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Item 9A. Controls and Procedures

2023-03-06 compared with 2022-03-17 · 73 added, 61 removed, 248 unchanged (35% of the section changed)

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Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be included in our SEC reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”), who is our principal executive officer, and Chief Financial Officer (“CFO”), who is our principal financial officer, as

appropriate, to allow timely decisions regarding required disclosures.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.

However, our disclosure controls and procedures are designed to provide reasonable assurances of achieving our control objectives.

forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”), who is our principal executive officer, and Chief Financial Officer (“CFO”), who is our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

We conducted an evaluation, under the supervision and with the participation of our management, including our CEO, CFO and management Disclosure Committee, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act.

Based on that evaluation, and in light of the material weaknesses identified in our internal control over financial reporting, our CEO and CFO concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective at a reasonable assurance level.

Based on that evaluation, and in light of the material weaknesses identified in our internal control over financial reporting described below, our CEO and CFO concluded that, as of December 31, 2022, our disclosure controls and procedures were not effective at a reasonable assurance level.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

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and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, under the supervision of and with the participation of the CEO and CFO, assessed the effectiveness of our internal control over financial reporting and disclosure controls and procedures as of December 31, 2021.

In making this assessment, management used the updated criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework .

Based on our assessment under the COSO framework, management believes that, as of December 31, 2021, our internal control over financial reporting was not effective, as described below.

Our management, under the supervision of and with the participation of the CEO and CFO, assessed the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control-Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this assessment, our management concluded that our internal control over financial reporting was not effective as of December 31, 2022, as described below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weaknesses have been identified:

As outlined in Item 8—Financial Statements and Supplementary Data, Note 4 — Acquisitions, throughout 2022, we acquired several companies in a series of purchase business combinations including Brand New Galaxy, Maru Group Limited, TMA Direct, Inc, Wolfgang, LLC, Epicenter Experience LLC and other less significant acquisitions.

The Securities and Exchange Commission permits companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition, and our management has elected to exclude these from our assessment as of December 31, 2022.

Combined total assets and total revenues of the acquired businesses represent approxim ately 4% and 2%, respe ctively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.

Material Weaknesses in Internal Control over Financial Reporting

The following material weaknesses were disclosed in our Form 10-K for the fiscal year ended December 31, 2021 and the remediation has not been completed as of December 31, 2022.

We did not effectively select and develop certain information technology (“IT”) general controls related to access and change management controls that led to deficiencies in the design and operation of control activities, including segregation of duties deficiencies.

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• Monitoring—control deficiencies constituting material weaknesses, either individually or in the aggregate, relating to monitoring activities to ascertain whether the components of internal control are present and functioning.

As a result of the merger between MDC and SMG on August 2, 2021, and the acquisition of GoodStuff Holdings Limited (“GoodStuff”) on December 31, 2021, management excluded from its assessment t internal control over financial reporting as of December 31, 2021, the internal control over financial reporting of SMG and GoodStuff, which together constituted 44% of

total assets (excluding goodwill, intangible and right of use assets) and 59% of total revenue as of and for the year ended December 31, 2021.

In addition, the effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included in this Item 9A.

Notwithstanding the conclusion by our CEO and CFO that our internal control over financial reporting as of December 31, 2022 was not effective, management has concluded that the consolidated financial statements and related financial information included in this Annual Report on Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with GAAP.

The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included in this Item 9A.

Remediation Plan and Status

Although the material weaknesses described above have not yet been fully remediated as of December 31, 2022, our management remains committed to remediating identified control deficiencies (including both those that rise to the level of a material weakness and those that do not), fostering continuous improvement in our internal controls and enhancing our overall internal control environment.

The Company made progress with the remediation of these material weaknesses and continued to execute on the following remediation activities through December 31, 2022:

• Continued to emphasize at the executive management level, the importance of internal control over financial reporting, as well as the integrity of our financial statements throughout the Company.

• Hired a Senior Vice President of Sarbanes-Oxley Act (“SOX”) reporting directly to the CFO with the appropriate level of knowledge and experience to lead the development and execution of the remediation plan.

• Established a SOX Steering Committee, that monitors and advises with respect to the remediation plan and progress.

• Enhanced communications with the Audit Committee of the Board of Directors for increased oversight.

The Company also continues to formally report quarterly to the Audit Committee regarding progress against the remediation plan.

• Assessed the current state of the system of internal control, including information technology systems and controls, at the consolidated and brand levels.

The results of this assessment allowed management to enhance existing business processes and control activities and assess the adequacy of its resources.

• Implemented new controls across our information technology environment to address the identified material weaknesses.

To assess the effectiveness of the controls, management retained a consultant to test the design and implementation across select significant IT applications and remediation is in progress.

• Redesigned and strengthened control activities over reconciliations including enhanced review and approval controls.

• Conducted a detailed qualitative, quantitative, and fraud risk assessment and enhanced the linkage between risks and internal controls associated with the risk of material misstatement.

• Formalized internal control policies and procedures and conducted multiple in-depth trainings with control owners throughout the Company.

The Company has also continued to roll out its finance transformation initiative, which involves a phased deployment of new enterprise resource planning and human resource information systems and a shared service platform.

Management’s actions are expected to continue into 2023, with the goal of having the system of internal controls substantially designed and implemented in the second quarter of 2023.

We will consider the above material weaknesses to be fully remediated once the applicable controls operate for a sufficient period of time and our management has concluded, through testing, that these controls are operating effectively.

In addition, as we continue to monitor the effectiveness of our internal control over financial reporting, we may perform additional internal control changes as necessary.

Changes in Internal Control Over Financial Reporting

There have been no changes to our internal control over financial reporting, other than the material weaknesses noted above, that occurred during the quarter ended December 31, 2021.

As described above in Management’s Report on Internal Control Over Financial Reporting, we excluded from our assessment the internal control over financial reporting of Legacy SMG.

We are aware that Legacy SMG had previously identified and disclosed the following material weaknesses:

• Legacy SMG did not maintain a sufficient complement of personnel with an appropriate degree of internal controls and accounting knowledge, experience and training commensurate with its accounting and reporting requirements;

• Legacy SMG did not establish effective controls in response to the risks of material misstatement, including designing and maintaining formal accounting policies, procedures and controls over journal entries, significant accounts and disclosures, in order to achieve complete and accurate financial accounting, reporting and disclosures;

• Legacy SMG did not design and maintain effective controls over information technology (“IT”) general controls for information systems that are relevant to the preparation of its financial statements.

Specifically, SMG did not design and maintain:

(i) program change management controls for the financial systems to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately;

(ii) appropriate user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs and data to appropriate SMG personnel;

(iii) computer operations controls to ensure critical data interfaces between systems are appropriately identified and monitored, and data backups are authorized and restorations monitored;

and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements;

• Legacy SMG did not establish a sufficient risk assessment process to identify risks of material misstatement due to fraud and/or error and implement controls against such risks.

Remediation Efforts to Address Material Weaknesses

We are evaluating what remedial actions will be necessary to remediate the material weaknesses in our internal control over financial reporting.

We intend to develop and execute a remediation plan and to continue evaluating our internal control over financial reporting during 2022.

Other than the changes discussed above in connection with our implementation of the remediation plan, there were no other changes in our internal control over financial reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) that occurred during our most recent quarter, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected.

These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake.

Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions;

over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Report of Independent Registered Public Accounting Firm

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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated March 6, 2023, expressed an unqualified opinion on those financial statements.

As described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, as a result of the merger between MDC Partners, Inc.

(“Legacy MDC”) and Stagwell Marketing Group, LLC (“Legacy SMG”) on August 2, 2021, and the acquisition of Goodstuff Holdings, Limited (“GoodStuff”) on December 31, 2021, management excluded from its assessment the internal control over financial reporting of Legacy SMG and GoodStuff which together constituted 44% of total assets (excluding goodwill, intangible and right of use assets) and 59% of total revenue as of and for the year ended December 31, 2021.

Accordingly, our audit did not include the internal control over financial reporting at Legacy SMG and GoodStuff.

As described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, the Company acquired several companies in a series of business combinations during the year ended December 31, 2022, including Brand New Galaxy, Maru Group Limited, TMA Direct, Inc., Wolfgang, LLC, Epicenter Experience LLC and other less significant acquisitions.

M anagement excluded these companies from its assessment of internal control over financial reporting.

The combined total assets and total revenues of the acquired businesses represent approxim ately 4% and 2%, respe ctively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.

Accordingly, our audit did not include the internal control over financial reporting for these acquired businesses.

Basis for Opinion

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Other Information

Second Amended and Restated Employment Agreement and Amended and Restated Stock Appreciation Rights Agreement with CEO

On March 11, 2022, the Company and Mark Penn, Chief Executive Officer of the Company, entered into (i) a Second Amended and Restated Employment Agreement (the “Second A&R Employment Agreement”) and (ii) an Amended and Restated Stock Appreciation Rights Agreement (the “A&R SARs Agreement”).

The Second A&R Employment Agreement and the A&R SARs Agreement provide that, with respect to the December 14, 2021 award to Mr.

Penn of 1,500,000 stock appreciation rights (“SARs”) in respect of the Company’s Class A common stock with a base price equal to $8.27 under the Company’s 2016 Stock Incentive Plan (the “Plan”), (i) the SARs will be settled only in cash upon any exercise, and (ii) the SARs will be considered to have been granted outside of the Plan and are not subject to stockholder approval.

On March 1, 2023, the Company granted Mark Penn 225,000 stock appreciation rights (“SARs ” ) in respect of the Company’s Class A Common Stock under the Company’s Second Amended and Restated 2016 Stock Incentive Plan and entered into a Stock Appreciation Rights Agreement with Mr.

The SARs have a base price of $6.79 per share, vest in three equal installments on each of the first three anniversaries of the date of grant, and expire on the fifth anniversary of the date of grant.

The description of the SARs Agreement in this Item 9B.

is qualified in its entirety by reference to the terms of the SARs Agreement, which is filed as Exhibit 10.9.3 to this Form 10-K and is incorporated herein by reference.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Directors, Executive Officers and Corporate Governance

The information required by this item, and not set forth below, will be included in the Company’s Proxy Statement for the 2022 Annual General Meeting of Stockholders (the “ 2022 Proxy Statement ” ), to be filed with the SEC no later than 120 days after December 31, 2021.

and is incorporated herein by reference.

The information required by this item, and not set forth below, will be included in the Company’s Proxy Statement for the 2023 Annual General Meeting of Stockholders (the “2023 Proxy Statement ” ), to be filed with the SEC no later than 120 days after December 31, 2022, and is incorporated herein by reference.

Executive Officers of Stagwell Inc.

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Penn joined MDC in March 2019 and currently serves as Chairman of the Board and Chief Executive Officer.

Penn has also been the Managing Partner and President of The Stagwell Group, a private equity fund that invests in digital

marketing services companies, since its formation in 2015.

Penn has also been the Managing Partner and President of The Stagwell Group, a private equity fund that invests in digital marketing services companies, since its formation in 2015.

Previously, Mr.

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Prior to joining Stagwell Inc., Mr.

Greene served as Chief Financial Officer of Stagwell Marketing Group since September 2015.

Greene served as Chief Financial Officer of The Stagwell Group since September 2015.

Previously, Mr.

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Prior to MorganFranklin, Mr.

Greene worked in various financial leadership roles for several agencies of Omnicom Group Inc., including CLS Strategies and C2 Creative.

Greene worked in various financial leadership roles for several agencies of Omnicom Group Inc.’s Diversified Agency Services network.

Earlier in his career, Mr.

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(a) Financial Statement Schedules

The Financial Statements and Schedules listed in the accompanying Index to the Consolidated Financial Statements in Item 8 are filed as part of this report.

The Financial Statements and Schedules listed in the accompanying Index to the Audited Consolidated Financial Statements in Item 8 are filed as part of this report.

Schedules not included in the Index have been omitted because they are not applicable.

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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

For the Two Years Ended December 31,

For the Three Years Ended December 31,

(dollars in thousands)

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December 31, 2021 5,109 2,037 ( 1,482 ) ( 26 ) 5,638

December 31, 2020 2,777 6,222 ( 3,907 ) 17 5,109

Schedule II — 2 of 2

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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

For the Two Years Ended December 31,

For the Three Years Ended December 31,

(Dollars in Thousands)

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December 31, 2021 5,551 ( 15 ) 289 — 5,825

December 31, 2020 2,945 2,606 — — 5,551

The exhibits listed on the accompanying Exhibits Index are filed as a part of this report.

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2 to the Transaction Agreement, dated as of July 8, 2021 (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on July 9, 2021).

Second Amended and Restated Certificate of Incorporation of Stagwell Inc., as amended.*

Second Amended and Restated Certificate of Incorporation of Stagwell Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K filed March 17, 2022).

Amended and Restated Bylaws of Stagwell Inc.

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Form of 5.625% Senior Note due 2029 (included in Exhibit 4.1).

Description of Securities*

Amended and Restated Limited Liability Company Agreement of Stagwell Global LLC (f/k/a Midas OpCo Holdings LLC) dated as of August 2, 2021.*

Amended and Restated Credit Agreement, dated August 2, 2021, by and among Stagwell Global LLC (f/k/a Midas OpCo Holdings LLC), Maxxcom LLC, Stagwell Marketing Group LLC, and the other Borrowers party thereto, and JP Morgan Chase Bank, as Administrative Agent, and the other Agents and Lenders party thereto (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on August 2, 2021).

Description of Securities (incorporated by reference to Exhibit 4.4 to the Company’s Form 10-K filed March 17, 2022).

Second Amended and Restated Limited Liability Company Agreement of Stagwell Global LLC dated as of March 23, 2022.

(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed March 28, 2022).

Amended and Restated Credit Agreement, dated as of August 2, 2021, as amended, among Stagwell Marketing Group LLC, Stagwell Global LLC, Maxxcom LLC, and the other Borrowers and other Loan Parties party thereto, the Lenders and other parties party thereto, and JP Morgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed on August 5, 2022).

Amendment No.

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Information Rights Letter Agreement, dated August 2, 2021, by and among the Company, Stagwell Media LP, Stagwell Group LLC and Stagwell Agency Holdings LLC (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on August 2, 2021).

OpCo Letter Agreement, dated August 4, 2021, by and among Stagwell Inc., Broad Street Principal Investments, L.L.C., Stonebridge 2017, L.P.

and Stonebridge 2017 Offshore, L.P.

(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on August 4, 2021).

Second Amended and Restated Employment Agreement Amendment, dated as of March 11, 2022, by and between the Company and Mark Penn.*

Second Amended and Restated Employment Agreement Amendment, dated as of March 11, 2022, by and between the Company and Mark Penn (incorporated by reference to Exhibit 10.10 to the Company’s Form 10-K filed March 17, 2022).

Stock Appreciation Rights Agreement by and between the Company and Mark Penn, dated as of April 5, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-K/A filed April 29, 2020).

Amended and Restated Stock Appreciation Rights Agreement by and between the Company and Mark Penn, dated as of March 11, 2022.*

Amended and Restated Stock Appreciation Rights Agreement by and between the Company and Mark Penn, dated as of March 11, 2022 (incorporated by reference to Exhibit 10.10.2 to the Company’s Form 10-K filed March 17, 2022).

Stock Appreciation Rights Agreement by and between the Company and Mark Penn, dated as of March 1, 2023.*

Employment Agreement dated as of May 6, 2019, by and between the Company and Frank Lanuto (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on May 8, 2019).

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2011 Stock Incentive Plan, as approved and adopted by the shareholders of the Company on June 1, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 1, 2011).

MDC Partners Inc.

Amended and Restated 2016 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 30, 2020).

Form of Financial Performance-Based Restricted Stock Agreement (2019) (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q filed on November 6, 2019).

Stagwell Inc.

Second Amended and Restated 2016 Stock Incentive Plan (incorporated by reference to Exhibit 4.3 to the Company’s Form S-8 filed on June 14, 2022).

Form of Financial Performance-Based Restricted Stock Grant Agreement (2021) (incorporated by reference to Exhibit 10.14 to the Company's Form 10-Q filed on November 9, 2021).

Form of Indemnification Agreement with Directors and Officers (incorporated by reference to Exhibit 10.17 to the Company’s Form 10-K filed March 16, 2021).

Form of Indemnification Agreement with Directors and Officers (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed November 7, 2022).

Stagwell Inc.

Non-Employee Director Compensation Policy.

(incorporated by reference to Exhibit 10.20 to the Company’s Form 10-K filed March 17, 2022).

Subsidiaries of Registrant*

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† Indicates management contract or compensatory plan.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused

this report to be signed on its behalf by the undersigned, thereunto duly authorized.

STAGWELL INC.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures