or representative actions, or seek substantial damages, or penalties. The Company has accrued amounts in connection with certain legal matters, including with respect to certain of the matters described below. There can be no assurance, however, that these accruals will be sufficient to cover such matters or other legal matters or that such matters or other legal matters will not materially or adversely affect the Company’s financial position, liquidity, or results of operations. Employment Matters The Company has also been involved in various litigation, including purported class or representative actions with respect to matters arising under the California Labor Code and Private Attorneys General Act. The Company has retained outside counsel to represent it in these matters and is vigorously defending its interests. Legal Matters Related to Take 5 On April 1, 2018, the Company acquired certain assets and assumed liabilities of Take 5 Media Group (“Take 5”). In June 2019, as a result of a review of internal allegations related to inconsistency of data provided by Take 5 to its clients, the Company commenced an investigation into Take 5’s operations. In July 2019, as a result of the Company’s investigation, the Company determined that revenue during the fiscal year ended December 31, 2018 attributable to the Take 5 business had been recognized for services that were not performed on behalf of clients of Take 5 and that inaccurate reports were made to Take 5 clients about those services (referred to as the “Take 5 Matter”). As a result of these findings, in July 2019, the Company terminated all operations of Take 5, including the use of its associated trade names and the offering of its services to its clients and offered refunds to Take 5 clients of collected revenues attributable to Take 5 since the Company’s acquisition of Take 5. 15 USAO and FBI Voluntary Disclosure and Investigation Related to Take 5 The Company voluntarily disclosed to the United States Attorney’s Office and the Federal Bureau of Investigation certain misconduct occurring at Take 5, a line of business that the Company closed in July 2019. The Company intends to cooperate in this and any other governmental investigations that may arise in connection with the Take 5 Matter. At this time, the Company cannot predict the ultimate outcome of any investigation related to the Take 5 Matter and is unable to estimate the potential impact such an investigation may have on the Company. Arbitration Proceedings Related to Take 5 In August 2019, as a result of the Take 5 Matter, the Company provided a written indemnification claim notice to the sellers of Take 5 (the “Take 5 Sellers”) seeking monetary damages (including interest, fees and costs) based on allegations of breach of the asset purchase agreement (the “Take 5 APA”), as well as fraud. In September 2019, the Take 5 Sellers initiated arbitration proceedings against the Company, alleging breach of the Take 5 APA as a result of the Company’s decision to terminate the operations of the Take 5 business, and seeking monetary damages equal to all unpaid earn-out payments under the Take 5 APA (plus interest, fees and costs). In 2020, the Take 5 sellers amended their statement of claim to allege defamation, relating to statements the Company made to customers in connection with terminating the operations of the Take 5 business, and seeking monetary damages for the alleged injury to their reputation. The Company filed its response to the Take 5 Sellers’ claims, and asserted indemnification, fraud and other claims against the Take 5 Sellers as counterclaims and cross-claims in the arbitration proceedings. The Company is currently unable to estimate the potential impact related to these arbitration proceedings, but the Company has retained outside counsel to represent the Company in these matters and intends to vigorously pursue the Company’s interests. The arbitration hearing for this matter commenced in the first quarter of 2022 and re-commenced during the second quarter of 2022; however, the Company does not know when the Company will receive a decision from the arbitrator. Other Legal Matters Related to Take 5 The Take 5 Matter may result in additional litigation against the Company, including lawsuits from clients, or governmental investigations, which may expose the Company to potential liability in excess of the amounts being offered by the Company as refunds to Take 5 clients. The Company is currently unable to determine the amount of any potential liability, costs or expenses (above the amounts already being offered as refunds) that may result from any lawsuits or investigations associated with the Take 5 Matter or determine whether any such issues will have any future material adverse effect on the Company’s financial position, liquidity, or results of operations. Although the Company has insurance covering certain liabilities, the insurance may not be sufficient to cover any potential liability or expenses associated with the Take 5 Matter. 10. Redeemable Noncontrolling Interest The Company is party to a put and call option agreement with respect to the common securities that represent the remaining noncontrolling interest from a majority-owned subsidiary, which was established through a majority-owned international joint venture. The put and call option agreement representing 20 % of the total outstanding noncontrolling equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company beginning in 2026 and expiring in 2028 . The redemption value of the put and call option agreement is based on a multiple of the majority-owned subsidiary earnings before interest, taxes, depreciation and amortization subject to certain adjustments. The noncontrolling interest is subject to a put option that is outside of the Company’s control, and is presented as redeemable non-controlling interest in the temporary equity section of the Condensed Consolidated Balance Sheets. The Company recorded its redeemable noncontrolling interest at fair value on the date of the related business combination transaction and 16 recognizes changes in the redemption value at the end of each reporting period. The carrying value of the redeemable noncontrolling interest was $ 1.8 million as of March 31, 2022. (in thousands) March 31, 2022 Beginning Balance $ 1,893 Net income attributable to redeemable noncontrolling interests 10 Foreign currency translation adjustment ( 54 ) Ending Balance $ 1,849 11. Stock-Based Compensation The Company has issued nonqualified stock options, restricted stock units, and performance restricted stock units under the Advantage Solutions Inc. 2020 Incentive Award Plan (the “ Plan ”). The Company’s restricted stock units and performance restricted stock units, as described below, are expensed and reported as non-vested shares. The Company recognized stock-based compensation expense of $ 7.8 million and $ 9.9 million during the three months ended March 31, 2022 and 2021, respectively. The related deferred tax benefit for stock-based compensation recognized was $ 1.5 million and $ 1.6 million for the three months ended March 31, 2022 and 2021, respectively. Performance Restricted Stock Units Performance restricted stock units (“PSUs”) are subject to the achievement of certain performance conditions based on the Company’s revenues and Adjusted EBITDA targets in the respective measurement period and the recipient’s continued service to the Company. The PSUs are scheduled to vest over a three-year period from the date of grant and may vest from 0 % to 150 % of the number of shares set forth in the table below. The number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each aforementioned defined term for each grant have been provided in the table below. During the first quarter of 2022, the Compensation Committee determined that the achievement of the performance objective applicable to the PSU EBITDA 2021 objective was 64.6 % of target and the achievement of the performance objective applicable to the PSU Revenues 2021 objective was 126.2 % of target. In the first quarter of 2022, the Compensation Committee determined that the PSU EBITDA and Revenue metrics will be measured separately when determining whether above-target performance has been maintained for future year performance. Such determination is applicable to the PSUs grants made in 2021 and in 2022. As a result, the 26.2 % above-target performance on Revenues for 2021 must be maintained in 2022 and 2023 in order for the corresponding above-target PSUs to vest in January 2024. Assuming there is no decline in performance with respect to Revenues in 2022 and 2023, an amount equal to approximately 9.2 % of the target number of PSUs granted in January 2021 will vest in full in January 2024 as a result of the above-target Revenue performance for fiscal 2021. The performance period for those awards ended on December 31, 2021 but remain subject to service-based vesting conditions. Under the provision of ASC 718, the Company determined that 2021 PSUs granted were modified as of March 11, 2022 related to 205,834 above-target Revenue Metric PSUs. The stock-based compensation expense for such modification was accounted for as a cancellation of the original award and the issuance of a new award using the fair value of the award on the date of modification, resulting in a $ 1.1 million gain upon cancellation during the three months ended March 31, 2022 and an intrinsic value associated with the new award of $ 1.2 million that will be recognized over the remaining service-based vesting term. The fair value of PSU grants is equal to the closing price of the Company's Class A common stock on the date of the applicable grant. The maximum potential remaining expense if the Maximum Goals were met for these awards has been provided in the table below. 17 Recognition of expense associated with performance-based stock is not permitted until achievement of the performance targets are probable of occurring. (in thousands, except share and per share data) Performance Period Number of Shares Threshold Number of Shares Target Number of Shares Maximum Weighted Average Fair Value per Share Maximum Potential Expense to be Recognized Maximum Potential Remaining Expense to be Recognized January 1, 2022— December 31, 2022 2,175,252 4,350,503 6,525,755 $ 5.99 $ 38,097 2.5 years January 1, 2021— December 31, 2021 1,597,725 1,597,725 1,597,725 $ 12.04 $ 10,239 1.8 years The following table summarizes the PSU activity for the three months ended March 31, 2022: Performance Share Units Weighted Average Grant Date Fair Value Outstanding at January 1, 2022 2,609,079 $ 13.07 Granted 4,350,503 $ 5.99 Distributed 621,009 $ 13.23 Forfeited 42,987 $ 12.97 PSU performance adjustment ( 347,358 ) $ 11.26 Outstanding at March 31, 2022 5,948,228 $ 7.61 Restricted Stock Units Restricted stock units (“RSUs”) are subject to the recipient’s continued service to the Company. The RSUs are generally scheduled to vest over three years and are subject to the provisions of the agreement under the Plan. During the three months ended March 31, 2022, the following activities involving RSUs occurred under the Plan: Number of RSUs Weighted Average Grant Date Fair Value Outstanding at January 1, 2022 3,660,553 $ 10.64 Granted 5,333,558 $ 5.99 Vested 520,427 $ 13.22 Forfeited 154,218 $ 9.77 Outstanding at March 31, 2022 8,319,466 $ 7.53 As of March 31, 2022, the total remaining unrecognized compensation cost related to RSUs amounted to $ 16.5 million, which will be amortized over the weighted-average remaining requisite service periods of 2.7 years. Stock Options Pursuant to the Plan, a total of 945,664 non-qualified stock options were granted during the three months ended March 31, 2022 and 1,206,988 remained outstanding as of March 31, 2022 with a weighted average exercise price of $ 6.68 . The fair value of the employee stock options granted was estimated using the following weighted average assumptions for the three months ended: 18 March 31, 2022 Share Price $ 5.99 Dividend yield 0.0 % Expected volatility 30.0 % Risk-free interest rate 2.0 % Expected term (years) 6.5 As of March 31, 2022, the Company had approximately $ 2.2 million of total unrecognized compensation expense related to stock options, net of related forfeiture estimates, which the Company expects to recognize over a weighted-average period of approximately 2.7 years . The intrinsic value of all outstanding options as of March 31, 2022 was $ 0.4 million based on the market price of the Company's Class A common stock of $ 6.38 per share. 12. Earnings Per Share The Company calculates earnings per share using a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income (loss) attributable to stockholders of the Company by the weighted-average shares of common stock outstanding without the consideration for potential dilutive shares of common stock. Diluted earnings per share represents basic earnings per share adjusted to include the potentially dilutive effect of performance stock units, restricted stock units, public and private placement warrants, the employee stock purchase plan and stock options . Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding and the potential dilutive shares of common stock for the period determined using the treasury stock method and if-converted method, as applicable. During periods of net loss, diluted loss per share is equal to basic loss per share because the antidilutive effect of potential common shares is disregarded. The following is a reconciliation of basic and diluted net earnings (loss) per common share: Three Months Ended March 31, (in thousands, except share and earnings per share data) 2022 2021 Basic earnings per share computation: Numerator: Net income (loss) attributable to stockholders of Advantage Solutions Inc. $ 18,965 $ ( 116 ) Denominator: Weighted average common shares - basic 317,784,656 317,601,345 Basic earnings (loss) per common share $ 0.06 $ ( 0.00 ) Diluted earnings per share computation: Numerator: Net income (loss) attributable to stockholders of Advantage Solutions Inc. $ 18,965 $ ( 116 ) Denominator: Weighted average common shares outstanding 317,784,656 317,601,345 Performance Stock Units 120,144 — Restricted Stock Units 668,291 — Employee stock purchase plan and stock options 147,991 — Weighted average common shares - diluted 318,721,082 317,601,345 Diluted earnings (loss) per common share $ 0.06 $ ( 0.00 ) The Company had 7,333,333 private placement warrants, which were owned by CP Sponsor, and 11,244,988 public warrants to purchase Class A common stock at $ 11.50 per share outstanding at March 31, 2022, which have been excluded in the calculation of diluted earnings per common share as the weighted average market price of the common stock during the three months ended March 31, 2022 did not exceed the exercise price of the warrants. The Company had 7,333,333 private placement warrants, which were owned by CP Sponsor, and 11,249,992 public warrants to purchase Class A common stock at $ 11.50 per share outstanding at March 31, 2021, which have been excluded in the calculation of diluted net loss per common share, as the effect would be antidilutive due to losses incurred. 19 13. Subsequent Events Subsequent to March 31, 2022, the Company completed two acquisitions of marketing agencies. The aggregate cash paid for these consummated acquisitions was $ 66.6 million. The Company has determined that the purchase price allocation related to these acquisitions is impractical to report as of the date of the issuance of these condensed consolidated financial statements. Purchase price allocations are considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date. 20 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This Quarterly Report on Form 10-Q, including the section titled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management’s assumptions. Such words as “expect,” “anticipate,” “outlook,” “could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “should,” “may,” “assume” and “continue” as well as variations of such words and similar expressions are intended to identify such forward-looking statements, although not all forward-looking statements contain such terms. These statements are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecasted by our forward-looking statements. More information regarding these risks and uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements is set forth in Part II, Item 1A “Risk Factors” of this report. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise. Executive Overview We are a leading business solutions provider to consumer goods manufacturers and retailers. We have a strong platform of competitively advantaged sales and marketing services built over multiple decades – essential, business critical services like headquarter sales, retail merchandising, in-store sampling, digital commerce and shopper marketing. For brands and retailers of all sizes, we help get the right products on the shelf (whether physical or digital) and into the hands of consumers (however they shop). We use a scaled platform to innovate as a trusted partner with our clients, solving problems to increase their efficiency and effectiveness across a broad range of channels. We have two reportable segments: sales and marketing. Through our sales segment, which generated approximately 64.7% and 67.5% of our total revenues in the three months ended March 31, 2022 and 2021, respectively, we offer headquarter sales representation services to consumer goods manufacturers, for whom we prepare and present to retailers a business case to increase distribution of manufacturers’ products and optimize how they are displayed, priced and promoted. We also make in-store merchandising visits for both manufacturer and retailer clients to ensure the products we represent are adequately stocked and properly displayed. Through our marketing segment, which generated approximately 35.3% and 32.5% of our total revenues in the three months ended March 31, 2022 and 2021, respectively, we help brands and retailers reach consumers through two main categories within the marketing segment. The first and largest category is our retail experiential business, also known as in-store sampling or demonstrations, where we manage highly customized large-scale sampling programs (both in-store and online) for leading retailers. The second category is our collection of specialized agency services, in which we provide private label services to retailers and develop granular marketing programs for brands and retailers through our shopper, consumer and digital marketing agencies. 21 Business Combination with Conyers Park On October 28, 2020 (the “Closing Date”), Conyers Park II Acquisition Corp. (“Conyers Park”), a Delaware corporation, consummated a merger with ASI Intermediate Corp. (“ASI”), formerly known as Advantage Solutions Inc, with ASI surviving the merger as a wholly owned subsidiary of Conyers Park (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”). On the Closing Date, and in connection with the closing of the Transactions (the “Closing”), Conyers Park changed its name to Advantage Solutions Inc. Impacts of the COVID-19 Pandemic Beginning in March 2020 and continuing through the first quarter of 2021, our services experienced the effects from reductions in client spending due to the economic impact related to the COVID-19 pandemic. While mixed by services and geography, the spending reductions impacted all of our services and markets. Globally, the most impacted services were our experiential services. Most services began to improve in April 2021, and the improvement has continued through the first quarter of 2022. We expect the ultimate significance of the impact of the pandemic on our financial condition, results of operations and cash flows will be dictated by the length of time that such circumstances continue and any future restrictions imposed on our business and operations, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic, any new variants and the nature and effectiveness of governmental, commercial and personal actions taken in response, along with the effectiveness of ongoing vaccination and other mitigation efforts to limit the magnitude of infections and hospitalizations across the United States and globally. Summary Our financial performance for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 includes: • Revenues increased by $123.8 million, or 15.6%, to $914.8 million; • Operating income decreased by $14.6 million, or 38.7%, to $23.0 million; • Net income increased by $18.1 million to $17.5 million; • Adjusted Net Income increased by $2.9 million, or 6.2%, to $49.1 million; and • Adjusted EBITDA decreased by $14.7 million, or 13.2%, to $96.7million. Factors Affecting Our Business and Financial Reporting There are a number of factors, in addition to the impact of the ongoing COVID-19 pandemic, that affect the performance of our business and the comparability of our results from period to period including: • Organic Growth. Part of our strategy is to generate organic growth by expanding our existing client relationships, continuing to win new clients, pursuing channel expansion and new industry opportunities, enhancing our digital technology solutions, developing our international platform, delivering operational efficiencies and expanding into logical adjacencies. We believe that by pursuing these organic growth opportunities we will be able to continue to enhance our value proposition to our clients and thereby grow our business. • Acquisitions. We have grown and expect to continue to grow our business in part by acquiring quality businesses, both domestic and international. Excluding the acquisition of Daymon Worldwide Inc., we have completed 72 acquisitions from January 2014 to May 10, 2022, ranging in purchase prices from approximately $0.3 million to $98.5 million. Many of our acquisition agreements include contingent consideration arrangements, which are described below. We have completed acquisitions at what we 22 believe are attractive purchase prices and have regularly structured our agreements to result in the generation of long-lived tax assets, which have in turn reduced our effective purchase prices when incorporating the value of those tax assets. We continue to look for strategic acquisitions that can be completed at attractive purchase prices. • Contingent Consideration. Many of our acquisition agreements include contingent consideration arrangements, which are generally based on the achievement of financial performance thresholds by the operations attributable to the acquired businesses. The contingent consideration arrangements are based upon our valuations of the acquired businesses and are intended to share the investment risk with the sellers of such businesses if projected financial results are not achieved. The fair values of these contingent consideration arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent consideration payments as part of the initial purchase price. We review and assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from our initial estimates. Changes in the estimated fair value of contingent consideration liabilities related to the time component of the present value calculation are reported in “Interest expense, net.” Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in “Selling, general and administrative expenses” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). • Depreciation and Amortization. As a result of the acquisition of our business by Karman Topco L.P. (“Topco”) on July 25, 2014 (the “2014 Topco Acquisition”), we acquired significant intangible assets, the value of which is amortized, on a straight-line basis, over 15 years from the date of the 2014 Topco Acquisition, unless determined to be indefinite-lived. The amortization of such intangible assets recorded in our consolidated financial statements has a significant impact on our operating income (loss) and net income (loss). Our historical acquisitions have increased, and future acquisitions likely will increase, our intangible assets. We do not believe the amortization expense associated with the intangibles created from our purchase accounting adjustments reflect a material economic cost to our business. Unlike depreciation expense which has an economic cost reflected by the fact that we must re-invest in property and equipment to maintain the asset base delivering our results of operations, we do not have any capital re-investment requirements associated with the acquired intangibles, such as client relationships and trade names, that comprise the majority of the finite-lived intangibles that create our amortization expense. • Foreign Exchange Fluctuations. Our financial results are affected by fluctuations in the exchange rate between the U.S. dollar and other currencies, primarily Canadian dollars, British pounds and euros, due to our operations in such foreign jurisdictions. See also “ —Quantitative and Qualitative Disclosure of Market Risk—Foreign Currency Risk. ” • Seasonality. Our quarterly results are seasonal in nature, with the fourth fiscal quarter typically generating a higher proportion of our revenues than other fiscal quarters, as a result of higher consumer spending. We generally record slightly lower revenues in the first fiscal quarter of each year, as our clients begin to roll out new programs for the year, and consumer spending generally is less in the first fiscal quarter than other quarters. Timing of our clients’ marketing expenses, associated with marketing campaigns and new product launches, can also result in fluctuations from one quarter to another. How We Assess the Performance of Our Business Revenues Revenues related to our sales segment are primarily comprised of commissions, fee-for-service and cost-plus fees for providing retail merchandising services, category and space management, headquarter relationship management, technology solutions and administrative services. A small portion of our arrangements include performance incentive provisions, which allow us to earn additional revenues on our performance relative to specified quantitative or qualitative goals. We recognize the incentive portion of revenues under these arrangements when the related services are transferred to the customer. 23 Marketing segment revenues are primarily recognized in the form of a fee-for-service (including retainer fees, fees charged to clients based on hours incurred, project-based fees or fees for executing in-person consumer engagements or experiences, which engagements or experiences we refer to as events), commissions or on a cost-plus basis, in each case, related to services including experiential marketing, shopper and consumer marketing services, private label development or our digital, social and media services. Given our acquisition strategy, we analyze our financial performance, in part, by measuring revenue growth in two ways—revenue growth attributable to organic activities and revenue growth attributable to acquisitions, which we refer to as organic revenues and acquired revenues, respectively. We define organic revenues as any revenues that are not acquired revenues. Our organic revenues exclude the impacts of acquisitions and divestitures, when applicable, which improves comparability of our results from period to period. In general, when we acquire a business, the acquisition includes a contingent consideration arrangement (e.g., an earn-out provision) and, accordingly, we separately track the relevant metrics associated with the earnout agreement of the acquired business. In such cases, we consider revenues generated by such a business during the 12 months following its acquisition to be acquired revenues. For example, if we completed an acquisition on July 1, 2021 for a business that included a contingent consideration arrangement, we would consider revenues from the acquired business from July 1, 2021 to June 30, 2022 to be acquired revenues. We generally consider growth attributable to the financial performance of an acquired business after the 12-month anniversary of the date of acquisition to be organic. In limited cases, when the acquisition of an acquired business does not include a contingent consideration arrangement, or we otherwise do not separately track the financial performance of the acquired business due to operational integration, we consider the revenues that the business generated in the 12 months prior to its acquisition to be our acquired revenues for the 12 months following its acquisition, and any differences in revenues actually generated during the 12 months after its acquisition to be organic. For example, if we completed an acquisition on July 1, 2021 for a business that did not include a contingent consideration arrangement, we would consider the amount of revenues from the acquired business from July 1, 2020 to June 30, 2021 to be acquired revenues during the period from July 1, 2021 to June 30, 2022, with any differences from that amount actually generated during the latter period to be organic revenues. All revenues generated by our acquired businesses are considered to be organic revenues after the 12-month anniversary of the date of acquisition. When we divest a business, we consider the revenues that the divested business generated in the 12 months prior to its divestiture to be subtracted from acquired revenues for the 12 months following its divestiture. For example, if we completed a divestiture on July 1, 2021 for a business, we would consider the amount of revenues from the divested business from July 1, 2020 to June 30, 2021 to be subtracted from acquired revenues during the period from July 1, 2021 to June 30, 2022. We measure organic revenue growth and acquired revenue growth by comparing the organic revenues or acquired revenues, respectively, period over period, net of any divestitures. Cost of Revenues Our cost of revenues consists of both fixed and variable expenses primarily attributable to the hiring, training, compensation and benefits provided to both full-time and part-time associates, as well as other project-related expenses. A number of costs associated with our associates are subject to external factors, including inflation, increases in market specific wages and minimum wage rates at federal, state and municipal levels and minimum pay levels for exempt roles. Additionally, when we enter into certain new client relationships, we may experience an initial increase in expenses associated with hiring, training and other items needed to launch the new relationship. 24 Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of salaries, payroll taxes and benefits for corporate personnel. Other overhead costs include information technology, occupancy costs for corporate personnel, professional services fees, including accounting and legal services, and other general corporate expenses. Additionally, included in selling, general and administrative expenses are costs associated with the changes in fair value of the contingent consideration of acquisitions and other acquisition-related costs. Acquisition-related costs are comprised of fees related to change of equity ownership, transaction costs, professional fees, due diligence and integration activities. Other (Income) Expenses Change in Fair Value of Warrant Liability Change in fair value of warrant liability represents a non-cash (income) expense resulting from a fair value adjustment to warrant liability with respect to the private placement warrants. Based on the period of time the public warrants have now been trading, we determined the fair value of the liability classified private placement warrants by approximating the value with the share price of the public warrants at the respective period end, which is inherently less subjective and judgmental given it is based on observable inputs. Previously, the fair value of the warrant liability was based on the input assumptions used in the Black-Scholes option pricing model, including our stock price at the end of the reporting period, the implied volatility or other inputs to the model and the number of private placement warrants outstanding, which may vary from period to period. As of March 31, 2022, based on the period of time the public warrants have now been trading, the Company determined the fair value of the liability classified private placement warrants by approximating the value with the share price of the public warrants as of March 31, 2022. We believe these amounts are not correlated to future business operations. Interest Expense Interest expense relates primarily to borrowings under the Senior Secured Credit Facilities as described below. See “ — Liquidity and Capital Resources .” Depreciation and Amortization Amortization Expense Included in our depreciation and amortization expense is amortization of acquired intangible assets. We have ascribed value to identifiable intangible assets other than goodwill in our purchase price allocations for companies we have acquired. These assets include, but are not limited to, client relationships and trade names. To the extent we ascribe value to identifiable intangible assets that have finite lives, we amortize those values over the estimated useful lives of the assets. Such amortization expense, although non-cash in the period expensed, directly impacts our results of operations. It is difficult to predict with any precision the amount of expense we may record relating to future acquired intangible assets. As a result of the 2014 Topco Acquisition, we acquired significant intangible assets, the value of which is amortized, on a straight-line basis, over 15 years from the date of the 2014 Topco Acquisition, unless determined to be indefinite-lived. Depreciation Expense Depreciation expense relates to the property and equipment that we own, which represented less than 1% of our total assets at March 31, 2022 and 2021, respectively. 25 Income Taxes Income tax (benefit) expense and our effective tax rates can be affected by many factors, including state apportionment factors, our acquisition strategy, tax incentives and credits available to us, changes in judgment regarding our ability to realize our deferred tax assets, changes in our worldwide mix of pre-tax losses or earnings, changes in existing tax laws and our assessment of uncertain tax positions. Cash Flows We have positive cash flow characteristics, as described below, due to the limited required capital investment in the fixed assets and working capital needs to operate our business in the normal course. See “ —Liquidity and Capital Resources. ” Our principal sources of liquidity are cash flows from operations, borrowings under the Revolving Credit Facility, and other debt. Our principal uses of cash are operating expenses, working capital requirements, acquisitions and repayment of debt. Adjusted Net Income Adjusted Net Income is a non-GAAP financial measure. Adjusted Net Income means net income (loss) before (i) impairment of goodwill and indefinite-lived assets, (ii) amortization of intangible assets, (iii) equity based compensation of Topco, (iv) changes in fair value of warrant liability, (v) fair value adjustments of contingent consideration related to acquisitions, (vi) acquisition-related expenses, (vii) costs associated with COVID-19, net of benefits received, (viii) EBITDA for economic interests in investments, (ix) restructuring expenses, (x) litigation expenses (recovery), (xi) costs associated with the Take 5 Matter, (xii) other adjustments that management believes are helpful in evaluating our operating performance and (xiii) related tax adjustments. We present Adjusted Net Income because we use it as a supplemental measure to evaluate the performance of our business in a way that also considers our ability to generate profit without the impact of items that we do not believe are indicative of our operating performance or are unusual or infrequent in nature and aid in the comparability of our performance from period to period. Adjusted Net Income should not be considered as an alternative for net income (loss), our most directly comparable measure presented on a GAAP basis. Adjusted EBITDA and Adjusted EBITDA by Segment Adjusted EBITDA and Adjusted EBITDA by segment are supplemental non-GAAP financial measures of our operating performance. Adjusted EBITDA means net income (loss) before (i) interest expense, net, (ii) (benefit from) provision for income taxes, (iii) depreciation, (iv) impairment of goodwill and indefinite-lived assets, (v) amortization of intangible assets, (vi) equity based compensation of Topco, (vii) changes in fair value of warrant liability, (viii) stock-based compensation expense, (ix) fair value adjustments of contingent consideration related to acquisitions, (x) acquisition-related expenses, (xi) costs associated with COVID-19, net of benefits received, (xii) EBITDA for economic interests in investments, (xiii) restructuring expenses, (xiv) litigation expenses (recovery), (xv) costs associated with the Take 5 Matter and (xvi) other adjustments that management believes are helpful in evaluating our operating performance. We present Adjusted EBITDA and Adjusted EBITDA by segment because they are key operating measures used by us to assess our financial performance. These measures adjust for items that we believe do not reflect the ongoing operating performance of our business, such as certain noncash items, unusual or infrequent items or items that change from period to period without any material relevance to our operating performance. We evaluate these measures in conjunction with our results according to GAAP because we believe they provide a more complete understanding of factors and trends affecting our business than GAAP measures alone. Furthermore, the agreements governing our indebtedness contain covenants and other tests based on measures substantially similar to Adjusted EBITDA. Neither Adjusted EBITDA nor Adjusted EBITDA by segment should be considered as an alternative for net income (loss), for our most directly comparable measure presented on a GAAP basis. 26 Results of Operations for the Three Months Ended March 31, 2022 and 2021 The following table sets forth items derived from the Company’s consolidated statements of operations for the three months ended March 31, 2022 and 2021 in dollars and as a percentage of total revenues. Three Months Ended March 31, (amounts in thousands) 2022 2021 Revenues $ 914,808 100.0 % $ 791,021 100.0 % Cost of revenues 785,943 85.9 % 653,339 82.6 % Selling, general, and administrative expenses 48,073 5.3 % 40,481 5.1 % Depreciation and amortization 57,768 6.3 % 59,613 7.5 % Total expenses 891,784 97.5 % 753,433 95.2 % Operating income 23,024 2.5 % 37,588 4.8 % Other (income) expenses: Change in fair value of warrant liability (15,442 ) (1.7 )% 5,526 0.7 % Interest expense, net 11,883 1.3 % 30,865 3.9 % Total other (income) expenses (3,559 ) (0.4 )% 36,391 4.6 % Income before income taxes 26,583 2.9 % 1,197 0.2 % Provision for income taxes 9,049 1.0 % 1,743 0.2 % Net income (loss) $ 17,534 1.9 % $ (546 ) (0.1 )% Other Financial Data Adjusted Net Income (1) $ 49,115 5.4 % $ 46,264 5.8 % Adjusted EBITDA (1) $ 96,739 10.6 % $ 111,428 14.1 % (1) Adjusted Net Income and Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted Net Income and Adjusted EBITDA and reconciliations of net income (loss) to Adjusted Net Income and Adjusted EBITDA, see “ —Non-GAAP Financial Measures .” Comparison of the Three Months Ended March 31, 2022 and 2021 Revenues Three Months Ended March 31, Change (amounts in thousands) 2022 2021 $ % Sales $ 591,969 $ 534,324 $ 57,645 10.8 % Marketing 322,839 256,697 66,142 25.8 % Total revenues $ 914,808 $ 791,021 $ 123,787 15.6 % Total revenues increased by $123.8 million, or 15.6%, during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The sales segment revenues increased $57.6 million during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, of which $47.9 million were revenues from acquired businesses. Excluding revenues from acquired businesses and unfavorable foreign exchange rates of $5.0 million, the segment experienced an increase of $14.7 million in organic revenues primarily due to our European joint venture which experienced continued recoveries from temporary reduction in services as a result of the COVID-19 pandemic and growth in our retail merchandising services. The marketing segment revenues increased $66.1 million during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, of which $2.1 million were revenues from acquired businesses. Excluding revenues from acquired businesses, the segment experienced an increase of $64.0 million in organic revenues. The increase in revenues was primarily due to an increase in our in-store product demonstration and sampling services which continue to recover from the temporary suspensions as a result of the COVID-19 pandemic, partially offset by a decrease in certain of our media services. 27 Cost of Revenues Cost of revenues as a percentage of revenues for the three months ended March 31, 2022 was 85.9%, as compared to 82.6% for the three months ended March 31, 2021. The increase as a percentage of revenues was largely attributable to the change in the revenue mix of our services as a result of recoveries from the COVID-19 pandemic and acquired businesses, the ongoing investment in recruiting, labor and wage spend, and an increase in self-insured medical claims. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of revenues for the three months ended March 31, 2022 was 5.3% compared to 5.1% for the three months ended March 31, 2021, which stayed relatively consistent year over year. Depreciation and Amortization Expense Depreciation and amortization expense stayed relatively consistent at $57.8 million for the three months ended March 31, 2022 compared to $59.6 million for the three months ended March 31, 2021. Operating Income Three Months Ended March 31, Change (amounts in thousands) 2022 2021 $ % Sales $ 18,973 $ 35,148 $ (16,175 ) (46.0 )% Marketing 4,051 2,440 1,611 66.0 % Total operating income $ 23,024 $ 37,588 $ (14,564 ) (38.7 )% In the sales segment, the decrease in operating income during the three months ended March 31, 2022 was primarily attributable to ongoing investments in labor and wage spend and an increase in the amount of self-insured medical claims. In the marketing segment, the increase in operating income during the three months ended March 31, 2022 was primarily attributable to the growth in revenues as described above. Change in Fair Value of Warrant Liability Change in fair value of warrant liability represents $21.0 million of non-cash gain resulting from a fair value adjustment to warrant liability with respect to the private placement warrants for the three months ended March 31, 2022, approximating the fair value with the warrant price of the public warrants. Interest Expense, net Interest expense decreased $19.0 million, or 61.5%, to $11.9 million for the three months ended March 31, 2022, from $30.9 million for the three months ended March 31, 2021. The decrease in interest expense, net was primarily due to the decrease in fair value changes in derivatives instruments. Provision for Income Taxes Provision for income taxes was $9.0 million for the three months ended March 31, 2022 as compared to $1.7 million for the three months ended March 31, 2021. The fluctuation was primarily attributable to the greater pre-tax income for the three months ended March 31, 2022. 28 Net Income Net income was $17.5 million for the three months ended March 31, 2022, compared to net loss of $0.5 million for the three months ended March 31, 2021. The increase in net income was primarily driven by the decrease in change in fair value of warrant liability and interest expense as described above, partially offset by the decrease in operating income and increase in the provision for income taxes. Adjusted Net Income The increase in Adjusted Net Income for the three months ended March 31, 2022 was attributable to the decrease in change in fair value of warrant liability, interest expense, net, partially offset by the provision for income taxes as described above . For a reconciliation of Adjusted Net Income to Net income (loss), see “ — Non-GAAP Financial Measures.” Adjusted EBITDA and Adjusted EBITDA by Segment Three Months Ended March 31, Change (amounts in thousands) 2022 2021 $ % Sales $ 68,233 $ 84,076 $ (15,843 ) (18.8 )% Marketing 28,506 27,352 1,154 4.2 % Total Adjusted EBITDA $ 96,739 $ 111,428 $ (14,689 ) (13.2 )% Adjusted EBITDA decreased $14.7 million, or 13.2%, to $96.7 million for the three months ended March 31, 2022, from $111.4 million for the three months ended March 31, 2021. The decrease in Adjusted EBITDA was primarily attributable to the increase in cost of revenues as described above. For a reconciliation of Adjusted EBITDA to net income, see “— Non-GAAP Financial Measures .” 29 Non-GAAP Financial Measures Adjusted Net Income is a non-GAAP financial measure. Adjusted Net Income means net income (loss) before (i) impairment of goodwill and indefinite-lived assets, (ii) amortization of intangible assets, (iii) equity based compensation of Topco, (iv) change in fair value of warrant liability, (v) fair value adjustments of contingent consideration related to acquisitions, (vi) acquisition-related expenses, (vii) costs associated with COVID-19, net of benefits received, (viii) EBITDA for economic interests in investments, (ix) restructuring expenses, (x) litigation expenses (recovery), (xi) costs associated with the Take 5 Matter, (xii) other adjustments that management believes are helpful in evaluating our operating performance and (xiii) related tax adjustments. We present Adjusted Net Income because we use it as a supplemental measure to evaluate the performance of our business in a way that also considers our ability to generate profit without the impact of items that we do not believe are indicative of our operating performance or are unusual or infrequent in nature and aid in the comparability of our performance from period to period. Adjusted Net Income should not be considered as an alternative for our Net income (loss), our most directly comparable measure presented on a GAAP basis. A reconciliation of Adjusted Net Income to Net income (loss) is provided in the following table: Three Months Ended March 31, 2022 2021 (in thousands) Net income (loss) $ 17,534 $ (546 ) Less: Net income attributable to noncontrolling interest (1,431 ) (430 ) Add: Equity based compensation of Topco (a) (2,795 ) (2,814 ) Change in fair value of warrant liability (15,442 ) 5,526 Fair value adjustments related to contingent consideration related to acquisitions (c) 2,134 (1,043 ) Acquisition-related expenses (d) 9,585 5,146 Restructuring expenses (e) 643 4,096 Litigation expenses (recovery) (f) — (818 ) Amortization of intangible assets (g) 50,277 49,438 Costs associated with COVID-19, net of benefits received (h) 1,574 1,293 Costs associated with the Take 5 Matter (j) 1,087 901 Tax adjustments related to non-GAAP adjustments (k) (16,913 ) (15,345 ) Adjusted Net Income $ 49,115 $ 46,264 Adjusted EBITDA and Adjusted EBITDA by segment are supplemental non-GAAP financial measures of our operating performance. Adjusted EBITDA means net income (loss) before (i) interest expense, net, (ii) provision for income taxes, (iii) depreciation, (iv) impairment of goodwill and indefinite-lived assets, (v) amortization of intangible assets, (vi) equity based compensation of Topco, (vii) change in fair value of warrant liability, (viii) stock-based compensation expense, (ix) fair value adjustments of contingent consideration related to acquisitions, (x) acquisition-related expenses, (xi) costs associated with COVID-19, net of benefits received, (xii) EBITDA for economic interests in investments, (xiii) restructuring expenses, (xiv) litigation expenses (recovery), (xv) costs associated with the Take 5 Matter and (xvi) other adjustments that management believes are helpful in evaluating our operating performance. We present Adjusted EBITDA and Adjusted EBITDA by segment because they are key operating measures used by us to assess our financial performance. These measures adjust for items that we believe do not reflect the ongoing operating performance of our business, such as certain noncash items, unusual or infrequent items or items that change from period to period without any material relevance to our operating performance. We evaluate these measures in conjunction with our results according to GAAP because we believe they provide a more complete understanding of factors and trends affecting our business than GAAP measures alone. Furthermore, the agreements governing our indebtedness contain covenants and other tests based on measures substantially similar to Adjusted EBITDA. Neither Adjusted EBITDA nor Adjusted EBITDA by segment should be considered as an alternative for our Net income (loss), our most directly comparable measure presented on a GAAP basis. 30 A reconciliation of Adjusted EBITDA to Net income (loss) is provided in the following table: Consolidated Three Months Ended March 31, 2022 2021 (in thousands) Net income (loss) $ 17,534 $ (546 ) Add: Interest expense, net 11,883 30,865 Provision for income taxes 9,049 1,743 Depreciation and amortization 57,768 59,613 Equity based compensation of Topco (a) (2,795 ) (2,814 ) Change in fair value of warrant liability (15,442 ) 5,526 Stock-based compensation expense (b) 7,771 8,655 Fair value adjustments related to contingent consideration related to acquisitions (c) 2,134 (1,043 ) Acquisition-related expenses (d) 9,585 5,146 EBITDA for economic interests in investments (k) (4,052 ) (1,189 ) Restructuring expenses (e) 643 4,096 Litigation expenses (recovery) (f) — (818 ) Costs associated with COVID-19, net of benefits received (h) 1,574 1,293 Costs associated with the Take 5 Matter (j) 1,087 901 Adjusted EBITDA $ 96,739 $ 111,428 Financial information by segment, including a reconciliation of Adjusted EBITDA by segment to operating income, the closest GAAP financial measure, is provided in the following table: Sales Segment Three Months Ended March 31, 2022 2021 (in thousands) Operating income $ 18,973 $ 35,148 Add: Depreciation and amortization 40,969 42,564 Equity based compensation of Topco (a) (1,652 ) (1,838 ) Stock-based compensation expense (b) 4,758 4,694 Fair value adjustments related to contingent consideration related to acquisitions (c) 803 778 Acquisition-related expenses (d) 7,314 3,320 EBITDA for economic interests in investments (k) (4,207 ) (1,487 ) Restructuring expenses (e) 819 780 Litigation expenses (recovery) (f) — (516 ) Costs associated with COVID-19, net of benefits received (h) 456 633 Sales Segment Adjusted EBITDA $ 68,233 $ 84,076 Marketing Segment Three Months Ended March 31, 2022 2021 (in thousands) Operating income $ 4,051 $ 2,440 Add: Depreciation and amortization 16,799 17,049 Equity based compensation of Topco (a) (1,143 ) (976 ) Stock-based compensation expense (b) 3,013 3,961 Fair value adjustments related to contingent consideration related to acquisitions (c) 1,331 (1,821 ) Acquisition-related expenses (d) 2,271 1,826 EBITDA for economic interests in investments (k) 155 298 Restructuring expenses (e) (176 ) 3,316 Litigation expenses (recovery) (f) — (302 ) Costs associated with COVID-19, net of benefits received (h) 1,118 660 Costs associated with the Take 5 Matter (j) 1,087 901 Marketing Segment Adjusted EBITDA $ 28,506 $ 27,352 31 (a) Represents expenses related to (i) equity-based compensation expense associated with grants of Common Series D Units of Topco made to one of the Advantage Sponsors (as defined below) and (ii) equity-based compensation expense associated with the Common Series C Units of Topco. (b) Represents non-cash compensation expense related to the 2020 Incentive Award Plan and the 2020 Employee Stock Purchase Plan. (c) Represents adjustments to the estimated fair value of our contingent consideration liabilities related to our acquisitions. See Note 5— Fair Value of Financial Instruments to our unaudited condensed financial statements for the three months ended March 31, 2022 and 2021. (d) Represents fees and costs associated with activities related to our acquisitions and restructuring activities related to our equity ownership, including transaction bonuses paid in connection with the Transactions, professional fees, due diligence, and integration activities. (e) Represents fees and costs associated with various internal reorganization activities among our consolidated entities. (f) Represents legal settlements that are unusual or infrequent costs associated with our operating activities. (g) Represents the amortization of intangible assets recorded in connection with the 2014 Topco Acquisition and our other acquisitions. (h) Represents (i) costs related to implementation of strategies for workplace safety in response to COVID-19, including employee-relief fund, additional sick pay for front-line associates, medical benefit payments for furloughed associates, and personal protective equipment; and (ii) benefits received from government grants for COVID-19 relief. (i) Represents costs associated with the Take 5 Matter, primarily, professional fees and other related costs, for the three months ended March 31, 2022 and 2021, respectively. (j) Represents the tax provision or benefit associated with the adjustments above, taking into account the Company’s applicable tax rates, after excluding adjustments related to items that do not have a related tax impact. (k) Represents additions to reflect our proportional share of Adjusted EBITDA related to our equity method investments and reductions to remove the Adjusted EBITDA related to the minority ownership percentage of the entities that we fully consolidate in our financial statements. 32 Liquidity and Capital Resources Our principal sources of liquidity were cash flows from operations, borrowings under the Revolving Credit Facility, and other debt. Our principal uses of cash are operating expenses, working capital requirements, acquisitions, interest on debt and repayment of debt. Cash Flows A summary of our cash operating, investing and financing activities are shown in the following table: Three Months Ended March 31, (in thousands) 2022 2021 Net cash (used in) provided by operating activities $ (23,955 ) $ 29,887 Net cash used in investing activities (12,239 ) (19,281 ) Net cash used in financing activities (2,017 ) (54,514 ) Net effect of foreign currency fluctuations on cash (1,485 ) (2,234 ) Net change in cash, cash equivalents and restricted cash $ (39,696 ) $ (46,142 ) Net Cash (Used in) Provided by Operating Activities Net cash used in operating activities during the three months ended March 31, 2022 consisted of net income of $16.9 million adjusted for certain non-cash items, including depreciation and amortization of $57.8 million and effects of changes in working capital. Net cash provided by operating activities during the three months ended March 31, 2021 consisted of net loss of $0.5 million adjusted for certain non-cash items, including depreciation and amortization of $59.6 million and effects of changes in working capital. The increase in cash used in operating activities during the three months ended March 31, 2022 relative to the same period in 2021 was primarily due to increased working capital requirements to stand up services during the three months ended March 31, 2022. Net Cash Used in Investing Activities Net cash used in investing activities during the three months ended March 31, 2022 primarily consisted of the purchase of businesses, net of cash acquired of $1.8 million and purchase of property and equipment of $10.4 million. Net cash used in investing activities during the three months ended March 31, 2021 primarily consisted of the purchase of businesses, net of cash acquired of $14.0 million and purchase of property and equipment of $5.2 million. Net Cash Used in Financing Activities We primarily finance our growth through cash flows from operations, however, we also incur long-term debt or borrow under lines of credit when necessary to execute acquisitions. Additionally, many of our acquisition agreements include contingent consideration arrangements, which are generally based on the achievement of future financial performance by the operations attributable to the acquired companies. The portion of the cash payment up to the acquisition date fair value of the contingent consideration liability are classified as financing outflows, and amounts paid in excess of the acquisition date fair value of that liability are classified as operating outflows. Cash flows used in financing activities during the three months ended March 31, 2022 were primarily related to borrowings of $9.3 million, and offset by repayment of $9.0 million, on our lines of credit, payment of principal on our Term Loan Facility of $3.3 million, partially offset by $1.7 million related to proceeds from the issuance of Class A common stock. Cash flows used in financing activities during the three months ended March 31, 2021 were primarily related to repayment of $50.0 million on the Revolving Credit Facility and payment of principal on our Term Loan Facility of $3.3 million . 33 Description of Credit Facilities Senior Secured Credit Facilities In connection with the consummation of the Transactions, Advantage Sales & Marketing Inc. (the “Borrower”), an indirect wholly-owned subsidiary of the Company, entered into (i) a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $400.0 million, subject to borrowing base capacity (as may be amended from time to time, the “Revolving Credit Facility”) and (ii) a secured first lien term loan credit facility in an aggregate principal amount of $1.325 billion (as may be amended from time to time, the “Term Loan Facility” and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”). Revolving Credit Facility Our Revolving Credit Facility provides for revolving loans and letters of credit in an aggregate amount of up to $400.0 million, subject to borrowing base capacity. Letters of credit are limited to the lesser of (a) $150.0 million and (b) the aggregate unused amount of commitments under our Revolving Credit Facility then in effect. Loans under the Revolving Credit Facility may be denominated in either U.S. dollars or Canadian dollars. Bank of America, N.A., is administrative agent and ABL Collateral Agent. The Revolving Credit Facility is scheduled to mature in October 2025. We may use borrowings under the Revolving Credit Facility to fund working capital and for other general corporate purposes, including permitted acquisitions and other investments. As of March 31, 2022, we had unused capacity under our Revolving Credit Facility available to us of $400.0 million, subject to borrowing base limitations (without giving effect to approximately $54.8 million of outstanding letters of credit and the borrowing base limitations for additional borrowings). Borrowings under the Revolving Credit Facility are limited by borrowing base calculations based on the sum of specified percentages of eligible accounts receivable plus specified percentages of qualified cash, minus the amount of any applicable reserves. Borrowings will bear interest at a floating rate, which can be either an adjusted Eurodollar rate plus an applicable margin or, at the Borrower’s option, a base rate plus an applicable margin. The applicable margins for the Revolving Credit Facility are 2.00%, 2.25% or 2.50%, with respect to Eurodollar rate borrowings and 1.00%, 1.25% or 1.50%, with respect to base rate borrowings, in each case depending on average excess availability under the Revolving Credit Facility. The Borrower’s ability to draw under the Revolving Credit Facility or issue letters of credit thereunder will be conditioned upon, among other things, the Borrower’s delivery of prior written notice of a borrowing or issuance, as applicable, the Borrower’s ability to reaffirm the representations and warranties contained in the credit agreement governing the Revolving Credit Facility and the absence of any default or event of default thereunder. The Borrower’s obligations under the Revolving Credit Facility are guaranteed by Karman Intermediate Corp. (“Holdings”) and all of the Borrower’s direct and indirect wholly owned material U.S. subsidiaries (subject to certain permitted exceptions) and Canadian subsidiaries (subject to certain permitted exceptions, including exceptions based on immateriality thresholders of aggregate assets and revenues of Canadian subsidiaries) (the “Guarantors”). The Revolving Credit Facility is secured by a lien on substantially all of Holdings’, the Borrower’s and the Guarantors’ assets (subject to certain permitted exceptions). The Borrower’s Revolving Credit Facility has a first-priority lien on the current asset collateral and a second-priority lien on security interests in the fixed asset collateral (second in priority to the liens securing the Notes and the Term Loan Facility discussed below), in each case, subject to other permitted liens. The Revolving Credit Facility has the following fees: (i) an unused line fee of 0.375% or 0.250% per annum of the unused portion of the Revolving Credit Facility, depending on average excess availability under the Revolving Credit Facility; (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit equal to the applicable margin for adjusted Eurodollar rate loans, as applicable; and (iii) certain other customary fees and expenses of the lenders and agents thereunder. The Revolving Credit Facility contains customary covenants, including, but not limited to, restrictions on the Borrower’s ability and that of our subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or 34 otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness, enter into transactions with affiliates or change our line of business. The Revolving Credit Facility will require the maintenance of a fixed charge coverage ratio (as set forth in the credit agreement governing the Revolving Credit Facility) of 1.00 to 1.00 at the end of each fiscal quarter when excess availability is less than the greater of $25 million and 10% of the lesser of the borrowing base and maximum borrowing capacity. Such fixed charge coverage ratio will be tested at the end of each quarter until such time as excess availability exceeds the level set forth above. The Revolving Credit Facility provides that, upon the occurrence of certain events of default, the Borrower’s obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults to the lenders thereunder, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy, insolvency, corporate arrangement, winding-up, liquidation or similar proceedings, material money judgments, material pension-plan events, certain change of control events and other customary events of default. On October 28, 2021, the Borrower and Holdings entered into the First Amendment to ABL Revolving Credit Agreement (the “ABL Amendment”), which amended the ABL Revolving Credit Agreement, dated October 28, 2020, by and among the Borrower, Holdings, the lenders from time to time party thereto and Bank of America, as administrative agent. The ABL Amendment was entered into by the Borrower to amend certain terms and provisions, including (i) reducing the interest rate floor for Eurocurrency rate loans from 0.50% to 0.00% and base rate loans from 1.50% to 1.00%, and (ii) updating the provisions by which U.S. Dollar LIBOR will eventually be replaced with the Secured Oversight Financing Rate ( “ S OFR”) or another interest rate benchmark to reflect the most recent standards and practices used in the industry. Term Loan Facility The Term Loan Facility is a term loan facility denominated in US dollars in an aggregate principal amount of $1.325 billion. Borrowings under the Term Loan Facility amortize in equal quarterly installments in an amount equal to 1.00% per annum of the principal amount. Borrowings will bear interest at a floating rate, which can be either an adjusted Eurodollar rate plus an applicable margin or, at the Borrower’s option, a base rate plus an applicable margin. The applicable margins for the Term Loan Facility are 4.50% with respect to Eurodollar rate borrowings and 3.50% with respect to base rate borrowings. The Borrower may voluntarily prepay loans or reduce commitments under the Term Loan Facility, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty (other than a 1.00% premium on any prepayment in connection with a repricing transaction prior to the date that is six months after the effective date of the First Lien Amendment). The Borrower will be required to prepay the Term Loan Facility with 100% of the net cash proceeds of certain asset sales (such percentage subject to reduction based on the achievement of specific first lien net leverage ratios) and subject to certain reinvestment rights, 100% of the net cash proceeds of certain debt issuances and 50% of excess cash flow (such percentage subject to reduction based on the achievement of specific first lien net leverage ratios). The Borrower’s obligations under the Term Loan Facility are guaranteed by Holdings and the Guarantors. Our Term Loan Facility is secured by a lien on substantially all of Holdings’, the Borrower’s and the Guarantors’ assets (subject to certain permitted exceptions). The Term Loan Facility has a first-priority lien on the fixed asset collateral (equal in priority with the liens securing the Notes) and a second-priority lien on security interests in the current asset collateral (second in priority to the liens securing the Revolving Credit Facility), in each case, subject to other permitted liens. The Term Loan Facility contains certain customary negative covenants, including, but not limited to, restrictions on the Borrower’s ability and that of our restricted subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, pay dividends or make other restricted payments, sell or otherwise transfer assets or enter into transactions with affiliates. 35 The Term Loan Facility provides that, upon the occurrence of certain events of default, the Borrower’s obligations thereunder may be accelerated. Such events of default will include payment defaults to the lenders thereunder, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy, insolvency, corporate arrangement, winding-up, liquidation or similar proceedings, material money judgments, change of control and other customary events of default. On October 28, 2021 (the “First Lien Amendment Effective Date”), the Borrower, Holdings, and certain of the Borrower’s subsidiaries, entered into Amendment No. 1 to the First Lien Credit Agreement (the “First Lien Amendment”), which amended the First Lien Credit Agreement, dated October 28, 2020, by and among the Borrower, Holdings, Bank of America, as administrative agent and collateral agent, each lender party from time to time thereto, and the other parties thereto. The First Lien Amendment was entered into by the Borrower to reduce the applicable interest rate on the term loan to 5.25% per annum, resulting in estimated interest savings of approximately $9.9 million or $7.3 million, net of tax, per annum. Additional terms and provisions amended include (i) resetting the period for six months following the First Lien Amendment Effective Date in which a 1.00% prepayment premium shall apply to any prepayment of the term loan in connection with certain repricing events, and (ii) updating the provisions by which U.S. Dollar LIBOR will eventually be replaced with SOFR or another interest rate benchmark to reflect the most recent standards and practices used in the industry and by Bank of America. Senior Secured Notes In connection with the Transactions, Advantage Solutions FinCo LLC (“Finco”) issued $775.0 million aggregate principal amount of 6.50% Senior Secured Notes due 2028 (the “Notes”). Substantially concurrently with the Transactions, Finco merged with and into Advantage Sales & Marketing Inc. (in its capacity as the issuer of the Notes, the “Issuer”), with the Issuer continuing as the surviving entity and assuming the obligations of Finco. The Notes were sold to BofA Securities, Inc., Deutsche Bank Securities Inc., Morgan Stanley & Co. LLC and Apollo Global Securities, LLC. The Notes were resold to certain non-U.S. persons pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), and to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act at a purchase price equal to 100% of their principal amount. The terms of the Notes are governed by an Indenture, dated as of October 28, 2020 (the “Indenture”), among Finco, the Issuer, the guarantors named therein (the “Notes Guarantors”) and Wilmington Trust, National Association, as trustee and collateral agent. Interest and maturity Interest on the Notes is payable semi-annually in arrears on May 15 and November 15 at a rate of 6.50% per annum, commencing on May 15, 2021. The Notes will mature on November 15, 2028. Guarantees The Notes are guaranteed by Holdings and each of the Issuer’s direct and indirect wholly owned material U.S. subsidiaries (subject to certain permitted exceptions) and Canadian subsidiaries (subject to certain permitted exceptions, including exceptions based on immateriality thresholders of aggregate assets and revenues of Canadian subsidiaries) that is a borrower or guarantor under the Term Loan Facility. Security and Ranking The Notes and the related guarantees are the general, senior secured obligations of the Issuer and the Notes Guarantors, are secured on a first-priority pari passu basis by security interests on the fixed asset collateral (equal in priority with liens securing the Term Loan Facility), and are secured on a second-priority basis by security interests on the current asset collateral (second in priority to the liens securing the Revolving Credit Facility and equal in priority with liens securing the Term Loan Facility), in each case, subject to certain limitations and exceptions and permitted liens. 36 The Notes and related guarantees rank (i) equally in right of payment with all of the Issuer’s and the Guarantors’ senior indebtedness, without giving effect to collateral arrangements (including the Senior Secured Credit Facilities) and effectively equal to all of the Issuer’s and the Guarantors’ senior indebtedness secured on the same priority basis as the Notes, including the Term Loan Facility, (ii) effectively subordinated to any of the Issuer’s and the Guarantors’ indebtedness that is secured by assets that do not constitute collateral for the Notes to the extent of the value of the assets securing such indebtedness and to indebtedness that is secured by a senior-priority lien, including the Revolving Credit Facility to the extent of the value of the current asset collateral and (iii) structurally subordinated to the liabilities of the Issuer’s non-Guarantor subsidiaries. Optional redemption for the Notes The Notes are redeemable on or after November 15, 2023 at the applicable redemption prices specified in the Indenture plus accrued and unpaid interest. The Notes may also be redeemed at any time prior to November 15, 2023 at a redemption price equal to 100% of the aggregate principal amount of such Notes to be redeemed plus a “make-whole” premium, plus accrued and unpaid interest. In addition, the Issuer may redeem up to 40% of the original aggregate principal amount of Notes before November 15, 2023 with the net cash proceeds of certain equity offerings at a redemption price equal to 106.5% of the aggregate principal amount of such Notes to be redeemed, plus accrued and unpaid interest. Furthermore, prior to November 15, 2023 the Issuer may redeem during each calendar year up to 10% of the original aggregate principal amount of the Notes at a redemption price equal to 103% of the aggregate principal amount of such Notes to be redeemed, plus accrued and unpaid interest. If the Issuer or its restricted subsidiaries sell certain of their respective assets or experience specific kinds of changes of control, subject to certain exceptions, the Issuer must offer to purchase the Notes at par. In connection with any offer to purchase all Notes, if holders of no less than 90% of the aggregate principal amount of Notes validly tender their Notes, the Issuer is entitled to redeem any remaining Notes at the price offered to each holder. Restrictive covenants The Notes are subject to covenants that, among other things limit the Issuer’s ability and its restricted subsidiaries’ ability to: incur additional indebtedness or guarantee indebtedness; pay dividends or make other distributions in respect of, or repurchase or redeem, the Issuer’s or a parent entity’s capital stock; prepay, redeem or repurchase certain indebtedness; issue certain preferred stock or similar equity securities; make loans and investments; sell or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting the Issuer’s subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or substantially all of the Issuer’s assets. Most of these covenants will be suspended on the Notes so long as they have investment grade ratings from both Moody’s Investors Service, Inc. and S&P Global Ratings and so long as no default or event of default under the Indenture has occurred and is continuing. Events of default The following constitute events of default under the Notes, among others: default in the payment of interest; default in the payment of principal; failure to comply with covenants; failure to pay other indebtedness after final maturity or acceleration of other indebtedness exceeding a specified amount; certain events of bankruptcy; failure to pay a judgment for payment of money exceeding a specified aggregate amount; voidance of subsidiary guarantees; failure of any material provision of any security document or intercreditor agreement to be in full force and effect; and lack of perfection of liens on a material portion of the collateral, in each case subject to applicable grace periods. Cash and Cash Equivalents Held Outside the United States As of March 31, 2022 and December 31, 2021, $69.9 million and $86.2 million, respectively, of our cash and cash equivalents and marketable securities were held by foreign subsidiaries. As of March 31, 2022, and December 31, 2021, $40.8 million and $40.0 million, respectively, of our cash and cash equivalents and marketable securities were held by foreign branches. 37 We assessed our determination as to our indefinite reinvestment intent for certain of our foreign subsidiaries and recorded a deferred tax liability of approximately $2.5 million of withholding tax as of December 31, 2021 for unremitted earnings in Canada with respect to which the Company does not have an indefinite reinvestment assertion. We will continue to evaluate our cash needs, however we currently do not intend, nor do we foresee a need, to repatriate funds from the foreign subsidiaries except for Canada. We have continued to assert indefinite reinvestment on all other earnings as it is necessary for continuing operations and to grow the business. If at a point in the future our assertion changes, we will evaluate tax-efficient means to repatriate the income. In addition, we expect existing domestic cash and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as debt repayment and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. If we should require more capital in the United States than is generated by our domestic operations, for example, to fund significant discretionary activities such as business acquisitions, we could elect to repatriate future earnings from foreign jurisdictions. These alternatives could result in higher tax expense or increased interest expense. We consider the majority of the undistributed earnings of our foreign subsidiaries, as of December 31, 2021, to be indefinitely reinvested and, accordingly, no provision has been made for taxes in excess of the $2.5 million noted above. Off-Balance Sheet Arrangements We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in our consolidated financial statements. Additionally, we do not have an interest in, or relationships with, any special-purpose entities. Critical Accounting Policies and Estimates Our critical accounting policies and estimates are included in our Annual Report on Form 10-K filed March 1, 2022 for the year ended December 31, 2021 and did not materially change during the three months ended March 31, 2022. Recently Issued Accounting Pronouncements See the information set forth in Note 1, Organization and Significant Accounting Policies – Recent Accounting Pronouncements , to our unaudited condensed consolidated financial statements for the three months ended March 31, 2022 and 2021 included in “Part I, Financial Information—Item 1. Financial Statements” in this Quarterly Report. 38