Item 8. Financial Statements and Supplementary Data
Item 8.
Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
69
Consolidated Balance Sheets
72
Consolidated Statements of Operations and Comprehensive Loss
73
Consolidated Statements of Stockholders Equity
74
Consolidated Statements of Cash Flows
75
Notes to Consolidated Financial Statements
76
Schedule ICondensed Parent Only Financial Information of Advantage Solutions
Inc. as of December 31, 2020 and 2019, and for the years ended December 31, 2020, 2019 and 2018
122
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Advantage Solutions Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Advantage Solutions Inc. and its subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations and
comprehensive loss, of stockholders equity, and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the accompanying index
(collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of
America.
Change in Accounting Principle
As
discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for
Opinion
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on the Companys consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters
communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are
material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment
As described in
Notes 1 and 3 to the consolidated financial statements, the Companys consolidated goodwill balance was $2.2 billion as of December 31, 2020. Management tests goodwill for impairment at the beginning
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of the fourth quarter of a given fiscal year, and whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value. Upon performing the
quantitative impairment test, if the fair value of the reporting unit is less than its carrying amount, goodwill is impaired and the excess of the reporting units carrying value over the fair value is recognized as an impairment loss.
Management performed a quantitative impairment test as of October 1, 2020 for its reporting units, and determined that its goodwill is not impaired. Management utilizes a combination of income and market approaches to estimate the fair value of
its reporting units. The income approach utilizes estimates of discounted cash flows of the reporting units, which requires assumptions for the reporting units revenue growth rates, operating margins, terminal growth rates, and discount rates,
all of which require significant management judgment. The market approach applies market multiples derived from the historical earnings data of selected guideline publicly-traded companies to the reporting units businesses to yield a value of
each reporting unit, which requires significant management judgment.
The principal considerations for our determination that performing
procedures relating to the goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when determining the fair value estimates of the reporting units; (ii) the high degree of auditor judgment,
subjectivity, and effort in performing procedures and evaluating managements significant assumptions related to revenue growth rates, operating margins, terminal growth rates, discount rates, and market multiples; and (iii) the audit
effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit
evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing managements process for determining the fair value estimates of the reporting units;
(ii) evaluating the appropriateness of the income and market approaches, and the combination of the approaches; (iii) testing the completeness and accuracy of the underlying data used in the fair value estimates; and (iv) evaluating
the reasonableness of the significant assumptions used by management related to revenue growth rates, operating margins, terminal growth rates, discount rates, and market multiples. Evaluating managements assumptions related to revenue growth
rates and operating margins involved evaluating whether the assumptions were reasonable considering (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and
(iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the income and market
approaches, and the combination of the approaches and (ii) the reasonableness of the significant assumptions related to the terminal growth rates, discount rates, and market multiples.
Indefinite-Lived Intangible Assets Impairment Assessment
As described in Notes 1 and 3 to the consolidated financial statements, the Companys consolidated indefinite-lived intangible assets net carrying
value was $900 million as of December 31, 2020. Intangible assets with indefinite useful lives are not amortized but tested annually, at the beginning of the fourth quarter, for impairment or more often if events occur or circumstances
change that would create a triggering event. Management performed a quantitative impairment test as of October 1, 2020, and determined that its indefinite-lived intangible assets are not impaired. Management tests its indefinite-lived
intangible assets for impairment using a relief from royalty method by comparing the estimated fair values of the indefinite-lived intangible assets with the carrying values. The estimates used in the determination of fair value are subjective in
nature and involve the use of significant assumptions. These estimates and assumptions include revenue growth rates, terminal growth rates, discount rates, and royalty rates, all of which require significant management judgment.
The principal considerations for our determination that performing procedures relating to the indefinite-lived intangible assets impairment assessment is a
critical audit matter are (i) the significant judgment by management when determining the fair value estimates of the indefinite-lived intangible assets; (ii) the high degree of auditor judgment, subjectivity, and effort in performing
procedures and evaluating managements significant
70
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assumptions related to revenue growth rates, terminal growth rates, discount rates, and royalty rates; and (iii) the audit effort involved the use of professionals with specialized skill and
knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included, among others, (i) testing managements process for determining the fair value estimates; (ii) evaluating the appropriateness of the relief from royalty method;
(iii) testing the completeness and accuracy of the underlying data used in the fair value estimates; and (iv) evaluating the reasonableness of the significant assumptions used by management related to revenue growth rates, terminal growth
rates, discount rates, and royalty rates. Evaluating managements assumption related to revenue growth rates involved evaluating whether the assumption was reasonable considering (i) the current and past performance of the underlying
assets; (ii) the consistency with external market and industry data; and (iii) whether this assumption was consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to
assist in evaluating (i) the appropriateness of the relief from royalty method and (ii) the reasonableness of the significant assumptions related to the terminal growth rates, discount rates, and royalty rates.
/s/ PricewaterhouseCoopers LLP
Irvine, California
March 16, 2021
We have served as the Companys
auditor since 2003.
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ADVANTAGE SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
2020
December 31,
2019
ASSETS
Current assets
Cash and cash equivalents
$
204,301
$
184,224
Restricted cash
15,665
14,801
Accounts receivable, net of allowance for expected credit losses of $16,377 and $15,107,
respectively
574,142
684,046
Prepaid expenses and other current assets
105,643
69,420
Total current assets
899,751
952,491
Property and equipment, net
80,016
114,690
Goodwill
2,163,339
2,116,696
Other intangible assets, net
2,452,796
2,600,596
Investments in unconsolidated affiliates
115,624
111,663
Other assets
65,966
116,547
Total assets
$
5,777,492
$
6,012,683
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Current portion of long-term debt
$
63,745
$
27,655
Accounts payable
195,452
179,415
Accrued compensation and benefits
142,136
136,645
Other accrued expenses
121,758
128,835
Deferred revenues
51,898
45,581
Total current liabilities
574,989
518,131
Long-term debt, net of current portion
2,029,328
3,172,087
Deferred income tax liabilities, net
491,242
506,362
Other long-term liabilities
141,910
146,297
Total liabilities
3,237,469
4,342,877
Commitments and contingencies (Note 17)
Equity attributable to stockholders of Advantage Solutions Inc.
Preferred stock, no par value, 10,000,000 shares authorized; none issued and outstanding as of
December 31, 2020 and 2019, respectively
Common stock, $0.0001 par value, 3,290,000,000 shares authorized; 318,425,182 and 203,750,000
shares issued and outstanding as of December 31, 2020 and 2019, respectively
32
20
Additional paid in capital
3,356,417
2,337,471
Accumulated deficit
(907,738
)
(745,295
)
Loans to Karman Topco L.P.
(6,316
)
(6,244
)
Accumulated other comprehensive income (loss)
674
(8,153
)
Total equity attributable to stockholders of Advantage Solutions Inc.
2,443,069
1,577,799
Nonredeemable noncontrolling interest
96,954
92,007
Total stockholders equity
2,540,023
1,669,806
Total liabilities and stockholders equity
$
5,777,492
$
6,012,683
See Notes to the Consolidated Financial Statements.
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ADVANTAGE SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year Ended December 31,
(in thousands, except share and per share data)
2020
2019
2018
Revenues
$
3,155,671
$
3,785,063
$
3,707,628
Cost of revenues (exclusive of depreciation and amortization shown separately below)
2,551,485
3,163,443
3,108,651
Selling, general, and administrative expenses
306,282
175,373
152,493
Impairment of goodwill and indefinite-lived assets
1,232,000
(Recovery from) loss on Take 5
(7,700
)
79,165
Depreciation and amortization
238,598
232,573
225,233
Total expenses
3,088,665
3,571,389
4,797,542
Operating income (loss)
67,006
213,674
(1,089,914
)
Interest expense, net
234,044
232,077
229,643
Loss before income taxes
(167,038
)
(18,403
)
(1,319,557
)
(Benefit from) provision for income taxes
(5,331
)
1,353
(168,334
)
Net loss
(161,707
)
(19,756
)
(1,151,223
)
Less: net income attributable to noncontrolling interest
736
1,416
6,109
Net loss attributable to stockholders of Advantage Solutions Inc.
(162,443
)
(21,172
)
(1,157,332
)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
8,827
5,497
(8,961
)
Total comprehensive loss attributable to stockholders of Advantage Solutions Inc.
$
(153,616
)
$
(15,675
)
$
(1,166,293
)
Net loss per common share:
Basic and diluted
$
(0.73
)
$
(0.10
)
$
(5.68
)
Weighted-average number of common shares:
Basic and diluted
223,227,833
203,750,000
203,750,000
See Notes to the Consolidated Financial Statements.
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ADVANTAGE SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Accumulated
Advantage
Additional
Retained
Loans
Other
Solutions Inc.
Nonredeemable
Total
Common Stock
Paid-in
Earnings
to
Comprehensive
Stockholders
noncontrolling
Stockholders
(in thousands, except share data)
Shares
Amount
Capital
(Deficit)
Topco
Income (Loss)
Equity
Interests
Equity
Balance at January 1, 2018, as originally reported
125
$
$
2,345,360
$
433,209
$
(248
)
$
(4,689
)
$
2,773,632
$
73,734
$
2,847,366
Retroactive application of recapitalization
203,749,875
20
(20
)
Balance at January 1, 2018, as adjusted
203,750,000
20
2,345,340
433,209
(248
)
(4,689
)
2,773,632
73,734
2,847,366
Comprehensive loss
Net (loss) income
(1,157,332
)
(1,157,332
)
6,109
(1,151,223
)
Foreign currency translation adjustments
(8,961
)
(8,961
)
(3,384
)
(12,345
)
Total comprehensive (loss) income
(1,166,293
)
2,725
(1,163,568
)
Increase in noncontrolling interest
588
588
Redemption of noncontrolling interest
(1,196
)
(1,196
)
(197
)
(1,393
)
Loans to Karman Topco L.P.
(5,802
)
(5,802
)
(5,802
)
Equity-based compensation
(7,877
)
(7,877
)
(7,877
)
Balance at December 31, 2018
203,750,000
20
2,336,267
(724,123
)
(6,050
)
(13,650
)
1,592,464
76,850
1,669,314
Comprehensive loss
Net (loss) income
(21,172
)
(21,172
)
1,416
(19,756
)
Foreign currency translation adjustments
5,497
5,497
1,515
7,012
Total comprehensive (loss) income
(15,675
)
2,931
(12,744
)
Increase in noncontrolling interest
12,749
12,749
Redemption of noncontrolling interest
(109
)
(109
)
(523
)
(632
)
Loans to Karman Topco L.P.
(194
)
(194
)
(194
)
Equity-based compensation
1,313
1,313
1,313
Balance at December 31, 2019
203,750,000
20
2,337,471
(745,295
)
(6,244
)
(8,153
)
1,577,799
92,007
1,669,806
Comprehensive loss
Net (loss) income
(162,443
)
(162,443
)
736
(161,707
)
Foreign currency translation adjustments
8,827
8,827
4,211
13,038
Total comprehensive (loss) income
(153,616
)
4,947
(148,669
)
Recapitalization transaction, net of fees and deferred taxes
109,675,182
11
929,173
929,184
929,184
Issuance of performance shares
5,000,000
1
(1
)
Loans to Karman Topco L.P.
(72
)
(72
)
(72
)
Equity-based compensation
89,774
89,774
89,774
Balance at December 31, 2020
318,425,182
$
32
$
3,356,417
$
(907,738
)
$
(6,316
)
$
674
$
2,443,069
$
96,954
$
2,540,023
See Notes to Consolidated Financial Statements
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ADVANTAGE SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(in thousands)
2020
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
$
(161,707
)
$
(19,756
)
$
(1,151,223
)
Adjustments to reconcile net loss to net cash provided by
operating activities
Noncash interest expense
15,550
18,980
19,120
Extinguishment costs related to repayment of First and Second Lien Credit Agreements
11,275
Impairment of goodwill and long-lived assets
1,232,000
Loss on Take 5
79,165
Depreciation and amortization
238,598
232,573
225,233
Fair value adjustments related to contingent consideration
16,091
6,064
(45,662
)
Deferred income taxes
(14,357
)
(68,063
)
(213,615
)
Equity-based compensation
89,774
1,313
(7,877
)
Equity in earnings of unconsolidated affiliates
(5,138
)
(4,850
)
(4,784
)
Distribution received from unconsolidated affiliates
968
707
2,058
Loss on disposal of property and equipment
21,091
Loss on divestiture
1,033
Changes in operating assets and liabilities, net of effects from purchases of businesses:
Accounts receivable
116,105
(33,290
)
73,693
Prepaid expense and other assets
24,687
19,114
(2,101
)
Accounts payable
10,880
21,635
(14,364
)
Accrued compensation and benefits
4,514
19,417
(2,930
)
Deferred revenues
4,535
2,207
12,688
Other accrued expenses and other liabilities
(27,136
)
(45,741
)
(75,053
)
Net cash provided by operating activities
345,730
151,343
126,348
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired
(68,057
)
(10,582
)
(186,014
)
Purchase of investment in unconsolidated affiliates
(1,881
)
(269
)
Purchase of property and equipment
(30,946
)
(52,419
)
(47,162
)
Proceeds from divestiture
1,750
2,000
Return on investments from unconsolidated affiliates
1,324
Net cash used in investing activities
(99,003
)
(61,808
)
(231,445
)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit
213,927
20,070
30,000
Payments on lines of credit
(164,828
)
(19,697
)
(30,000
)
Proceeds from accounts receivable securitization facility
120,000
Payment under accounts receivable securitization facility
(120,000
)
Proceeds from issuance of long-term debt
350,368
Proceeds from government loans for COVID-19 relief
4,822
Proceeds from new borrowings under the New Senior Secured Credit Facilities
2,100,000
Principal payments on long-term debt
(3,229,848
)
(25,810
)
(27,070
)
Proceeds from recapitalization, net of fees
925,216
Settlement of Daymon credit agreement
(205,128
)
Contingent consideration payments
(18,314
)
(21,172
)
(26,811
)
Financing fees paid
(58,391
)
(17,071
)
Holdback payments
(2,736
)
(1,224
)
(845
)
Contribution from noncontrolling interest
10,257
Redemption of noncontrolling interest
(632
)
(3,303
)
Net cash (used in) provided by financing activities
(230,152
)
(38,208
)
70,140
Net effect of foreign currency fluctuations on cash
4,366
3,179
(9,146
)
Net change in cash, cash equivalents and restricted cash
20,941
54,506
(44,103
)
Cash, cash equivalents and restricted cash, beginning of period
199,025
144,519
188,622
Cash, cash equivalents and restricted cash, end of period
$
219,966
$
199,025
$
144,519
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest
$
151,030
$
210,209
$
228,230
Cash payments for income taxes
$
18,263
$
59,465
$
70,248
Non-cash proceeds from divestitures
$
6,750
Purchase of property and equipment recorded in accounts payable
and accrued expenses
$
508
$
250
$
2,690
Deferred taxes related to transaction costs in connection with recapitalization
$
3,968
Note payable related to settlement of contingent consideration
$
4,048
See Notes to the Consolidated Financial Statements.
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ADVANTAGE SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
On July 25, 2014, Advantage Solutions Inc. (ASI Intermediate) acquired Advantage Sales & Marketing Inc. (the
2014 Topco Acquisition) from AGS Topco Holdings, L.P. and its private equity sponsor, Apax Partners. As a result of the 2014 Topco Acquisition, Advantage Sales & Marketing Inc. became a wholly owned indirect subsidiary of ASI
Intermediate, of which Karman Topco L.P. (Topco) is the parent.
The units of Topco are held by equity funds affiliated with
or advised by CVC Capital Partners, Leonard Green & Partners, Juggernaut Capital Partners, Centerview Capital, L.P., Bain Capital and Yonghui Investment Limited, as well as by current and former members of the Companys management.
On September 7, 2020, ASI Intermediate entered into an agreement and plan of merger (as amended, modified, supplemented or waived,
the Merger Agreement), with Conyers Park II Acquisition Corp, a Delaware corporation, now known as Advantage Solutions Inc. (Conyers Park), CP II Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Conyers
Park (Merger Sub), and Topco. Conyers Park neither engaged in any operations nor generated any revenue. Based on Conyers Parks business activities, it was a shell company as defined under the Securities Exchange Act of
1934, as amended (the Exchange Act)
On October 28, 2020 (the Closing Date), Conyers Park consummated the
merger pursuant to the Merger Agreement, by and among Merger Sub, ASI Intermediate (Legacy Advantage), and Topco. Pursuant to the Merger Agreement, Merger Sub was merged with and into Legacy Advantage with Legacy Advantage being the
surviving company in 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. (the Company or Advantage) and ASI Intermediate changed its name to ASI Intermediate, Corp.
As of the Closing, Topco received 203,750,000 shares of the Companys Class A common stock, par value $0.0001 per share (the
Common Stock). Additionally, 5,000,000 shares of Class A common stock (Performance Shares) were issued to Topco at Closing, which were subject to vesting upon satisfaction of a market performance condition for any period
of 20 trading days out of 30 consecutive trading days during the five-year period after the Closing, and Topco was not able to vote or sell such shares until vesting. Such Performance Shares vested on January 15, 2021 when the market
performance condition was satisfied.
In connection with the entry into the Merger Agreement, Conyers Park also entered into the
Subscription Agreements with certain investors (the PIPE Investors), pursuant to which, among other things, Conyers Park agreed to issue and sell in a private placement shares of Conyers Park Class A common stock for a purchase
price of $10.00 per share. The PIPE Investors, other than the Advantage Sponsors and their affiliates, have agreed to purchase an aggregate of 51,130,000 shares of Conyers Park Class A common stock. Certain of the Advantage Sponsors or their
affiliates agreed to purchase an aggregate of 34,410,000 shares of Conyers Park Class A common stock, and, at their sole discretion. The shares of Conyers Park Class A common stock purchased by the PIPE Investors in the private placement
are referred to as the PIPE Shares and the aggregate purchase price paid for the PIPE Shares is referred to as the PIPE Investment Amount. At the Closing, the PIPE Investment was consummated, and 85,540,000 shares of
Class A common stock were issued for aggregate gross proceeds of $855.4 million.
Further, as part of the Closing, Conyers
Parks public shareholders redeemed 32,114,818 shares of Class A common stock at a redemption price of $10.06 per share, resulting in a $323.1 million payment from Conyers Parks trust account proceeds and 12,885,182 shares of Class A
common stock of Conyers Park existing public
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stockholders remain outstanding. Additionally, 11,250,000 shares of Conyers Park Class B common stock, par value $0.0001 per share, held by the CP Sponsor, automatically converted into shares of
Conyers Park Class A common stock. As of the Closing, the PIPE Investors, Conyers Park existing public stockholders, and CP Sponsor collectively held 109,675,182 shares of Class A common stock.
The Merger was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Conyers Park is treated
as the acquired company for financial reporting purposes. This determination was primarily based on the current stockholder of Legacy Advantage, Topco, having a relative majority of the voting power of the combined entity, the operations
of Legacy Advantage prior to the Merger comprising the only ongoing operations of the combined entity, and senior management of Legacy Advantage comprising the senior management of the combined entity. Accordingly, for accounting purposes, the
financial statements of the combined entity represent a continuation of the financial statements of Legacy Advantage with the acquisition being treated as the equivalent of Legacy Advantage issuing stock for the net assets of Conyers Park,
accompanied by a recapitalization. The net assets of Conyers Park are stated at historical cost, with no goodwill or other intangible assets recorded. The shares and net (loss) income per share available to holders of the Legacy Advantages
common stock, prior to the Merger, have been retroactively restated as shares reflecting the exchange ratio established in the Merger Agreement.
In connection with the Merger, ASI Intermediate received $93.9 million from Conyers Parks trust account balance after the payments of
$323.1 million redemptions by Conyers Park public stockholders and of $37.3 million transaction expenses incurred by Conyers Park. ASI Intermediate incurred direct and incremental costs of approximately $24.0 million related to the equity
issuance, consisting primarily of investment banking, legal, accounting and other professional fees, which were recorded to additional paid-in capital as a reduction of proceeds. In addition, the Company
incurred $39.8 million in transaction bonuses and $76.0 million in non-cash share-based compensation expense due to the accelerated vesting of Topcos legacy share-based compensation plan. The
transaction bonuses and share-based compensation are included in Selling, general and administrative expenses on our Consolidated Statement of Operations and Comprehensive Loss for year ended December 31, 2020.
The Company is headquartered in Irvine, California and is a leading business solutions provider to consumer goods manufacturers and retailers.
The Company is a provider of outsourced solutions to consumer goods companies and retailers.
The Companys common stock and warrants
are now listed on the Nasdaq Global Select market under the symbol ADV and warrants to purchase the 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 and Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its controlled subsidiaries and have been prepared in accordance
with accounting principles generally accepted in the United States (U.S. GAAP). The financial information set forth herein reflects: (a) the consolidated statements of operations and comprehensive loss, stockholders equity,
and cash flows for the years ended December 31, 2020, 2019, and 2018 and (b) the consolidated balance sheets as of December 31, 2020 and 2019. The consolidated financial statements for the years ended December 31, 2020, 2019, and
2018 reflect Topcos basis in the assets and liabilities of the Company, as a result of the 2014 Topco Acquisition. The Companys share in the earnings or losses for its joint ventures is reflected in Investments in unconsolidated
affiliates and Cost of revenues in the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Loss, respectively. All intercompany balances and transactions have been eliminated upon consolidation.
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Take 5 Matter
On April 1, 2018, the Company acquired certain assets and assumed liabilities of Take 5 Media Group (Take 5) for total
consideration of $81.6 million, including the fair value of contingent consideration of $4.6 million and holdback liabilities of $0.8 million. 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 5s operations. In July 2019, as a result of the Companys 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 Companys acquisition of Take 5. The Company also determined that the amounts assigned to the assets of Take 5 acquired on the acquisition date had been improperly established based
on inaccurate assumptions as to the fair value of the assets acquired and recorded a loss on Take 5 charge of $79.2 million in the Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2018.
In May 2020, the Company received $7.7 million from its representation warranty and indemnity policy related to the Take 5 acquisition
for claims related to the Take 5 Matter, the maximum aggregate recovery under the policy.
Use of Estimates
The preparation of the Companys consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from such estimates. The most significant estimates include revenues, workers compensation and employee medical claim reserves, fair value of contingent consideration, leases, income taxes, equity-based compensation, derivative
instruments and fair value considerations in applying purchase accounting and assessing goodwill and other asset impairments.
Foreign Currency
The Companys reporting currency is U.S. dollars as that is the currency of the primary economic environment in which the Company
operates. The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenues and
expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are included in Accumulated other comprehensive income (loss) in the Consolidated
Statements of Stockholders Equity. Transactions in foreign currencies other than the entities functional currency are converted using the rate of exchange at the date of transaction. The gains or losses arising from the revaluation of
foreign currency transactions to functional currency are included in Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss. Unrealized foreign currency exchange gains and losses
on certain intercompany transactions that are of a long-term investment nature (i.e., settlement is not planned or anticipated in the foreseeable future) are also recorded in accumulated other comprehensive income (loss) in stockholders
equity. The Company reports gains and losses from foreign exchange rate changes related to intercompany receivables and payables that are of a long-term investment nature, in Other comprehensive income (loss) in the
Consolidated Statements of Operations and Comprehensive Loss. These items represented net losses of $2.1 million, $2.9 million, and $4.4 million during the fiscal years ended December 31, 2020, 2019, and 2018, respectively.
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Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments having an original maturity of three months or less. The
Companys investments consist primarily of institutional money market funds and U.S. Treasury securities. The Companys investments are carried at cost, which approximates fair value. The Company has restricted cash related to funds
received from clients that will be disbursed at the direction of those clients. Corresponding liabilities have been recorded in Other accrued expenses in the Consolidated Balance Sheets.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Companys consolidated
balance sheets that sum to the total of the same such amounts shown in the Companys Consolidated Statements of Cash Flows:
December 31,
(in thousands)
2020
2019
2018
Cash and cash equivalents
$
204,301
$
184,224
$
141,590
Restricted cash
15,665
14,801
2,929
Total cash, cash equivalents and restricted cash
$
219,966
$
199,025
$
144,519
Accounts Receivable and Expected Credit Losses
Accounts receivable consist of amounts due from clients for services provided in normal business activities and are recorded at invoiced
amounts. The Company measures expected credit losses against certain billed receivables based upon the latest information regarding whether invoices are ultimately collectible. Assessing the collectability of client receivables requires management
judgment. The Company determines its expected credit losses by specifically analyzing individual accounts receivable, historical bad debts, client credit-worthiness, current economic conditions, and accounts receivable aging trends. Valuation
reserves are periodically re-evaluated and adjusted as more information about the ultimate collectability of accounts receivable becomes available. Upon determination that a receivable is uncollectible, the
receivable balance and any associated reserve is written off.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts
receivable and cash balances at various financial institutions. The Company maintains cash balances in accounts at various financial institutions. At times such cash balances may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
Derivatives
The Company uses derivative financial instruments to hedge interest rate and foreign exchange risk. Derivative instruments, used to hedge
interest rates, consist of interest rate swaps and interest rate caps. Interest rate swap contracts involve the exchange of floating rate interest payment obligations for fixed interest rate payments without the exchange of the underlying principal
amounts. Interest rate cap contracts limit the floating interest rate exposure to the indicative rate in the agreement. Derivatives are initially recognized at fair value on the date a contract is entered into and are subsequently re-measured at fair value. The fair values of derivatives are measured using observable market prices or, where market prices are not available, by using discounted expected future cash flows at prevailing interest
and exchange rates. The Company does not designate these derivatives as hedges for accounting purposes, and as a result, all changes in the fair value of derivatives, used to hedge interest rates and foreign exchange risk, are recorded in
Interest expense and in Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss, respectively. These arrangements contain an element of risk in that the counterparties
may be unable to meet the terms of such
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arrangements. In the event the counterparties are unable to fulfill their related obligations, the Company could potentially incur significant additional costs by replacing the positions at then
current market rates. The Company manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management.
Property and Equipment
Property and equipment are stated at cost, and the balances are presented net of accumulated depreciation. Depreciation expense is calculated
using the straight-line method over the estimated useful lives of the assets. The following table provides the range of estimated useful lives used for each asset type:
Leasehold improvements
310 years
Furniture and fixtures
37 years
Computer hardware and other equipment
35 years
Software
35 years
The Company capitalizes certain direct costs associated with the development and purchase of internal-use software within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally not exceeding five years.
Leasehold improvements are amortized on a straight-line basis over the shorter of their respective lease terms or their respective estimated
useful lives. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the Consolidated Balance Sheets and the resulting gain or loss is reflected in the Cost of revenues and Selling, general,
administrative expenses within the Consolidated Statements of Operations and Comprehensive Loss, depending on the nature of the assets. Expenditures for maintenance and repairs are expensed as incurred, whereas expenditures for improvements
and replacements are capitalized.
Equity Method Investments
Investments in companies in which the Company exercises significant influence over the operating and financial policies of the investee and are
not required to be consolidated are accounted for using the equity method. The Companys proportionate share of the net income or loss of equity method investments is included in results of operations and any dividends received reduce the
carrying value of the investment. The excess of the cost of the Companys investment over its proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill and included in the carrying
amount of the investment. Goodwill in the equity method investments is not amortized. Gains and losses from changes in the Companys ownership interests are recorded in results of operations until control is achieved. In instances in which a
change in the Companys ownership interest results in obtaining control, the existing carrying value of the investment is remeasured to the acquisition date fair value and any gain or loss is recognized in the Consolidated Statements of
Operations and Comprehensive Loss.
Distributions received from unconsolidated entities that represent returns on the investors
investment are reported as cash flows from operating activities in the Companys statement of cash flows. Cash distributions from unconsolidated entities that represent returns of the Companys investment are reported as cash flows from
investing activities.
Business Combinations
The Company accounts for business combinations using the acquisition method. Under this method, the purchase price of an acquisition is
allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets
acquired and liabilities assumed, such excess is allocated to goodwill. Factors giving rise to goodwill generally include assembled workforce, geographic presence, expertise,
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and synergies that are anticipated as a result of the business combination, including enhanced product and service offerings. The Company determines the estimated fair values after review and
consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management. The Company adjusts the preliminary purchase price allocation, as necessary, during the measurement period of up to one
year after the acquisition closing date as the Company obtains more information as to facts and circumstances existing at the acquisition date impacting asset valuations and liabilities assumed. Goodwill acquired in business combinations is assigned
to the reporting unit expected to benefit from the combination as of the acquisition date. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired in an
acquisition. The Company tests for impairment of goodwill at the reporting unit level. The Company generally combines reporting units, which are a component of an operating segment when they have similar economic characteristics, nature of services,
types of client, distribution methods and regulatory environment. The Company has two reporting units, sales and marketing, which are also the Companys operating segments.
The Company tests its goodwill for impairment at the beginning of the fourth quarter of a given fiscal year and whenever events or changes in
circumstances indicate that the carrying value of a reporting unit may exceed its fair value. The Company has the option to perform a qualitative assessment of whether it is more likely than not that a reporting units fair value is less than
its carrying value before performing a quantitative impairment test. If the qualitative assessment indicates it is not more likely than not that the fair value of a reporting unit, as determined applying the quantitative impairment test described
below, is less than the carrying amount, then there is no need to perform the quantitative impairment test. Upon performing the quantitative impairment test, if the fair value of the reporting unit is less than its carrying amount, goodwill is
impaired and the excess of the reporting units carrying value over the fair value is recognized as an impairment loss; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit.
The Companys annual goodwill impairment assessment for the year ended December 31, 2020 was performed as of October 1, 2020.
The Company utilizes a combination of income and market approaches to estimate the fair value of its reporting units. The income approach utilizes estimates of discounted cash flows of the reporting units, which requires assumptions for the
reporting units revenue growth rates, operating margins, terminal growth rates, and discount rates all of which require significant management judgment. The market approach applies market multiples derived from the historical earnings data of
selected guideline publicly-traded companies to the Companys reporting units businesses to yield a second assumed value of each reporting unit, which requires significant management judgment. The guideline companies are first screened by
industry group and then further narrowed based on the reporting units business descriptions, markets served, competitors, operating margins, and revenue size. Market multiples are then selected from within the range of these guideline
companies multiples based on the subject reporting unit. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy (described in Fair Value
Measurements, below). The Company based its fair value estimates on assumptions it believes to be reasonable but which are unpredictable and inherently uncertain. A change in these underlying assumptions would cause a change in the results of
the tests and, as such, could cause fair value to be less than the carrying amounts and result in an impairment of goodwill in the future. Additionally, if actual results are not consistent with the estimates and assumptions or if there are
significant changes to the Companys planned strategy, it may cause fair value to be less than the carrying amounts and result in an impairment of goodwill in the future.
The Company compares a weighted average of the output from the income and market approaches to the carrying value of each reporting unit. The
Company also compares the aggregate estimated fair value of its reporting units to the estimated value of its total invested capital on a marketable basis.
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Based on the results of the Companys quantitative impairment test performed for its
reporting units, the Company determined that its goodwill is not impaired for the year ended December 31, 2020. The fair value of the sales reporting unit exceeded its carrying value by 8.3%. The fair value of the marketing reporting unit
significantly exceeded its carrying value, which the Company defines as greater than 20%. The Company determined that no additional triggering events occurred that required the Company to perform an interim goodwill impairment test as of
December 31, 2020.
In performing the quantitative impairment test for the year ended December 31, 2019, the Company had also
determined that its goodwill was not impaired. The fair value of the sales reporting unit exceeded its carrying value by 3.5%. The fair value of the marketing reporting unit significantly exceeded its carrying value. The Company determined that no
additional triggering events occurred that required the Company to perform an interim goodwill impairment test as of December 31, 2019. Accordingly, no impairment related to the Companys goodwill was recorded for the year ended
December 31, 2019.
During the year ended December 31, 2018, based on the results of the Companys quantitative impairment
test performed for the sales reporting unit, the Company recognized a $652.0 million non-cash goodwill impairment charge. While there was no single determinative event or factor, the consideration of the
weight of evidence of several factors that developed during 2018 led the Company to conclude that it was more likely than not that the fair value of the sales reporting unit was below its carrying value. These factors included: (i) the decrease
of revenues and profitability due to a large retailer revising its in-store retail merchandising program to restrict manufacturers ability to select any third-party outsource provider to perform
unrestricted and unmonitored retail merchandising, (ii) the unrelated decrease of revenues and profitability related to reduced services from several clients in the grocery channel and foodservice channel, (iii) the combination of the
Companys completed third quarter and preliminary fourth quarter results being below managements expectations, and (iv) the development and approval of the Companys 2019 annual operating plan in the fourth quarter of 2018,
which provided additional insights into expectations such as lower long-term revenue growth and profitability expectations. Based on these factors, the Company recorded the non-cash goodwill impairment charge
in 2018, which has been reflected in the Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2018. As the sales reporting unit was written down to its respective fair value, there was zero excess fair
value over its carrying amount as of December 31, 2018.
Based on the results of the quantitative impairment test performed for the
marketing reporting unit for 2018, the Company determined that the Companys goodwill was not impaired for the marketing reporting unit for the year ended December 31, 2018. The fair value of the marketing reporting unit significantly
exceeded its carrying value.
The Companys indefinite-lived intangible assets are its sales and marketing trade names. Intangible
assets with indefinite useful lives are not amortized but tested annually, at the beginning of the fourth quarter, for impairment or more often if events occur or circumstances change that would create a triggering event. The Company has the option
to perform a qualitative assessment of whether it is more likely than not that the indefinite-lived intangible assets fair value is less than its carrying value before performing a quantitative impairment test. The Company tests its
indefinite-lived intangible assets for impairment using a relief from royalty method by comparing the estimated fair values of the indefinite-lived intangible assets with the carrying values. The estimates used in the determination of fair value are
subjective in nature and involve the use of significant assumptions. These estimates and assumptions include revenue growth rates, terminal growth rates, discount rates and royalty rates, all of which require significant management judgment. The
assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The Company based its fair value estimates on assumptions it believes to be reasonable, but which
are unpredictable and inherently uncertain. Actual future results may differ from the estimates.
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In connection with the Companys annual quantitative impairment test as of
October 1, 2020 and 2019, the Company concluded that its indefinite-lived intangible assets were not impaired for the years ended December 31, 2020 and 2019. The fair value of the indefinite-lived intangible assets related to sales trade
names exceeded its carrying value by 13.3% and 8.3% for the years ended December 31, 2020 and 2019, respectively. The fair value of the indefinite-lived intangible assets related to marketing trade names exceeded its carrying value by 8.4% and
10.0% for the years ended December 31, 2020 and 2019, respectively. The Company determined that no additional triggering events occurred that required the Company to perform an interim impairment test of indefinite-lived intangible assets as of
December 31, 2020 and 2019. Accordingly, no impairment related to the Companys intangible assets was recorded for the years ended December 31, 2020 and 2019.
During the year ended December 31, 2018, the Company concluded the carrying value of the indefinite-lived trade name in the sales
reporting unit exceeded its estimated fair value. While there was no single determinative event or factor, the factors that led to the impairment were the same circumstances outlined in the goodwill impairment discussion above. As a result, the
Company recognized a non-cash intangible asset impairment charge of $580.0 million during the year ended December 31, 2018, which was reflected in its Consolidated Statements of Operations and
Comprehensive Loss. Based on the quantitative test performed for the indefinite-lived marketing trade name, the Company determined that the indefinite-lived trade name in the marketing reporting unit was not impaired for the year ended
December 31, 2018.
Long-Lived Assets
Long-lived assets to be held and used, including finite-lived intangible assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated
future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are
impaired, the impairment recognized is measured as the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of
discounted cash flows would be the rate required for a similar investment of like risk. No impairment related to the Companys long-lived assets was recorded during the years ended December 31, 2020, 2019, and 2018.
As the Company assesses impairment of long-lived assets at the lowest level for which identifiable cash flows are largely independent of the
cash flows of other assets and liabilities, the Company has determined that the asset group for impairment testing is comprised of the assets and liabilities of the Companys operating segments. The Company has identified client relationships
as the primary asset because it is the principal asset from which the components derive their cash flow generating capacity.
Contingent Consideration
Certain of the Companys acquisition and sale agreements include contingent consideration arrangements, which are generally based on the
achievement of future financial performance. If it is determined the contingent consideration arrangements are not compensatory, the fair values of these contingent consideration arrangements are included as part of the purchase price of the
acquisitions or divestitures on their respective transaction dates. For each transaction, the Company estimates the fair value of contingent consideration payments as part of the initial purchase price and records the estimated fair value of
contingent consideration related to proceeds from divestitures as an asset in Other Assets or related to purchases of businesses as a liability in Other accrued expenses or Other long-term liabilities in the
Consolidated Balance Sheets.
The Company reviews and assesses the estimated fair value of contingent consideration on a quarterly basis,
and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of contingent consideration liabilities related to the time component of the present value calculation are reported
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in Interest expense in the Consolidated Statements of Operations and Comprehensive Loss. Adjustments to the estimated fair value related to changes in all other unobservable inputs
are reported in Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss.
The portion of the cash settlement up to the acquisition date fair value of the contingent consideration are classified as Contingent
consideration payments in cash flows from financing activities, and amounts paid in excess of the acquisition date fair value are classified as Other accrued expenses and other liabilities in cash flows from operating activities in
the Consolidated Statements of Cash Flows.
Leases
In the first quarter of 2019, the Company adopted ASC 842, Leases , using the modified retrospective transition method.
The Company has obligations under various real estate leases, equipment leases, and software license agreements. The Company assesses whether
these arrangements are or contain leases at lease inception. Classification of the leases between financing and operating leases is determined by assessing whether the lease transfers ownership of the asset to the Company, the lease grants an option
for the Company to purchase the underlying asset, the lease term is for the majority of the remaining assets economic life, or if the minimum lease payments equals or substantially exceed all of the leased assets fair market value. As of
December 31, 2020, the Company did not have any finance leases. See Note 8, Leases , for further information regarding the Companys operating leases.
Self-Insurance Liability
The Company maintains a high deductible program for workers compensation claims. Losses and liabilities relating to workers
compensation claims are fully insured beyond the Companys deductible limits. The Companys estimated liabilities are not discounted and are based on information provided by third party administrators, combined with managements
judgment regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation and claims settlement practices.
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 Companys 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 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.
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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:
Year Ended December 31,
(in thousands)
2020
2019
2018
Sales brand-centric services
$
1,204,240
$
1,209,480
$
1,177,989
Sales retail-centric services
856,353
745,225
679,015
Total sales revenues
2,060,593
1,954,705
1,857,004
Marketing brand-centric services
429,200
474,928
424,373
Marketing retail-centric services
665,878
1,355,430
1,426,251
Total marketing revenues
1,095,078
1,830,358
1,850,624
Total revenues
$
3,155,671
$
3,785,063
$
3,707,628
The Company is party to certain client contracts that include variable consideration, whereby the ultimate
consideration is contingent on future events such as the clients sales to retailers, hours worked, event count, costs incurred, and performance incentive bonuses. For commission based service contracts, the consideration received from the
client is variable because the Company earns an agreed upon percentage of the clients sales to retailers, which is agreed upon on a manufacturer-by-manufacturer
basis. Revenues are recognized for the commission earned during the applicable reporting period. The Company generally earns commission revenues from headquarter relationship management, analytics, insights and intelligence, e-commerce, administration, private label development and retail services arrangements. As part of these arrangements, the Company provides a variety of services to consumer goods manufacturers in order to improve
the manufacturers sales at retailers. This includes primarily outsourced sales, business development, category and space management, relationship management, and sales strategy services. In exchange for these services, the Company earns an
agreed upon percentage of its clients sales to retailers, which is agreed upon on a manufacturer-by-manufacturer basis.
For service contracts whereby the client is charged a fee per hour incurred or fee per event completed, revenues are recognized over time as
actual hours are incurred or as events are completed, respectively. For service contracts with a cost-plus arrangement, revenues are recognized on a gross basis over time for a given period based on the actual costs incurred plus a fixed mark-up fee that is negotiated on a client-by-client basis.
For certain contracts with clients, the Company is entitled to additional fees upon meeting specific performance goals or thresholds, which
are referred to as bonus revenues. Bonus revenues are estimated and are recognized as revenues as the related services are performed for the client.
The variability of the consideration for the services transferred during a reporting period is typically resolved by the end of the reporting
period. However, for certain client contracts, the Company is required to estimate the variable consideration for the services that have been transferred to the client during the reporting period. The Company typically estimates the variable
consideration based on the expected value method. Estimates are based on historical experience and current facts known during the reporting period. The Company only recognizes revenues related to variable consideration if it is probable that a
significant reversal of revenues recognized will not occur when the uncertainty associated with the variable consideration is resolved. When such probable threshold is not satisfied, the Company will constrain some or all of the variable
consideration and the constrained variable consideration will not be recognized as revenues. The Company records an adjustment to revenue for differences between estimated revenues and the amounts ultimately invoiced to the client. Adjustments to
revenue during the current period related to services transferred during prior periods were not material during the year ended December 31, 2020.
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The Company has contracts that include fixed consideration such as a fee per project or a
fixed monthly fee. For contracts with a fee per project, revenues are recognized over time using an input method such as hours worked that reasonably depicts the Companys performance in transferring control of the services to the client. The
Company determined that the input method represents a reasonable method to measure the satisfaction of the performance obligation to the client. For contracts with a fixed monthly fee, revenues are recognized using a time-based measure resulting in
a straight-line revenue recognition. A time-based measure was determined to represent a reasonable method to measure the satisfaction of the performance obligation to the client because the Company has a stand ready obligation to make itself
available to provide services upon the clients request or the client receives the benefit from the Companys services evenly over the contract period.
The Company evaluates each client contract individually in accordance with the applicable accounting guidance to determine whether the Company
acts as a principal (whereby the Company would present revenues on a gross basis), or as an agent (whereby the Company would present revenues on a net basis). While the Company primarily acts as a principal in its arrangements and reports revenues
on a gross basis, the Company will occasionally act as an agent and accordingly presents revenues on a net basis. For example, for certain advertising arrangements, the Companys clients purchase media content in advance, and the Company does
not take on any risk of recovering its cost to acquire the media content. As a result, the Company determined it acts as the agent in these arrangements and records revenues and their related costs on a net basis. However, in cases where media
content is not purchased in advance by its clients, the Company records such revenues and its related costs on a gross basis, as it bears the risk of recovering the costs to acquire the revenues related to such media content and it is responsible
for fulfillment of the services thereunder.
Substantially all of the Companys contracts with its clients either have a contract
term that is less than one year with options for renewal and/or can be cancelled by either party upon 30 to 120 days notice. For the purpose of disclosing the transaction price allocated to remaining unsatisfied performance obligations or
partially satisfied performance obligations, the Company elected policies to: (1) exclude contracts with a contract term of one year or less and (2) exclude contracts with variable consideration that is allocated entirely to a wholly
unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation when that performance obligation qualifies as a series of remaining performance obligations.
After applying these policy elections, the Company determined that it does not have a significant amount of fixed considerations allocated to remaining performance obligations for contracts with a contract term that exceeds one year.
When the Company satisfies its performance obligation and recognizes revenues accordingly, the Company has a present and unconditional right
to payment and records the receivable from clients in Accounts receivable in the Consolidated Balance Sheet. The Companys general payment terms are short-term in duration and the Company does not adjust the promised amount of
consideration for the effects of a significant financing component.
Contract liabilities represent deferred revenues which are cash
payments that are received in advance of the Companys satisfaction of the applicable obligation(s) and are included in Deferred revenues in the Consolidated Balance Sheet. Deferred revenues are recognized as revenues when the
related services are performed for the client. Revenues recognized during the year ended December 31, 2020 included $33.2 million of Deferred revenues as of December 31, 2019.
Income Taxes
The
Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of
assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are
expected to be realized or settled. The income
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tax provision (benefit) is computed on the pre-tax income (loss) of the entities located within each taxing jurisdiction based on current tax law. A
valuation allowance for deferred tax assets is recorded to the extent that the ultimate realization of the deferred tax assets is not considered more likely than not. The Company believes its deferred tax assets are more likely than not to be
realized based on historical and projected future results, or a valuation allowance is established.
Realization of the Companys
deferred tax assets is principally dependent upon its achievement of future taxable income, the estimation of which requires significant management judgment. These judgments regarding future profitability may change due to many factors, including
future market conditions and the Companys ability to successfully execute its business plans. These changes, if any, may require adjustments to deferred tax asset balances and deferred income tax expense.
Uncertain Tax Positions
The Company accounts for uncertain tax positions when it is more likely than not that the tax position will not be sustained on examination by
the taxing authorities, based on the technical merits of the position. As of December 31, 2020, and 2019, the Companys unrecognized tax benefits were $0.6 million and $0.6 million, respectively. All the unrecognized tax benefits
as of December 31, 2020 would be included in the effective tax rate if recognized in future periods.
The Company is unaware of any
positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next twelve months. The Company files tax returns in the United States, various states and foreign
jurisdictions. With few exceptions, as of December 31, 2020, the Company is no longer subject to federal, state, or non-U.S. income tax examinations by tax authorities for years prior to 2016.
The Company has elected to classify interest and penalties as components of tax expense. These amounts were immaterial for the years ended
December 31, 2020, 2019 and 2018.
Equity-based Compensation
The Company measures the cost of non-employee services received in exchange for an award of equity
instruments based on the measurement date fair value consistent with the vesting of the awards and measuring the fair value of these units at the end of each measurement period. The cost is recognized over the requisite service period. The
Companys equity-based compensation is based on grant date fair value determined utilizing Backsolve Option Pricing Method (OPM) for its Common Series C Units and a combination of the OPM and Monte Carlo valuation model for its
Common Series C-2 Units.
Other Comprehensive Income (Loss)
The Companys comprehensive loss includes net loss as well as foreign currency translation adjustments, net of tax. Unrealized foreign
currency exchange gains and losses on certain intercompany transactions that are of a long-term investment nature (i.e., settlement is not planned or anticipated in the foreseeable future) are also recorded in accumulated other comprehensive loss in
stockholders equity.
Earnings Per Share
The Company calculates earnings per share (EPS) using a dual presentation of basic and diluted earnings per share. Basic earnings
per share is calculated by dividing net income 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 outstanding share option awards, non-vested share awards, common stock warrants, and Performance Shares.
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Diluted earnings per share is computed by dividing the net income by the weighted-average number of common share equivalents outstanding 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. As a
result of the Transactions, the Company has retrospectively adjusted the weighted-average number of common shares outstanding prior to October 28, 2020 by multiplying them by the exchange ratio used to determine the number of common shares into
which they converted.
The following is a reconciliation of basic and diluted net loss per common share:
Year Ended December 31,
(in thousands, except share and earnings per share data)
2020
2019
2018
Basic and diluted:
Net loss attributable to stockholders of Advantage Solutions Inc.
$
(162,443
)
$
(21,172
)
$
(1,157,332
)
Weighted-average number of common shares
223,227,833
203,750,000
203,750,000
Basic and diluted net loss per common share
$
(0.73
)
$
(0.10
)
$
(5.68
)
As part of the Transactions, 5,000,000 Performance Shares were issued to Topco at Closing, which were subject
to vesting upon satisfaction of a market performance condition for any period of 20 trading days out of 30 consecutive trading days during the five-year period after the Closing, and Topco was not able to vote or sell such shares until vesting.
These Performance Shares were considered contingently issuable shares and remained unvested as of December 31, 2020. Therefore, these Performance Shares are excluded from shares outstanding for basic and diluted EPS until the contingency is
resolved. The 5,000,000 Performance Shares vested on January 15, 2021, when the closing price for the Class A common stock exceeded $12.00 per share for 20 trading days out of 30 consecutive trading days.
The Company had 18,583,333 warrants, including 7,333,333 private placement warrants held by the CP Sponsor, to purchase Class A common
stock at $11.50 per share at the Closing, and no such warrants were exercised during the years ended December 31, 2020, 2019 and 2018. For the years ended December 31, 2020, 2019 and 2018, the Company has excluded the potential effect of
warrants to purchase shares of Class A common stock and Performance Shares in the calculation of diluted net loss per common share, as the effect would be anti-dilutive due to losses incurred.
See Note 11 Equity Based Compensation and Equity for additional information regarding the terms of public and private placement
warrants.
Fair Value Measurements
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous
market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit
risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and
significant to the fair value measurement:
Level 1
Quoted prices in active markets for identical assets or liabilities.
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Level 2
Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted
prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Inputs that are generally unobservable and typically reflect managements estimate of assumptions that
market participants would use in pricing the asset or liability.
The valuation techniques used to measure the fair
value of all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market
data.
Variable Interest Entities and Investments
In accordance with the guidance for the consolidation of a variable interest entity (VIE), the Company analyzes its variable
interests, including loans, leases, guarantees, and equity investments, to determine if the entity in which it has a variable interest is a VIE. The Companys analysis includes both quantitative and qualitative considerations. The Company bases
its quantitative analysis on the forecasted cash flows of the entity, and its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and financial agreements. The Company also
uses its quantitative and qualitative analyses to determine if it is the primary beneficiary of the VIE, and if such determination is made, it includes the accounts of the VIE in its consolidated financial statements.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the sole source of
authoritative U.S. GAAP literature recognized by the FASB and applicable to the Company. The Company has reviewed the FASB issued Accounting Standards Update (ASU) accounting pronouncements and interpretations thereof that have
effectiveness dates during the periods reported and in future periods. For any new pronouncements announced, management considers whether the new pronouncements could alter previous U.S. GAAP and determine whether any new or modified principles will
have a material impact on the Companys reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Companys financial management and certain standards are under
consideration.
Recent Accounting Standards Adopted by the Company
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which changes the methodology for measuring credit losses on financial
instruments and the timing of when such losses are recorded. This update replaces the existing incurred loss impairment model with an expected loss model (referred to as the Current Expected Credit Loss model). The Company adopted ASU 2016-13 and its related amendments on January 1, 2020. The adoption of this new accounting standard and its related amendments did not have a material impact on the Companys consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement . This guidance modifies the disclosure requirements on fair value measurements in Topic 820 based on the consideration of costs and benefits to promote the
appropriate exercise and discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The
amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this accounting standard did not have a material impact on the Companys consolidated financial
statements.
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Accounting Standards Recently Issued but Not Yet Adopted by the Company
In March 2020 and January 2021, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2021-01, Reference Rate Reform (Topic 848): Scope , respectively. ASU 2020-04 and ASU 2021-01 provide optional expedients and exceptions for applying U.S. GAAP, to contracts, hedging relationships, and other transactions that reference the
London Interbank Offered Rate or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. The guidance in ASU 2020-04 and ASU 2021-01 was effective upon issuance and, once adopted, may be applied prospectively to contract modifications and hedging relationships through December 31, 2022. The Company is currently evaluating the impact
of the adoption of ASU 2020-04 and ASU 2021-01 on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for
Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes , and clarifies certain
aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. Most amendments within the standard
are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. 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.
2. Acquisitions
2020 Acquisitions
The Company acquired five businesses during the year ended December 31, 2020, of which three were sales agencies and two marketing
agencies in the United States. The acquisitions were accounted for under the acquisition method of accounting. As such, the purchase consideration for each acquired business was allocated to the acquired tangible and intangible assets and
liabilities assumed based upon their respective fair values. Assets acquired and liabilities assumed in the business combination were recorded on the Companys financial statements as of the acquisition date based upon the estimated fair value
at such date. The excess of the purchase consideration over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill. The allocation of the excess purchase price was based upon preliminary
estimates and assumptions and is subject to revision when the Company receives final information. Accordingly, the measurement period for such purchase price allocations will end when the information, or the facts and circumstances, becomes
available, but will not exceed twelve months. The results of operations of the business acquired by the Company have been included in the Consolidated Statements of Operations and Comprehensive Loss since the date of acquisition.
The aggregate purchase price for the acquisitions referenced above was $88.1 million, which includes $68.0 million paid in cash,
$14.8 million recorded as contingent consideration liabilities, and $5.3 million recorded as holdback amounts. Contingent consideration payments are determined based on future financial performance and payment obligations (as defined in
the applicable purchase agreement) and recorded at fair value. The maximum potential payment outcome related to the acquisitions is $53.0 million. Holdback amounts are used to withhold a portion of the initial purchase price payment until
certain post-closing conditions are satisfied and are typically settled within 24 months of the acquisition. The goodwill related to the acquisitions represented the value paid for the assembled workforce, geographic presence, and expertise. Of
the resulting goodwill relating to these acquisitions, $26.7 million is deductible for tax purposes.
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The preliminary fair values of the identifiable assets and liabilities of the acquisitions
completed during the year ended December 31, 2020, at the respective acquisition dates, are as follows:
(in thousands)
Consideration:
Cash
$
68,057
Holdbacks
5,260
Fair value of contingent consideration
14,766
Total consideration
$
88,083
Recognized amounts of identifiable assets acquired and liabilities assumed:
Assets
Accounts receivable
$
3,542
Other assets
2,936
Property and equipment
321
Identifiable intangible assets
42,460
Total assets
49,259
Liabilities
Total liabilities
4,569
Total identifiable net assets
44,690
Goodwill arising from acquisitions
$
43,393
Purchase price allocations are considered preliminary and subject to adjustment during the measurement period,
which is up to one year from the acquisition date.
The identifiable intangible assets are being amortized on a straight-line basis over
their estimated useful lives. The preliminary fair value and estimated useful lives of the intangible assets acquired are as follows:
(in thousands)
Amount
Weighted
Average
Useful
Life
Client relationships
$
42,460
6 years
The operating results of the businesses acquired during the year ended December 31, 2020 contributed
total revenues of $64.3 million in the year ended December 31, 2020. The Company has determined that the presentation of net income or loss from the date of acquisition is impracticable due to the integration of the operations upon
acquisition.
During the year ended December 31, 2020, the Company incurred $0.2 million in transaction costs related to the
acquisitions described above. These costs have been included in Selling, general, and administrative expenses in the Consolidated Statement of Operations and Comprehensive Loss.
2019 Acquisitions
The Company acquired four businesses during fiscal year 2019, of which two were marketing agencies in the United States and two were sales
agencies in the Europe. The acquisitions were accounted for under the acquisition method of accounting. As such, the purchase consideration for each acquired business was allocated to the acquired tangible and intangible assets and liabilities
assumed based upon their respective fair values. Assets acquired and liabilities assumed in the business combination were recorded on the Companys financial
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statements as of the acquisition date based upon the estimated fair value at such date. The excess of the purchase consideration over the estimated fair value of the net tangible and identifiable
intangible assets acquired was recorded as goodwill. The allocation of the excess purchase price was based upon estimates and assumptions. The results of operations of the businesses acquired by the Company have been included in the Companys
consolidated financial statements since the date of the consummation of the acquisition.
The aggregate purchase price for the
acquisitions was $14.0 million, which includes $10.6 million paid in cash, $2.5 million recorded as contingent consideration liabilities, and $0.9 million recorded as holdback amounts. Contingent consideration payments are
determined based on future financial performance and payment obligations (as defined in the applicable purchase agreement) and recorded at fair value. The maximum potential payment outcome related to the acquisitions referenced above is
$10.7 million. Holdback amounts are used to withhold a portion of the initial purchase price payment until certain post-closing conditions are satisfied and are typically settled within 24 months of the acquisition. The goodwill related to
the acquisitions represented the value paid for the assembled workforce, geographic presence, and expertise. Of the resulting goodwill relating to these acquisitions, $0.3 million is deductible for tax purposes.
The fair values of the identifiable assets and liabilities of the acquisitions completed during the year ended December 31, 2019, at the
respective acquisition dates, are as follows:
(in thousands)
Consideration:
Cash
$
10,582
Holdbacks
915
Fair value of contingent consideration
2,519
Total consideration
$
14,016
Recognized amounts of identifiable assets acquired and liabilities assumed:
Assets
Accounts receivable
$
6,853
Other assets
1,390
Identifiable intangible assets
10,400
Total assets
18,643
Liabilities
Accounts payable
2,138
Accrued compensation and benefits
2,478
Deferred revenue
1,258
Long-term debt
1,009
Deferred income tax liabilities
2,334
Noncontrolling interest and other liabilities
2,761
Total liabilities and noncontrolling interest
11,978
Total identifiable net assets
6,665
Goodwill arising from acquisitions
$
7,351
(in thousands)
Amount
Weighted Average
Useful Life
Client relationships
$
7,562
10 years
Trade names
2,838
5 years
Total identifiable intangible assets
$
10,400
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The operating results of the businesses acquired during the year ended December 31,
2019 contributed total revenues of $17.3 million to the Company in such period. The Company has determined that the presentation of net income from the date of the respective acquisitions is impracticable due to the integration of the
operations upon acquisition.
During the year ended December 31, 2019, the Company incurred $0.4 million in transaction costs
related to the acquisitions described above. These costs have been included in Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss.
2018 Acquisitions
The Company acquired nine businesses during fiscal year 2018, of which four were sales agencies and five were marketing agencies in the United
States. This included the acquisition of Take 5 in April 2018, which is discussed further in Note 1, Organization and Significant Accounting Policies . The acquisitions were accounted for under the acquisition method of accounting. As such,
the purchase consideration for each acquired business was allocated to the acquired tangible and intangible assets and liabilities assumed based upon their respective fair values. Assets acquired and liabilities assumed in the business combination
were recorded on the Companys financial statements as of the acquisition date based upon the estimated fair value at such date. The excess of the purchase consideration over the estimated fair value of the net tangible and identifiable
intangible assets acquired was recorded as goodwill. Excluding Take 5, the results of operations of the businesses acquired by the Company have been included in the Companys consolidated financial statements since the date of the consummation
of the acquisition.
The aggregate purchase price for the acquisitions, excluding Take 5, was $129.8 million, which includes $109.8
million paid in cash, $18.7 million recorded as contingent consideration liabilities, and $1.4 million recorded as holdback amounts. A $79.2 million loss on Take 5 was recognized in the Companys Statement of Comprehensive Loss for the year
ended December 31, 2018, which represents $76.2 million paid in cash for Take 5 and $3.0 million of acquired liabilities remaining. The maximum potential payment outcome related to the acquisitions referenced above is $127.0 million. The goodwill
related to the acquisitions represented the value paid for the assembled workforce, geographic presence, and expertise. Of the resulting goodwill relating to these acquisitions, $45.1 million is deductible for tax purposes.
The operating results of the businesses acquired during the year ended December 31, 2018 contributed total revenues of $29.6 million to the
Company in such period.
During the year ended December 31, 2018, the Company incurred $2.1 million in transaction costs related to the
acquisitions described above. These costs have been included in Selling, general, and administrative expenses in the Consolidated Statements of Comprehensive Loss.
Supplemental Pro Forma Information
Supplemental information on a pro forma basis, presented as if the acquisitions executed during the period from January 1, 2018 to
March 16, 2021 had been consummated as of the beginning of the comparative prior period, is as follows:
Twelve Months Ended December 31,
(in thousands, except per share data)
2020
2019
2018
Total revenues
$
3,181,224
$
3,869,643
$
3,772,569
Net loss attributable to stockholders of Advantage Solutions Inc.
$
(156,145
)
$
(12,696
)
$
(1,152,738
)
Basic and diluted net loss per common share
$
(0.70
)
$
(0.06
)
$
(5.66
)
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The unaudited pro forma supplemental information is based on estimates and assumptions which
the Company believes are reasonable and reflects the pro forma impact of additional amortization related to the fair value of acquired intangible assets, the pro forma impact of acquisition costs which consisted of legal, advisory and due diligence
fees and expenses, and the pro forma tax effect of the pro forma adjustments for the years ended December 31, 2020, 2019, and 2018. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be
indicative of what would have occurred had the acquisition been consummated during the periods for which pro forma information is presented.
3.
Goodwill and Intangible Assets
Changes in goodwill for the years ended December 31, 2020 and 2019, are as follows:
(in thousands)
Sales
Marketing
Total
Gross carrying amount as of December 31, 2019
$
2,090,340
$
678,356
$
2,768,696
Accumulated impairment charge (1)
(652,000
)
(652,000
)
Balance at December 31, 2019
$
1,438,340
$
678,356
$
2,116,696
Acquisitions
20,788
22,605
43,393
Foreign exchange translation effects
3,250
3,250
Balance at December 31, 2020
$
1,462,378
$
700,961
$
2,163,339
(in thousands)
Sales
Marketing
Total
Gross carrying amount as of December 31, 2018
$
2,085,684
$
672,683
$
2,758,367
Accumulated impairment charge (1)
(652,000
)
(652,000
)
Balance at December 31, 2018
$
1,433,684
$
672,683
$
2,106,367
Acquisitions
2,948
4,403
7,351
Foreign exchange translation effects
(418
)
1,270
852
Foreign exchange translation effects
2,126
2,126
Balance at December 31, 2019
$
1,438,340
$
678,356
$
2,116,696
(1)
During the fiscal year ended December 31, 2018, the Company recognized a
non-cash goodwill impairment charge of $652.0 million related to the Companys sales reporting unit as a result of the Companys annual evaluation of goodwill impairment test.
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The following tables set forth information for intangible assets:
December 31, 2020
(in thousands)
Weighted
Average Useful
Life
Gross Carrying
Value
Accumulated
Amortization
Accumulated
Impairment
Charges
Net Carrying
Value
Finite-lived intangible assets:
Client relationships
14 years
$
2,455,360
$
977,140
$
$
1,478,220
Trade names
8 years
134,220
66,209
68,011
Developed technology
5 years
10,160
5,989
4,171
Covenant not to compete
5 years
6,100
3,706
2,394
Total finite-lived intangible assets
2,605,840
1,053,044
1,552,796
Indefinite-lived intangible assets:
Trade names
1,480,000
580,000
900,000
Total other intangible assets
$
4,085,840
$
1,053,044
$
580,000
$
2,452,796
December 31, 2019
(in thousands)
Weighted
Average Useful
Life
Gross Carrying
Value
Accumulated
Amortization
Accumulated
Impairment
Charges
Net
Carrying
Value
Finite-lived intangible assets:
Client relationships
14 years
$
2,408,573
$
798,153
$
$
1,610,420
Trade names
8 years
132,844
52,485
80,359
Developed technology
5 years
10,160
3,957
6,203
Covenant not to compete
5 years
6,100
2,486
3,614
Total finite-lived intangible assets
2,557,677
857,081
1,700,596
Indefinite-lived intangible assets:
Trade names
1,480,000
580,000
900,000
Total other intangible assets
$
4,037,677
$
857,081
$
580,000
$
2,600,596
As of December 31, 2020, estimated future amortization expenses of the Companys existing intangible
assets are as follows:
(in thousands)
2021
$
195,704
2022
193,094
2023
189,512
2024
188,549
2025
183,401
Thereafter
602,536
Total amortization expense
$
1,552,796
The Company recorded all intangible assets at their respective fair values and assessed the useful lives of
the assets. Client relationships were valued using the multi-period excess earnings method under the income approach. The values of client relationships are generally regarded as the estimated economic benefit derived from the incremental revenues
and related cash flow as a direct result of the client relationships in place versus having to replicate them. Further, the Company evaluated the legal, regulatory, contractual, competitive, economic or other factors in determining the useful life.
Trade names were valued using the relief-from-royalty method under the income approach. This method relies on the premise that, in lieu of ownership, a company would be willing to pay a royalty to obtain access to the use and benefits of the trade
names. The Company has
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considered its sales and marketing trade names related to the 2014 Topco Acquisition to be indefinite, as there is no foreseeable limit on the period of time over which such trade names are
expected to contribute to the cash flows of the reporting entity. Further, the Company evaluated legal, regulatory, contractual, competitive, economic and other factors in determining the useful life.
In connection with the acquisitions during the years ended December 31, 2020 and 2019, the Company recorded intangible assets of
$42.5 million and $10.4 million, respectively. Amortization expenses included in the Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020, 2019 and 2018 were $191.2 million,
$189.9 million, and $188.8 million, respectively.
No impairment related to the Companys intangible assets was recorded
for the years ended December 31, 2020 and 2019. During the fiscal year ended December 31, 2018, the Company recognized a non-cash intangible asset impairment charge of $580.0 million related to
the Companys indefinite-lived sales trade name in connection with the annual intangible impairment test (as further described in Note 1, Organization and Significant Account Policies ).
4. Prepaid and Other Assets
Prepaid and other current assets consist of the following:
December 31,
(in thousands)
2020
2019
Inventory
$
44,185
$
25,163
Prepaid expenses
31,792
25,136
Taxes
11,006
326
Miscellaneous receivables
9,244
9,500
Interest rate cap
1,824
Workers compensation receivables
881
1,109
Other current assets
6,711
8,186
Total prepaid expenses and other current assets
$
105,643
$
69,420
December 31,
(in thousands)
2020
2019
Operating lease
right-of-use assets
$
49,773
$
93,924
Deposits
6,986
8,364
Contingent consideration receivable
6,120
Workers compensation receivable
4,400
5,583
Other long-term assets
4,807
2,556
Total other assets
$
65,966
$
116,547
Inventories are stated at the lower of cost and net realizable value. Costs are determined on the first-in, first-out basis. The Company records write-downs of inventories which are obsolete or in excess of anticipated demand or net realizable value based on a
consideration of marketability, historical sales and demand forecasts which consider the assumptions about future demand and market conditions.
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5. Property and Equipment
Property and equipment consist of the following:
December 31,
(in thousands)
2020
2019
Software
$
106,250
$
126,796
Computer hardware
69,428
76,558
Leasehold improvements
32,584
54,293
Furniture, fixtures, and other
16,736
28,868
Total property and equipment
224,998
286,515
Less: accumulated depreciation
(144,982
)
(171,825
)
Total property and equipment, net
$
80,016
$
114,690
Depreciation expense was $45.1 million, $42.7 million, and $36.4 million related to property
and equipment for the years ended December 31, 2020, 2019, and 2018, respectively.
The Company commenced a plan to strategically
exit certain offices during the year ended December 31, 2020. In enacting the plan, the Company recognized $21.1 million of loss primarily related to disposal of property and equipment from abandoning several office leases for the year
ended December 31, 2020.
6. Other Liabilities
Other accrued expenses consist of the following:
December 31,
(in thousands)
2020
2019
Interest rate cap and accrued interest payable
$
25,266
$
1,520
Operating lease liability
20,894
34,072
Rebates due to retailers
11,246
6,979
Contingent consideration
10,733
24,502
Client deposits
10,706
8,674
Client refunds related to the Take 5 Matter
9,417
14,946
Employee insurance reserves
8,759
9,418
Taxes
6,602
6,342
Holdbacks
5,764
2,630
Note payable related to contingent consideration
4,048
9,385
Restructuring charges
1,344
2,615
Other accrued expenses
6,979
7,752
Total other accrued expenses
$
121,758
$
128,835
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Other long-term liabilities consist of the following:
December 31,
(in thousands)
2020
2019
Operating lease liability
$
44,737
$
84,902
Contingent consideration
35,168
23,147
Workers compensation and other insurance reserves
30,552
29,718
Deferred employer social security taxes
24,034
Interest rate cap
900
2,294
Holdbacks
504
926
Taxes
525
525
Other long-term liabilities
5,490
4,785
Total other long-term liabilities
$
141,910
$
146,297
Under the workers compensation programs, the estimated liability for claims incurred but unpaid at
December 31, 2020 and 2019 were $56.2 million and $55.9 million, respectively. These amounts include reported claims as well as claims incurred but not reported. As of December 31, 2020, $25.6 million and $30.6 million
of this liability was included in the Accrued compensation and benefits and Other long-term liabilities in the Consolidated Balance Sheets, respectively. As of December 31, 2019, $26.2 million and $29.7 million
of this liability was included in the Accrued compensation and benefits and Other long-term liabilities in the Consolidated Balance Sheets, respectively. In connection with its deductible limits, the Company has standby letters-of-credit as of December 31, 2020 and 2019 in the amount of $60.7 million and $63.5 million, respectively, and a $7.5 million surety bond as of
December 31, 2020 supporting the estimated unpaid claim liabilities.
The CARES Act (as further described in Note 15, Income
Taxes ) provides for deferred payment of the employer portion of social security taxes between March 27, 2020 and December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31,
2022. The Company began deferring payment of the employer share of the security taxes in April 2020. As of December 31, 2020, $24.0 million and $24.0 million of this liability was included in the Accounts payable and
Other long-term liabilities, respectively, in the Consolidated Balance Sheets.
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
Consolidated Statements of Operations and Comprehensive Loss. The Company has reassessed the fair value of contingent consideration, noting that as of December 31, 2020, projected EBITDA related to acquisitions, which was anticipated to
contribute to measurement period EBITDA, was higher than expected. This reassessment resulted in a fair value adjustment of a $7.2 million loss that was included in Selling, general, and administrative expenses in the Consolidated
Statements of Operations and Comprehensive Loss. The remaining change in fair value for the year ended December 31, 2020 was due to present value accretion that was included in Interest expense, net in the Consolidated Statements of
Operations and Comprehensive Loss. As of December 31, 2020, the maximum potential payment outcomes were $286.2 million.
The
Company had unsecured loan notes in aggregate of $4.0 million outstanding as of December 31, 2020 to settle contingent considerations related to 2017 sales acquisitions, which is included in Other accrued expenses in the
Consolidated Balance Sheets.
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The following table summarizes the changes in the carrying value of estimated contingent
consideration liabilities:
Year Ended December 31,
(in thousands)
2020
2019
Beginning of the period
$
47,649
$
85,977
Fair value of acquisitions
14,766
2,519
Payments
(21,875
)
(37,100
)
Note issuance for settlements
(4,048
)
(9,385
)
Changes in fair value
9,971
6,064
Foreign exchange translation effects
(562
)
(426
)
End of the period
$
45,901
$
47,649
7. Debt
(in thousands)
December 31,
2020
December 31,
2019
New Term Loan Facility
$
1,325,000
$
Notes
775,000
First Lien Term Loan
2,467,529
Second Lien Term Loan
760,000
New Revolving Credit Facility
50,000
Notes payable and deferred obligations
3,618
2,053
2,153,618
3,229,582
Less: current portion
63,745
27,655
Less: debt issuance costs
60,545
29,840
Long-term debt, net of current portion
$
2,029,328
$
3,172,087
First Lien Credit Agreement, Second Lien Credit Agreement, and AR Facility
On July 25, 2014, certain subsidiaries of the Company entered into the following credit facilities with different syndicates of lenders in
connection with the 2014 Topco Acquisition:
a first lien credit agreement (the First Lien Credit Agreement) that provided for:
a $200.0 million revolving line of credit (the Revolving Credit Facility), of which up to
$75.0 million may be used for letters of credit,
a $1.8 billion term loan facility (the Initial First Lien Term Loans),
commitments for an additional $60.0 million of unfunded delayed draw term loans (the Delayed Draw
Commitments), and
uncommitted incremental revolving and first lien term loan facilities, subject to certain incurrence tests; and
a second lien credit agreement (the Second Lien Credit Agreement) that provided for:
a $760.0 million term loan facility (the Second Lien Term Loans), and
uncommitted incremental second lien term loan facilities, subject to certain incurrence tests.
The Company incurred $1.8 billion of Initial First Lien Term Loans and $760.0 million of Second Lien Term
Loans in July 2014, and used the proceeds to finance the 2014 Topco Acquisition and to pay related fees
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and expenses. The Company incurred an aggregate of $60.0 million of additional first lien term loans under the Delayed Draw Commitments in September and November 2014, and used the proceeds
to finance certain acquisitions and to pay related fees and expenses. The Company incurred $150.0 million of additional first lien term loans under the incremental facilities in April 2015 and used the proceeds to finance additional
acquisitions, pay related fees and expenses, repay loans under the Revolving Credit Facility and for general corporate purposes. The Company also uses the Revolving Credit Facility to maintain various letters of credit. In May 2017, the Company
incurred $225.0 million of additional First Lien Term Loans and extended the termination with respect to a $150.0 million portion of the Companys Revolving Credit Facility (the Series A Revolving Loan Facility) from
July 25, 2019 to April 23, 2021. The proceeds were used to finance additional acquisitions, to repay existing loans under the Revolving Credit Facility and for general corporate purposes. From time to time the Borrower has incurred and
repaid loans under the Revolving Credit Facility, and those borrowings generally are used for working capital purposes and to fund acquisitions. The Borrower also uses the Revolving Credit Facility (including the Series A Revolving Loan Facility) to
issue letters of credit on the Borrower and its subsidiaries behalf. In February 2018, the Borrower executed the Third Amendment to First Lien Credit Agreement, which amended the First Lien Credit Agreement to enable the Borrower to incur the
Incremental First Lien Term Loans in an aggregate principal amount of $350.0 million. The Borrower used the proceeds of the Incremental Term Loans to pay for the refinancing of all existing indebtedness of Daymon, finance additional
acquisitions, and for general corporate purposes.
As of December 31, 2019, the Company had $2.5 billion of debt outstanding
under the First Lien Term Loan and $760 million of debt outstanding under the Second Lien which were scheduled to mature in July 2021 and July 2022, respectively.
In April 2020, the Company entered into an accounts receivable securitization facility under which accounts receivable of certain domestic
subsidiaries are sold on a non-recourse basis to a special purpose entity (SPE), which is a bankruptcy-remote, consolidated subsidiary of the Company. Accordingly, the assets of the SPE
are not available to satisfy the obligations of the Company or any of its subsidiaries. From time to time, the SPE may finance such accounts receivable with a revolving loan facility secured by a pledge of such accounts receivable. The amount of
outstanding borrowings on the revolving loan facility at any one time is limited to $300.0 million. The agreement governing the accounts receivable securitization facility provides for an initial three-year term and may be extended and contains
certain covenants and termination events. An occurrence of an event of default or a termination event under the accounts receivable securitization facility may give rise to the right of its counterparty to terminate this facility.
On April 27, 2020 the Company obtained $120.0 million under its accounts receivable securitization facility, representing the
minimum funding threshold of 60.0% of the $200.0 million borrowing base. The Company guaranteed the performance of the obligations of its subsidiaries that sell and service the account receivable under the accounts receivable securitization
facility. In accordance with the terms of the accounts receivable securitization facility, the Company may use the borrowings for working capital, general corporate or other purposes permitted thereunder.
In connection with the Merger, $3.3 billion of the Companys debt arrangements under the First Lien Credit Agreement, Second Lien
Credit Agreement, and AR Facility that existed in 2020 (collectively, the Credit Facilities) were repaid and terminated, with incremental costs of $86.8 million. Of these fees, $56.7 million were capitalized and recorded as
deferred debt issuance costs and $30.1 million were expensed. As of the time of the repayment, there were $16.7 million of unamortized fees related to the Credit Facilities. Of these fees, $5.4 million fees continued to be capitalized
as deferred issuance costs and $11.3 million were expensed as a loss on the extinguishment of debt. All expensed fees are included in Interest expense, net, in the Consolidated Statements of Operations and Comprehensive Loss.
Fees related to the issuance or refinancing of long-term debt capitalized are amortized over the term of the debt using the effective interest
rate method. The amortization of deferred debt issuance costs is included in
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Interest expense, net, in the Consolidated Statements of Operations and Comprehensive Loss and amounted to $14.8 million, $16.9 million, and $15.3 million for the years
ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, Long-term debt in the Consolidated Balance Sheets included debt issuance costs of $62.1 million less accumulated amortization of
$1.6 million.
New Senior Secured Credit Facilities
In connection with the consummation of the Transaction, Advantage Sales & Marketing Inc., an indirect wholly-owned subsidiary of the
Company (the Borrower) entered into (i) a new senior secured asset-based revolving credit facility in an aggregate principal amount of up to $400.0 million, subject to borrowing base capacity (the New Revolving Credit
Facility) and (ii) a new secured first lien term loan credit facility in an aggregate principal amount of $1.325 billion (the New Term Loan Facility and together with the New Revolving Credit Facility, the New
Senior Secured Credit Facilities).
New Revolving Credit Facility
The New 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 the New Revolving Credit Facility then in effect. Loans under the New Revolving
Credit Facility may be denominated in either U.S. dollars or Canadian dollars. Bank of America, N.A., will act as administrative agent and ABL Collateral Agent. The New Revolving Credit Facility matures five years after the date the Company enters
into our New Revolving Credit Facility. The Borrower may use borrowings under the New Revolving Credit Facility to fund working capital and for other general corporate purposes, including permitted acquisitions and other investments.
Borrowings under the New 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 Borrowers option, a base rate plus an applicable margin. The applicable margins for the
New 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 New Revolving Credit
Facility. The Borrowers ability to draw under the New Revolving Credit Facility or issue letters of credit thereunder will be conditioned upon, among other things, the Borrowers delivery of prior written notice of a borrowing or
issuance, as applicable, the Borrowers ability to reaffirm the representations and warranties contained in the credit agreement governing the New Revolving Credit Facility and the absence of any default or event of default thereunder.
The Borrowers obligations under the New Revolving Credit Facility are guaranteed by Karman Intermediate Corp. (Holdings) and
all of the Borrowers 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 New Revolving Credit Facility is secured by a lien on substantially all of Holdings, the Borrowers and the Guarantors assets
(subject to certain permitted exceptions). The New 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 New Term Loan Facility discussed below), in each case, subject to other permitted liens.
The New 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 New Revolving Credit Facility, depending on average excess availability under the New 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.
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The New Revolving Credit Facility contains customary covenants, including, but not limited
to, restrictions on the Borrowers ability and that of its 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 otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness, enter into transactions with affiliates or change its line of business. The New Revolving Credit Facility will require the maintenance of a
fixed charge coverage ratio (as set forth in the credit agreement governing the New 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 $25.0 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 New Revolving Credit Facility provides that, upon the occurrence of certain events of default, the Borrowers 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.
New Term Loan Facility
The New Term Loan Facility consists of a term loan facility denominated in US dollars in an aggregate principal amount of $1.325 billion.
Borrowings under the New 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 Borrowers option, a base rate plus an applicable margin. The applicable margins for the New Term Loan Facility are 5.25% with respect to Eurodollar rate borrowings and 4.25% with respect to base rate
borrowings.
The Borrower may voluntarily prepay loans or reduce commitments under the New 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 twelve months after the date we entered into the New Term
Loan Facility).
The Borrower will be required to prepay the New 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 was not required to make any excess cash flow payment for the year ended December 31, 2020, and the Borrower did not make any
other mandatory or voluntary prepayments of the New Term Loan Facility for the year ended December 31, 2020.
The Borrowers
obligations under the New Term Loan Facility are guaranteed by Holdings and the Guarantors. The New Term Loan Facility is secured by a lien on substantially all of Holdings, the Borrowers and the Guarantors assets (subject to
certain permitted exceptions). The New 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 the current asset collateral (second in priority to
the liens securing the New Revolving Credit Facility), in each case, subject to other permitted liens.
The New Term Loan Facility
contains certain customary negative covenants, including, but not limited to, restrictions on the Borrowers ability and that of its 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.
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The New Term Loan Facility provides that, upon the occurrence of certain events of default,
the Companys 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.
Senior Secured Notes
In connection with the Closing, 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 Merger, Finco merged with and into Advantage Sales & Marketing Inc. (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 Issuers 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 New 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 New 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 New Revolving Credit Facility and equal in priority with liens securing the New Term Loan Facility), in each case, subject to certain limitations and exceptions and permitted liens.
The Notes and related guarantees rank (i) equally in right of payment with all of the Issuers and the Guarantors senior
indebtedness, without giving effect to collateral arrangements (including the New Senior Secured Credit Facilities) and effectively equal to all of the Issuers and the Guarantors senior indebtedness secured on the same priority basis as
the Notes, including the New Term Loan Facility, (ii) effectively subordinated to any of the Issuers 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 New Revolving Credit Facility to the extent of the value of the current asset collateral and (iii) structurally
subordinated to the liabilities of the Issuers non-Guarantor subsidiaries.
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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 Issuers 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 Issuers or a parent entitys 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 Issuers
subsidiaries ability to pay dividends; and consolidate, merge or sell all or substantially all of the Issuers assets. Most of these covenants will be suspended on the Notes so long as they have investment grade ratings from both
Moodys 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.
Government Loans for COVID-19 relief
On May 25, 2020, a subsidiary of the Company operating in Japan entered into two loan agreements from a bank lender pursuant to a local
government loan program. Subsequently, one of the loans was refinanced on October 26, 2020. No loss on extinguishment of debt was recognized. The loans, which includes a refinanced loan on October 26, 2020, bear interest rates of 1.82% and
1.83% per annum with maturity dates of May 27, 2029 and October 27, 2029, respectively, and amounts under the loans will be repayable to the lender in monthly installments. As of December 31, 2020, the Company had an aggregate
principal amount of $2.9 million borrowings outstanding.
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Future minimum principal payments on long-term debt are as follows:
(in thousands)
2021
$
13,745
2022
13,298
2023
13,293
2024
13,274
2025
13,277
Thereafter
2,086,731
Total future minimum principal payments
$
2,153,618
8. Leases
The Company leases facilities, and equipment under noncancelable leases that have been classified as operating leases for financial reporting
purposes. These leases often include one or more options to renew and the lease term includes the renewal terms when it is reasonably certain that the Company will exercise the option. In general, for the Companys material leases, the renewal
options are not included in the calculation of its right-of-use assets and lease liabilities, as the Company does not believe that it is reasonably certain that these
renewal options will be exercised. The Companys lease agreements do not contain any material residual guarantees or material restrictive covenants.
All operating lease expenses are recognized on a straight-line basis over the lease term as a component of Selling, general, and
administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss. Payments under the Companys lease arrangements are primarily fixed. However, certain lease agreements contain variable costs, which are expensed
as incurred and not included in the calculation of the Companys right-of-use assets and related liabilities for those leases. These costs typically include real
estate taxes, common area maintenance and utilities for which the Company is obligated to pay under the terms of those leases.
During the
years ended December 31, 2020 and 2019, the Company expensed approximately $44.2 million and $53.5 million of total operating lease costs, which includes $6.6 million and $8.5 million of variable lease costs, respectively.
During the year ended December 31, 2018, the Company recognized $48.7 million of total operating lease expense.
Beginning in mid-March of 2020, in response to the COVID-19 pandemic, the Company established a global work from home policy. A significant portion of the
Companys office-based workforce temporarily transitioned to working from home and the Company commenced a plan to strategically exit certain offices during the year ended December 31, 2020. Based on a number of factors, the Company
concluded that this strategic initiative did not result in a triggering event that would indicate that the Companys related asset groups may not be recoverable as of December 31, 2020. In enacting the plan, the Company abandoned several
office leases prior to reaching termination agreements with its landlords, and as a result, adjusted the useful life of these asset to reflect the remaining expected use. The reduction to
the right-of use assets and liabilities related to these leases for the year ended December 31, 2020 were $41.8 million and $42.6 million, respectively, resulting in additional lease
gain of $0.8 million. Additionally, the Company paid $18.0 million in termination fees for the year ended December 31, 2020, which was recorded in Selling, general and administrative expenses in the Consolidated Statements
of Operations and Comprehensive Loss.
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Based on the present value of the lease payments for the remaining lease term of the
Companys existing leases, the Companys right-of-use assets and lease liabilities for operating leases as of December 31, 2020 and 2019 were as follows:
(in thousands)
Classification
December 31,
2020
December 31,
2019
Assets
Operating lease
right-of-use assets
Other assets
$
49,772
$
93,924
Liabilities
Current operating lease liabilities
Other accrued expenses
20,894
34,072
Noncurrent operating lease liabilities
Other long-term liabilities
44,737
84,902
Total lease liabilities
$
65,631
$
118,974
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental
borrowing rate to determine the present value of the lease payments. In determining its incremental borrowing rate, the Company reviewed the terms of its leases, its credit facilities, and other factors.
Information related to the Companys right-of-use assets
and related lease liabilities were as follows:
Year Ended December 31,
(in thousands)
2020
2019
Cash paid for operating lease liabilities
$
42,670
$
32,229
Right-of-use
assets obtained in exchange for new operating lease obligations
7,496
40,536
Weighted-average remaining lease term
4.7 years
4.4 years
Weighted-average discount rate
9.8
%
10.0
%
Maturities of lease liabilities as of December 31, 2020 were as follows:
(in thousands)
2021
$
27,323
2022
17,691
2023
11,748
2024
8,962
2025
5,266
Thereafter
7,004
Total lease payments
$
77,994
Less imputed interest
(12,363
)
Present value of lease liabilities
$
65,631
The Company has additional operating leases for real estate of $1.8 million which have not commenced as
of December 31, 2020, and as such, have not been recognized on the Companys Consolidated Balance Sheet. These operating leases commence in 2021.
9. 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
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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.
As of December 31, 2020, and 2019, the Companys interest rate derivatives
and forward contracts are Level 2 assets and liabilities with the related fair values based on third-party pricing service models. These models use discounted cash flows that utilize market-based forward swap curves commensurate with the terms
of the underlying instruments.
As of December 31, 2020, and 2019, the contingent consideration assets and liabilities are
Level 3 assets and liabilities with the related fair values based on the significant unobservable inputs and probability weightings in using the income approach.
The following table sets forth the Companys financial assets and liabilities measured on a recurring basis at fair value, categorized by
input level within the fair value hierarchy. The carrying amounts of Cash and cash equivalents, Accounts receivable, and Accounts payable approximate fair value due to the short-term maturities of these
financial instruments in the Consolidated Balance Sheets.
December 31, 2020
(in thousands)
Fair Value
Level 1
Level 2
Level 3
Assets measured at fair value
Cash and cash equivalents
$
204,301
$
204,301
$
$
Derivative financial instruments
1,824
1,824
Total assets measured at fair value
$
206,125
$
204,301
$
1,824
$
Liabilities measured at fair value
Derivative financial instruments
$
1,882
$
$
1,882
$
Contingent consideration liabilities
45,901
45,901
Total liabilities measured at fair value
$
47,783
$
$
1,882
$
45,901
December 31, 2019
(in thousands)
Fair Value
Level 1
Level 2
Level 3
Assets measured at fair value
Cash and cash equivalents
$
184,224
$
184,224
$
$
Contingent consideration receivable
6,120
6,120
Total assets measured at fair value
$
190,344
$
184,224
$
$
6,120
Liabilities measured at fair value
Derivative financial instruments
$
3,277
$
$
3,277
$
Contingent consideration liabilities
47,649
47,649
Total liabilities measured at fair value
$
50,926
$
$
3,277
$
47,649
Interest Rate Cap Agreements
As of December 31, 2020, and 2019, the Company had interest rate cap contracts with an aggregate notional value of principals of
$2.2 billion and $1.5 billion, respectively, from various financial institutions to manage the Companys exposure to interest rate movements on variable rate credit facilities. As of December 31, 2020, the aggregate fair value of
the Companys outstanding interest rate caps represented an outstanding net asset of $1.8 million and an outstanding net liability of $1.9 million. As of December 31, 2019, the aggregate fair value of the Companys
outstanding interest rate caps represented an outstanding net liability of $3.3 million.
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As of December 31, 2020, $1.8 million, $1.0 million, and $0.9 million of
the Companys fair value of outstanding interest rate caps were included in Prepaid expenses and other current assets , Other accrued expenses, and Other long-term liabilities 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 Loss. As of December 31, 2019, $1.0 million and
$2.3 million of the Companys fair value of outstanding interest rate caps were included in Other accrued expenses and Other long-term liabilities 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 Loss.
During the years ended December 31, 2020, 2019, and 2018, the Company recorded interest expense in the amount of $0.4 million,
$2.7 million, and $3.9 million, respectively, related to changes in the fair value of its derivative instruments, respectively.
Forward Contracts
During the years ended December 31, 2020, 2019, and 2018, the Company recognized a gain of $0.5 million, a loss of $0.4 million,
and a loss of $1.0 million, respectively, related to changes in fair values of the forward contracts as a component of Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss.
Contingent Consideration Receivable
Each reporting period, the Company measures the fair value of its contingent receivable 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 Consolidated Statements
of Operations and Comprehensive Loss.
The Company has reassessed the fair value of contingent consideration, noting that as of
December 31, 2020, projected EBITDA related to acquisitions, which was anticipated to contribute to measurement period EBITDA, was lower than expected. This reassessment resulted in a fair value adjustment of a $6.1 million loss that was
included in Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss.
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Long-term Debt
The following table sets forth the carrying values and fair values of the Companys 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 December 31, 2020
New Term Loan Credit Facility
$
1,325,000
$
1,447,993
Notes
775,000
884,826
New Revolving Credit Facility
50,000
50,000
Notes payable and deferred obligations
3,618
3,618
Total long-term debt
$
2,153,618
$
2,386,437
(in thousands)
Carrying Value
Fair Value
(Level 2)
Balance at December 31, 2019
First Lien Term Loan
$
2,467,529
$
2,413,663
Second Lien Term Loan
760,000
733,526
Notes payable and deferred obligations
2,053
1,872
Total long-term debt
$
3,229,582
$
3,149,061
10. Investments
Investments in Unconsolidated Affiliates
In connection with the Daymon Acquisition, the Company acquired 9.9% of the outstanding common shares of a subsidiary of a Japanese supermarket
chain (ATV). The Company has no substantial influence over ATV. The Company elected the measurement alternative to value this equity investment without a readily determinable fair value. The Company will continue to apply the
alternative measurement guidance until this investment does not qualify to be so measured. The carrying value of the investment was $7.9 million and $7.5 million as of December 31, 2020 and 2019, respectively.
The Companys significant equity investments primarily consist of Global Smollan Holdings (25% ownership), Smollan Holding Proprietary
Limited (25% ownership), Partnership SPV 1 Limited (12.5% ownership), and Ceuta Holding Limited (8.8% ownership). Income from the Companys equity method investments, included in Cost of revenues in the Consolidated Statements of
Operations and Comprehensive Loss, was $5.1 million, $4.9 million, and $4.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. The Companys proportionate share in their net assets
at December 31, 2020, and 2019 were $107.7 million and 104.1 million, respectively. The Companys equity method investments are not material to the Companys results of operations or financial position; therefore,
no summarized financial information for the Companys unconsolidated subsidiaries has been presented.
11. Equity-Based Compensation and Equity
The Limited Partnership Agreement allows profits interests in Topco to be granted to directors, officers, employees, and
consultants of Topco and its subsidiaries. The performance-based profits interests (Common Series C Units) are subject to certain vesting requirements, as described below.
Additionally, in 2014, Topco issued 30,000 time-vesting profits interests (Common Series D Units) to entities affiliated with one
equity sponsor of Topco. Time-vesting profits interests vest on a monthly basis that began on October 1, 2014 and ended on September 1, 2019. The compensation expense associated with the issuance of such awards for non-employees is recorded by the Company as the Company receives the benefit of the services being provided by the non-employees.
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Common Series C Units and Common Series C-2
Units
During the years ended December 31, 2020, 2019, and 2018, 2,900 Common Series C Units, 21,953 Common Series C Units,
and 10,830 Common Series C Units, respectively, were granted at no cost to employees of the Company. As the result of an amendment and restatement of the Limited Partnership Agreement, on March 15, 2018, 75% of all Common Series C Units awards
are subject to vesting over four fiscal years from their respective issuance date. The remaining 25% of the units vest if and when Topcos private equity sponsors as of the date of the 2014 Topco Acquisition realize a pre-tax internal rate of return of 20% compounded annually with respect to the Common Series A Units of Topco held by such sponsors. To the extent the Common Series C Units vest, such units may still be forfeited as
a result of termination of the employment of the applicable holders or upon a non-qualifying exit event. Certain awards vest over the remaining initial four-year term, subject to the employees continued
employment. In addition, certain Common Series C Units were issued in connection with the Daymon Acquisition to Daymon employees, certain of which are deemed to be vested upon issuance, and certain on which vest in four installments on each of the
first four anniversaries following the completion of the Daymon Acquisition, subject to such employees continued employment with the Company. The Limited Partnership Agreement also authorizes Topco to issue 35,000 Common Series C-2 Units to employees of the Company, which are deemed to be vested upon issuance and subject to substantially similar forfeiture provisions as the Common Series C Units, including forfeiture upon certain
terminations of employment with the Company of the applicable holders or a non-qualifying exit event.
A valuation, including an option pricing method allocation and Monte Carlo simulation, was used to estimate the fair value of Common Series C
Units and Common Series C-2 Units. The expected price volatility is based on the average of the historical volatility of comparable public companies. The risk-free rate is based on U.S. Treasury
yields in effect at the time of grant over the expected term. The Company did not use a dividend yield as it has not historically paid distributions.
The following weighted average assumptions were used in determining the fair value of Common Series C Unit grants made during the years ended
December 31, 2020, 2019, and 2018:
Year Ended December 31,
2020
2019
2018
Grant date fair value
$
201.25
$
37.90
$
167.40
Dividend yield
0.0
%
0.0
%
0.0
%
Expected volatility
75.3
%
41.2
%
36.0
%
Risk-free interest rate
0.2
%
2.5
%
2.3
%
Lack of marketability discount
30.5
%
31.3
%
29.2
%
Expected term (years)
1.0
1.0
1.0
The following weighted average assumptions were used in determining the fair value of Common Series C-2 Unit grants made during the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
2020
2019
2018
Grant date fair value
$
223.00
$
284.00
$
652.99
Dividend yield
0.0
%
0.0
%
0.0
%
Yield Test Probability
23.3
%
39.0
%
97.1
%
Cost of Equity Capital
11.8
%
11.1
%
12.3
%
Expected term (years)
1.0
2.0
3.0
Topco has the option to repurchase Common Series C Units for cash.
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The following table summarizes the activity in the Common Series C Units during the years
ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
2020
2019
2018
Beginning of the period
174,190
156,975
150,906
Grants
2,900
21,953
10,830
Forfeitures
(5,064
)
(4,738
)
(4,416
)
Repurchases
(345
)
End of the period
172,026
174,190
156,975
The following table summarizes the activity in the Common Series C-2
Units during the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
2020
2019
2018
Beginning of the period
33,400
33,525
Grants
2,500
1,425
34,275
Forfeitures
(3,625
)
(1,550
)
(750
)
End of the period
32,275
33,400
33,525
The Company classified the Merger as a vesting exit event for accounting purposes associated with the Common
Series C and C-2 Units. As a result, the Company recognized non-cash compensation expenses of $62.7 million in connection with the Common Series C Units and
$13.3 million in connection with the Common Series C-2 Units for the year ended December 31, 2020. The remaining $5.7 million and $0.4 million will vest in 2021 and 2022,
respectively. As the vesting exit event was at Topco, there was no impact to the Companys outstanding shares of Common Stock. No expense was recorded in the years ended December 31, 2019 or 2018, since a vesting exit event was not yet
deemed probable of occurring.
Common Series D Units
The Company measures the fair value of the Common Series D Units quarterly throughout the five-year vesting period and recognizes this cost
ratably over the vesting period. There were no grants during the years ended December 31, 2020, 2019, and 2018. The OPM was used to estimate the Common Series D Units fair value of $300 as of the grant date. The expected share price volatility
is based on the average of the historical volatility of comparable public companies. The risk-free rate is based on U.S. Treasury yields in effect at the time of grant over the expected term. The Company did not use a dividend yield as it has not
historically paid distributions. The fair value of these units at the end of each measurement period were $644, $184, and $165 per unit as of December 31, 2020, 2019, and 2018. Since the Common Series D Units that were issued under the Limited
Partnership Agreement were for interests in Topco, which is outside of the consolidated group, the value of the profits interests were marked to market at each of the Companys reporting periods.
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The following assumptions were used in determining the fair value for the years ended
December 31, 2020, 2019, and 2018:
Year Ended December 31,
2020
2019
2018
Grant date fair value
$
300.00
$
300.00
$
300.00
Dividend yield
0.0
%
0.0
%
0.0
%
Expected volatility
48.0
%
44.0
%
40.0
%
Risk-free interest rate
0.1
%
1.6
%
2.6
%
Lack of marketability discount
23.0
%
26.0
%
25.0
%
Expected term (years)
1.0
1.0
1.0
On December 31, 2020, there were 30,000 Common Series D Units outstanding. During the years ended
December 31, 2020, 2019, and 2018, the Company recorded an equity-based compensation expense of $13.8 million, $1.3 million and a gain related to equity-based compensation of $8.2 million, respectively, included in Selling,
general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss.
Equity
Class A Common Stock The Company is authorized to issue 3,920,000,000 shares of Class A common stock with a par
value of $0.0001 per share. Holders of the Companys Class A common stock are entitled to one vote for each share on each matter on which they are entitled to vote. At December 31, 2020, there were 318,425,182 shares of
Class A common stock legally issued and outstanding, including 5,000,000 Performance Shares issued to Topco at the Closing, which were subject to vesting upon satisfaction of a market performance condition after the Closing. Such performance
shares vested on January 15, 2021 when the market performance condition was satisfied. Topco did not have the right to vote the Performance Shares until the vesting condition for the Performance Shares was achieved.
Preferred stock The Company is authorized to issue 10,000,000 preferred stock with no par value of $0.0001 per share. At December
31, 2020 and 2019, there are no preferred stock issued or outstanding.
Warrants As of December 31,
2020, 11,250,000 public warrants were outstanding. Each whole warrant entitles the holder to purchase one whole share of the Companys Class A common stock at an exercise price of $11.50 per share, subject to
adjustment. Warrants may only be exercised for a whole number of shares of Class A common stock. No fractional warrants will be issued upon separation of the units and only whole warrants will trade. The warrants became exercisable 30 days
after the completion of the Merger. The warrants will expire five years after the completion of the Merger, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation.
As of December 31, 2020, 7,333,333 private placement warrants were outstanding. The private placement warrants are identical to the
public warrants, except that the private placement warrants and the Class A common stock issuable upon exercise of the private placement warrants were not transferable, assignable or salable until 30 days after the completion of the
Merger, subject to certain limited exceptions. Additionally, the private placement warrants will be non-redeemable so long as they are held by the initial purchasers or such purchasers permitted transferees. If the private placement warrants
are held by someone other than the initial stockholders or their permitted transferees, the private placement warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants.
The Company may call the warrants for redemption:
For cash:
in whole and not in part;
at a price of $0.01 per warrant;
upon a minimum of 30 days prior written notice of redemption; and
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if, and only if, the last reported closing price of the common stock equals or exceeds $18.00 per share (as
adjusted for share splits, share dividends, reorganizations, reclassifications, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the
notice of redemption to the warrant holders.
For cash or Class A common stock:
in whole and not in part;
at a price of $0.10 per warrant, provided that the warrant holders will be able to exercise their warrants prior
to redemption and receive that number of shares of Class A common stock to be determined by reference to a table included in the warrant agreement, based on the redemption date and the fair market value of the Class A common stock;
upon a minimum of 30 days prior written notice of redemption;
if, and only if, the last reported closing price of the common stock equals or exceeds $10.00 per share (as
adjusted for share splits, share dividends, reorganizations, reclassifications, recapitalizations and the like) on the trading day prior to the date on which the Company sends notice of redemption to the warrant holders; and
if, and only if, an effective registration statement covering the shares of Class A common stock issuable
upon exercise of the warrants and a current prospectus relating thereto is available throughout the 30 day period after which written notice of redemption is given, or the Company has elected to require the exercise of the warrants on a
cashless basis.
If the Company calls the warrants for redemption, management will have the option to
require all holders that wish to exercise the warrants to do so on a cashless basis, as described in the warrant agreement.
The exercise price and number of Class A common stock issuable upon exercise of the warrants may be adjusted in certain circumstances
including in the event of a share dividend. Additionally, in the event of a recapitalization, reorganization, merger or consolidation, the kind and amount of shares of stock or other securities or property (including cash) issuable upon exercise of
the warrants may be adjusted. However, the warrants will not be adjusted for issuance of Class A common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants shares.
During the year ended December 31, 2020, no warrants were exercised for Class A common stock.
12. Employee Benefit Plans
The
Company sponsors 401(k) plans for certain employees who meet specified age and length of service requirements. The 401(k) plans include a deferral feature under which employees may elect to defer a portion of their salary, subject to Internal
Revenue Service limitations. The Company provides a matching contribution based on a percentage of participating employees salaries and contributions made. Total contributions to the plan for the years ended December 31, 2020, 2019, and
2018, were $10.8 million, $13.9 million, and $13.2 million, respectively.
13. Related Party Transactions
Management Fees
The Company incurred $1.4 million, $5.5 million, and $5.5 million, in management fees to certain entities affiliated with or
advised by CVC Capital Partners, Leonard Green & Partners, Bain Capital, Juggernaut Management, LLC, and Centerview Capital, L.P. for the years ended December 31, 2020, 2019, and 2018, respectively, which are included in Selling,
general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss. As of the closing of the Transactions, the management service agreements were terminated other than certain provisions, which survive,
related to indemnification and expense advancement.
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Overlapping Directors
Until February 2, 2020, a member of the board of directors of Topco served as a member of the board of directors for a holding company of
a client. During the years ended December 31, 2020, 2019, and 2018, the Company recognized revenues of $3.9 million, $41.8 million, and $43.0 million, respectively, from this client. Accounts receivable from this client were zero
and $7.0 million as of December 31, 2020, and 2019, respectively.
Beginning October 28, 2020, two members of the board of
directors of Topco served as the members of the board of directors of another client of the Company. During the year ended December 31, 2020, the Company recognized revenues of $0.2 million from this client. Accounts receivable from this
client was less than $0.1 million as of December 31, 2020.
Until October 28, 2020, a member of the board of directors of
Topco served as a member of the board of directors of another client of the Company since the appointment on June 25, 2019. During the years ended December 31, 2020 and 2019, the Company recognized revenues of $16.4 million and
$5.4 million, respectively, from this client. Accounts receivable from this client was zero and $0.1 million as of December 31, 2020 and 2019, respectively.
Investment in Unconsolidated Affiliates
During the years ended December 31, 2020, 2019, and 2018, the Company recognized revenues of $19.6 million, $21.9 million, and
$23.5 million, respectively, from the parent company of an investment in unconsolidated affiliates. Accounts receivable from this client were $2.2 million and $2.2 million as of December 31, 2020 and 2019, respectively.
Long-term Debt
Certain funds managed by CVC Credit Partners, which is part of the same network of companies providing investment management advisory services
operating under the CVC brand as CVC Capital Partners, act as lenders under the Companys New Term Loan Facility. As of December 31, 2020, the funds managed by CVC Credit Partners held $11.3 million of the aggregate principal
outstanding under the New Term Loan Facility.
Prior to the Closing of the Transactions, the funds managed by CVC Credit Partners under
the Companys First Lien Term Loans and Second Lien Term Loans were $100.2 million and $31.1 million, respectively, as of December 31, 2019.
Intercompany Promissory Notes
Advantage Sales & Marketing Inc., an indirect wholly-owned subsidiary of the Company, entered into intercompany loan agreements with
Topco, pursuant to which Topco has borrowed various amounts totaling $6.0 million from Advantage Sales & Marketing Inc. to facilitate the payment to certain former associates for their equity interests in Topco. On September 1,
2020, Advantage Sales & Marketing Inc. entered into a new intercompany loan agreement with Topco consolidating all outstanding amounts under the prior agreements. Pursuant to the new intercompany loan agreement Topco borrowed
$6.0 million at an interest rate of 0.39% per annum. This loan matures on December 31, 2023 and is pre-payable at any time without penalty.
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14. Restructuring Charges
Restructuring charges include severance plans designed to integrate and reduce costs intended to further improve efficiencies in operational
activities and align cost structures consistent with revenue levels associated with business changes. In response to the COVID-19 pandemic, the Company commenced a plan involving terminating certain employees, particularly with respect to COVID-19
impacted operations. In addition, the Company established a global work from home policy. A significant portion of the Companys office-based workforce temporarily transitioned to working from home and the Company commenced a plan to
strategically exit certain offices during the year ended December 31, 2020. Refer to Note 8 Leases , for additional information. During the years ended December 31, 2019 and 2018, in connection with the Daymon
Acquisition, the Company commenced restructuring programs designed to achieve cost savings through transaction synergies. The Company recorded severance expenses of $4.6 million, $2.3 million, and $7.9 million included in
Selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020, 2019, and 2018, respectively.
As of December 31, 2020, and 2019, $1.3 million and $2.6 million of the Companys restructuring charges were included in
Other accrued expenses in the Consolidated Balance Sheets, respectively.
The following table summarizes the Companys
restructuring activity:
Severance
Facilities and Other
Costs
Total Restructuring
Charges
(In thousands)
Balance at January 1, 2018
$
13,257
$
$
13,257
Charges
7,901
4,564
12,465
Payments/utilization
(16,841
)
(1,862
)
(18,703
)
Foreign exchange translation effects
(867
)
(48
)
(915
)
Balance at December 31, 2018
3,450
2,654
6,104
Charges
2,271
3,114
5,385
Payments/utilization
(4,398
)
(4,476
)
(8,874
)
Balance at December 31, 2019
$
1,323
$
1,292
$
2,615
Charges
4,601
755
5,356
Payments/utilization
(5,380
)
(1,292
)
(6,672
)
Balance at December 31, 2020
$
544
$
755
$
1,299
The following table summarizes the Companys restructuring charges by segment:
Year Ended December 31,
(In thousands)
2020
2019
2018
Sales
$
2,451
$
2,928
$
6,663
Marketing
2,905
2,457
5,802
Total restructuring charges
$
5,356
$
5,385
$
12,465
Total restructuring charges recognized represents the estimated total charges for the years ended
December 31, 2020, 2019, and 2018, respectively.
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15. Income Taxes
The (benefit from) provision for income taxes is as follows:
Year Ended December 31,
2020
2019
2018
(in thousands)
Current tax (benefit) expense
Federal
$
(9,106
)
$
45,874
$
21,399
State
4,710
11,311
11,742
Foreign
13,422
12,231
12,140
Total current tax expense
9,026
69,416
45,281
Deferred tax (benefit) expense
Federal
(6,501
)
(53,314
)
(164,208
)
State
868
(11,055
)
(48,653
)
Foreign
(8,724
)
(3,694
)
(754
)
Total deferred tax benefit
(14,357
)
(68,063
)
(213,615
)
Total (benefit from) provision for income taxes
$
(5,331
)
$
1,353
$
(168,334
)
A reconciliation of the provision for taxes based on the federal statutory income tax rate attributable to the
Companys effective income tax rate is as follows:
Year Ended December 31,
2020
2019
2018
Statutory U.S. rate
21.0
%
21.0
%
21.0
%
State tax, net of federal tax benefit
(2.6
)%
(1.1
)%
2.2
%
Foreign tax, net of federal tax benefit
1.1
%
(17.4
)%
(0.4
)%
Goodwill impairment
(10.4
)%
Global Intangible Low Taxed Income
(8.3
)%
(0.2
)%
Transaction expenses
(0.1
)%
(5.4
)%
(0.1
)%
Disallowed Executive Compensation
(3.4
)%
Equity-based compensation
(11.2
)%
(1.5
)%
0.2
%
Meals and entertainment
(0.7
)%
(11.1
)%
(0.2
)%
Contingent consideration fair value adjustment
(1.4
)%
7.1
%
0.7
%
Non-deductible expenses
(0.4
)%
(4.6
)%
Return to provision on permanent differences
0.1
%
8.2
%
0.1
%
Work opportunity tax credit
0.5
%
3.3
%
Research and development credit
0.3
%
4.0
%
Other
(1.6
)%
(0.1
)%
Effective tax rate
3.2
%
(7.4
)%
12.8
%
The geographic components of (loss) income before income taxes are as follows:
Year Ended December 31,
2020
2019
2018
(in thousands)
U.S. sources
$
(190,163
)
$
(32,893
)
$
(1,347,770
)
Non-U.S. sources
23,125
14,490
28,213
Loss before income taxes
$
(167,038
)
$
(18,403
)
$
(1,319,557
)
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Net deferred tax liabilities consist of the following:
December 31,
(in thousands)
2020
2019
Deferred tax assets
Accrued liabilities
$
77,599
$
70,420
Interest expense
20,851
49,586
Social security tax deferral
12,656
Net operating losses
10,557
7,671
Right-of-use liabilities
11,996
26,648
Transaction expenses
8,643
5,325
Debt issuance costs
6,422
973
Acquired intangibles, including goodwill
2,205
2,292
Insurance reserves
2,262
2,403
Other
4,755
6,158
Total deferred tax assets
157,946
171,476
Deferred tax liabilities
Acquired intangibles including goodwill
618,697
636,245
Right-of-use assets
7,890
20,294
Restructuring expenses
4,977
6,857
Depreciation
2,464
1,617
Unrealized transactions
990
Other
6,266
6,038
Total deferred tax liabilities
640,294
672,041
Less: deferred income tax asset valuation allowances
(6,706
)
(5,570
)
Net deferred tax liabilities
$
489,054
$
506,135
December 31,
(in thousands)
2020
2019
Reported as:
Noncurrent deferred tax asset
$
2,188
$
227
Noncurrent deferred tax liability
491,242
506,362
Net deferred tax liabilities
$
489,054
$
506,135
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was
signed into law. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions, among others, addressing the carryback of net operating loss carryforwards
(NOLs) for specific periods, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property
(QIP). Additionally, the CARES Act, in efforts to enhance business liquidity, provides for refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes.
The CARES Act allows employers to defer payment of a portion of payroll taxes otherwise due on wages paid between the enactment date and
December 31, 2020 and remit the deferred payroll taxes in equal amounts on December 31, 2021 and December 31, 2022. Under this provision of the CARES Act, the Company has recorded the tax impact of $12.6 million as
a deferred tax asset.
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The Company held cash and cash equivalents in foreign subsidiaries of $87.7 million and
$59.3 million as of December 31, 2020 and 2019, respectively. As of December 31, 2020, and 2019, the undistributed earnings of the Companys foreign subsidiaries are $134.6 million and $92.6 million, respectively.
The Company has not recorded a deferred tax liability related to undistributed earnings of its foreign subsidiaries as of December 31,
2020, except for a $2.1 million of deferred tax liability recorded as of December 31, 2020 for unremitted earnings in Canada with respect to which the Company no longer has an indefinite reinvestment assertion. Taxes have not been provided
on the remaining $82.5 million of undistributed foreign earnings. The incremental tax liability associated with these earnings is expected to be immaterial.
The Company evaluates its deferred tax assets, including a determination of whether a valuation allowance is necessary, based upon its ability
to utilize the assets using a more likely than not analysis. Deferred tax assets are only recorded to the extent that they are realizable based upon past and future income. As a result of the evaluation, the Company established a valuation allowance
of $6.7 million and $5.6 million on its foreign affiliates deferred tax assets as of December 31, 2020 and 2019, respectively.
As of December 31, 2020, the Company had $6.2 million of federal NOLs, $16.3 million state NOLs, and $31.4 million foreign
NOLs. The change of ownership provisions of the Tax Reform Act of 1986 may limit utilization of a portion of The Companys domestic NOLs to future periods. The federal NOLs expire between 2036 and 2037, $13.2 million of the state NOLs
expire between 2023 and 2039 and the remaining $3.1 million of the state NOLs carry forward indefinitely. Foreign NOLs of $11.6 million expire between 2024 and 2032 and the remaining $19.8 million of the foreign NOLs carry forward
indefinitely.
16. Segments and Geographic Information
The Companys 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 (the chief executive officer) in deciding how to allocate resources and in
assessing performance. Through the Companys 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 Companys 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
Year Ended December 31, 2020
Revenues
$
2,060,593
$
1,095,078
$
3,155,671
Depreciation and amortization
$
171,569
$
67,029
$
238,598
Operating income
$
63,305
$
3,701
$
67,006
Year Ended December 31, 2019
Revenues
$
1,954,705
$
1,830,358
$
3,785,063
Depreciation and amortization
$
161,563
$
71,010
$
232,573
Operating income
$
127,961
$
85,713
$
213,674
Year Ended December 31, 2018
Revenues
$
1,857,004
$
1,850,624
$
3,707,628
Depreciation and amortization
$
157,098
$
68,135
$
225,233
Operating loss
$
(1,072,702
)
$
(17,212
)
$
(1,089,914
)
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Revenues and long-lived assets by services provided in geographic region are as follows:
Year Ended December 31,
(in thousands)
2020
2019
2018
Revenues
North America
$
2,791,282
$
3,324,019
$
3,257,937
International
363,433
461,044
449,691
Total revenues
$
3,154,715
$
3,785,063
$
3,707,628
December 31,
(in thousands)
2020
2019
Long-Lived Assets
North America
$
72,722
$
107,940
International
7,294
6,750
Total long-lived assets
$
80,016
$
114,690
The classification North America is primarily comprised of the Companys U.S. and Canadian
operations and the classification International primarily includes the Companys operation in the U.K., Germany, the Netherlands and Japan.
Revenues by location of services provided in the U.S. were $2.7 billion, $3.1 billion, and $3.0 billion during the years ended
December 31, 2020, 2019, and 2018, respectively.
17. 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 Companys business, financial position, 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
USAO and FBI Voluntary Disclosure and Investigation Related to Take 5
The Company voluntarily disclosed to the United States Attorneys 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.
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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 Companys 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 Companys interests.
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 Companys financial
position, liquidity, or results of operations. Although the Company has insurance covering certain liabilities, the Company cannot assure that the insurance will be sufficient to cover any potential liability or expenses associated with the Take 5
Matter.
Surety Bonds
In the ordinary course of business, the Company is required to provide financial commitments in the form of surety bonds to third parties as a
guarantee of its performance on and its compliance with certain obligations. If the Company were to fail to perform or comply with these obligations, any draws upon surety bonds issued on its behalf would then trigger the Companys payment
obligation to the surety bond issuer. The Company has outstanding surety bonds issued for its benefit of $7.5 million and $0.5 million as of December 31, 2020, and 2019, respectively.
18. Subsequent Events
Subsequent
to December 31, 2020, the Company completed two business acquisitions, which were a sales agency and a marketing agency. The aggregate cash paid for these consummated acquisitions was $17.0 million. The purchase agreements related to those
acquisitions included contingent consideration with a maximum payment outcome of $14.2 million and holdback of $1.4 million. The Company has determined that the purchase price allocation related to these acquisitions is impractical to
report as of the date of this filing. Purchase price allocations are considered preliminary and subject to adjustment during the measurement period, which is up to one year from the acquisition date.
In January 2021 and February 2021, the Company granted performance restricted stock units with respect to our Class A common stock
(PSUs) under the Advantage Solutions Inc. 2020 Incentive Award Plan (the 2020 Plan). The grants provided for a target of 2,557,188 shares of Common Stock to be issued pursuant to the PSUs under the 2020 Plan. The PSUs are
subject to the achievement of certain performance conditions based on the Companys Adjusted EBITDA and revenues and the recipients 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 targeted number of shares set forth in the immediately preceding sentence.
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In January 2021 and February 2021, the Company granted restricted stock units with respect
to our Class A common stock (RSUs) of 1,703,663 shares. RSUs for 125,000 shares of Common Stock are scheduled to vest in two equal tranches on the first and second anniversaries of the grant date. The remaining RSUs are scheduled to
vest in three equal tranches, and a tranche shall vest on each of the first, second and third anniversaries of the grant date.
In January
2021, the Company granted RSUs to certain of its directors (Ronald E. Blaylock, Beverly Chase, Virginie Costa and Elizabeth Muñoz-Guzman) with respect to 10,356 shares each. The grants were made in
accordance with the Companys Non-Employee Director Compensation Policy. The RSUs granted to these directors are scheduled to vest on the earlier of the one-year
anniversary of the date of grant or the day immediately preceding the date of the first annual meeting of the Companys stockholders occurring after the date of grant.
The 5,000,000 Performance Shares issued to Topco at the Closing vested on January 15, 2021, when the closing price for the Class A
common stock equaled or exceeded $12.00 per share for 20 trading days out of 30 consecutive trading days during the five-year period after the Closing.
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SCHEDULE I
ADVANTAGE SOLUTIONS INC.
CONDENSED PARENT ONLY FINANCIAL INFORMATION
OF ADVANTAGE SOLUTIONS INC.
CONDENSED BALANCE SHEETS
December 31,
(in thousands, except share data)
2020
2019
ASSETS
Investment in subsidiaries
$
2,443,067
$
1,577,799
Total assets
$
2,443,067
$
1,577,799
LIABILITIES AND STOCKHOLDERS EQUITY
Equity attributable to stockholders of Advantage Solutions Inc.
Common stock $0.0001 par value, 3,290,000,000 shares authorized; 318,425,182 and 203,750,000
shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively
31
23
Additional paid-in capital
3,356,417
2,337,468
Accumulated deficit
(907,734
)
(745,295
)
Loans to Karman Topco L.P.
(6,316
)
(6,244
)
Accumulated other comprehensive income (loss)
669
(8,153
)
Total equity attributable to stockholders of Advantage Solutions Inc.
2,443,067
1,577,799
Equity attributable to noncontrolling interest
Total stockholders equity
2,443,067
1,577,799
Total liabilities and stockholders equity
2,443,067
1,577,799
See Notes to Condensed Financial Statements
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SCHEDULE I
ADVANTAGE SOLUTIONS INC.
CONDENSED PARENT ONLY FINANCIAL INFORMATION
OF ADVANTAGE SOLUTIONS INC.
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31,
(in thousands)
2020
2019
2018
Revenues
$
$
$
Cost of revenues
Selling, general, and administrative expenses
Depreciation and amortization
Total expenses
Operating income
Interest expense, net
Income before income taxes and equity in net income of subsidiaries
Provision for income taxes
Net income before equity in net income of subsidiaries
Less: net income attributable to noncontrolling interests
Equity in net income (loss) of subsidiaries
96,954
(21,172
)
(1,157,332
)
Other comprehensive income (loss), net tax
Equity in comprehensive income (loss) of Subsidiaries
8,822
5,497
(8,961
)
Total comprehensive income (loss)
$
105,776
$
(15,675
)
$
(1,166,293
)
See Notes to Condensed Financial Statements
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ADVANTAGE SOLUTIONS INC.
CONDENSED PARENT ONLY FINANCIAL INFORMATION
OF ADVANTAGE SOLUTIONS INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
In the parent
company only financial statements, Advantage Solutions Inc.s (Parent) investment in subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries during the years ended December 31, 2020 and 2019.
The accompanying condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule 1 of Regulation S-X. A
condensed statement of cash flows was not presented because Parents operating activities have no cash impact and there were no investing or financing cash flow activities during the years ended December 31, 2020, 2019, and 2018. This
information should be read in conjunction with the accompanying Consolidated Financial Statements.
2. Debt Restrictions
Pursuant to the terms of the New Senior Secured Credit Facilities and the Notes discussed in Note 7, Debt , of the Notes to the
Consolidated Financial Statements, the Parents subsidiaries have restrictions on their ability to pay dividends or make intercompany loans and advances to the Parent. Since the restricted net assets of the Parents subsidiaries exceed 25%
of the consolidated net assets of the Parent and its subsidiaries, the accompanying condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule 1 of Regulation S-X.
Advantage Sales & Marketing Inc., an indirect wholly-owned
subsidiary of the Company (the Borrower) has obligations under the New Term Loan Facility that are guaranteed by Karman Intermediate Corp. (Holdings) and all of the Borrowers 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 New Term Loan Facility is secured by a lien on substantially all of Holdings, the Borrowers and the Guarantors assets (subject to certain permitted exceptions). The New 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 the current asset collateral (second in priority to the liens securing the New Revolving Credit Facility), in each
case, subject to other permitted liens.
The Borrower will be required to prepay the New 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 New Term
Loan Facility contains certain customary negative covenants, including, but not limited to, restrictions on the ability of Holdings and that of its 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.
The New Term Loan Facility provides that, upon the occurrence of certain events of default, the Companys 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.
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Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None