Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
ADVANTAGE SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30,
December 31,
(in thousands, except share and per share data)
2021
2020
ASSETS
Current assets
Cash and cash equivalents
$
159,782
$
204,301
Restricted cash
17,380
15,665
Accounts receivable, net of allowance for expected credit losses of $ 18,155 and $ 16,377 , respectively
641,136
574,142
Prepaid expenses and other current assets
110,369
105,643
Total current assets
928,667
899,751
Property and equipment, net
63,130
80,016
Goodwill
2,181,191
2,163,339
Other intangible assets, net
2,365,280
2,452,796
Investments in unconsolidated affiliates
117,098
115,624
Other assets
66,095
65,966
Total assets
$
5,721,461
$
5,777,492
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt
$
13,303
$
63,745
Accounts payable
206,436
195,452
Accrued compensation and benefits
118,695
142,136
Other accrued expenses
129,548
121,758
Deferred revenue
53,881
51,898
Total current liabilities
521,863
574,989
Long-term debt, net of current portion
2,027,097
2,029,328
Deferred income tax liabilities
483,146
491,242
Warrant liability
19,701
21,234
Other long-term liabilities
133,167
141,910
Total liabilities
3,184,974
3,258,703
Redeemable noncontrolling interest
1,823
—
Equity attributable to stockholders of Advantage Solutions Inc.
Preferred stock, no par value, 10,000,000 shares authorized; no ne issued and outstanding as of June 30, 2021 and December 31, 2020, respectively
—
—
Common stock, $ 0.0001 par value, 3,290,000,000 shares authorized; 318,496,390 and 318,425,182 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively
32
32
Additional paid in capital
3,361,262
3,348,546
Accumulated deficit
( 915,096
)
( 921,101
)
Loans to Karman Topco L.P.
( 6,328
)
( 6,316
)
Accumulated other comprehensive (loss) income
( 1,122
)
674
Total equity attributable to stockholders of Advantage Solutions Inc.
2,438,748
2,421,835
Nonredeemable noncontrolling interest
95,916
96,954
Total stockholders’ equity
2,534,664
2,518,789
Total liabilities, redeemable noncontrolling interest, and stockholders’ equity
$
5,721,461
$
5,777,492
See Notes to the Condensed Consolidated Financial Statements.
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ADVANTAGE SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands, except share and per share data)
2021
2020
2021
2020
Revenues
$
849,954
$
641,543
$
1,640,975
$
1,520,939
Cost of revenues (exclusive of depreciation and amortization shown
separately below)
698,226
509,923
1,351,565
1,256,616
Selling, general, and administrative expenses
46,607
80,569
87,088
121,625
Recovery from Take 5
—
( 7,700
)
—
( 7,700
)
Depreciation and amortization
62,674
58,748
122,287
118,957
Total operating expenses
807,507
641,540
1,560,940
1,489,498
Operating income
42,447
3
80,035
31,441
Other (income) expenses:
Change in fair value of warrant liability
( 7,059
)
—
( 1,533
)
—
Interest expense, net
37,189
51,521
68,054
103,315
Total other (income) expenses
30,130
51,521
66,521
103,315
Income (loss) before income taxes
12,317
( 51,518
)
13,514
( 71,874
)
Provision for (benefit from) income taxes
6,563
( 13,704
)
8,306
( 12,337
)
Net income (loss)
5,754
( 37,814
)
5,208
( 59,537
)
Less: net loss attributable to noncontrolling interest
( 367
)
( 410
)
( 797
)
( 425
)
Net income (loss) attributable to stockholders of Advantage Solutions Inc.
6,121
( 37,404
)
6,005
( 59,112
)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
624
1,843
( 1,796
)
( 6,317
)
Total comprehensive income (loss) attributable to stockholders of Advantage Solutions Inc.
$
6,745
$
( 35,561
)
$
4,209
$
( 65,429
)
Net income (loss) per common share:
Basic
$
0.02
$
( 0.18
)
$
0.02
$
( 0.29
)
Diluted
$
0.00
$
( 0.18
)
$
0.01
$
( 0.29
)
Weighted-average number of common shares:
Basic
318,464,596
203,750,000
318,035,355
203,750,000
Diluted
323,294,273
203,750,000
321,350,145
203,750,000
See Notes to the Condensed Consolidated Financial Statements.
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ADVANTAGE SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Accumulated
Advantage
Common Stock
Additional
Loans
Other
Solutions Inc.
Nonredeemable
Total
Paid-in
Accumulated
to
Comprehensive
Stockholders’
Noncontrolling
Stockholders’
Shares
Amount
Capital
Deficit
Topco
Income (Loss)
Equity
Interests
Equity
(in thousands, except share data)
Balance at April 1, 2021
318,449,966
$
32
$
3,354,383
$
( 921,217
)
$
( 6,322
)
$
( 1,746
)
$
2,425,130
$
95,814
$
2,520,944
Comprehensive income (loss)
Net (loss) income
—
—
—
6,121
—
—
6,121
( 353
)
5,768
Foreign currency translation adjustments
—
—
—
—
—
624
624
219
843
Total comprehensive income (loss)
6,745
( 134
)
6,611
Loans to Karman Topco L.P.
—
—
—
—
( 6
)
—
( 6
)
—
( 6
)
Redemption of noncontrolling interest
—
—
( 436
)
—
—
—
( 436
)
236
( 200
)
Equity-based compensation
—
—
( 3,061
)
—
—
—
( 3,061
)
—
( 3,061
)
Shares issued upon vesting of restricted stock units
41,424
—
—
—
—
—
—
—
—
Shares issued upon exercise of warrants
5,000
—
58
—
—
—
58
—
58
Stock-based compensation expense
—
—
10,318
—
—
—
10,318
—
10,318
Balance at June 30, 2021
318,496,390
$
32
$
3,361,262
$
( 915,096
)
$
( 6,328
)
$
( 1,122
)
$
2,438,748
$
95,916
$
2,534,664
Accumulated
Advantage
Common Stock
Additional
Loans
Other
Solutions Inc.
Nonredeemable
Total
Paid-in
Accumulated
to
Comprehensive
Stockholders’
Noncontrolling
Stockholders’
Shares
Amount
Capital
Deficit
Topco
Income (Loss)
Equity
Interests
Equity
(in thousands, except share data)
Balance at A pril
1, 2020
203,750,000
$
20
$
2,337,471
$
( 767,003
)
$
( 6,244
)
$
( 16,313
)
$
1,547,931
$
87,703
$
1,635,634
Comprehensive loss
Net loss
—
—
—
( 37,404
)
—
—
( 37,404
)
( 410
)
( 37,814
)
Foreign currency translation adjustments
—
—
—
—
—
1,843
1,843
190
2,033
Total comprehensive loss
( 35,561
)
( 220
)
( 35,781
)
Loans to Karman Topco L.P.
—
—
—
—
( 38
)
—
( 38
)
—
( 38
)
Equity-based compensation
—
—
1,650
—
—
—
1,650
—
1,650
Balance at June 30, 2020
203,750,000
$
20
$
2,339,121
$
( 804,407
)
$
( 6,282
)
$
( 14,470
)
$
1,513,982
$
87,483
$
1,601,465
See Notes to the Condensed Consolidated Financial Statements.
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Accumulated
Advantage
Common Stock
Additional
Loans
Other
Solutions Inc.
Nonredeemable
Total
Paid-in
Accumulated
to
Comprehensive
Stockholders’
Noncontrolling
Stockholders’
Shares
Amount
Capital
Deficit
Topco
Income (Loss)
Equity
Interests
Equity
(in thousands, except share data)
Balance at January 1, 2021
318,425,182
$
32
$
3,348,546
$
( 921,101
)
$
( 6,316
)
$
674
$
2,421,835
$
96,954
$
2,518,789
Comprehensive loss
Net income (loss)
—
—
—
6,005
—
—
6,005
( 783
)
5,222
Foreign currency translation adjustments
—
—
—
—
—
( 1,796
)
( 1,796
)
( 491
)
( 2,287
)
Total comprehensive loss
4,209
( 1,274
)
2,935
Loans to Karman Topco L.P.
—
—
—
—
( 12
)
—
( 12
)
—
( 12
)
Redemption of noncontrolling interest
—
—
( 436
)
—
—
—
( 436
)
236
( 200
)
Equity-based compensation
—
—
( 7,110
)
—
—
—
( 7,110
)
—
( 7,110
)
Vesting of stock-based compensation awards
24,784
—
—
—
—
—
—
—
—
Shares issued upon vesting of restricted stock units
41,424
—
—
—
—
—
—
—
—
Shares issued upon exercise of warrants
5,000
—
58
—
—
—
58
—
58
Stock-based compensation expense
—
—
20,204
—
—
—
20,204
—
20,204
Balance at June 30, 2021
318,496,390
$
32
$
3,361,262
$
( 915,096
)
$
( 6,328
)
$
( 1,122
)
$
2,438,748
$
95,916
$
2,534,664
Accumulated
Advantage
Common Stock
Additional
Loans
Other
Solutions Inc.
Nonredeemable
Total
Paid-in
Accumulated
to
Comprehensive
Stockholders’
Noncontrolling
Stockholders’
Shares
Amount
Capital
Deficit
Topco
Income (Loss)
Equity
Interests
Equity
(in thousands, except share data)
Balance at January 1, 2020
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
—
—
—
( 59,112
)
—
—
( 59,112
)
( 425
)
( 59,537
)
Foreign currency translation adjustments
—
—
—
—
—
( 6,317
)
( 6,317
)
( 4,099
)
( 10,416
)
Total comprehensive loss
( 65,429
)
( 4,524
)
( 69,953
)
Loans to Karman Topco L.P.
—
—
—
—
( 38
)
—
( 38
)
—
( 38
)
Equity-based compensation
—
—
1,650
—
—
—
1,650
—
1,650
Balance at June 30, 2020
203,750,000
$
20
$
2,339,121
$
( 804,407
)
$
( 6,282
)
$
( 14,470
)
$
1,513,982
$
87,483
$
1,601,465
See Notes to the Condensed Consolidated Financial Statements.
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ADVANTAGE SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
(in thousands)
2021
2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
$
5,208
$
( 59,537
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Noncash interest expense, net
419
8,120
Depreciation and amortization
122,287
118,957
Change in fair value of warrant liability
( 1,533
)
—
Fair value adjustments related to contingent consideration
3,361
9,532
Deferred income taxes
( 7,403
)
2,658
Equity-based compensation of Topco
( 7,110
)
1,650
Stock-based compensation
20,204
—
Equity in earnings of unconsolidated affiliates
( 3,260
)
( 1,750
)
Distribution received from unconsolidated affiliates
1,154
221
Noncash losses (gains) related to lease abandonments
1,241
( 25,825
)
Loss on disposal of property and equipment
6,199
10,978
Changes in operating assets and liabilities, net of effects from purchases of businesses:
Accounts receivable
( 64,802
)
190,720
Prepaid expenses and other assets
3,309
49,796
Accounts payable
8,901
( 44,723
)
Accrued compensation and benefits
( 23,224
)
( 26,649
)
Deferred revenues
1,717
5,154
Other accrued expenses and other liabilities
( 10,744
)
( 4,875
)
Net cash provided by operating activities
55,924
234,427
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired
( 20,426
)
( 51,389
)
Purchase of property and equipment
( 12,958
)
( 15,425
)
Net cash used in investing activities
( 33,384
)
( 66,814
)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit
41,736
97,658
Payments on lines of credit
( 92,756
)
( 98,640
)
Proceeds from accounts receivable securitization facility
—
120,000
Proceeds from issuance of long-term debt
—
2,787
Principal payments on long-term debt
( 6,849
)
( 13,281
)
Contingent consideration payments
( 6,247
)
( 7,641
)
Holdback payments
( 173
)
—
Redemption of noncontrolling interest
( 200
)
—
Net cash (used in) provided by financing activities
( 64,489
)
100,883
Net effect of foreign currency fluctuations on cash
( 855
)
( 5,860
)
Net change in cash, cash equivalents and restricted cash
( 42,804
)
262,636
Cash, cash equivalents and restricted cash, beginning of period
219,966
199,025
Cash, cash equivalents and restricted cash, end of period
$
177,162
$
461,661
SUPPLEMENTAL CASH FLOW INFORMATION
Purchase of property and equipment recorded in accounts payable and accrued expenses
$
628
$
25
Note payable related to settlement of contingent consideration
$
—
$
5,982
See Notes to the Condensed Consolidated Financial Statements.
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ADVANTAGE SOLUTIONS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Significant Accounting Policies
Advantage Solutions Inc. (“Advantage” or the “Company”) is a provider of outsourced solutions to consumer goods companies and retailers.
On September 7, 2020, ASI Intermediate Corp., then known as Advantage Solutions Inc. (“ASI”), 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 (“Conyers Park”), now known as Advantage Solutions Inc., CP II Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Conyers Park (“Merger Sub”), and Karman Topco L.P., then the parent company of ASI (“Topco”). Conyers Park neither engaged in any operations nor generated any revenue. Based on Conyers Park’s 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, and Merger Sub was merged with and into ASI with ASI surviving the merger as a wholly owned subsidiary of Conyers Park (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”). On the Closing Date, and in connection with the closing of the Transactions (the “Closing”), Conyers Park changed its name to Advantage Solutions Inc. and ASI changed its name to ASI Intermediate Corp.
The Company’s Class A common stock is listed on the Nasdaq Global Select Market under the symbol “ADV” and warrants to purchase the Class A common stock at an exercise price of $ 11.50 per share are listed on the Nasdaq Global Select Market under the symbol “ADVWW”.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. The unaudited condensed consolidated financial statements do not include all of the information required by accounting principles generally accepted in the United States (“ U.S. GAAP
”). The Condensed Consolidated Balance Sheet at December 31, 2020 was derived from the audited Consolidated Balance Sheet at that date and does not include all the disclosures required by U.S. GAAP. In the opinion of management, all adjustments which are of a normal recurring nature and necessary for a fair statement of the results as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 have been reflected in the condensed consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2020 and the related footnotes thereto. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period.
COVID-19
Pandemic
COVID-19 continues
to spread throughout the United States and other countries across the world, and the duration and severity of the effects are currently unknown. The COVID-19 pandemic
has impacted the Company and could materially impact the Company’s financial results in the future. The Consolidated Condensed Financial Statements presented herein reflect estimates and assumptions made by management at June 30, 2021.
Such estimates and assumptions affect, among other things, the Company’s goodwill, long-lived asset and indefinite-lived intangible asset valuation, assessment of the annual effective tax rate and the allowance for expected credit losses. Events and changes in circumstances, including those resulting from the impacts of COVID-19, will
be reflected in management’s estimates for future periods.
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Recent Accounting Standards
Recent Accounting Standards Adopted by the Company
In December 2019, the Financial Accounting Standards Board (“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, 2020. The Company adopted ASU 2019-12
on January 1, 2021 and the adoption of this accounting standard did not have a material impact on the Company’s condensed consolidated financial statements.
Accounting Standards Recently Issued but Not Yet Adopted by the Company
In March 2020, the FASB issued ASU 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional expedients and exceptions for U.S. GAAP to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate if certain criteria are met. The amendments in this update are effective for reporting periods that include or are subsequent to March 12, 2020. Once adopted, the amendments in this update must be applied prospectively to contract modifications and hedging relationships through December 31, 2022. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04,
Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):
Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). The guidance clarifies certain aspects of the current guidance to promote consistency among reporting of an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for all entities, including adoption in an interim period. 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. Revenue Recognition
The Company recognizes revenue when control of promised goods or services are transferred to the client in an amount that reflects the consideration that the Company expects to be entitled to in exchange for such goods or services. Substantially all of the Company’s contracts with clients involve the transfer of a service to the client, which represents a performance obligation that is satisfied over time because the client simultaneously receives and consumes the benefits of the services provided. In most cases, the contracts consist of a performance obligation that is comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). For these contracts, the Company allocates the ratable portion of the consideration based on the services provided in each period of service to such period.
Revenues related to the sales segment are primarily recognized in the form of commissions, fee-for-service,
or on a cost-plus basis for providing headquarter relationship management, analytics, insights and intelligence services, administrative services, retail merchandising services, retailer client relationships and in-store
media programs, and digital technology solutions (which include business intelligence solutions, e-commerce
services, and content services).
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Marketing segment revenues are primarily recognized in the form of fee-for-service
(including retainer fees, fees charged to clients based on hours incurred, project-based fees, or fees for executing in-person
consumer engagements or experiences, which engagements or experiences the Company refers to as “events”), commissions, or on a cost-plus basis for providing experiential marketing, shopper and consumer marketing services, private label development and digital, social, and media services.
The Company disaggregates revenues from contracts with clients by reportable segment. Revenues within each segment are further disaggregated between brand-centric services and retail-centric services. Brand-centric services are centered on providing solutions to support manufacturers’ sales and marketing strategies. Retail-centric services are centered on providing solutions to retailers.
Disaggregated revenues were as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2021
2020
2021
2020
(in thousands)
Sales brand-centric services
$
321,876
$
278,807
$
615,407
$
596,405
Sales retail-centric services
239,768
181,432
480,561
371,632
Total sales revenues
561,644
460,239
1,095,968
968,037
Marketing brand-centric services
121,822
82,354
238,804
178,719
Marketing retail-centric services
166,488
98,950
306,203
374,183
Total marketing revenues
288,310
181,304
545,007
552,902
Total revenues
$
849,954
$
641,543
$
1,640,975
$
1,520,939
Contract liabilities represent deferred revenues which are cash payments that are received in advance of the Company’s satisfaction of the applicable obligation and are included in Deferred revenues in the Condensed Consolidated Balance Sheets. Deferred revenues are recognized as revenues when the related services are performed for the client. Revenues recognized during the three and six months ended June 30, 2021 that were included in Deferred revenues as of December 31, 2020 were $ 5.8 million and $ 31.9 million, respectively. Revenues recognized during the three and six months ended June 30, 2020 that were included in Deferred revenues as of December 31, 2019 were $ 3.2 million and $ 27.2 million, respectively.
3. Acquisitions
2021 Acquisitions
During the six months ended June 30, 2021, the Company acquired three sales businesses. 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 Company’s 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 each acquired business has been included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) since its respective date of acquisition.
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The aggregate purchase price for the acquisitions referenced above was $ 27.0 million, which includes $ 20.4 million paid in cash, $ 5.1 million recorded as contingent consideration liabilities, and $ 1.4 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 are
recorded at fair value. The maximum potential payment outcome related to the acquisitions is $ 13.5 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 18 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, $ 9.0 million is deductible for tax purposes.
The preliminary fair values of the identifiable assets and liabilities of the acquisitions completed during the six months ended June 30, 2021, as of the applicable acquisition dates, are as follows:
(in thousands)
Consideration:
Cash
$
20,426
Holdback
1,442
Fair value of contingent consideration
5,116
Total consideration
$
26,984
Recognized amounts of identifiable assets acquired and liabilities assumed:
Assets
Accounts receivable
$
3,382
Property and equipment
86
Identifiable intangible assets
11,083
Total assets
14,551
Liabilities
Total liabilities
4,222
Redeemable noncontrolling interest
1,804
Total identifiable net assets
8,525
Goodwill arising from acquisitions
$
18,459
The identifiable intangible assets are 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
$
10,082
7 years
Trade n
ames
1,001
10 years
Total identifiable intangible assets
$
11,083
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The operating results of the businesses acquired during the six months ended June 30, 2021 contributed total revenues of $ 6.3 million and $ 10.9 million in the three and six months ended June 30, 2021, respectively. The Company has determined that the presentation of net income from the date of acquisition is impracticable due to the integration of the operations upon acquisition.
During the three and six months ended June 30, 2021, the Company incurred an immaterial amount and $ 0.2 million, respectively, in transaction costs related to the acquisitions described above. These costs have been included in “Selling, general, and administrative expenses” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
2020 Acquisitions
The Company acquired three businesses during the six months ended June 30, 2020, of which two were sales businesses and a marketing agency 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 Company’s 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 results of operations of the business acquired by the Company have been included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) since the date of acquisition.
The aggregate purchase price for the acquisitions referenced above was $ 72.1 million, which includes $ 51.4 million paid in cash, $ 17.2 million recorded as contingent consideration liabilities, and $ 3.5 million recorded as holdback amounts. The maximum potential payment outcome related to the acquisitions is $ 45.8 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, $ 19.8 million is deductible for tax purposes.
The fair values of the identifiable assets and liabilities of the acquisitions completed during the six months ended June 30, 2020, at the respective acquisition dates, are as follows:
(in thousands)
Consideration
Cash
$
51,389
Holdbacks
3,488
Fair value of contingent consideration
17,210
Total consideration
$
72,087
Recognized amounts of identifiable assets acquired and liabilities assumed:
Assets
Accounts receivable
$
2,534
Other assets
2,907
Property and equipment
321
Identifiable intangible asset s
32,610
Total assets
38,372
Liabilities
Total liabilities
4,242
Total identifiable net assets
34,130
Goodwill arising from acquisitions
$
37,957
The identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. The fair value and estimated useful lives of the intangible assets acquired are as follows:
(in thousands)
Amount
Weighted Average
Useful Life
Client relationships
$
32,610
10 years
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The operating results of the businesses acquired during the six months ended June 30, 2020 contributed total revenues of $ 15.8 million and $ 26.9 million in the three months and six months ended June 30, 2020, respectively. The Company has determined that the presentation of net income from the date of acquisition is impracticable due to the integration of the operations upon acquisition.
During the three and six months ended June 30, 2020, the Company incurred an immaterial amount and $ 0.2 million, respectively, in transaction costs related to the acquisitions described above. These costs have been included in “Selling, general, and administrative expenses” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Supplemental Pro Forma Information
Supplemental information on a pro forma basis, presented as if the acquisitions executed during the period from January 1, 2021 to August 9, 2021 and for the year ended December 31, 2020, had been consummated as of the beginning of the comparative prior period, is as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2021
2020
2021
2020
(in thousands, except per share data)
Total revenues
$
852,157
$
648,602
$
1,646,090
$
1,536,060
Net income (loss) attributable to stockholders of Advantage Solutions Inc.
$
6,032
$
( 34,598
)
$
6,231
$
( 54,066
)
Basic net income (loss) per common share
$
0.02
$
( 0.17
)
$
0.02
$
( 0.27
)
Diluted net income (loss) per common share
$
0.00
$
( 0.17
)
$
0.01
$
( 0.27
)
T
he unaudited
pro forma supplemental information is based on estimates and assumptions that 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 three and six months ended June 30, 2021 and 2020. 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.
4. Goodwill and Intangible Assets
Changes in goodwill for the six months ended June 30, 2021 are as follows:
Sales
Marketing
Total
(in thousands)
Gross carrying amount as of December 31, 2020
$
2,114,378
$
700,961
$
2,815,339
Accumulated impairment charge (1)
( 652,000
)
—
( 652,000
)
Balance at December 31, 2020
$
1,462,378
$
700,961
$
2,163,339
Acquisitions
18,459
—
18,459
Measurement period adjustments
179
( 1,045
)
( 866
)
Foreign exchange translation effects
259
—
259
Balance at June 30, 2021
$
1,481,275
$
699,916
$
2,181,191
(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 Company’s sales reporting unit as a result of the Company’s annual evaluation of goodwill impairment test.
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The following tables set forth information for intangible assets:
June 30, 2021
(in thousands)
Weighted
Average Useful
Life
Gross Carrying
Value
Accumulated
Amortization
Accumulated
Impairment
Charges (1)
Net Carrying
Value
Finite-lived intangible assets:
Client relationships
14 years
$
2,465,579
$
1,067,784
$
—
$
1,397,795
Trade names
8 years
134,885
72,339
—
62,546
Developed technology
5 years
10,160
7,005
—
3,155
Covenant not to compete
5 years
6,100
4,316
—
1,784
Total finite-lived intangible assets
2,616,724
1,151,444
—
1,465,280
Indefinite-lived intangible assets:
Trade names
1,480,000
—
580,000
900,000
Total other intangible assets
$
4,096,724
$
1,151,444
$
580,000
$
2,365,280
(1)
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 Company’s sales trade name as a result of the Company’s annual impairment test for indefinite-lived 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
Amortization expenses included in the Consolidated Statements of Operatio n
s and Comprehensive Income (Loss) for the three and six months ended June 30, 2021 and 2020 were $ 49.2 million, $ 98.6 million, $ 47.7 million, and $ 95.5 million, respectively.
As of June 30, 2021, estimated future amortization expenses of the Company’s existing intangible assets are as follows:
(in thousands)
Remainder of 2021
$
98,662
2022
194,917
2023
191,363
2024
189,968
2025
184,611
Thereafter
605,759
Total amortization expense
$
1,465,280
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5. Debt
June 30,
2021
December 31,
2020
(in thousands)
New Term Loan Facility
$
1,318,375
$
1,325,000
Notes
775,000
775,000
New Revolving Credit Facility
—
50,000
Notes payable and deferred obligations
2,953
3,618
2,096,328
2,153,618
Less: current portion
13,303
63,745
Less: debt issuance costs
55,928
60,545
Long-term debt, net of current portion
$
2,027,097
$
2,029,328
As of June 30, 2021, the Company had $ 1.3 billion of debt outstanding under the New Term Loan Facility and $ 775.0 million of debt outstanding under the Notes with maturity dates of October 28, 2027 and November 15, 2028 , respectively. The Company was in compliance with all of its affirmative and negative covenants under the New Term Loan Facility and Notes as of June 30, 2021. In addition, the Company was required to repay the principal under the New Term Loan Facility (as such term was defined in the New Term Loan Facility Agreement) in the greater amount of its excess cash flow, as defined in the New Term Loan Facility Agreement, or $ 13.3 million, per annum, in quarterly payments. The Company made the minimum quarterly principal payments of $ 3.3 million during the three months ended June 30, 2021 and no payments under the excess cash flow calculation were required. During the three months ended June 30, 2020, the Company made the minimum quarterly principal payments of $ 6.5 million pursuant to its then outstanding first lien term loans that existed prior to consummation of the Transactions.
6. Fair Value of Financial Instruments
The Company
measures fair value based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The following table sets forth the Company’s financial assets and liabilities measured on a recurring basis at fair value, categorized by input level within the fair value hierarchy.
June 30, 2021
(in thousands)
Fair Value
Level 1
Level 2
Level 3
Assets measured at fair value
Cash and cash equivalents
$
159,782
$
159,782
$
—
$
—
Derivative financial instruments
6,142
—
6,142
—
Total assets measured at fair value
$
165,924
$
159,782
$
6,142
$
—
Liabilities measured at fair value
Derivative financial instruments
$
1,143
$
—
$
1,143
$
—
Warrant liability
19,701
—
—
19,701
Contingent consideration liabilities
46,843
—
—
46,843
Total liabilities measured at fair value
$
67,687
$
—
$
1,143
$
66,544
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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
$
—
Warrant liability
21,234
—
—
21,234
Contingent consideration liabilities
45,901
—
—
45,901
Total liabilities measured at fair value
$
69,017
$
—
$
1,882
$
67,135
Interest Rate Cap Agreements
The Company had interest rate cap contracts with an aggregate notional value of principal of $ 2.2 billion as of each of June 30, 2021 and December 31, 2020, from various financial institutions to manage the Company’s exposure to interest rate movements on variable rate credit facilities. As of June 30, 2021, the aggregate fair value of the Company’s outstanding interest rate caps represented an outstanding net asset of $ 6.1 million and an outstanding net liability of $ 1.1 million. As of December 31, 2020, the aggregate fair value of the Company’s outstanding interest rate caps represented an outstanding net asset of $ 1.8 million and an outstanding net liability of $ 1.9 million.
As of June 30, 2021, $ 6.1 million and $ 1.1 million of fair value of the Company’s outstanding interest rate caps were included in “Prepaid expenses and other current assets” and “Other accrued expenses” in the Condensed Consolidated Balance Sheets, respectively, with changes in fair value recognized as a component of “Interest expense, net” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). As of December 31, 2020, $ 1.8 million, $ 1.0 million, and $ 0.9 million of fair value of the Company’s outstanding interest rate caps were included in “Prepaid expenses and other current assets”, “Other accrued expenses”, and “Other long-term liabilities” in the Condensed Consolidated Balance Sheets, respectively, with changes in fair value recognized as a component of “Interest expense, net” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
During the three months ended June 30, 2021 and 2020, the Company recorded a loss of $ 1.2 million and a gain of less than $ 0.1 million, respectively, within Interest expense, net, related to changes in the fair value of its derivative instruments. During the six months ended June 30, 2021 and 2020, the Company recorded a gain within Interest expense, net in the amount of $
4.3 million, and $ 0.1 million, respectively, related to changes in the fair value of its derivative instruments.
Forward Contracts
As of June 30, 2021, the Company had
eight
open
euro
forward contracts to hedge foreign currency exposure on a total of € 3.6 million, with maturities in fiscal year 2021 . As of December 31, 2020, the Company had no open euro forward contracts. During the three months and six months ended June 30, 2021 and 2020, the Company recognized immaterial changes in fair value of the forward contracts as a component of “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss).
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Table of Contents
Warrant Liability
The estimated fair value of the liability is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.
The fair value of the warrants on the date of issuance and on each re -
measurement date of certain warrants issued by the Company in a private placement in connection with the Closing (the “private placement warrants”) and classified as liabilities is estimated using the Black-Scholes option pricing model using the following assumptions:
June 30, 2021
December 31, 2020
Fair value warrants per share
$
2.69
$
2.90
Share Price
$
10.79
$
13.17
Exercise price per share
$
11.50
$
11.50
Expected term (years)
4.3
4.8
Expected volatility
32.0
%
17.0
%
Risk-free interest rate
0.7
%
0.4
%
Dividend yield
0.0
%
0.0
%
As of June 30, 2021, 7,333,333 private placement warrants remained outstanding at a fair value of $ 19.7 million resulting in $ 7.0 million and $ 1.5 million gain related to the change in fair value of warrant liability for the three and six months ended June 30, 2021, respectively. The warrant liability is stated at fair value at each reporting period with the change in fair value recorded on the
Condensed
Consolidated Statement s
of Operations and Comprehensive
Income (Loss)
until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument.
Contingent Consideration Liabilities
Each reporting period, the Company measures the fair value of its contingent liabilities by evaluating the significant unobservable inputs and probability weightings using Monte Carlo simulations. Any resulting decreases or increases in the fair value result in a corresponding gain or loss reported in “Selling, general, and administrative expenses” in the Condensed Consolidated Statements of
Operations and
Comprehensive
Income (Loss).
As of June 30, 2021, the maximum potential payment outcomes were $ 233.0 million. The following table summarizes the changes in the carrying value of estimated contingent consideration liabilities:
June 30,
(in thousands)
2021
2020
Beginning of the period
$
45,901
$
47,649
Fair value of acquisitions
5,116
17,210
Payments
( 6,399
)
( 8,859
)
Note issuance for settlements
—
( 5,982
)
Measurement period adjustments
( 1,181
)
—
Changes in fair value
3,361
9,532
Foreign exchange translation effects
45
( 802
)
End of the period
$
46,843
$
58,748
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Long-term Debt
The following table sets forth the carrying values and fair values of the Company’s financial liabilities measured on a recurring basis, categorized by input level within the fair value hierarchy:
(in thousands)
Carrying Value
Fair Value
(Level 2)
Balance at June 30, 2021
New Term Loan Credit Facility
$
1,318,375
$
1,461,643
Notes
775,000
899,251
Notes payable and deferred obligations
2,953
2,953
Total long-term debt
$
2,096,328
$
2,363,847
(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
7. Related Party Transactions
Conyers Park and the Transactions
In May 2019, Conyers Park II Sponsor LLC, an affiliate of Centerview Capital Management, LLC, which was Conyer s
Park’s sponsor prior to the Merger (“CP Sponsor”) ,
purchased 11,500,000 of Conyers Park’s Class B ordinary shares for an aggregate purchase price of $ 25,000 in cash, or approximately $ 0.002 per share. In June 2019, CP Sponsor transferred 25,000 shares to each of four individuals, including a current member of the board of directors of the Company. At the time of the Closing, the 11,250,000 shares of Conyers Park Class B common stock, par value $ 0.0001 per share, then held by CP Sponsor and its directors automatically converted into shares of
the Company’s
Class A common stock. CP Sponsor also purchased 7,333,333 private placement warrants for a purchase price of $ 1.50 per whole warrant, or $ 11,000,000 in the aggregate, in private placement transactions that occurred simultaneously with the closing of the Conyers Park’s initial public offering and related over-allotment option. As a result of the Closing, each private placement warrant entitles CP Sponsor to purchase one share
of
the Company’s
Class A Common Stock at $ 11.50 per share.
Concurrent with the execution of the Merger Agreement, Conyers Park entered into the subscription agreements with certain investors (collectively, the “Subscription Agreements”), 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. 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. Conyers Park also entered into a stockholders agreement (the “Stockholders Agreement”) with CP Sponsor, Topco, and certain of the Advantage Sponsors and their affiliates (collectively, the “Stockholder Parties”). The Stockholders Agreement provides, among other things, that the Stockholder Parties agree to cast their votes such that the Company’s board of directors is constituted as set forth in the Stockholders Agreement and the Merger Agreement and will have certain rights to designate directors to the Company’s board of directors, in each case, on the terms and subject to the conditions therein. Additionally, Conyers Park entered into a Registration Rights Agreement with CP Sponsor, Topco, the Advantage Sponsors and their affiliates and the other parties thereto, pursuant to which the Company
has
agreed to register for resale certain shares of Class A common stock and other equity securities that are held by the parties thereto from time to time.
18
Table of Contents
Overlapping Directors
Seven members of the board of directors of the Company served as the members of the board of
directors of five clients of the Company.
Until February 2, 2020, a member of the board of directors of the Company served as a member of the board of directors for a holding company of a client.
The information below details the Company’s financial relationships with those clients as of and for the periods indicated:
Revenues
Accounts Receivable
Three Months Ended
Six Months Ended
as of
(In thousands)
June 30,
2021
June 30,
2020
June 30,
2021
June 30,
2020
June 30,
2021
December 31,
2020
Client 1
$
2,071
$
—
$
4,495
$
—
$
—
$
—
Client 2
—
—
—
3,866
—
—
Client 3
107
—
214
—
736
572
Client 4
116
514
333
608
5,152
4,819
Client 5
264
33
407
209
1,276
1,285
Client 6
37
66
126
171
1,041
915
Total
$
2,595
$
613
$
5,575
$
4,854
$
8,205
$
7,591
From June 25, 2019 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. During the three and six months ended June 30, 2020, the Company recognized revenues of $
4.3 million and $
9.1 million, respectively, from this client.
Investment in Unconsolidated Affiliates
During the three months ended June 30, 2021 and 2020, the Company recognized revenues of $ 4.7 million and $ 2.6 million, respectively, from a parent company of an unconsolidated affiliate. During the six months ended June 30, 2021 and 2020, the Company recognized revenues of $ 9.3 million and $ 7.3 million, respectively, from the
parent company of such
unconsolidated affiliate. Accounts receivable from this client were $ 1.7 million and $ 2.2 million as of June 30, 2021 and December 31, 2020, respectivel y
.
8. Income Taxes
The Company’s effective income tax rates were 53.3 % and 26.6 % for the three months ended June 30, 2021 and 2020, respectively. The fluctuation in the effective rates during the three months ended June 30, 2021 and 2020 is caused by variations in the Company’s estimated annual effective tax rate from the respective previous quarters, changes in the income (loss) before income taxes in those periods and the impact of discrete items related to changes in statutory tax rates in certain foreign and state jurisdictions for the three months ended June 30, 2021 which resulted in a higher tax
provision overall.
The Company’s effective
tax rate was
61.5 % and
17.2 % during the six months ended June 30, 2021 and 2020, respectively. The effective tax rate is based upon the estimated income or loss before taxes for the year, by jurisdiction, and adjusted for estimated permanent tax adjustments. The fluctuation in the Company’s effective tax rate was primarily due to a difference in projected income (loss) before income taxes used in the annual effective tax rate and unfavorable permanent differences related to officers’ compensation including stock-based awards for the six months ended June 30, 2021. Also, the Company recorded discrete items during the six months ended June 30, 2021, including a valuation allowance of $ 1.3 million for its Mexico operations and income tax expenses of $ 2.3 million and $ 0.8 million to adjust the deferred tax liability resulting from changes in statutory tax rates in certain foreign and state jurisdictions, respectively. These discrete items resulted in a higher tax provision overall for the six months ended June 30, 2021.
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Table of Contents
9. Segments
The Company’s
operations are organized into two reportable segments: sales and marketing. The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the chief operating decision maker (i.e., the Company’s Chief Executive Officer) in deciding how to allocate resources and in assessing performance. Through the Company’s sales segment, the Company serves as a strategic intermediary between consumer goods manufacturers and retailer partners and performs critical merchandizing services on behalf of both consumer goods manufacturers and retail partners. Through the Company’s marketing segment, the Company develops and executes marketing programs for manufacturers and retailers. These reportable segments are organized by the types of services provided, similar economic characteristics, and how the Company manages its business. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; therefore, no additional information is produced or included herein. The Company and its chief operating decision maker evaluate performance based on revenues and operating income.
(in thousands)
Sales
Marketing
Total
Three Months Ended June 30, 2021
Revenues
$
561,644
$
288,310
$
849,954
Depreciation and amortization
$
44,710
$
17,964
$
62,674
Operating income (loss)
$
44,673
$
( 2,226
)
$
42,447
Three Months Ended June 30, 2020
Revenues
$
460,239
$
181,304
$
641,543
Depreciation and amortization
$
42,234
$
16,514
$
58,748
Operating income (loss)
$
11,021
$
( 11,018
)
$
3
(in thousands)
Sales
Marketing
Total
Six Months Ended June 30, 2021
Revenues
$
1,095,968
$
545,007
$
1,640,975
Depreciation and amortization
$
87,274
$
35,013
$
122,287
Operating income
$
79,822
$
213
$
80,035
Six Months Ended June 30, 2020
Revenues
$
968,037
$
552,902
$
1,520,939
Depreciation and amortization
$
85,341
$
33,616
$
118,957
Operating income (loss)
$
35,215
$
( 3,774
)
$
31,441
10. Commitments and Contingencies
Litigation
The Company is involved in various legal matters that arise in the ordinary course of its business. Some of these legal matters purport or may be determined to be class and/or representative actions, or seek substantial damages, or penalties. The Company has accrued amounts in connection with certain legal matters, including with respect to certain of the matters described below. There can be no assurance, however, that these accruals will be sufficient to cover such matters or other legal matters or that such matters or other legal matters will not materially or adversely affect the Company’s 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.
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Legal Matters Related to Take 5
On April 1, 2018, the Company acquired certain assets and assumed liabilities of Take 5 Media Group (“Take 5”). In June 2019, as a result of a review of internal allegations related to inconsistency of data provided by Take 5 to its clients, the Company commenced an investigation into Take 5’s operations. In July 2019, as a result of the Company’s investigation, the Company determined that revenue during the fiscal year ended December 31, 2018 attributable to the Take 5 business had been recognized for services that were not performed on behalf of clients of Take 5 and that inaccurate reports were made to Take 5 clients about those services (referred to as the “Take 5 Matter”). As a result of these findings, in July 2019, the Company terminated all operations of Take 5, including the use of its associated trade names and the offering of its services to its clients and offered refunds to Take 5 clients of collected revenues attributable to Take 5 since the Company’s acquisition of Take 5.
USAO and FBI Voluntary Disclosure and Investigation Related to Take 5
The Company voluntarily disclosed to the United States Attorney’s Office and the Federal Bureau of Investigation certain misconduct occurring at Take 5, a line of business that the Company closed in July 2019. The Company intends to cooperate in this and any other governmental investigations that may arise in connection with the Take 5 Matter. At this time, the Company cannot predict the ultimate outcome of any investigation related to the Take 5 Matter and is unable to estimate the potential impact such an investigation may have o n
the Company.
Arbitration Proceedings Related to Take 5
In August 2019, as a result of the Take 5 Matter, the Company provided a written indemnification claim notice to the sellers of Take 5 (the “Take 5 Sellers”) seeking monetary damages (including interest, fees and costs) based on allegations of breach of the asset purchase agreement (the “Take 5 APA”), as well as fraud. In September 2019, the Take 5 Sellers initiated arbitration proceedings against the Company, alleging breach of the Take 5 APA as a result of the Company’s decision to terminate the operations of the Take 5 business, and seeking monetary damages equal to all unpaid earn-out
payments under the Take 5 APA (plus interest, fees and costs). In 2020, the Take 5 sellers amended their statement of claim to allege defamation, relating to statements the Company made to customers in connection with terminating the operations of the Take 5 business, and seeking monetary damages for the alleged injury to their reputation. The Company filed its response to the Take 5 Sellers’ claims, and asserted indemnification, fraud and other claims against the Take 5 Sellers as counterclaims and cross-claims in the arbitration proceedings. The Company is currently unable to estimate the potential impact related to these arbitration proceeding s
, but the Company has retained outside counsel to represent the Company in these matters and intends to vigorously pursue the Company’s 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 Company’s financial position, liquidity, or results of operations. Although the Company has insurance covering certain liabilities, the insurance may not be sufficient to cover any potential liability or expenses associated with the Take 5 Matter.
11. Redeemable Noncontrolling Interest
The Company is party
to a put and call option agreement with respect to the common securities that represent the remaining noncontrolling interest from a majority-owned subsidiary, which was established through a majority-owned international joint venture during the six months ended June 30, 2021. The put and call option agreement representing 20 % of the total outstanding noncontrolling equity interest of that subsidiary, may be
exercised at the
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discretion of the noncontrolling interest holder by providing written notice to the Company beginning in 2026 and expiring in 2028 . The redemption value of the put and call option agreement is based on a multiple of the majority-owned subsidiary earnings before interest, taxes, depreciation and amortization subject to certain adjustments. The noncontrolling interest is subject to a put option that is outside of the Company’s control, and is presented as redeemable non-controlling interest in the temporary equity section of the Condensed Consolidated Balance Sheets. The Company recorded its redeemable noncontrolling interest at fair value on the date of the related business combination transaction and recognizes changes in the redemption value at the end of each reporting period.
The carrying value of the redeemable noncontrolling interest was $ 1.8 million as of June 30, 2021.
(in thousands)
2021
Beginning Balance
$
—
Fair value at acquisition
1,804
Net
loss
attributable to redeemable noncontrolling interests
( 14
)
Foreign currency translation adjustment
33
Ending Balance
$
1,823
12. Stock-Based Compensation
The Company has issued nonqualified stock options, restricted stock units, and performance restricted stock units under the Advantage Solutions Inc. 2020 Incentive Award Plan (the “Plan”). As of June 30, 2021, the number of nonqualified stock options outstanding was immaterial. The Company’s restricted stock units and performance restricted stock units, as described below, are expensed and reported as non-vested shares. The Company recognized stock-based compensation expense of $
10.3 million and $
20.2 million in the three and six months ended June 30, 2021, respectively. The related deferred tax benefit for stock-based compensation recognized was $ 1.5 million and $ 3.1 million for the three and six months ended June 30, 2021, respectively.
Performance Restricted Stock Units
Performance restricted stock units (“PSUs”) are subject to the achievement of certain performance conditions based on the Company’s Revenue and Adjusted EBITDA targets in the respective measurement period and the recipient’s continued service to the Company. The PSUs are scheduled to vest over a three-year period from the date of grant and may vest from 0 % to 150 % of the number of shares set forth in the table below. The number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each aforementioned defined term for each grant have been provided in the table below.
Performance Period
Number of
Shares
Threshold
Number of
Shares
Target
Number of
Shares
Maximum
Weighted
Average Fair
Value per
Share
Maximum
Potential
Expense to be
Recognized *
Maximum
Remaining
Expense to be
Recognized *
January 1, 2021—December 31,
2021
1,273,231
2,546,461
3,816,120
$
13.22
$
50,446
$
40,721
*
dollars in thousands
The fair value of PSU grants was equal to the closing price of ADV stock on the date of the applicable grant
. The maximum potential expense if the Maximum Goals were met for these awards has been provided in the table above. Recognition of expense associated with performance-based stock is not permitted until achievement of the performance targets are probable of occurring.
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Restricted Stock Units
Restricted stock units (“RSUs”) are subject to the recipient’s continued service to the Company. The RSUs are generally scheduled to vest over three years and are subject to the provisions of the agreement under the Plan.
During the six months ended June 30, 2021, the following activities involving RSUs occurred under the Plan:
Number of RSUs
Weighted Average Grant
Date Fair Value
Outstanding at January 1, 2021
—
$
—
Granted
1,825,166
$
13.18
Vested
41,424
$
13.22
Forfeited
78,816
$
13.33
Outstanding at June 30, 2021
1,704,926
$
13.17
As of June 30, 2021, the total remaining unrecognized compensation cost related to RSUs amounted to $ 15.9 million, which will be amortized over the weighted-average remaining requisite service periods of 2.5 years.
13. Earnings Per Share
The Company calculates earnings per share using a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income (loss) attributable to stockholders of the Company by the weighted-average shares of common stock outstanding without the consideration for potential dilutive shares of common stock. Diluted earnings per share represents basic earnings per share adjusted to include the potentially dilutive effect of outstanding share option awards, non-vested
share awards, common stock warrants, and Performance Shares (as defined below). 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.
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The following is a reconciliation of basic and diluted net earnings (loss) per common share:
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands, except share and earnings per share data)
2021
2020
2021
2020
Basic earnings per share computation:
Numerator:
Net income (loss) attributable to stockholders of Advantage Solutions Inc.
$
6,121
$
( 37,404
)
$
6,005
$
( 59,112
)
Denominator:
Weighted average common shares—basic
318,464,596
203,750,000
318,035,355
203,750,000
Basic earnings (loss) per common share
$
0.02
$
( 0.18
)
$
0.02
$
( 0.29
)
Diluted earnings per share computation:
Numerator:
Net income (loss) attributable to stockholders of Advantage Solutions Inc.
$
6,121
$
( 37,404
)
$
6,005
$
( 59,112
)
Change in fair value of warrant liability
( 7,059
)
—
( 1,533
)
—
Numerator for diluted earnings per share
( 938
)
( 37,404
)
4,472
( 59,112
)
Denominator:
Weighted average common shares outstanding
318,464,596
203,750,000
318,035,355
203,750,000
RSUs and PSUs
3,457,299
—
3,207,047
—
Public and private placement warrants
1,276,669
—
29,527
—
Employee stock purchase plan and stock options
95,709
—
78,216
—
Weighted average common shares—diluted
323,294,273
203,750,000
321,350,145
203,750,000
Diluted earnings (loss) per common share
$
0.00
$
( 0.18
)
$
0.01
$
( 0.29
)
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 part of the Transactions, 5,000,000 shares of Class A common stock were issued to Topco at Closing (the “Performance Shares”), 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. Topco was not able to vote or sell such shares until vesting. The 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 and were included in the June 30, 2021 earnings per share calculation.
The Company had
18,578,325 warrants, including
7,333,333 private placement warrants held by CP Sponsor, to purchase Class A common stock at $
11.50 per share outstanding at the Closing, and
5,000 warrants were exercised during the six months ended June 30, 2021.
Joint Venture – Preferred Dividends
The Company also has cumulative preferred dividends, undeclared and unpaid associated with its joint venture. These preferred shares do not represent a participating security, but preference dividends would be considered in determining income available to common stockholders. The amount of the preference dividends was immaterial to all periods presented.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.