# Advantage Solutions Inc. (ADV) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from Advantage Solutions Inc.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1776661/000095017022002524/adv-20211231.htm Accession: 0000950170-22-002524 Filing date: 2022-03-01 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/ADV/ All MD&A years: /company/ADV/mda/ Next year: /company/ADV/mda/fy2022/ (FY 2022) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Form 10-K/A for the fiscal year ended December 31, 2020 filed with the SEC on May 17, 2021. Executive Overview We are a leading business solutions provider to consumer goods manufacturers and retailers. We have a strong platform of competitively advantaged sales and marketing services built over multiple decades – essential, business critical services like headquarter sales, retail merchandising, in-store sampling, digital commerce and shopper marketing. For brands and retailers of all sizes, we help get the right products on the shelf (whether physical or digital) and into the hands of consumers (however they shop). We use a scaled platform to innovate as a trusted partner with our clients, solving problems to increase their efficiency and effectiveness across a broad range of channels. We have two reportable segments: sales and marketing. Through our sales segment, which generated approximately 64.5% of our total revenues in the year ended December 31, 2021, we offer headquarter sales representation services to consumer goods manufacturers, for whom we prepare and present to retailers a business case to increase distribution of manufacturers’ products and optimize how they are displayed, priced and promoted. We also make in-store merchandising visits for both manufacturer and retailer clients to ensure the products we represent are adequately stocked and properly displayed. Through our marketing segment, which generated approximately 35.5% of our total revenues in the year ended December 31, 2021, we help brands and retailers reach consumers through two main categories within the marketing segment. The first and largest is our retail experiential business, also known as in-store sampling or demonstrations, where we create and manage highly customized large scale sampling programs (both in-store and online) for leading retailers. The second business is our collection of specialized agency businesses, in which we provide private label services to retailers and develop granular marketing programs for brands and retailers through our shopper, consumer and digital marketing agencies. 31 Impacts of the COVID-19 Pandemic The COVID-19 pandemic has had, and is likely to continue to have, a severe and unprecedented impact on the world. Measures to prevent its spread, including government-imposed restrictions on large gatherings, closures of face-to-face events, “shelter in place” health orders and travel restrictions have had a significant effect on certain of our business operations. In response to these business disruptions, we have taken several actions including reducing certain of our discretionary expenditures, eliminating non-essential travel, terminating or amending certain office leases, furloughing, instituting pay reductions and deferrals and terminating some of our employees, particularly with respect to COVID-19 impacted operations. These measures to prevent the spread of COVID-19 have adversely impacted certain areas of our business operations, including our in-store sampling, foodservice and international businesses. Most notably, we temporarily suspended all in-store sampling in all U.S. locations starting in March and April of 2020 as well as in certain international locations. While the restrictions relating to in-store sampling services materially and adversely affected our results of operations during the year ended December 31, 2021, and 2020, we have re-opened in-store sampling activities in certain retailers in certain geographies on a prudent, phased basis, and we have been successful in growing other adjacent services in our experiential marketing business such as online grocery pick-up sampling and virtual product demonstrations, both of which have seen increased adoption and demand. Additionally, our international business continues to show recovery in 2021 since the pandemic started and compared to prior year. During the years ended December 31, 2021 and 2020, our operations experienced a favorable increase in volume and demand in our headquarter sales and private label services due to the large increase in consumer purchases at retail to support incremental at-home consumption. Additionally, our e-commerce services have benefited due to the increase in consumer purchasing with online retailers. We expect the ultimate significance of the impact of the pandemic on our financial condition, results of operations and cash flows will be dictated by the length of time that such circumstances continue and any future restrictions imposed on our business and operations, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic, any new variants and the nature and effectiveness of governmental, commercial and personal actions taken in response, along with the effectiveness of ongoing vaccination and other mitigation efforts to limit the magnitude of infections and hospitalizations across the United States and globally. Summary Our financial performance for the year ended December 31, 2021 as compared to the year ended December 31, 2020 includes: • Revenues increased by $446.6 million, or 14.2%, to $3.6 billion; • Operating income increased by $163.0 million, or 243.3%, to $230.0 million; • Net income increased by $232.6 million, or 132.9%, to $57.5 million; • Adjusted Net Income increased by $40.8 million, or 22.3%, to $223.8 million; and • Adjusted EBITDA increased by $34.0 million, or 7.0%, to $521.2 million. In November 2021, we commenced a stock repurchase program, and returned $12.6 million to our stockholders through share repurchases. In October 2021, we amended our Term Loan Facility, which, among other things, should result in reducing the interest expense on our existing debt outstanding on our Term Loan facility by $9.9 million per year. We completed six business acquisitions during the year ended December 31, 2021, consisting of five sales agencies, which have been incorporated into our sales segment and a marketing agency, which has been incorporated into our marketing segment. The aggregate purchase price for these acquisitions was $76.0 million, of which $42.7 million were paid in cash, $19.8 million in contingent consideration, and $13.5 million in holdbacks. Factors Affecting Our Business and Financial Reporting There are a number of factors, in addition to the impact of the ongoing COVID-19 pandemic, that affect the performance of our business and the comparability of our results from period to period including: • Organic Growth. Part of our strategy is to generate organic growth by expanding our existing client relationships, continuing to win new clients, pursuing channel expansion and new industry opportunities, enhancing our digital technology solutions, developing our international platform, delivering operational efficiencies and expanding into 32 logical adjacencies. We believe that by pursuing these organic growth opportunities we will be able to continue to enhance our value proposition to our clients and thereby grow our business. • Acquisitions. We have grown and expect to continue to grow our business in part by acquiring quality businesses, both domestic and international. Excluding the Daymon Acquisition, we have completed 70 acquisitions from January 2014 to February 28, 2022, ranging in purchase prices from approximately $0.3 million to $98.5 million. Many of our acquisition agreements include contingent consideration arrangements, which are described below. We have completed acquisitions at what we believe are attractive purchase prices and have regularly structured our agreements to result in the generation of long-lived tax assets, which have in turn reduced our effective purchase prices when incorporating the value of those tax assets. We continue to look for strategic and tuck-in acquisitions that can be completed at attractive purchase prices. • Contingent Consideration. Many of our acquisition agreements include contingent consideration arrangements, which are generally based on the achievement of financial performance thresholds by the operations attributable to the acquired businesses. The contingent consideration arrangements are based upon our valuations of the acquired businesses and are intended to share the investment risk with the sellers of such businesses if projected financial results are not achieved. The fair values of these contingent consideration arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent consideration payments as part of the initial purchase price. We review and assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from our initial estimates. Changes in the estimated fair value of contingent consideration liabilities related to the time component of the present value calculation are reported in “Interest expense, net.” Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in “Selling, general and administrative expenses” in the Consolidated Statements of Operations and Comprehensive Income (Loss). • Depreciation and Amortization. As a result of the acquisition of our business by Topco on July 25, 2014 (the “2014 Topco Acquisition”), we acquired significant intangible assets, the value of which is amortized, on a straight-line basis, over 15 years from the date of the 2014 Topco Acquisition, unless determined to be indefinite-lived. The amortization of such intangible assets recorded in our consolidated financial statements has a significant impact on our operating income (loss) and net loss. Our historical acquisitions have increased, and future acquisitions likely will increase, our intangible assets. We do not believe the amortization expense associated with the intangibles created from our purchase accounting adjustments reflect a material economic cost to our business. Unlike depreciation expense which has an economic cost reflected by the fact that we must re-invest in property and equipment to maintain the asset base delivering our results of operations, we do not have any capital re-investment requirements associated with the acquired intangibles, such as client relationships and trade names, that comprise the majority of the finite-lived intangibles that create our amortization expense. • Foreign Exchange Fluctuations. Our financial results are affected by fluctuations in the exchange rate between the U.S. dollar and other currencies, primarily the Canadian dollars, British pounds and euros, due to our operations in such foreign jurisdictions. See also “ —Quantitative and Qualitative Disclosure of Market Risk—Foreign Currency Risk.” • Seasonality. Our quarterly results are seasonal in nature, with the fourth fiscal quarter typically generating a higher proportion of our revenues than other fiscal quarters, as a result of higher consumer spending. We generally record slightly lower revenues in the first fiscal quarter of each year, as our clients begin to roll out new programs for the year, and consumer spending generally is less in the first fiscal quarter than other quarters. Timing of our clients’ marketing expenses, associated with marketing campaigns and new product launches, can also result in fluctuations from one quarter to another. How We Assess the Performance of Our Business Revenues Revenues related to our sales segment are primarily comprised of commissions, fee-for-service and cost- plus fees for providing retail services, category and space management, headquarter relationship management, technology solutions and administrative services. A small portion of our arrangements include performance incentive provisions, which allow us to earn additional revenues on our performance relative to specified quantitative or qualitative goals. We recognize the incentive portion of revenues under these arrangements when the related services are transferred to the customer. Marketing segment revenues are primarily recognized in the form of a fee-for-service (including retainer fees, fees charged to clients based on hours incurred, project-based fees or fees for executing in-person consumer engagements or experiences, which 33 engagements or experiences we refer to as events), commissions or on a cost- plus basis, in each case, related to services including experiential marketing, shopper and consumer marketing services, private label development or our digital, social and media services. Given our acquisition strategy, we analyze our financial performance, in part, by measuring revenue growth in two ways—revenue growth attributable to organic activities and revenue growth attributable to acquisitions, which we refer to as organic revenues and acquired revenues, respectively. We define organic revenues as any revenues that are not acquired revenues. Our organic revenues exclude the impacts of acquisitions and divestitures, when applicable, which improves comparability of our results from period to period. In general, when we acquire a business, the acquisition includes a contingent consideration arrangement (e.g., an earn-out provision) and, accordingly, we separately track the financial performance of the acquired business. In such cases, we consider revenues generated by such a business during the 12 months following its acquisition to be acquired revenues. For example, if we completed an acquisition on July 1, 2021 for a business that included a contingent consideration arrangement, we would consider revenues from the acquired business from July 1, 2021 to June 30, 2022 to be acquired revenues. We generally consider growth attributable to the financial performance of an acquired business after the 12-month anniversary of the date of acquisition to be organic. In limited cases when the acquisition of an acquired business does not include a contingent consideration arrangement, or we otherwise do not separately track the financial performance of the acquired business due to operational integration, we consider the revenues that the business generated in the 12 months prior to its acquisition to be our acquired revenues for the 12 months following its acquisition, and any differences in revenues actually generated during the 12 months after its acquisition to be organic. For example, if we completed an acquisition on July 1, 2021 for a business that did not include a contingent consideration arrangement, we would consider the amount of revenues from the acquired business from July 1, 2020 to June 30, 2021 to be acquired revenues during the period from July 1, 2021 to June 30, 2022, with any differences from that amount actually generated during the latter period to be organic revenues. All revenues generated by our acquired businesses are considered to be organic revenues after the 12-month anniversary of the date of acquisition. When we divest a business, we consider the revenues that the divested business generated in the 12 months prior to its divestiture to be subtracted from acquired revenues for the 12 months following its divestiture. For example, if we completed a divestiture on July 1, 2021 for a business, we would consider the amount of revenues from the divested business from July 1, 2020 to June 30, 2021 to be subtracted from acquired revenues during the period from July 1, 2021 to June 30, 2022. We measure organic revenue growth and acquired revenue growth by comparing the organic revenues or acquired revenues, respectively, period over period, net of any divestitures. Cost of Revenues Our cost of revenues consists of both fixed and variable expenses primarily attributable to the hiring, training, compensation and benefits provided to both full-time and part-time associates, as well as other project- related expenses. A number of costs associated with our associates are subject to external factors, including inflation, increases in market specific wages and minimum wage rates at federal, state and municipal levels and minimum pay levels for exempt roles. Additionally, when we enter into certain new client relationships, we may experience an initial increase in expenses associated with hiring, training and other items needed to launch the new relationship. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of salaries, payroll taxes and benefits for corporate personnel. Other overhead costs include information technology, occupancy costs for corporate personnel, professional services fees, including accounting and legal services, and other general corporate expenses. Additionally, included in selling, general and administrative expenses are costs associated with the changes in fair value of the contingent consideration of acquisitions and other acquisition-related costs. Acquisition-related costs are comprised of fees related to change of equity ownership, transaction costs, professional fees, due diligence and integration activities. We also incurred additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting 34 obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations, and professional services. Other Expenses Change in Fair Value of Warrant Liability Change in fair value of warrant liability represents a non-cash (income) expense resulting from a fair value adjustment to warrant liability from the private placement warrants that is based on the input assumptions used in the Black-Scholes option pricing model including our Class A common stock price at the end of the reporting period, the implied volatility or other inputs to the model and the number of private placement warrants outstanding which may vary from period to period. We believe these amounts are not correlated to future business operations. Interest Expense Interest expense relates primarily to borrowings under our material debt agreements as described below. See “ —Liquidity and Capital Resources.” Depreciation and Amortization Amortization Expense As a result of the 2014 Topco Acquisition, we acquired significant intangible assets, the value of which is amortized, on a straight-line basis, over 15 years from the date of the 2014 Topco Acquisition, unless determined to be indefinite-lived. Included in our depreciation and amortization expense is amortization of acquired intangible assets. We have ascribed value to identifiable intangible assets other than goodwill in our purchase price allocations for companies we have acquired. These assets include, but are not limited to, client relationships and trade names. To the extent we ascribe value to identifiable intangible assets that have finite lives, we amortize those values over the estimated useful lives of the assets. Such amortization expense, although non-cash in the period expensed, directly impacts our results of operations. It is difficult to predict with any precision the amount of expense we may record relating to future acquired intangible assets. Depreciation Expense Depreciation expense relates to the property and equipment that we own, which represented less than 1% of our total assets at December 31, 2021. Income Taxes Income tax (benefit) expense and our effective tax rates can be affected by many factors, including state apportionment factors, our acquisition strategy, tax incentives and credits available to us, changes in judgment regarding our ability to realize our deferred tax assets, changes in our worldwide mix of pre-tax losses or earnings, changes in existing tax laws and our assessment of uncertain tax positions. Cash Flows We have positive cash flow characteristics, as described below, due to the limited required capital investment in the fixed assets and working capital needs to operate our business in the normal course. See “ —Liquidity and Capital Resources.” Prior to the consummation of the Transactions (including our entry into the Senior Secured Credit Facilities (as defined below)), our principal sources of liquidity have been cash flows from operations, borrowings under our then-revolving credit facility and other debt. Following the Transactions, our principal sources of liquidity are cash flows from operations, borrowings under the Revolving Credit Facility (as defined below), and other debt. Our principal uses of cash are operating expenses, working capital requirements, acquisitions and repayment of debt. Adjusted Net Income Adjusted Net Income is a non-GAAP financial measure. Adjusted Net Income means net loss before (i) impairment of goodwill and indefinite-lived assets, (ii) amortization of intangible assets, (iii) equity based compensation of Topco and Advantage Sponsors’ management fee, (iv) changes in fair value of warrant liability, (v) fair value adjustments of contingent consideration related to 35 acquisitions, (vi) acquisition-related expenses, (vii) costs associated with COVID-19, net of benefits received, (viii) EBITDA for economic interests in investments, (ix) restructuring expenses, (x) litigation expenses, (xi) Recovery from Take 5, (xii) deferred financing fees, (xiii) costs associated with the Take 5 Matter, (xiv) other adjustments that management believes are helpful in evaluating our operating performance, and (xv) related tax adjustments. We present Adjusted Net Income because we use it as a supplemental measure to evaluate the performance of our business in a way that also considers our ability to generate profit without the impact of items that we do not believe are indicative of our operating performance or are unusual or infrequent in nature and aid in the comparability of our performance from period to period. Adjusted Net Income should not be considered as an alternative for net loss, our most directly comparable measure presented on a GAAP basis. Adjusted EBITDA and Adjusted EBITDA by Segment Adjusted EBITDA and Adjusted EBITDA by segment are supplemental non-GAAP financial measures of our operating performance. Adjusted EBITDA means net loss before (i) interest expense, net, (ii) provision for (benefit from) income taxes, (iii) depreciation, (iv) impairment of goodwill and indefinite-lived assets, (v) amortization of intangible assets, (vi) equity based compensation of Topco and Advantage Sponsors’ management fee, (vii) changes in fair value of warrant liability, (viii) fair value adjustments of contingent consideration related to acquisitions, (ix) acquisition-related expenses, (x) costs associated with COVID-19, net of benefits received, (xi) EBITDA for economic interests in investments, (xii) restructuring expenses, (xiii) litigation expenses, (xiv) Recovery from Take 5, (xv) costs associated with the Take 5 Matter and (xvi) other adjustments that management believes are helpful in evaluating our operating performance. We present Adjusted EBITDA and Adjusted EBITDA by segment because they are key operating measures used by us to assess our financial performance. These measures adjust for items that we believe do not reflect the ongoing operating performance of our business, such as certain noncash items, unusual or infrequent items or items that change from period to period without any material relevance to our operating performance. We evaluate these measures in conjunction with our results according to GAAP because we believe they provide a more complete understanding of factors and trends affecting our business than GAAP measures alone. Furthermore, the agreements governing our indebtedness contain covenants and other tests based on measures substantially similar to Adjusted EBITDA. Neither Adjusted EBITDA nor Adjusted EBITDA by segment should be considered as an alternative for net loss, for our most directly comparable measure presented on a GAAP basis. For a reconciliation of Adjusted EBITDA to net income (loss) and Adjusted EBITDA by segment to operating income (loss), see “ —Non-GAAP Financial Measures.” Take 5 Matter On April 1, 2018, we acquired certain assets and assumed certain liabilities of Take 5 Media Group. In June 2019, as a result of a review of internal allegations related to inconsistency of data provided by Take 5 to its clients, we commenced an investigation into Take 5’s operations. In July 2019, as a result of our investigation, we 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 our acquisition of Take 5. In May 2020, we received $7.7 million from our representation and warranty insurance policy related to the acquisition of Take 5 for claims related to the Take 5 Matter, the maximum aggregate recovery under the policy. For the years ended December 31, 2021, 2020, and 2019, we incurred $4.9 million, $3.6 million, and $7.7 million, respectively, of costs associated with the investigation and remediation activities in connection with the Take 5 Matter, primarily professional fees and other related costs. For the year ended December 31, 2019, we incurred $8.6 million of operating expenses associated with the Take 5 business, which we believe do not reflect the ongoing operating performance of our business. These costs were recorded in “Selling, general, and administrative expenses” in the Consolidated Statements of Operations and Comprehensive Income (Loss) for such years. Restructuring Charges Restructuring charges include severance plans designed to integrate and reduce costs intended to further improve efficiencies in operational activities and align cost structures consistent with revenue levels associated with business changes. In response to the COVID-19 pandemic, we commenced a plan involving terminating certain employees, particularly with respect to COVID-19 impacted operations. In addition, we established a global work from home policy. A significant portion of our office-based workforce temporarily transitioned to working from home and we commenced a plan to strategically exit certain offices since 2020. Refer to Note 8—Leases, for additional information. During the year ended December 31, 2019, we incurred restructuring expenses associated 36 with a restructuring program designed to achieve cost savings through transaction synergies in connection with the Daymon Acquisition. We recorded severance expenses of $1.0 million, $4.6 million, and $2.3 million included in “Selling, general, and administrative expenses” in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2021, 2020, and 2019, respectively. Results of Operations for the Years Ended December 31, 2021 and 2020 [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(amounts in thousands)","","2021","","","2020"],["Revenues","","$","3,602,298","","","","100.0","%","","$","3,155,671","","","","100.0","%"],["Cost of revenues","","","2,964,123","","","","82.3","%","","","2,551,485","","","","80.9","%"],["Selling, general, and administrative expenses","","","168,086","","","","4.7","%","","","306,282","","","","9.7","%"],["Recovery from Take 5","","","\u2014","","","","0.0","%","","","(7,700",")","","","(0.2",")%"],["Depreciation and amortization","","","240,041","","","","6.7","%","","","238,598","","","","7.6","%"],["Total expenses","","","3,372,250","","","","93.6","%","","","3,088,665","","","","97.9","%"],["Operating income","","","230,048","","","","6.4","%","","","67,006","","","","2.1","%"],["Other expenses:"],["Change in fair value of warrant liability","","","955","","","","0.0","%","","","13,363","","","","0.4","%"],["Interest expense, net","","","137,927","","","","3.8","%","","","234,044","","","","7.4","%"],["Total other expenses","","","138,882","","","","3.9","%","","","247,407","","","","7.8","%"],["Income (loss) before income taxes","","","91,166","","","","2.5","%","","","(180,401",")","","","(5.7",")%"],["Provision for (benefit from) income taxes","","","33,617","","","","0.9","%","","","(5,331",")","","","(0.2",")%"],["Net income (loss)","","$","57,549","","","","1.6","%","","$","(175,070",")","","","(5.5",")%"],["Other Financial Data"],["Adjusted Net Income(1)","","$","223,793","","","","6.2","%","","$","182,969","","","","5.8","%"],["Adjusted EBITDA(1)","","$","521,178","","","","14.5","%","","$","487,175","","","","15.4","%"]] [[/GREPCENT_TABLE]] (1) Adjusted Net Income and Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted Net Income and Adjusted EBITDA and reconciliations of net loss to Adjusted Net Income and Adjusted EBITDA, see “—Non-GAAP Financial Measures.” Comparison of the Years Ended December 31, 2021 and 2020 Revenues [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["(amounts in thousands)","","2021","","","2020","","","$","","","%"],["Sales","","$","2,323,884","","","$","2,060,593","","","$","263,291","","","","12.8","%"],["Marketing","","","1,278,414","","","","1,095,078","","","","183,336","","","","16.7","%"],["Total revenues","","$","3,602,298","","","$","3,155,671","","","$","446,627","","","","14.2","%"]] [[/GREPCENT_TABLE]] Total revenues increased by $446.6 million, or 14.2%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020. The sales segment revenues increased $263.3 million, of which $74.4 million were revenues from acquired businesses during the year ended December 31, 2021 as compared to the year ended December 31, 2020. Excluding revenues from acquired businesses, the segment experienced an increase of $188.9 million in organic revenues primarily due to growth in our retail services that benefited from several new clients, expansion in our e-commerce services, and our European businesses which experienced recoveries from reductions in services as a result of the COVID-19 pandemic. The marketing segment revenues increased $183.3 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020, which includes revenues of $16.2 million from acquired businesses. Excluding revenues from acquired businesses, the segment experienced an increase of $167.1 million in organic revenues primarily due to an increase in our in-store product demonstration and sampling services which continue to recover from the temporary suspensions as a result of the COVID-19 pandemic and growth in our digital marketing services. 37 Cost of Revenues Cost of revenues as a percentage of revenues for the year ended December 31, 2021 was 82.3%, as compared to 80.9% for the year ended December 31, 2020. The increase as a percentage of revenues was largely attributable to the change in the revenue mix of our services as a result of recoveries from the COVID-19 pandemic and investment to stand up associates on behalf of clients to restart services that were dormant during COVID-19. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of revenues for the year ended December 31, 2021 was 4.7%, as compared to 9.7% for the year ended December 31, 2020. The decrease as a percentage of revenues for the year ended December 31, 2021 was primarily attributable to $35.5 million decrease in equity-based compensation expense associated with our Common Series D Units and $71.3 million decrease in non-cash compensation expense previously recognized in connection with the Common Series C Units and C-2 Units as a result of the consummation of the Transactions, partially offset by $34.6 million of new stock-based compensation expense during the year ended December 31, 2021. Further contributing to the decrease in Selling, general and administrative expenses was $36.2 million decrease of transaction bonuses paid shortly following the completion of the Transactions during the year ended December 31, 2020, $27.3 million decrease in restructuring charges primarily associated with terminating certain office leases. Depreciation and Amortization Expense Depreciation and amortization expense was $240.0 million for the year ended December 31, 2021 as compared to $238.6 million, which is consistent year over year. Operating Income [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["(amounts in thousands)","","2021","","","2020","","","$","","","%"],["Sales","","$","182,529","","","$","63,305","","","$","119,224","","","","188.3","%"],["Marketing","","","47,519","","","","3,701","","","","43,818","","","","1184.0","%"],["Total operating income","","$","230,048","","","$","67,006","","","$","163,042","","","","243.3","%"]] [[/GREPCENT_TABLE]] In the sales and marketing segments, the increases in operating income during the year ended December 31, 2021 were primarily attributable to growth in revenues together with the decrease in Selling, general and administrative expenses as described above. Change in Fair Value of Warrant Liability Change in fair value of warrant liability represents $1.0 million of non-cash loss resulting from a fair value adjustment to warrant liability for the private placement warrants for the year ended December 31, 2021. Fair value adjustments are based on the input assumptions used in the Black-Scholes option pricing model including our Class A common stock price at the end of the reporting period, the implied volatility or other inputs to the model and the number of private placement warrants outstanding which may vary from period to period. Based on the period of time the public warrants have now been trading, it is also an appropriate method to determine the fair value of the liability classified private placement warrants by approximating the value with the share price of the public warrants at the respective period end, which is inherently less subjective and judgmental given it is based on observable inputs. The Company determined the valuation as of December 31, 2021 taking into consideration that both methods did not result in a materially different valuation. Interest Expense, Net Interest expense, net decreased $96.1 million, or 41.1%, to $137.9 million for the year ended December 31, 2021, from $234.0 million for the year ended December 31, 2020. The decrease in interest expense, net was primarily due to the decrease in total debt as a result of the Transactions. 38 Provision for (benefit from) Income Taxes Provision for income taxes was $33.6 million for the year ended December 31, 2021 as compared to a benefit from income taxes of $5.3 million for the year ended December 31, 2020. The fluctuation was primarily attributable to the pre-tax income versus pre-tax loss for the year ended December 31, 2021 and December 31, 2020, respectively. In addition, the variance is explained by the remeasurement of deferred tax liabilities in U.S. state jurisdictions due to income tax rate and apportionment changes and equity-based compensation for the year ended December 31, 2021. Net Income (Loss) Net Income was $57.5 million for the year ended December 31, 2021, compared to net loss of $175.1 million for the year ended December 31, 2020. The increase in net income was primarily driven by the increase in operating income, and the decrease in interest expense as a result of the consummation of the Transactions, as well as the decrease in the fair value adjustment to the warrant liability, partially offset by an increase in the provision for (benefit from) income taxes as described above. Adjusted Net Income The increase in Adjusted Net Income for the year ended December 31, 2021 was attributable to the decrease in interest expense as a result of the consummation of the Transactions and change in fair value of warrant liability partially offset by recovery from the Take 5 Matter and the increase in provision for (benefit from) income taxes as described above. For a reconciliation of Adjusted Net Income to Net loss, see “ —Non-GAAP Financial Measures”. Adjusted EBITDA and Adjusted EBITDA by Segment [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["(amounts in thousands)","","2021","","","2020","","","$","","","%"],["Sales","","$","363,211","","","$","360,017","","","$","3,194","","","","0.9","%"],["Marketing","","","157,967","","","","127,158","","","","30,809","","","","24.2","%"],["Total Adjusted EBITDA","","$","521,178","","","$","487,175","","","$","34,003","","","","7.0","%"]] [[/GREPCENT_TABLE]] Adjusted EBITDA increased $34.0 million, or 7.0% to $521.2 million for the year ended December 31, 2021, from $487.2 million for the year ended December 31, 2020. The increase in Adjusted EBITDA was primarily attributable to growth in revenues as described above and the decrease in performance based compensation expenses partially offset by investments in building back our workforce impacted by the COVID-19 pandemic and the increased cost of revenues associated with our revenue mix. For a reconciliation of Adjusted EBITDA to net income (loss), see “—Non-GAAP Financial Measures.” Non-GAAP Financial Measures Adjusted Net Income is a non-GAAP financial measure. Adjusted Net Income means net income (loss) before (i) amortization of intangible assets, (ii) equity based compensation of Topco and Advantage Sponsors’ management fee, (iii) changes in fair value of warrant liability, (iv) fair value adjustments of contingent consideration related to acquisitions, (v) acquisition-related expenses, (vi) costs associated with COVID-19, net of benefits received, (vii) EBITDA for economic interests in investments, (viii) restructuring expenses, (ix) litigation expenses, (x) Recovery from Take 5, (xi) deferred financing fees, (xii) costs associated with the Take 5 Matter, (xiii) other adjustments that management believes are helpful in evaluating our operating performance, and (xiv) related tax adjustments. We present Adjusted Net Income because we use it as a supplemental measure to evaluate the performance of our business in a way that also considers our ability to generate profit without the impact of items that we do not believe are indicative of our operating performance or are unusual or infrequent in nature and aid in the comparability of our performance from period to period. Adjusted Net Income should not be considered as an alternative for our Net income (loss), our most directly comparable measure presented on a GAAP basis. 39 A reconciliation of Adjusted Net Income to Net income (loss) is provided in the following table: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","","2020","","","2019"],["(in thousands)"],["Net income (loss)","","$","57,549","","","$","(175,070",")","","$","(19,756",")"],["Less: Net income attributable to noncontrolling interest","","","3,055","","","","736","","","","1,416"],["Add:"],["Equity based compensation of Topco and Advantage Sponsors\u2019 management fee(a)","","","(10,313",")","","","98,119","","","","7,960"],["Change in fair value of warrant liability","","","955","","","","13,363","","","","\u2014"],["Fair value adjustments related to contingent consideration related to acquisitions(c)","","","4,562","","","","13,367","","","","1,516"],["Acquisition-related expenses(d)","","","20,173","","","","50,823","","","","31,476"],["Restructuring expenses(e)","","","12,502","","","","39,770","","","","5,385"],["Litigation expenses(f)","","","(910",")","","","1,980","","","","3,500"],["Amortization of intangible assets(g)","","","198,946","","","","193,543","","","","189,881"],["Costs associated with COVID-19, net of benefits received(h)","","","(991",")","","","(11,954",")","","","\u2014"],["Deferred financing fees(i)","","","3,895","","","","41,428","","","","\u2014"],["Recovery from Take 5","","","\u2014","","","","(7,700",")","","","\u2014"],["Costs associated with the Take 5 Matter(j)","","","4,901","","","","3,628","","","","16,368"],["Tax adjustments related to non-GAAP adjustments(k)","","","(64,421",")","","","(77,592",")","","","(65,805",")"],["Adjusted Net Income","","$","223,793","","","$","182,969","","","$","169,109"]] [[/GREPCENT_TABLE]] Adjusted EBITDA and Adjusted EBITDA by segment are supplemental non-GAAP financial measures of our operating performance. Adjusted EBITDA means net income (loss) before (i) interest expense, net, (ii) provision for (benefit from) income taxes, (iii) depreciation, (iv) amortization of intangible assets, (v) equity based compensation of Topco and Advantage Sponsors’ management fee, (vi) changes in fair value of warrant liability, (vii) stock based compensation expense (viii) fair value adjustments of contingent consideration related to acquisitions, (ix) acquisition-related expenses, (x) costs associated with COVID-19, net of benefits received, (xi) EBITDA for economic interests in investments, (xii) restructuring expenses, (xiii) litigation expenses, (xiv) Recovery from Take 5, (xv) costs associated with the Take 5 Matter and (xvi) other adjustments that management believes are helpful in evaluating our operating performance. We present Adjusted EBITDA and Adjusted EBITDA by segment because they are key operating measures used by us to assess our financial performance. These measures adjust for items that we believe do not reflect the ongoing operating performance of our business, such as certain noncash items, unusual or infrequent items or items that change from period to period without any material relevance to our operating performance. We evaluate these measures in conjunction with our results according to GAAP because we believe they provide a more complete understanding of factors and trends affecting our business than GAAP measures alone. Furthermore, the agreements governing our indebtedness contain covenants and other tests based on measures substantially similar to Adjusted EBITDA. Neither Adjusted EBITDA nor Adjusted EBITDA by segment should be considered as an alternative for our Net income (loss), our most directly comparable measure presented on a GAAP basis. 40 A reconciliation of Adjusted EBITDA to Net income (loss) is provided in the following table: [[GREPCENT_TABLE]] [["Consolidated","","Year Ended December 31,"],["","","2021","","","2020","","","2019"],["(in thousands)"],["Net income (loss)","","$","57,549","","","$","(175,070",")","","$","(19,756",")"],["Add:"],["Interest expense, net","","","137,927","","","","234,044","","","","232,077"],["Provision for (benefit from) income taxes","","","33,617","","","","(5,331",")","","","1,353"],["Depreciation and amortization","","","240,041","","","","238,598","","","","232,573"],["Equity based compensation of Topco and Advantage Sponsors\u2019 management fee(a)","","","(10,313",")","","","98,119","","","","7,960"],["Change in fair value of warrant liability","","","955","","","","13,363","","","","\u2014"],["Stock based compensation expense(b)","","","34,602","","","","\u2014","","","","\u2014"],["Fair value adjustments related to contingent consideration related to acquisitions(c)","","","4,562","","","","13,367","","","","1,516"],["Acquisition-related expenses(d)","","","20,173","","","","50,823","","","","31,476"],["EBITDA for economic interests in investments(l)","","","(13,437",")","","","(6,462",")","","","(8,421",")"],["Restructuring expenses(e)","","","12,502","","","","39,770","","","","5,385"],["Litigation expenses(f)","","","(910",")","","","1,980","","","","3,500"],["Costs associated with COVID-19, net of benefits received(h)","","","(991",")","","","(11,954",")","","","\u2014"],["Recovery from Take 5","","","\u2014","","","","(7,700",")","","","\u2014"],["Costs associated with the Take 5 Matter(j)","","","4,901","","","","3,628","","","","16,368"],["Adjusted EBITDA","","$","521,178","","","$","487,175","","","$","504,031"]] [[/GREPCENT_TABLE]] Financial information by segment, including a reconciliation of Adjusted EBITDA by segment to operating income (loss), the closest GAAP financial measure, is provided in the following table: [[GREPCENT_TABLE]] [["Sales Segment","","Year Ended December 31,"],["","","2021","","","2020","","","2019"],["(in thousands)"],["Operating income","","$","182,529","","","$","63,305","","","$","127,961"],["Add:"],["Depreciation and amortization","","","170,076","","","","171,569","","","","161,563"],["Equity based compensation of Topco and Advantage Sponsors\u2019 management fee(a)","","","(6,490",")","","","71,124","","","","6,418"],["Stock based compensation expense(b)","","","18,357","","","","\u2014","","","","\u2014"],["Fair value adjustments related to contingent consideration related to acquisitions(c)","","","(6,553",")","","","8,371","","","","(2,720",")"],["Acquisition-related expenses(d)","","","13,945","","","","36,722","","","","18,276"],["EBITDA for economic interests in investments(l)","","","(14,058",")","","","(7,565",")","","","(8,395",")"],["Restructuring expenses(e)","","","4,478","","","","20,295","","","","2,928"],["Litigation expenses(f)","","","(584",")","","","1,658","","","","3,500"],["Costs associated with COVID-19, net of benefits received(h)","","","1,511","","","","(5,462",")","","","\u2014"],["Sales Segment Adjusted EBITDA","","$","363,211","","","$","360,017","","","$","309,531"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Marketing Segment","","Year Ended December 31,"],["","","2021","","","2020","","","2019"],["(in thousands)"],["Operating income","","$","47,519","","","$","3,701","","","$","85,713"],["Add:"],["Depreciation and amortization","","","69,965","","","","67,029","","","","71,010"],["Equity based compensation of Topco and Advantage Sponsors\u2019 management fee(a)","","","(3,823",")","","","26,995","","","","1,542"],["Stock based compensation expense(b)","","","16,245","","","","\u2014","","","","\u2014"],["Fair value adjustments related to contingent consideration related to acquisitions(c)","","","11,115","","","","4,996","","","","4,236"],["Acquisition-related expenses(d)","","","6,228","","","","14,101","","","","13,200"],["EBITDA for economic interests in investments(l)","","","621","","","","1,103","","","","(26",")"],["Restructuring expenses(e)","","","8,024","","","","19,475","","","","2,457"],["Litigation expenses(f)","","","(326",")","","","322","","","","\u2014"],["Costs associated with COVID-19, net of benefits received(h)","","","(2,502",")","","","(6,492",")","","","\u2014"],["Recovery from Take 5","","","\u2014","","","","(7,700",")","","","\u2014"],["Costs associated with the Take 5 Matter(j)","","","4,901","","","","3,628","","","","16,368"],["Marketing Segment Adjusted EBITDA","","$","157,967","","","$","127,158","","","$","194,500"]] [[/GREPCENT_TABLE]] 41 (a) Represents the management fees and reimbursements for expenses paid to certain of the Advantage Sponsors (as defined below) or certain of the management companies associated with it or its advisors pursuant to a management services agreement. Also represents expenses related to (i) equity-based compensation expense associated with grants of Common Series D Units of Topco made to one of the Advantage Sponsors, (ii) equity-based compensation expense associated with the Common Series C Units of Topco as a result of the Transactions, (iii) compensation amounts associated with the Company’s Management Incentive Plan originally scheduled for potential payment March 2022 that were accelerated and terminated as part of the Transactions, and (iv) compensation amounts associated with the anniversary payments to Tanya Domier. Certain of Ms. Domier’s anniversary payments were accelerated as part of the Transactions. (b) Represents non-cash compensation expense related to PSUs, RSUs, and stock options under the 2020 Plan and the Advantage Solutions 2020 Employee Stock Purchase Plan. (c) Represents adjustments to the estimated fair value of our contingent consideration liabilities related to our acquisitions, excluding the present value accretion recorded in interest expense, net, for the applicable periods. See Note 6—Other Liabilities to our audited consolidated financial statements for the year ended December 31, 2021. (d) Represents fees and costs associated with activities related to our acquisitions and restructuring activities related to our equity ownership, including transaction bonuses paid in connection with the Transactions, professional fees, due diligence and integration activities. (e) Represents fees and costs associated with various internal reorganization activities among our consolidated entities. (f) Represents legal settlements that are unusual or infrequent costs associated with our operating activities. (g) Represents the amortization of intangible assets recorded in connection with the 2014 Topco Acquisition and our other acquisitions. (h) Represents (i) costs related to implementation of strategies for workplace safety in response to COVID-19, including employee-relief fund, additional sick pay for front-line associates, medical benefit payments for furloughed associates, and personal protective equipment; and (ii) benefits received from government grants for COVID-19 relief. (i) Represents fees associated with the issuance of the indebtedness associated with our material debt agreements and the amendment of our term loan credit facility. For additional information, refer to Note 7 – Debt of our audited consolidated financial statements for the year ended December 31, 2021. (j) Represents $4.9 million, $3.6 million, and $7.7 million of costs associated with investigation and remediation activities related to the Take 5 Matter, primarily, professional fees and other related costs, respectively for the years ended December 31, 2021, 2020, and 2019, respectively. Represents $8.6 million of operating expenses associated with the Take 5 business, which we believe do not reflect the ongoing operating performance of our business for the year ended December 31, 2019. (k) Represents the tax provision or benefit associated with the adjustments above, taking into account the Company’s applicable tax rates, after excluding adjustments related to items that do not have a related tax impact. (l) Represents additions to reflect our proportional share of Adjusted EBITDA related to our equity method investments and reductions to remove the Adjusted EBITDA related to the minority ownership percentage of the entities that we fully consolidate in our financial statements. Liquidity and Capital Resources Prior to the Transactions, our principal sources of liquidity were cash flows from operations, borrowings under two credit facilities, including $2.5 billion under a first lien credit agreement and $760 million under a second lien credit agreement which were scheduled to mature in July 2021 and July 2022, respectively. On October 28, 2020, in connection with the Transactions, we (i) repaid the outstanding debt under these two credit facilities and a separate accounts receivable securitization facility, (ii) entered into new credit facilities consisting of our $1.325 billion term loan credit facility and our $400.0 million revolving credit facility, (iii) borrowed $100.0 million under our revolving credit facility and (iv) issued $775.0 million of senior secured notes. Following the Transactions, our principal sources of liquidity have been cash flows from operations, borrowings under our revolving credit facility, and other debt. Our principal uses of cash are operating expenses, working capital requirements, acquisitions, and repayment of debt. Share Repurchase Program On November 9, 2021, we announced that our board of directors authorized a new share repurchase program (the “2021 Share Repurchase Program”) pursuant to which we may repurchase up to $100 million of our Class A common stock. The 2021 Share Repurchase Program does not have an expiration date, but provides for suspension or discontinuation at any time. The 2021 Share Repurchase Program permits the repurchase of our Class A common stock on the open market and in other means from time to time. The timing and amount of any share repurchase is subject to prevailing market conditions, relevant securities laws and other considerations, and we are under no obligation to repurchase any specific number of shares. 42 During the fourth quarter of 2021, we executed open market purchases of $12.6 million of our Class A common stock under the 2021 Share Repurchase Program. There remains $87.4 million of share repurchase availability under the 2021 Share Repurchase Program as of December 31, 2021. We anticipate that our cash from operations, together with our current borrowing capacity, will be sufficient to fund the 2021 Share Repurchase Program to the extent implemented by management and pay principal and interest as it comes due under our Senior Secured Credit Facilities. Cash Flows A summary of cash provided by or used in our operating, investing and financing activities are shown in the following table: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(in thousands)","","2021","","","2020","","","2019"],["Net cash provided by operating activities","","$","125,991","","","$","345,730","","","$","151,343"],["Net cash used in investing activities","","","(75,843",")","","","(99,003",")","","","(61,808",")"],["Net cash used in financing activities","","","(86,300",")","","","(230,152",")","","","(38,208",")"],["Net effect of foreign currency fluctuations on cash","","","(3,177",")","","","4,366","","","","3,179"],["Net change in cash, cash equivalents and restricted cash","","$","(39,329",")","","$","20,941","","","$","54,506"]] [[/GREPCENT_TABLE]] Net Cash Provided by Operating Activities Net cash provided by operating activities during the year ended December 31, 2021, consisted of net income of $54.6 million adjusted for certain non-cash items, including depreciation and amortization of $240.0 million and effects of changes in working capital. Net cash provided by operating activities for the year ended December 31, 2020 consisted of net loss of $175.1 million adjusted for certain non-cash items, including depreciation and amortization of $238.6 million and effects of changes in working capital. The decrease in cash provided by operating activities during the year ended December 31, 2021 relative to the same period in 2020 was primarily due to the increased need for working capital due to growth in revenues which continue to recover from the COVID-19 pandemic, combined with the payment during the year ended December 31, 2021 of a portion of our deferred Social Security taxes. Net Cash Used in Investing Activities For the years ended December 31, 2021 and 2020, our net cash used in investing activities primarily consisted of acquisitions. Additionally, we invest cash for the purchase of property and equipment to support our increased employee headcount and overall growth in our business. We expect that we will make additional capital expenditures and investments in the future to support the future growth of our business. Net Cash Used in Financing Activities We primarily finance our growth through cash flows from operations, however, we also incur long-term debt or borrow under lines of credit when necessary to execute acquisitions. Cash flows from financing activities consisted of borrowings related to these lines of credit and subsequent payments of principal and financing fees. Additionally, many of our acquisition agreements include contingent consideration arrangements, which are generally based on the achievement of future financial performance by the operations attributable to the acquired companies. The portion of the cash payment up to the acquisition date fair value of the contingent consideration liability are classified as financing outflows, and amounts paid in excess of the acquisition date fair value of that liability are classified as operating outflows. Cash flows related to financing activities during the year ended December 31, 2021, were primarily related to borrowings of $61.6 million and repayment of $111.7 million on our revolving credit facility and $13.8 million related to payments of contingent consideration and holdback payments. During the fourth quarter of 2021, we executed open market purchases of $12.6 million of our Class A common stock under the 2021 Share Repurchase Program. Additionally, in December 2021, we had $3.0 million of COVID-19 relief fund borrowing for one of our majority owned subsidiaries operating in Japan. The loan bears an interest rate of 0.35% per annum with a maturity date in December 2036. 43 Cash flows related to financing activities during the year ended December 31, 2020, were primarily related to the proceeds from new borrowings associated with our term loan credit facility and issuance of our senior secured notes, the repayment of our prior credit agreements and principal payments on our long- term debt of $3.2 billion, and the proceeds from issuance of our Class A common stock of $929.2 million, net of fees, as a result of the consummation of the Transactions. Business Combination with Conyers Park On September 7, 2020, Advantage Solutions Inc., now known as ASI Intermediate Corp. (“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 now known as Advantage Solutions Inc. (“Conyers Park”), CP II Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Conyers Park (“Merger Sub”), and Topco. In September 2020 and in connection with its entry into the Merger Agreement, Conyers Park entered into subscription agreements pursuant to which certain investors, including participating equityholders of Topco (the “Advantage Sponsors”), agreed to purchase Class A Common Stock of Conyers Park (“Common Stock”) at a purchase price of $10.00 per share (the “PIPE Investment”). Pursuant to the terms of the Merger Agreement, on October 28, 2020 Merger Sub was merged with and into ASI with ASI being the surviving company in the merger (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”). On October 28, 2020, the PIPE Investment was consummated, and 85,540,000 shares of Common Stock were sold for aggregate gross proceeds of $855.4 million. Of the 85,540,000 shares of Common Stock, the Advantage Sponsors acquired 34,410,000 shares of Common Stock, and other purchasers acquired 51,130,000 shares of Common Stock. Holders of 32,114,818 shares of Common Stock sold in its initial public offering properly exercised their right to have such shares redeemed for a full pro rata portion of the trust account holding the proceeds from Conyers Park’s initial public offering, calculated as of two business days prior to the consummation of the business combination, $10.06 per share, or $323.1 million in the aggregate (collectively, the “Redemptions”). As a result of the Merger, among other things, pursuant to the Merger Agreement, Conyers Park issued to Topco, as sole stockholder of ASI prior to the Merger, aggregate consideration equal to (a) 203,750,000 shares of Common Stock, and (b) 5,000,000 shares of Common Stock that vested upon achievement of a market performance condition on January 15, 2021. After giving effect to the Transactions, the Redemptions, and the consummation of the PIPE Investment, there were 313,425,182 shares of Common Stock issued and outstanding as of October 28, 2020, excluding the 5,000,000 shares of Common Stock subject to the market performance condition. The Class A common stock and outstanding warrants of Conyers Park (renamed “Advantage Solutions Inc.” following the Transactions) commenced trading on the Nasdaq Global Select Market under the symbols “ADV” and “ADVWW”, respectively, on October 29, 2020. As noted above, an aggregate of $323.1 million was paid from the Conyers Park’s trust account to holders in connection with the Redemption, and the remaining balance immediately prior to the closing of the Transactions of approximately $131.2 million remained in the trust account. The remaining amount in the trust account was used to fund the Transactions, including the entry into the agreements governing material indebtedness. In connection with the Merger, ASI repaid and terminated $3.3 billion of debt arrangements under its then existing credit facilities with incremental costs of $86.8 million. This amount was repaid by ASI through a combination of (i) cash on hand, (ii) proceeds from certain private investments in Common Stock, (iii) the entry by Advantage Sales & Marketing Inc., a wholly owned subsidiary of ASI, into (a) a senior secured asset-based revolving credit facility, which permits borrowing in an aggregate principal amount of up to $400.0 million, subject to borrowing base capacity (as amended and/or restated from time to time, the “Revolving Credit Facility”), of which $100.0 million of principal amount was borrowed as of October 28, 2020, and (b) a secured first lien term loan credit facility in an aggregate principal amount of $1.325 billion (as amended and/or restated from time to time, the “Term Loan Facility” and, together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”), and (iv) the issuance by Advantage Solutions FinCo LLC, a direct subsidiary of Advantage Sales & Marketing Inc., of $775.0 million aggregate principal amount of 6.50% Senior Secured Notes due 2028 (the “Notes”). The Merger was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Conyers Park was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on Topco having a relative majority of the voting power of the combined entity, the operations of ASI prior to the Merger comprising the only ongoing operations of the combined entity, and senior management of ASI comprising the senior management of the combined 44 entity. Accordingly, for accounting purposes, the financial statements of the combined entity represent a continuation of the financial statements of ASI with the acquisition being treated as the equivalent of ASI issuing stock for the net assets of Conyers Park, accompanied by a recapitalization. The net assets of Conyers Park was stated at historical cost, with no goodwill or other intangible assets recorded. Description of Credit Facilities Senior Secured Credit Facilities In connection with the consummation of the Transaction, Advantage Sales & Marketing Inc., an indirect wholly-owned subsidiary of the Company (the “Borrower”) entered into the Senior Secured Credit Facilities consisting of (i) the Revolving Credit Facility, which is a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $400.0 million, subject to borrowing base capacity and (ii) the Term Loan Facility, which is a secured first lien term loan credit facility in an aggregate principal amount of $1.325 billion. Revolving Credit Facility Our Revolving Credit Facility provides for revolving loans and letters of credit in an aggregate amount of up to $400.0 million, subject to borrowing base capacity. Letters of credit are limited to the lesser of (a) $150.0 million and (b) the aggregate unused amount of commitments under our Revolving Credit Facility then in effect. Loans under the Revolving Credit Facility may be denominated in either U.S. dollars or Canadian dollars. Bank of America, N.A. (“Bank of America”), will act as administrative agent and ABL Collateral Agent. The Revolving Credit Facility matures five years after the date we enter into the Revolving Credit Facility. We may use borrowings under the Revolving Credit Facility to fund working capital and for other general corporate purposes, including permitted acquisitions and other investments. Borrowings under the Revolving Credit Facility are limited by borrowing base calculations based on the sum of specified percentages of eligible accounts receivable plus specified percentages of qualified cash, minus the amount of any applicable reserves. Borrowings will bear interest at a floating rate, which can be either an adjusted Eurodollar rate plus an applicable margin or, at the Borrower’s option, a base rate plus an applicable margin. The applicable margins for the Revolving Credit Facility are 2.00%, 2.25% or 2.50%, with respect to Eurodollar rate borrowings and 1.00%, 1.25% or 1.50%, with respect to base rate borrowings, in each case depending on average excess availability under the Revolving Credit Facility. The Borrower’s ability to draw under the Revolving Credit Facility or issue letters of credit thereunder will be conditioned upon, among other things, the Borrower’s delivery of prior written notice of a borrowing or issuance, as applicable, the Borrower’s ability to reaffirm the representations and warranties contained in the credit agreement governing the Revolving Credit Facility and the absence of any default or event of default thereunder. The Borrower’s obligations under the Revolving Credit Facility are guaranteed by Karman Intermediate Corp. (“Holdings”) and all of the Borrower’s direct and indirect wholly owned material U.S. subsidiaries (subject to certain permitted exceptions) and Canadian subsidiaries (subject to certain permitted exceptions, including exceptions based on immateriality thresholders of aggregate assets and revenues of Canadian subsidiaries) (the “Guarantors”). The Revolving Credit Facility is secured by a lien on substantially all of Holdings’, the Borrower’s and the Guarantors’ assets (subject to certain permitted exceptions). The Borrower’s Revolving Credit Facility has a first-priority lien on the current asset collateral and a second-priority lien on security interests in the fixed asset collateral (second in priority to the liens securing the Notes and the Term Loan Facility discussed below), in each case, subject to other permitted liens. The Revolving Credit Facility has the following fees: (i) an unused line fee of 0.375% or 0.250% per annum of the unused portion of the Revolving Credit Facility, depending on average excess availability under the Revolving Credit Facility; (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit equal to the applicable margin for adjusted Eurodollar rate loans, as applicable; and (iii) certain other customary fees and expenses of the lenders and agents thereunder. The Revolving Credit Facility contains customary covenants, including, but not limited to, restrictions on the Borrower’s ability and that of our subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness, enter into transactions with affiliates or change our line of business. The Revolving Credit Facility will require the maintenance of a fixed charge coverage ratio (as set forth in the credit agreement governing the Revolving Credit Facility) of 1.00 to 1.00 at the end of each fiscal quarter when excess availability is less than the greater of $25 million and 10% of the lesser of the borrowing base and maximum borrowing capacity. Such fixed charge coverage ratio will be tested at the end of each quarter until such time as excess availability exceeds the level set forth above. The Revolving Credit Facility provides that, upon the occurrence of certain events of default, the Borrower’s obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults to the 45 lenders thereunder, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy, insolvency, corporate arrangement, winding-up, liquidation or similar proceedings, material money judgments, material pension-plan events, certain change of control events and other customary events of default. On October 28, 2021, the Borrower and Holdings entered into the First Amendment to ABL Revolving Credit Agreement (the “ABL Amendment”), which amended the ABL Revolving Credit Agreement, dated October 28, 2020, by and among the Borrower, Holdings, the lenders from time to time party thereto and Bank of America, as administrative agent (the “Prior Revolving Credit Facility”). The ABL Amendment was entered into by the Borrower to amend certain terms and provisions, including (i) reducing the interest rate floor for Eurocurrency rate loans from 0.50% to 0.00% and base rate loans from 1.50% to 1.00%, and (ii) updating the provisions by which U.S. Dollar LIBOR will eventually be replaced with SOFR or another interest rate benchmark to reflect the most recent standards and practices used in the industry. Term Loan Facility The Term Loan Facility consists of a term loan credit facility denominated in U.S. dollars in an aggregate principal amount of $1.312 billion. Borrowings under the Term Loan Facility amortize in equal quarterly installments in an amount equal to 1.00% per annum of the principal amount. Borrowings will bear interest at a floating rate, which can be either an adjusted Eurodollar rate plus an applicable margin or, at the Borrower’s option, a base rate plus an applicable margin. The applicable margins for the Term Loan Facility are 5.25% with respect to Eurodollar rate borrowings and 4.25% with respect to base rate borrowings. The Borrower may voluntarily prepay loans or reduce commitments under the Term Loan Facility, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty (other than a 1.00% premium on any prepayment in connection with a repricing transaction prior to the date that is twelve months after the date we entered into the Term Loan Facility on October 28, 2020). The Borrower will be required to prepay the Term Loan Facility with 100% of the net cash proceeds of certain asset sales (such percentage subject to reduction based on the achievement of specific first lien net leverage ratios) and subject to certain reinvestment rights, 100% of the net cash proceeds of certain debt issuances and 50% of excess cash flow (such percentage subject to reduction based on the achievement of specific first lien net leverage ratios). The Borrower’s obligations under the Term Loan Facility are guaranteed by Holdings and the Guarantors. Our Term Loan Facility is secured by a lien on substantially all of Holdings’, the Borrower’s and the Guarantors’ assets (subject to certain permitted exceptions). The Term Loan Facility has a first- priority lien on the fixed asset collateral (equal in priority with the liens securing the Notes) and a second-priority lien on security interests in the current asset collateral (second in priority to the liens securing the Revolving Credit Facility), in each case, subject to other permitted liens. The Term Loan Facility contains certain customary negative covenants, including, but not limited to, restrictions on the Borrower’s ability and that of our restricted subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, pay dividends or make other restricted payments, sell or otherwise transfer assets or enter into transactions with affiliates. The Term Loan Facility provides that, upon the occurrence of certain events of default, the Borrower’s obligations thereunder may be accelerated. Such events of default will include payment defaults to the lenders thereunder, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy, insolvency, corporate arrangement, winding-up, liquidation or similar proceedings, material money judgments, change of control and other customary events of default. On October 28, 2021 (the “First Lien Amendment Effective Date”), the Borrower, Holdings, and certain of the Borrower’s subsidiaries, entered into Amendment No. 1 to the First Lien Credit Agreement (the “First Lien Amendment”), which amended the First Lien Credit Agreement, dated October 28, 2020, by and among the Borrower, Holdings, Bank of America, as administrative agent and collateral agent, each lender party from time to time thereto, and the other parties thereto. The First Lien Amendment was entered into by the Borrower to reduce the applicable interest rate on the term loan to 5.25% per annum, resulting in estimated interest savings of approximately $9.9 million or $7.3 million, net of tax, per annum. Additional terms and provisions amended include (i) resetting the period for six months following the First Lien Amendment Effective Date in which a 1.00% prepayment premium shall apply to any prepayment of the term loan in connection with certain repricing events, and (ii) updating the provisions by which U.S. Dollar LIBOR will eventually be replaced with SOFR or another interest rate benchmark to reflect the most recent standards and practices used in the industry and by Bank of America. 46 Senior Secured Notes In connection with the Transactions, Advantage Solutions FinCo LLC (“Finco”) issued $775.0 million aggregate principal amount of 6.50% Senior Secured Notes due 2028 (the “Notes”). Substantially concurrently with the Transactions, Finco merged with and into Advantage Sales & Marketing Inc. (the “Issuer”), with the Issuer continuing as the surviving entity and assuming the obligations of Finco. The Notes were sold to BofA Securities, Inc., Deutsche Bank Securities Inc., Morgan Stanley & Co. LLC and Apollo Global Securities, LLC. The Notes were resold to certain non-U.S. persons pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), and to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act at a purchase price equal to 100% of their principal amount. The terms of the Notes are governed by an Indenture, dated as of October 28, 2020 (the “Indenture”), among Finco, the Issuer, the guarantors named therein (the “Notes Guarantors”) and Wilmington Trust, National Association, as trustee and collateral agent. Interest and maturity Interest on the Notes is payable semi-annually in arrears on May 15 and November 15 at a rate of 6.50% per annum, commencing on May 15, 2021. The Notes will mature on November 15, 2028. Guarantees The Notes are guaranteed by Holdings and each of the Issuer’s direct and indirect wholly owned material U.S. subsidiaries (subject to certain permitted exceptions) and Canadian subsidiaries (subject to certain permitted exceptions, including exceptions based on immateriality thresholders of aggregate assets and revenues of Canadian subsidiaries) that is a borrower or guarantor under the Term Loan Facility. Security and Ranking The Notes and the related guarantees are the general, senior secured obligations of the Issuer and the Notes Guarantors, are secured on a first-priority pari passu basis by security interests on the fixed asset collateral (equal in priority with liens securing the Term Loan Facility), and are secured on a second-priority basis by security interests on the current asset collateral (second in priority to the liens securing the Revolving Credit Facility and equal in priority with liens securing the Term Loan Facility), in each case, subject to certain limitations and exceptions and permitted liens. The Notes and related guarantees rank (i) equally in right of payment with all of the Issuer’s and the Guarantors’ senior indebtedness, without giving effect to collateral arrangements (including the Senior Secured Credit Facilities) and effectively equal to all of the Issuer’s and the Guarantors’ senior indebtedness secured on the same priority basis as the Notes, including the Term Loan Facility, (ii) effectively subordinated to any of the Issuer’s and the Guarantors’ indebtedness that is secured by assets that do not constitute collateral for the Notes to the extent of the value of the assets securing such indebtedness and to indebtedness that is secured by a senior-priority lien, including the Revolving Credit Facility to the extent of the value of the current asset collateral and (iii) structurally subordinated to the liabilities of the Issuer’s non-Guarantor subsidiaries. Optional redemption for the Notes The Notes are redeemable on or after November 15, 2023 at the applicable redemption prices specified in the Indenture plus accrued and unpaid interest. The Notes may also be redeemed at any time prior to November 15, 2023 at a redemption price equal to 100% of the aggregate principal amount of such Notes to be redeemed plus a “make-whole” premium, plus accrued and unpaid interest. In addition, the Issuer may redeem up to 40% of the original aggregate principal amount of Notes before November 15, 2023 with the net cash proceeds of certain equity offerings at a redemption price equal to 106.5% of the aggregate principal amount of such Notes to be redeemed, plus accrued and unpaid interest. Furthermore, prior to November 15, 2023 the Issuer may redeem during each calendar year up to 10% of the original aggregate principal amount of the Notes at a redemption price equal to 103% of the aggregate principal amount of such Notes to be redeemed, plus accrued and unpaid interest. If the Issuer or its restricted subsidiaries sell certain of their respective assets or experience specific kinds of changes of control, subject to certain exceptions, the Issuer must offer to purchase the Notes at par. In connection with any offer to purchase all Notes, if holders of no less than 90% of the aggregate principal amount of Notes validly tender their Notes, the Issuer is entitled to redeem any remaining Notes at the price offered to each holder. Restrictive covenants The Notes are subject to covenants that, among other things limit the Issuer’s ability and its restricted subsidiaries’ ability to: incur additional indebtedness or guarantee indebtedness; pay dividends or make other distributions in respect of, or repurchase or redeem, the Issuer’s or a parent entity’s capital stock; prepay, redeem or repurchase certain indebtedness; issue certain preferred stock or similar equity securities; make loans and investments; sell or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting the Issuer’s subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or 47 substantially all of the Issuer’s assets. Most of these covenants will be suspended on the Notes so long as they have investment grade ratings from both Moody’s Investors Service, Inc. and S&P Global Ratings and so long as no default or event of default under the Indenture has occurred and is continuing. Events of default The following constitute events of default under the Notes, among others: default in the payment of interest; default in the payment of principal; failure to comply with covenants; failure to pay other indebtedness after final maturity or acceleration of other indebtedness exceeding a specified amount; certain events of bankruptcy; failure to pay a judgment for payment of money exceeding a specified aggregate amount; voidance of subsidiary guarantees; failure of any material provision of any security document or intercreditor agreement to be in full force and effect; and lack of perfection of liens on a material portion of the collateral, in each case subject to applicable grace periods. Prior Credit Agreements In connection with the Transactions, our debt arrangements under our then first lien credit agreement, second lien credit agreement and an accounts receivable credit agreement were repaid and terminated with incremental costs of $86.8 million. Future Cash Requirements [[GREPCENT_TABLE]] [["","Total","","","Current","","","Long-Term"],["(in thousands)"],["Operating lease liabilities(1)","$","60,859","","","$","20,415","","","$","40,444"],["Client deposits(2)","","13,623","","","","13,623","","","","\u2014"],["Total debt excluding deferred issuance costs(3)","","2,093,075","","","","14,397","","","","2,078,678"],["Other long-term liabilities on the consolidated balance sheets"],["Contingent consideration(4)","","58,366","","","","41,522","","","","16,844"],["Unpaid claims(5)","","65,821","","","","34,420","","","","31,401"],["Holdbacks(6)","","15,564","","","","15,564","","","","\u2014"],["Total contractual obligations","$","2,307,308","","","$","139,941","","","$","2,167,367"]] [[/GREPCENT_TABLE]] (1) Refer to Note 8 — Leases of our audited consolidated financial statements for the year ended December 31, 2021 for additional information regarding the maturity of operating lease liabilities. (2) Represents payments collected from our clients, primarily, associated with market development funds that arise out of our business. (3) We have an aggregate principal amount of $1.312 billion borrowing on the Term Loan Facility, which bears the applicable interest rate of 5.25% per annum, and $775.0 million in Senior Secured Notes, which is subject to a fixed interest rate of 6.5%. Refer to Note 7 — Debt of our audited consolidated financial statements for the year ended December 31, 2021 for additional information regarding the maturities of debt principal. Total debt excluding deferred issuance costs does not include the obligation of future interest payments. (4) Refer to Note 6 — Other Liabilities of our audited consolidated financial statements for the year ended December 31, 2021 for additional information regarding the contingent consideration liabilities. (5) Represents $57.7 million of an estimated liability under our workers’ compensation programs for claims incurred but unpaid and $8.2 million of employee insurance reserves as of December 31, 2021. (6) Represents $15.6 million of holdback amounts which are used to withhold a portion of the initial purchase price payment until certain post-closing conditions are satisfied and are typically settled within 24 months of the acquisition. Cash and Cash Equivalents Held Outside the United States As of December 31, 2021 and 2020, $86.2 million and $87.7 million, respectively, of our cash and cash equivalents were held by foreign subsidiaries. As of December 31, 2021 and 2020, $40.0 million and $28.9 million, respectively, of our cash and cash equivalents were held by foreign branches. We assessed our determination as to our indefinite reinvestment intent for certain of our foreign subsidiaries and recorded a deferred tax liability of approximately $2.5 million of withholding tax as of December 31, 2021 for unremitted earnings in Canada 48 with respect to which we do not have an indefinite reinvestment assertion. We will continue to evaluate our cash needs, however we currently do not intend, nor do we foresee a need, to repatriate funds from the foreign subsidiaries except for Canada. We have continued to assert indefinite reinvestment on all other earnings as it is necessary for continuing operations and to grow the business. If at a point in the future our assertion changes, we will evaluate tax-efficient means to repatriate the income. In addition, we expect existing domestic cash and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as debt repayment and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. If we should require more capital in the United States than is generated by our domestic operations, for example, to fund significant discretionary activities such as business acquisitions, we could elect to repatriate future earnings from foreign jurisdictions. These alternatives could result in higher income tax expense or increased interest expense. We consider the majority of the undistributed earnings of our foreign subsidiaries, as of December 31, 2021, to be indefinitely reinvested and, accordingly, no provision has been made for taxes in excess of the $2.5 million noted above. Off-Balance Sheet Arrangements We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in our consolidated financial statements. Additionally, we do not have an interest in, or relationships with, any special-purpose entities. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. We evaluate our accounting policies, estimates and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. We evaluated the development and selection of our critical accounting policies and estimates and believe that the following involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in the footnotes to our audited consolidated financial statements included elsewhere in this Annual Report. Revenue Recognition We recognize revenues when control of promised goods or services are transferred to the client in an amount that reflects the consideration that we expect to be entitled to in exchange for such goods or services. Substantially all of our contracts with clients involve the transfer of a service to the client, which represents the 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 include 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). We allocate variable consideration to each period of service to which it relates. Revenues related to the sales segment are primarily recognized in the form of commissions, fee-for-service or on a cost-plus basis for providing headquarter relationship management, analytics, insights and intelligence services, administrative services, retail services, retailer client relationships and in-store media programs and digital technology solutions (which include our business intelligence solutions, e-commerce services and content services). Marketing segment revenues are primarily recognized in the form of a fee-for-service (including retainer fees, fees charged to clients based on hours incurred, project-based fees or fees for executing in-person consumer engagements or experiences, which engagements or experiences we refer to as events), commissions or on a cost- plus basis for providing experiential marketing, shopper and consumer marketing services, private label development and our digital, social and media services. Our revenue recognition policies generally result in recognition of revenues at the time services are performed. Our accounting policy for revenue recognition has an impact on our reported results and relies on certain estimates that require judgments on the part of management. We record an allowance as a reduction to revenue for differences between estimated revenues and the amounts 49 ultimately invoiced to our clients based on our historical experience and current trends. Cash collected in advance of services being performed is recorded as deferred revenues. We have contracts that include variable consideration whereby the ultimate consideration is contingent on future events such as the client’s sales to retailers, hours worked, event count, costs incurred and performance incentive bonuses. Commission revenues are generally earned upon performance of headquarter relationship management, analytics, insights and intelligence, e-commerce, administration and retail services arrangements. As part of these arrangements, we provide a variety of services to consumer goods manufacturers in order to improve the manufacturer’s sales to retailers. This includes primarily outsourced sales, business development, category and space management, relationship management and in-store sales strategy services. In exchange for these services, we earn an agreed upon percentage of our client’s sales to retailers, which is agreed upon on a manufacturer-by-manufacturer basis. We may be entitled to additional fees upon meeting specific performance goals or thresholds, which we refer to as bonus revenue. The variability of the consideration for the services transferred during a reporting period is typically resolved by the end of the reporting period. However, for certain client contracts, we estimate the variable consideration for the services that have been transferred to the client during the reporting period. We typically estimate the variable consideration based on the expected value method. Estimates are based on historical experience and current facts known during the reporting period. We recognize revenue related to variable consideration if it is probable that a significant reversal of revenue recognized will not occur. When such probable threshold is not satisfied, we will constrain some or all of the variable consideration, and such constrained amount will not be recognized as revenue until the probable threshold is met or the uncertainty is resolved and the final amount is known. We record an adjustment to revenue for differences between estimated revenues and the amounts ultimately invoiced to the client. Adjustments to revenue during the current period related to services transferred during prior periods were not significant for the year ended December 31, 2021. We have contracts that include fixed consideration such as a fee per project or a fixed monthly fee. For contracts with a fee per project, revenue is recognized over time using an input method such as hours worked that reasonably depicts our performance in transferring control of the services to the client. We determined that the input method represents a reasonable method to measure the satisfaction of the performance obligation to the client. For contracts with a fixed monthly fee, revenue is recognized using a time-based measure resulting in a straight-line revenue recognition. A time-based measure was determined to represent a reasonable method to measure the satisfaction of the performance obligation to the client because we have a stand ready obligation to make itself available to provide services upon the client’s request or the client receives the benefit from our services evenly over the contract period. We evaluate each client contract individually in accordance with the applicable accounting guidance to determine whether we act as a principal (whereby we would present revenue on a gross basis) or as an agent (whereby we would present revenue on a net basis). While we primarily act as a principal in our arrangements and report revenues on a gross basis, given the varying terms of our client contracts, we will occasionally act as an agent and in such instances present revenues on a net basis. For example, for certain advertising arrangements, our clients purchase media content in advance, and we do not take on any risk of recovering the cost to acquire the media. As a result, we determined we act as the agent in these arrangements and record revenues and their related costs on a net basis as its agency services are performed. However, in cases where media is not purchased in advance by our clients, we record such revenues and the related costs on a gross basis, as we bear the risk of recovering the costs to acquire the media and are responsible for fulfillment of the services. We record revenues from sales of services and the related direct costs in accordance with the accounting guidance on reporting revenue gross as a principal versus net as an agent. In situations where we act as a principal in the transaction, we report gross revenues and cost of revenues. When we act as an agent, we report the revenues and their related costs on a net basis. Cost of revenues does not include depreciation charges for fixed assets. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired in an acquisition. We test for impairment of goodwill at the reporting unit level. We generally combine reporting units, which are a component of an operating segment when they have similar economic characteristics, nature of services, types of client, distribution methods and regulatory environment. We have two reporting units, sales and marketing, which are also our operating segments. We test our goodwill for impairment at the beginning of the fourth quarter of a given fiscal year, and whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value. We have the option to perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before performing a quantitative impairment test. If the qualitative assessment indicates it is not more likely than not that the fair value of a reporting unit, as determined applying the quantitative impairment test described below, is less than the carrying amount, then there is 50 no need to perform the quantitative impairment test. Upon performing the quantitative impairment test, if the fair value of the reporting unit is less than its carrying amount, goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment loss; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. Our annual goodwill impairment assessment for the year ended December 31, 2021 was performed as of October 1, 2021. We utilize a combination of income and market approaches to estimate the fair value of our reporting units. The income approach utilizes estimates of discounted cash flows of the reporting units, which requires assumptions for, the reporting units’ revenue growth rates, earnings before interest, taxes, depreciation and amortization ("EBITDA") margins, terminal growth rates, and discount rates, all of which require significant management judgment. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy (described in “Fair Value Measurements in Note 1, Organization and Significant Accounting Policies,”). The market approach applies market multiples derived from the historical earnings data of selected guideline publicly-traded companies to our reporting units’ businesses to yield a second assumed value of each reporting unit, which requires significant management judgement. The guideline companies are first screened by industry group and then further narrowed based on the reporting units’ business descriptions, markets served, competitors, EBITDA margins and revenue size. Market multiples are then selected from within the range of these guideline companies multiples based on the subject reporting unit. We based our fair value estimates on assumptions we believe to be reasonable but which are unpredictable and inherently uncertain. A change in these underlying assumptions would cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying amounts and result in an impairment of goodwill in the future. Additionally, if actual results are not consistent with the estimates and assumptions or if there are significant changes to our planned strategy, it may cause fair value to be less than the carrying amounts and result in an impairment of goodwill in the future. We compare a weighted average of the output from the income and market approaches to the carrying value of each reporting unit. We also compare the aggregate estimated fair value of our reporting units to the estimated value of our total invested capital on a marketable basis. Based on the results of our quantitative impairment test performed for our reporting units, we determined that our goodwill was not impaired for the year ended December 31, 2021. The fair values of our reporting units significantly exceeded their respective carrying values, which we define as greater than 20%. Management determined that no additional triggering events occurred that required us to perform an interim goodwill impairment test as of December 31, 2021. In performing the quantitative impairment test for the year ended December 31, 2020 and 2019, we had also determined that our goodwill was not impaired. The fair value of the sales reporting unit exceeded its carrying value by 8.3% and 3.5%, respectively. The fair value of the marketing reporting unit significantly exceeded its carrying value. Management determined that no additional triggering events occurred that required us to perform an interim goodwill impairment test as of December 31, 2020 and 2019. Indefinite-Lived Assets Our indefinite-lived intangible assets are comprised of our sales and marketing trade names. Intangible assets with indefinite useful lives are not amortized but tested annually, at the beginning of the fourth quarter, for impairment or more often if events occur or circumstances change that would create a triggering event. We have the option to perform a qualitative assessment of whether it is more likely than not that the indefinite-lived intangible asset’s fair value is less than its carrying value before performing a quantitative impairment test. We test our indefinite-lived intangible assets for impairment using a relief from royalty method by comparing the estimated fair values of the indefinite-lived intangible assets with the carrying values. The estimates used in the determination of fair value are subjective in nature and involve the use of significant assumptions. These estimates and assumptions include revenue growth rates, terminal growth rates, discount rates and royalty rates. which requires significant management judgement. The assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from the estimates. In connection with our annual quantitative impairment test as of October 1, 2021, 2020, and 2019, we concluded that our indefinite-lived intangible assets were not impaired for the years ended December 31, 2021, 2020, and 2019. The fair value of the indefinite-lived intangible assets related to sales trade names significantly exceeded its carrying value for the year ended December 31, 2021, and exceeded its carrying value by 13.3% and 8.3% for the years ended December 31, 2020 and 2019, respectively. The fair value of the indefinite-lived intangible assets related to marketing trade names significantly exceeded its carrying value for the year ended December 31, 2021, and exceeded its carrying value by 8.4% and 10.0% for the years ended December 31, 2020 and 2019, respectively. Management determined that no additional triggering events occurred that required us to perform an interim impairment test of indefinite-lived intangible assets as of December 31, 2021, 2020, and 2019. 51 Equity-Based Compensation Performance restricted stock units (“PSUs”) are subject to the achievement of certain performance conditions based on the Company’s revenues and Adjusted EBITDA targets in the respective measurement period and the recipient’s continued service to the Company. The PSUs are scheduled to vest over a three-year period from the date of grant and may vest from 0% to 150% of the number of shares. The number of PSUs earned is adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. The fair value of PSU grants was equal to the closing price of our stock on the date of the applicable grant. 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 RSU agreement under the Advantage Solutions. Inc. 2020 Incentive Award Plan (the “Plan”). Topco, the parent company of the Company, has a long-term equity incentive plan that allows for the grant of time- and performance-based profit interests, or Common Series C Units, in Topco to certain of its and its subsidiaries’ directors and employees in exchange for services provided to us. Since we receive the benefit associated with such services the related expense is recorded within our Consolidated Statements of Operations and Comprehensive Income (Loss). These profit interests are subject to certain vesting requirements including time and performance requirements based on specified annual targets substantially similar to Adjusted EBITDA thresholds. These awards are subject to forfeiture unless the following performance conditions are met: (i) 75% of the awards will vest when certain of the Advantage Sponsors as of the date of the 2014 Topco Acquisition, or the Common Series A Limited Partners of Topco, realize a pre-tax internal rate of return of 8% compounded annually and (ii) the remaining 25% of the awards vest when the Common Series A Limited Partners of Topco realize a pre-tax internal rate of return of 20% compounded annually. On March 15, 2018, Topco modified the vesting requirements. In accordance with the performance conditions, generally 75% of the awards will vest over a four-year term, subject to the employee’s continued employment. The remaining 25% of the equity awards vest when the Advantage Sponsors as of the date of the 2014 Topco Acquisition realize a pre-tax internal rate of return of 20% compounded annually. Once the equity awards vest, forfeiture may still occur as a result of termination of employment of the equity award holders or if an exit event occurs which is not a vesting exit event. Notwithstanding prior vesting, certain awards are subject to a requirement that the Advantage Sponsors receive a specific return on their equity investment, prior to the awards participating in any distribution whether in cash, property or securities of Topco. Certain awards vest over the remaining initial four-year terms, subject to the employee’s continued employment. The limited partnership agreement also authorizes Topco to issue up to 35,000 Common Series C-2 Units to members of our management, which Common Series C-2 Units are subject to substantially similar vesting and forfeiture provisions as the Common Series C Units, including forfeiture upon certain terminations of employment of the applicable holders or a non-qualifying exit event. As a result of the Transactions, the Company recognized non-cash compensation expenses of $62.7 million in connection with the Common Series C Units and $13.3 million in connection with the Common Series C-2 Units for the year ended December 31, 2020. Additional expenses of $5.7 million and $0.4 million are anticipated to occur, when the time-based options further vest in 2021 and 2022, respectively. If the vesting exit event of the remaining 25% of the equity awards is deemed probable to occur, the Company would have recognized a compensation expense of $8.2 million and $0.1 million for the years ended December 31, 2020 and 2021, respectively. No expense was recorded in the years ended December 31, 2019, or 2018 since a vesting exit event was not yet deemed probable of occurring. Topco also issued time-vesting profit interests to entities affiliated with one of the Advantage Sponsors, from whom we received services. These time-vesting profit interests vested on a monthly basis beginning on October 1, 2014 through September 1, 2019. We record the compensation expense associated with the issuance of such awards for non-employees as we receive the benefit of the services being provided by the non-employees. Topco is a private company with no active market for its equity securities. In determining the fair value of Topco’s equity, we utilize three widely recognized valuation models: • Discounted Cash Flow Analysis (Income Model)—The discounted cash flow analysis is dependent on a number of significant management assumptions regarding the expected future financial results of us and Topco as well as upon estimates of an appropriate cost of capital; • Guideline Public Companies (Market Model)—Multiples of historical and projected EBITDA from guideline public companies are applied to estimate the fair value for the equity of Topco; and • Mergers and Acquisition (Market Model)—Multiples of historical enterprise value divided by last twelve months revenues, and enterprise value divided by last twelve months EBITDA for mergers and acquisitions of comparable companies. After considering the results of each of these valuation models, we then use the Backsolve Option Pricing Method, or OPM, to determine the fair value of the profit interest awards and resulting equity-based compensation expense. 52 Assumptions used in the OPM include the expected life, volatility, risk-free rate and dividend yield. We utilize the observable data for a group of peer companies that grant options with substantially similar terms to assist in developing our volatility assumption. The risk-free rate is based on U.S. Treasury yields in effect at the time of grant over the expected term. We assume a dividend yield of 0% as we have not historically paid distributions. The assumptions used in estimating the fair value of equity-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, equity-based compensation expense could be different in the future. As a result of the publicly traded price of our common stock, certain key valuation inputs to the option pricing method will be based on publicly available information. These key valuation inputs include the fair value of our common stock, and once there is a sufficient trading history, the volatility would be derived from the historical trading activity of our common stock. Refer to Note 11—Stock Based Compensation and Other Benefit Plans to our audited consolidated financial statements included elsewhere in this Annual Report for details regarding Topco’s and our equity-based compensation plans. Warrant Liability We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board ASC 480, and ASC 815. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of our control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance and remeasured to fair value at each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized in “Changes in fair value of warrant liability” in the Consolidated Statements of Operations and Comprehensive Income (Loss). The fair value of the private placement warrants on the date of issuance and on each measurement date is estimated using a Black-Scholes option pricing model which includes inputs such as our stock price, exercise price per share, and the number of private placement warrants outstanding. Assumptions used in the model are subjective and require significant judgment, and include implied volatility and the risk-free interest rate. Based on the period of time the public warrants have been trading, we believe that it is also an appropriate method to determine the fair value of the liability classified private placement warrants by approximating the value with the share price of the public warrants at the respective period end, which is inherently less subjective and judgmental given it is based on observable inputs. The Company determined the valuation as of December 31, 2021 taking into consideration that both methods did not result in a materially different valuation. As of December 31, 2021 and 2020, 7,333,333 private placement warrants remained outstanding at a fair value of $22.2 million and $21.2 million, respectively. The initial fair value of the private placement warrants on October 28, 2020 was $7.9 million with $0.9 million and $13.4 million of changes in the estimated fair value recorded for the year ended December 31, 2021 and 2020, respectively. Recently Issued Accounting Pronouncements Refer to Note 1, Organization and Significant Accounting Policies – Recent Accounting Pronouncements, to our audited consolidated financial statements included elsewhere in this Annual Report. 53