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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 8-K
 
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (Date of Earliest Event Reported) — August 31, 2020
 
MDC PARTNERS INC.  
(Exact Name of Registrant as Specified in its Charter)
 
Canada
(Jurisdiction of Incorporation)
001-13718
(Commission File Number)
98-0364441
(IRS Employer Identification No.)
 
330 Hudson Street, 10th Floor, New York, NY 10013
(Address of principal executive offices and zip code)
 
(646) 429-1800
(Registrant’s Telephone Number)
 
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
 
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Class A Subordinate Voting Shares, no par value
MDCA
NASDAQ

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company     ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                              ☐

 
 

1


   
Item 8.01 Other Events
As disclosed in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 (the "2020 Q1 10-Q"), effective January 1, 2020, MDC Partners Inc. (the “Company”) modified its internal reporting structure. The Company is filing this Current Report on Form 8-K (including Exhibit 99.1 and Exhibit 99.2 hereto, this “Form 8-K”) to recast certain segment information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission on March 5, 2020 (the “2019 10-K”), in order to reflect this change in reportable segments. In this Form 8-K, the Company is also filing a revision to the Financial Statements and Notes to the Financial Statements as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 Q1 10-Q to reflect the change in reportable segments and provide a definition of the measurement metric.

The Company previously reported its financial results in four reportable segments, plus an All Other category: Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications, Media Services, and All Other. The Company reorganized its management structure in 2020 which resulted in a change to our reportable segments.

The Company began to present the Integrated Agencies Network reportable segment, which aggregated four operating segments (Constellation, Anomaly Alliance, Doner Partner Network and Colle McVoy), in the first quarter of 2020. In connection with our discussions with the SEC, the Company changed the prior presentation for the Integrated Agencies Network. Beginning in the second quarter of 2020, the Company separated the Integrated Agencies Network into two reportable segments: Integrated Networks - Group A (Anomaly Alliance and Colle McVoy) and Integrated Networks - Group B (Constellation and Doner Partner Network). The change was made to aggregate the operating segments that have the most similar historical average long-term profitability. The three reportable segments that result from applying the aggregation criteria are as follows: “Integrated Networks - Group A”, “Integrated Networks - Group B”; and “Media & Data Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other”. The products and services included in each of these reportable segments are as follows:

•
The Integrated Networks - Group A reportable segment is comprised of the Anomaly Alliance (Anomaly, Concentric Partners, Hunter, Mono, Y Media Labs) and Colle McVoy operating segments.

•
The Integrated Networks - Group B reportable segment is comprised of the Constellation (72andSunny, CPB, Instrument and Redscout) and Doner Partner Network (6degrees, Doner, KWT, Union, Veritas and Yamamoto) operating segments.

The operating segments aggregated within the Integrated Networks - Group A and B reportable segments provide a range of services for their clients, primarily including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast) as well as public relations and communications services, experiential, social media and influencer marketing. These operating segments share similar characteristics related to (i) the nature of their services; (ii) the type of clients and the methods used to provide services; and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these operating segments compete with each other for new business and from time to time have business move between them. While the operating segments are similar in nature, the distinction between the Integrated Networks - Group A and B is the aggregation of operating segments that have the most similar historical long-term profitability.

•
The Media & Data Network reportable segment is comprised of a single operating segment that combines media buying and planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast) with technology and data capabilities.

•
All Other consists of the Company’s remaining operating segments that provide a range of services including advertising, public relations and marketing communication services, but generally do not have similar services offerings or financial characteristics as those aggregated in the reportable segments.

The Company has recast the relevant parts of the following portions of the 2019 10-K to reflect this change in reportable segments:

2019 10-K
•
Item 1: Business
•
Item 2: Properties
•
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
•
Item 8: Financial Statements and Supplementary Data


2


The Company has revised the relevant parts of the following portions of the 2020 Q1 10-Q to reflect this change in reportable segments and provide a definition of the measurement metric:

2020 Q1 10-Q
•Item 1: Financial Statements and Notes to the Financial Statements
•Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The recast items included in Exhibit 99.1 and revised items included in Exhibit 99.2 of this Form 8-K have been updated to reflect the change in the Company’s segment reporting described above, as well as to revise Recent Developments included within Note 1 in Item 8 of Exhibit 99.1 in light of COVID-19. In addition, in connection with the preparation of its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 (the “2020 Q2 10-Q”), the Company identified certain errors related to prior periods that were not material to any of the Company’s prior period financial statements; however, the cumulative effect of these errors could be considered material to the Company's financial statements subsequent to December 31, 2019. As such, the Company revised the prior period financial statements as disclosed in the 2020 Q2 10-Q. The Company has not otherwise updated for activities or events occurring after the date the Company filed the 2019 10-K or the 2020 Q1 10-Q, as applicable, and the items included in Exhibit 99.1 and Exhibit 99.2 of this Form 8-K do not modify or update any other disclosures therein in any way. Without limitation of the foregoing, this filing does not purport to update the Note About Forward-Looking Statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations or the Risk Factors sections of the 2019 10-K or the 2020 Q1 10-Q for any information, uncertainties, transactions, risks, events or trends occurring, or becoming known to management subsequent to the date of filing of the 2019 10-K or the 2020 Q1 10-Q. Therefore, this Form 8-K should be read in conjunction with the 2019 10-K and the 2020 Q1 10-Q. For more updated information, refer to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 and the Company’s subsequent current reports on Form 8-K and other filings with the SEC.


Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.
    23.1 Consent of BDO USA, LLP

    99.1 Items from MDC Partners Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019, updated to reflect previously disclosed changes to its reportable segments: Item 1, Business; Item 2, Properties; Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Item 8, Financial Statements and Supplementary Data

    99.2 Items from MDC Partners Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, updated to reflect previously disclosed changes to its reportable segments: Item 1, Financial Statements and Notes to the Financial Statements and Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations

101.INS    XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the XBRL document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


3


Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed by the undersigned hereunto duly authorized.
 
Date: August 31, 2020
MDC Partners Inc.
 
 
 
 
By:
/s/ Jonathan Mirsky
 
 
Jonathan B. Mirsky
 
 
General Counsel
 



        
Exhibit 23.1


Consent of Independent Registered Public Accounting Firm

MDC Partners Inc.
New York, New York
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-226895, 333-212261, 333-176059, 333-159831, 333-145534, 333-141359, 333-107507, and 33309510) and Form S-3 (Nos. 333-222101 and 333-222095) of MDC Partners Inc., of our report dated March 5, 2020 (except for matters discussed in Notes 1, 4, 5, 6, 8, 10, 17, 21 and 22 as to which the date is August 31, 2020), relating to the consolidated financial statements and financial statement schedules presented in Item 15, and of our report dated March 5, 2020 on the effectiveness of MDC Partners Inc.’s internal control over financial reporting, which appear in this Current Report on Form 8-K dated August 31, 2020. Our report on the effectiveness of internal control over financial reporting expresses an adverse opinion on the effectiveness of MDC Partners Inc.’s internal control over financial reporting as of December 31, 2019.

/s/ BDO USA, LLP
New York, New York

August 31, 2020




Table of Contents


Exhibit 99.1

EXPLANATORY NOTE

MDC Partners, Inc. (“MDC Partners,” “MDC, “ the “Company,” “we,” “us” or “our”) is filing this Exhibit 99.1 to its Current Report on Form 8-K to recast certain segment information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission on March 5, 2020 (the “2019 10-K”).
The Company reorganized its management structure in 2020 which resulted in a change to our reportable segments. The Company previously reported its financial results in four reportable segments, plus an All Other category: Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications, Media Services, and All Other.
The Company began to present the Integrated Agencies Network reportable segment, which aggregated four operating segments (Constellation, Anomaly Alliance, Doner Partner Network and Colle McVoy), in the first quarter of 2020. In connection with our discussions with the SEC, the Company changed the prior presentation for the Integrated Agencies Network. Beginning in the second quarter of 2020, the Company separated the Integrated Agencies Network into two reportable segments: Integrated Networks - Group A (Anomaly Alliance and Colle McVoy) and Integrated Networks - Group B (Constellation and Doner Partner Network). The change was made to aggregate the operating segments that have the most similar historical average long-term profitability. The three reportable segments that result from applying the aggregation criteria are as follows: “Integrated Networks - Group A”, “Integrated Networks - Group B”; and “Media & Data Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other”.
The Company has recast the relevant parts of the following portions of the 2019 10-K:
•
Item 1: Business
•Item 2: Properties
•
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations (up to and not including the subsection entitled “Liquidity and Capital Resources”, except for other balance sheet commitments)
•Item 8: Financial Statements and Supplementary Data
The recast items included in this Exhibit 99.1 have been updated to reflect the change in the Company’s segment reporting described above. In addition, in connection with the preparation of its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 (the “2020 Q2 10-Q”), the Company identified certain errors related to prior periods that were not material to any of the Company’s prior period financial statements; however, the cumulative effect of these errors could be considered material to the Company's financial statements subsequent to December 31, 2019. As such, the Company revised the prior period financial statements as disclosed in the 2020 Q2 10-Q. The Company has not otherwise updated for activities or events occurring after the date the Company filed the 2019 10-K, and the items included in this Exhibit 99.1 do not modify or update any other disclosures therein in any way. Without limitation of the foregoing, this filing does not purport to update the Note About Forward-Looking Statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations or the Risk Factors sections of the 2019 10-K for any information, uncertainties, transactions, risks, events or trends occurring, or becoming known to management subsequent to the date of filing of the 2019 10-K. Therefore, this Exhibit 99.1 should be read in conjunction with the 2019 10-K. For more updated information, refer to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 and the Company’s subsequent current reports on Form 8-K and other filings with the SEC.


Table of Contents



MDC PARTNERS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
Page
PART I
1
6
PART II
6
30

i

Table of Contents


MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)


PART I
Item 1. Business
MDC PARTNERS INC.
MDC was formed by Certificate of Amalgamation effective December 19, 1986, pursuant to the Business Corporations Act (Ontario). Effective December 19, 1986, MDC amalgamated with Branbury Explorations Limited, and thereby became a public company operating under the name of MDC Corporation. On January 1, 2004, MDC changed its name to its current name, MDC Partners Inc., and on June 28, 2004, MDC was continued under Section 187 of the Canada Business Corporations Act. MDC’s registered address is located at 33 Draper Street, Toronto, Ontario, M5V 2M3, and its head office address is located at 330 Hudson Street, 10th Floor, New York, New York 10013. MDC is not a “foreign private issuer” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
About Us
MDC Partners is a leading global marketing and communications network, providing marketing and business solutions that realize the potential of combining data and creativity. Through its network of agencies, MDC delivers a broad range of client services, including (1) global advertising and marketing, (2) data analytics and insights, (3) mobile and technology experiences, (4) media buying, planning and optimization, (5) direct marketing, (6) database and customer relationship management, (7) business consulting, (8) sales promotion, (9) corporate communications, (10) market research, (11) corporate identity, design and branding services, (12) social media strategy and communications, (13) product and service innovation, and (14) e-commerce management. These marketing, communications, and consulting agencies (or “Partner Firms”) provide a wide range of service offerings both domestically and globally. While in some cases the firms provide the same or similar service offerings, the core or principal service offering is the key factor that distinguishes the Partner Firms from one another.
Market Strategy
MDC’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. MDC’s differentiation lies in its best-in-class creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. To be the modern marketing company of choice, MDC leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The Company’s work is designed to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
The MDC model is driven by:
Data + Creativity.  MDC creates solutions that aim to realize the potential of data and creativity, bringing the network’s award-winning creativity to modern solutions in mobile, digital experiences, and all methods of marketing communications. This is reinforced by the venture investments the Company makes in technology solutions as well as those it makes in building its own proprietary technologies and solutions from the ground up.
Talent + Entrepreneurialism.  The entrepreneurial spirit of both MDC and its firms is optimized through (1) its model that incentivizes senior-level ambition, including the creation of multi-agency networks that enable proven leaders to steward increasingly scaled platforms and provide growth opportunities for talent at all levels, and (2) best-in-class shared resources within the corporate group that allow individual firms to focus on client business and company growth.
Collaboration. MDC values collaboration as manifested through (1) MDC’s creation of customized solutions for clients across disciplines that foster the integration of complementary disciplines, driving better results for clients, and in turn, growth for its firms, and (2) the creation of multi-agency networks that drive greater opportunity for individual firms to benefit from the scale of the holding company and as well as resources of like-minded agencies within the group, and create fewer cost centers.
Reporting Segments
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by Mark Penn, Chief Executive Officer and Chairman of the Company, who is our Chief Operating Decision Maker (“CODM”), to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mr. Penn appointed key agency executives, that report directly into him, to

1


Table of Contents


lead each Network. In connection with the reorganization, we reassessed our reportable segments to align our external reporting with how we operate the Networks under our new organizational structure. Prior periods presented have been recast to reflect the change in reportable segments.
The three reportable segments that resulted from our reassessment are as follows: “Integrated Networks - Group A”, “Integrated Networks - Group B”; and “Media & Data Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described in Note 2 to the Consolidated Financial Statements included herein.
•
The Integrated Networks - Group A reportable segment is comprised of the Anomaly Alliance (Anomaly, Concentric Partners, Hunter, Mono, Y Media Labs) and Colle McVoy operating segments.

•
The Integrated Networks - Group B reportable segment is comprised of the Constellation (72andSunny, CPB, Instrument and Redscout) and Doner Partner Network (6degrees, Doner, HL Group, KWT, Union, Veritas and Yamamoto) operating segments.

The operating segments aggregated within the Integrated Networks - Group A and B reportable segments provide a range of services for their clients, primarily including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast) as well as public relations and communications services, experiential, social media and influencer marketing. These operating segments share similar characteristics related to (i) the nature of their services; (ii) the type of clients and the methods used to provide services; and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these operating segments compete with each other for new business and from time to time have business move between them. While the operating segments are similar in nature, the distinction between the Integrated Networks - Group A and B is the aggregation of operating segments that have the most similar historical average long-term profitability.

•
The Media & Data Network reportable segment is comprised of a single operating segment that combines media buying and planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast) with technology and data capabilities.
•
All Other consists of the Company’s remaining operating segments that provide a range of services including advertising, public relations and marketing communication services, but generally do not have similar services offerings or financial characteristics as those aggregated in the reportable segments. The All Other category includes Allison & Partners, Bruce Mau, Forsman & Bodenfors, Hello, Team and Vitro.
•
Corporate consists of corporate office expenses incurred in connection with the strategic resources provided to the operating segments, as well as certain other centrally managed expenses that are not fully allocated to the operating segments. These office and general expenses include (i) salaries and related expenses for corporate office employees, including employees dedicated to supporting the operating segments, (ii) occupancy expenses relating to properties occupied by all corporate office employees, (iii) other office and general expenses including professional fees for the financial statement audits and other public company costs, and (iv) certain other professional fees managed by the corporate office. Additional expenses managed by the corporate office that are directly related to the operating segments are allocated to the appropriate reportable segment and the All Other category.
For further information relating to the Company’s segments, including financial information, see Note 21 of the Notes to the Consolidated Financial Statements and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Ownership Information
MDC maintains a majority or 100% ownership position in substantially all of its Partner Firms with management of the Partner Firms owning the remaining equity.  MDC generally has rights to increase ownership of non-wholly owned subsidiaries to 100% over a defined period of time. MDC’s effective economic interest in each Partner Firm may vary from its voting ownership interest due to certain factors, such as the existence of contingent deferred acquisition payments and/or cash distribution hurdles related to noncontrolling interest holders. 
Below are the companies reflecting our reporting structure.

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MDC PARTNERS INC. AND SUBSIDIARIES
SCHEDULE OF REPORTING COMPANIES
 
 
Year of Initial
 
 
Company
 
Investment
 
Locations
Integrated Networks - Group A:

 
 
 
 
Anomaly Alliance:
 
 
 
 
Anomaly
 
2011
 
New York, Los Angeles, Netherlands, Canada, UK, China, Germany
Concentric Partners
 
2011
 
New York
Hunter
 
2014
 
New York, UK, Los Angeles
Mono Advertising
 
2004
 
Minneapolis
Y Media Labs
 
2015
 
Redwood City, New York, India, Indianapolis, Atlanta
 
 
 
 
 
Colle Network:
 
 
 
 
Colle McVoy
 
1999
 
Minneapolis
 
 
 
 
 
Integrated Networks - Group B:
 
 
 
 
Constellation:
 
 
 
 
72andSunny
 
2010
 
Los Angeles, New York, Netherlands, Australia, Singapore
Crispin Porter + Bogusky
 
2001
 
Boulder, UK, Brazil
Instrument
 
2018
 
Portland, New York, Los Angeles
Redscout
 
2007
 
New York, UK
 
 
 
 
 
Doner Network:
 
 
 
 
6degrees Communications
 
1993
 
Canada
Doner
 
2012
 
Detroit, Los Angeles, Norwalk, Pittsburgh
HL Group Partners
 
2007
 
New York, Los Angeles
KWT Global
 
2010
 
New York, UK
Union
 
2013
 
Canada
Veritas
 
1993
 
Canada
Yamamoto
 
2000
 
Minneapolis, Chicago
 
 
 
 
 
Media & Data:
 
 
 
 
Gale Partners
 
2014
 
Canada, New York, India, Singapore
Kenna
 
2010
 
Canada
MDC Media Partners
 
2010
 
New York, Los Angeles, Detroit, Austin
Northstar Research Partners
 
1998
 
Canada, New York, UK
 
 
 
 
 
All Other:
 
 
 
 
Allison & Partners
 
2010
 
San Francisco, Los Angeles, New York and other US Locations, China, Singapore, Thailand, UK, Japan, Germany
Bruce Mau Design
 
2004
 
Canada, New York, UK
Forsman & Bodenfors
 
2016
 
Sweden, New York, Canada, China, Singapore
Hello Design
 
2004
 
Los Angeles
TEAM
 
2010
 
Ft. Lauderdale
Vitro
 
2004
 
San Diego, Austin

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Competition
MDC operates in a highly competitive and fragmented industry. MDC Partner Firms compete for business and talent with the operating subsidiaries of large global holding companies such as Omnicom Group Inc., Interpublic Group of Companies, Inc., WPP plc, Publicis Groupe SA, Dentsu Inc. and Havas SA, as well as with numerous independent agencies that operate in multiple markets. Our Partner Firms also face competition from consultancies, tech platforms, media companies and other services firms that offer related services. MDC’s Partner Firms must compete with all of these other companies to maintain and grow existing client relationships and to obtain new clients and assignments.
MDC’s Partner Firms compete at this level by providing clients with innovative marketing solutions that leverage the full power of data, technology, and superior creativity. MDC also benefits from cooperation among its entrepreneurial Partner Firms, which enables MDC to service the full range of global clients’ varied marketing needs through custom integrated solutions. Additionally, MDC’s maintenance of separate, independent operating companies enables MDC to effectively manage potential conflicts of interest by representing competing clients across its network.
Industry Trends
There are several recent economic and industry trends that affect or may be expected to affect the Company’s results of operations. Historically, advertising has been the primary service provided by the marketing communications industry. However, as clients aim to establish one-to-one relationships with customers, and more accurately measure the effectiveness of their marketing expenditures, specialized and digital communications services as well as data and analytics services are consuming a growing portion of marketing dollars. The Company believes these changes in the way consumers interact with media are increasing the demand for a broader range of non-advertising marketing communications services (i.e., user experience design, product innovation, direct marketing, sales promotion, interactive, mobile, strategic communications and public relations), which we expect could have a positive impact on our results of operations. In addition, the rise of technology and data solutions have rendered scale less crucial as it once was in areas such as media buying, creating significant opportunities for agile and modern players. Global marketers now demand breakthrough and integrated creative ideas, and no longer require traditional brick-and-mortar communications partners in every market to optimize the effectiveness of their marketing efforts. Combined with the fragmentation of the media landscape, these factors provide new opportunities for small to mid-sized communications companies like those in the MDC network. In addition, marketers now require even greater speed-to-market to drive financial returns on their marketing and media investment, causing them to turn to more nimble, entrepreneurial and collaborative communications firms like MDC’s Partner Firms.
Clients
MDC serves a large base of clients across the full spectrum of industry verticals. In many cases, we serve the same clients in various geographic locations, across multiple disciplines, and through multiple Partner Firms. Representation of a client rarely means that MDC handles marketing communications for all brands or product lines of the client in every geographical location. During 2019, 2018 and 2017, the Company did not have a client that accounted for 5% or more of revenues. In addition, MDC’s ten largest clients (measured by revenue generated) accounted for approximately 23% of revenue for the three-year period ended December 31, 2019.
MDC’s agencies have written contracts with many of their clients. As is customary in the industry, these contracts generally provide for termination by either party on relatively short notice. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview” for a further discussion of MDC’s arrangements with its clients.


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Employees
As of December 31, 2019, we employed 5,647 people worldwide. The following table provides a breakdown of full time employees across MDC’s four reportable segments, the All Other category, and Corporate:
Segment
 
Total
Integrated Networks - Group A
 
1,576

Integrated Networks - Group B
 
1,921

Media & Data Network
 
699

All Other
 
1,385

Corporate
 
66

Total
 
5,647

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the effect of cost of services sold on MDC’s historical results of operations. Because of the personal service character of the marketing communications businesses, the quality of personnel is of crucial importance to MDC’s continuing success. MDC considers its relations with its employees to be satisfactory.
Seasonality
Historically, with some exceptions, we generate the highest quarterly revenues during the fourth quarter in each year. The fourth quarter has historically been the period in the year in which the highest volumes of media placements and retail-related consumer marketing occur. See Note 22 of the Notes to the Consolidated Financial Statements included herein for information relating to the Company’s quarterly results.
Available Information
Information regarding the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, will be made available, free of charge, at the Company’s website at https://www.mdc-partners.com, as soon as reasonably practicable after the Company electronically files such reports with or furnishes them to the Securities and Exchange Commission (the “SEC”). The information found on, or otherwise accessible through, the Company’s website is for information purposes only and is included as an inactive textual reference. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report on Form 10-K. The Company’s filings are also available to the public from the SEC’s website at https://www.sec.gov.



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Item 2. Properties
See Note 10 of the Consolidated Financial Statements included in this Annual Report for a discussion of the Company’s lease commitments and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the impact of occupancy costs on the Company’s operating expenses.
The Company maintains office space in many cities in North America, Europe, Asia, South America, and Australia. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. This office space is in suitable and well-maintained condition for MDC’s current operations. All of the Company’s materially important office space is leased from third parties with varying expiration dates. Certain of these leases are subject to rent reviews or contain various escalation clauses and certain of our leases require our payment of various operating expenses, which may also be subject to escalation. In addition, leases related to the Company’s non-U.S. businesses are denominated in currencies other than U.S. dollars and are therefore subject to changes in foreign exchange rates.
The table below provides a brief description of all locations in which office space is maintained and the related reportable segment.
Reportable Segment
 
Office Locations
Integrated Networks - Group A
 
Los Angeles, New York, Netherlands, Canada, UK, China, Germany, Minneapolis
Integrated Networks - Group B
 
Los Angeles, New York, Netherlands, Australia, Singapore, UK, Boulder, Brazil, China, Portland, Canada, Detroit, Cleveland
Media & Data Services
 
New York, Canada, India, Singapore, Los Angeles, Detroit, Austin, UK


All Other
 
Atlanta. Austin, Boston, Dallas, Ft. Lauderdale, Los Angeles, New York, Portland, San Diego, San Francisco, Scottsdale, Seattle, Washington, China, Singapore, Thailand, UK, Japan, Germany, Canada, Sweden


Corporate
 
New York, Washington D.C., Canada, and UK


Part II
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, references to the “Company” or “MDC” mean MDC Partners Inc. and its subsidiaries, and references to a “fiscal year” means the Company’s year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 2019 means the period beginning January 1, 2019, and ending December 31, 2019).
The Company reports its financial results in accordance with GAAP. In addition, the Company has included certain non-GAAP financial measures and ratios, which management uses to operate the business which it believes provide useful supplemental information to both management and readers of this report in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by GAAP and should not be construed as an alternative to other titled measures determined in accordance with GAAP.
Two such non-GAAP measures are “organic revenue growth” or “organic revenue decline” that refer to the positive or negative results, respectively, of subtracting both the foreign exchange and acquisition (disposition) components from total revenue growth. The acquisition (disposition) component is calculated by aggregating the prior period revenue for any acquired businesses, less the prior period revenue of any businesses that were disposed of in the current period. The organic revenue growth (decline) component reflects the constant currency impact (a) of the change in revenue of the Partner Firms which the Company has held throughout each of the comparable periods presented and (b) “non-GAAP acquisitions (dispositions), net.” Non-GAAP acquisitions (dispositions), net consists of (i) for acquisitions during the current year, the revenue effect from such acquisition as if the acquisition had been owned during the equivalent period in the prior year and (ii) for acquisitions during the previous year, the revenue effect from such acquisitions as if they had been owned during that entire year or same period as the current reportable period, taking into account their respective pre-acquisition revenues for the applicable periods and (iii) for dispositions, the revenue effect from such disposition as if they had been disposed of during the equivalent period in the prior year. The Company believes that isolating

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the impact of acquisition activity and foreign currency impacts is an important and informative component to understand the overall change in the Company’s consolidated revenue. The change in the consolidated revenue that remains after these adjustments illustrates the underlying financial performance of the Company’s businesses. Specifically, it represents the impact of the Company’s management oversight, investments and resources dedicated to supporting the businesses’ growth strategy and operations. In addition, it reflects the network benefit of inclusion in the broader portfolio of firms that includes, but is not limited to, cross-selling and sharing of best practices. This approach isolates changes in performance of the business that take place under the Company’s stewardship, whether favorable or unfavorable, and thereby reflects the potential benefits and risks associated with owning and managing a talent-driven services business.
Accordingly, during the first twelve months of ownership by the Company, the organic growth measure may credit the Company with growth from an acquired business that is dependent on work performed prior to the acquisition date, and may include the impact of prior work in progress, existing contracts and backlog of the acquired businesses. It is the presumption of the Company that positive developments that may have taken place at an acquired business during the period preceding the acquisition will continue to result in value creation in the post-acquisition period.
While the Company believes that the methodology used in the calculation of organic revenue change is consistent with our closest U.S. competitors, the calculations may not be comparable to similarly titled measures presented by other publicly traded companies in other industries. Additional information regarding the Company’s acquisition activity as it relates to potential revenue growth is provided in this Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Certain Factors Affecting our Business.”
Direct costs represent billable or non-billable internal and third-party expenses that are directly tied to providing services to our clients where we are principal in the arrangement. Direct costs exclude staff costs, which are presented separately.
All amounts are in dollars unless otherwise stated. Amounts reported in millions herein are computed based on the amounts in thousands. As a result, the sum of the components, and related calculations, reported in millions may not equal the total amounts due to rounding.
The percentage changes included in the tables herein Item 7 that are not considered meaningful are presented as “NM”.
Recent Developments
On February 14, 2020, the Company sold substantially all the assets and certain liabilities of Sloane and Company LLC (“Sloane”), an indirectly wholly owned subsidiary of the Company, to an affiliate of The Stagwell Group LLC (“Stagwell”), for an aggregate purchase price of approximately $26 million, consisting of cash paid at closing plus contingent deferred payments expected to be paid over the next two years. The sale resulted in a gain estimated at approximately $16 million. An affiliate of Stagwell has a minority ownership interest in the Company.  Mark Penn is the CEO and Chairman of the Board of Directors of the Company and is also manager of Stagwell.
On February 27, 2020, in connection with the centralization of our New York real estate portfolio, the Company entered into an agreement to lease space at One World Trade Center. The lease term is for approximately eleven years commencing on April 1, 2020, with rental payments totaling approximately $115 million. As part of the centralization initiative, the Company will sublease existing properties currently under lease, resulting in the recovery of a significant portion of our rent obligation under such arrangements.
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mark Penn, Chief Executive Officer and Chairman of the Company, appointed key agency executives, that report directly into him, to lead each Network. In connection with the reorganization, we reassessed our reportable segments to align our external reporting with how we operate the Networks under our new organizational structure. Prior periods presented have been recast to reflect the change in reportable segments.



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Executive Summary
MDC conducts its business through its network of Partner Firms, which provide marketing and business solutions that realize the potential of combining data and creativity. MDC’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. MDC’s differentiation lies in its best-in-class creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. MDC leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The Company’s work is designed to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
MDC manages its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are revenues, operating expenses and capital expenditures. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) growth by client industry vertical, (iii) growth from existing clients and the addition of new clients, (iv) growth by primary discipline, (v) growth from currency changes, and (vi) growth from acquisitions. In addition to monitoring the foregoing financial indicators, the Company assesses and monitors several non-financial performance indicators relating to the business performance of our Partner Firms. These indicators may include a Partner Firm’s recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the Partner Firm’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.
The Company previously reported its financial results in four reportable segments, plus an All Other category: Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications, Media Services, and All Other.
Starting with the quarter ended March 31, 2020 the Company reorganized its management structure which resulted in a change to our reportable segments. The Company began to present the Integrated Agencies Network reportable segment, which aggregated four operating segments (Constellation, Anomaly Alliance, Doner Partner Network and Colle McVoy), in the first quarter of 2020. In connection with our discussions with the SEC, the Company changed the prior presentation for the Integrated Agencies Network. Beginning in the second quarter of 2020, the Company separated the Integrated Agencies Network into two reportable segments: Integrated Networks - Group A (Anomaly Alliance and Colle McVoy) and Integrated Networks - Group B (Constellation and Doner Partner Network). The change was made to aggregate the operating segments that have the most similar historical average long-term profitability.The three reportable segments that result from applying the aggregation criteria are as follows: “Integrated Networks - Group A”, “Integrated Networks - Group B”; and “Media & Data Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described in Note 2 to the Consolidated Financial Statements included herein. Prior periods presented have been recast to reflect the change in reportable segments.
See Note 21 of the Notes to the Consolidated Financial Statements included herein for a description of each of our reportable segments and the All Other category.
In addition, MDC reports its corporate office expenses incurred in connection with the strategic resources provided to the Partner Firms, as well as certain other centrally managed expenses that are not fully allocated to the operating segments as Corporate, including interest expense and public company overhead costs. Corporate provides client and business development support to the Partner Firms as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions.
Significant Factors Affecting our Business and Results of Operations.  The most significant factors include national, regional and local economic conditions, our clients’ profitability, mergers and acquisitions of our clients, changes in top management of our clients and our ability to retain and attract key employees. New business wins and client losses occur due to a variety of factors. The two most significant factors are (i) our clients’ desire to change marketing communication firms, and (ii) the creative product that our Partner Firms offer. A client may choose to change marketing communication firms for a number of reasons, such as a change in top management and the new management wants to retain an agency that it may have previously worked with. In addition, if the client is merged or acquired by another company, the marketing communication firm is often changed. Another factor in a client changing firms is the agency’s campaign or work failing to meet the client’s expected financial or other measures.
Acquisitions and Dispositions. The Company’s strategy includes acquiring ownership stakes in well-managed businesses with world class expertise and strong reputations in the industry. The Company provides post-acquisition support to Partner Firms in order to help accelerate growth, including in areas such as business and client development (including cross-selling), corporate communications, corporate development, talent recruitment and training, procurement, legal services, human resources, financial management and reporting, and real estate utilization, among other areas. As most of the Company’s acquisitions remain as stand-alone entities post acquisition, integration is typically implemented promptly, and new Partner Firms can begin to tap into the full

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range of MDC’s resources immediately. Often the acquired businesses may begin to tap into certain MDC resources in the pre-acquisition period, such as talent recruitment or real estate.
Seasonality.  Historically, the Company typically generates the highest quarterly revenues during the fourth quarter in each year. The fourth quarter has historically been the period in the year in which the highest volumes of media placements and retail related consumer marketing occur. See Note 22 of the Notes to the Consolidated Financial Statements included herein for information relating to the Company’s quarterly results.
Results of Operations:
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Revenue:
 
(Dollars in Thousands)
Integrated Networks - Group A
 
$
392,101

 
$
393,890

 
$
337,104

Integrated Networks - Group B
 
531,717

 
551,317

 
591,630

Media & Data Network
 
161,451

 
183,287

 
200,757

All Other
 
330,534

 
346,594

 
384,288

Total
 
$
1,415,803

 
$
1,475,088

 
$
1,513,779

 
 
 
 
 
 

Operating income (loss):
 
 
 
 
 
 
Integrated Networks - Group A
 
$
35,230

 
$
59,130

 
$
50,764

Integrated Networks - Group B
 
61,417

 
34,659

 
66,155

Media & Data Network
 
2,376

 
(51,441
)
 
19,278

All Other
 
26,205

 
14,243

 
35,562

Corporate
 
(45,768
)
 
(55,157
)
 
(40,856
)
Total
 
$
79,460

 
$
1,434

 
$
130,903

 
 
 
 
 
 
 
Other Income (expense):

 
 
 
 
 
Interest expense and finance charges, net

$
(64,942
)

$
(67,075
)

$
(64,364
)
Foreign exchange gain (loss)

8,750


(23,258
)

18,137

Other, net

(2,401
)

230


1,346

Income (loss) before income taxes and equity in earnings of non-consolidated affiliates

20,867


(88,669
)

86,022

Income tax expense (benefit)

10,316


29,615


(168,358
)
Income (loss) before equity in earnings of non-consolidated affiliates

10,551


(118,284
)

254,380

Equity in earnings of non-consolidated affiliates

352


62


2,081

Net income (loss)

10,903


(118,222
)

256,461

Net income attributable to the noncontrolling interest

(16,156
)

(11,785
)

(15,375
)
Net income (loss) attributable to MDC Partners Inc.

$
(5,253
)

$
(130,007
)

$
241,086

 
 
 
 
 
 
 
 
 
 
 
 
 
 



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Years Ended December 31,
 
 
2019
 
2018
 
2017
Depreciation and amortization:
 
(Dollars in Thousands)
Integrated Networks - Group A
 
$
8,559

 
$
9,602

 
$
8,599

Integrated Networks - Group B
 
15,904

 
19,032

 
14,401

Media & Data Network
 
4,303

 
3,820

 
4,605

All Other
 
8,695

 
12,980

 
14,771

Corporate
 
868

 
762

 
1,098

Total
 
$
38,329

 
$
46,196

 
$
43,474

 
 
 
 
 
 
 
Stock-based compensation:
 
 
 
 
 
 
Integrated Networks - Group A
 
$
24,420

 
$
5,792

 
$
9,257

Integrated Networks - Group B
 
4,303

 
6,890

 
9,058

Media & Data Network
 
63

 
320

 
643

All Other
 
374

 
755

 
3,258

Corporate
 
1,880

 
4,659

 
2,134

Total
 
$
31,040

 
$
18,416

 
$
24,350

 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
Integrated Networks - Group A
 
$
5,934

 
$
8,228

 
$
10,242

Integrated Networks - Group B
 
9,270

 
6,352

 
15,739

Media & Data Network
 
627

 
1,632

 
4,026

All Other
 
2,729

 
3,985

 
2,928

Corporate
 
36

 
67

 
23

Total
 
$
18,596

 
$
20,264

 
$
32,958

YEAR ENDED DECEMBER 31, 2019 COMPARED TO YEAR ENDED DECEMBER 31, 2018
Consolidated Results of Operations
Revenues
Revenue was $1.42 billion for the twelve months ended December 31, 2019 compared to revenue of $1.48 billion for the twelve months ended December 31, 2018 representing a decrease of $59.3 million, or 4.0%.
The components of the fluctuations in revenues for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018 were as follows:
 
Total
 
United States
 
Canada
 
Other
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
 
(Dollars in Thousands)
December 31, 2018
$
1,475,088

 
 
 
$
1,152,055

 
 
 
$
124,023

 
 
 
$
199,010

 
 
Components of revenue change:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange impact
(12,697
)
 
(0.9
)%
 
—

 
—
 %
 
(2,390
)
 
(1.9
)%
 
(10,307
)
 
(5.2
)%
Non-GAAP acquisitions (dispositions), net
(1,563
)
 
(0.1
)%
 
11,339

 
1.0
 %
 
(15,484
)
 
(12.5
)%
 
2,582

 
1.3
 %
Non-GAAP Organic revenue growth (decline)
(45,025
)
 
(3.1
)%
 
(47,347
)
 
(4.1
)%
 
(1,083
)
 
(0.9
)%
 
3,405

 
1.7
 %
Total Change
(59,285
)
 
(4.0
)%
 
(36,008
)
 
(3.1
)%
 
(18,957
)
 
(15.3
)%
 
(4,320
)
 
(2.2
)%
December 31, 2019
$
1,415,803

 
 
 
$
1,116,047

 
 
 
$
105,066

 
 
 
$
194,690

 
 


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The negative foreign exchange impact of $12.7 million, or 0.9%, was attributable to the fluctuation of the U.S. dollar against the Canadian dollar, Swedish Króna, Euro and British Pound.
The Company utilizes non-GAAP metrics called organic revenue growth (decline) and non-GAAP acquisitions (dispositions), net, as defined above. For the twelve months ended December 31, 2019, organic revenue decreased by $45.0 million or 3.1%, of which $53.4 million, or 3.6% pertained to Partner Firms the Company has owned throughout each of the comparable periods presented, offset by growth of $8.3 million, or 0.6%, generated from acquired Partner Firms. The decline in revenue from existing Partner Firms was attributable to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients. The change in revenue was primarily driven by a decline in categories including healthcare, food and beverage and automotive, partially offset by growth in transportation, communications, and travel/lodging and technology.
The table below provides a reconciliation between the revenue from acquired/disposed businesses in the statement of operations to non-GAAP acquisitions (dispositions), net for the twelve months ended December 31, 2019:
Acquisition Revenue Reconciliation
 
Integrated Networks - Group B
 
All Other
 
Total
 
 
(Dollars in Thousands)
GAAP revenue from 2018 and 2019 acquisitions
 
$
17,882

 
$
4,163

 
$
22,045

Foreign exchange impact
 
—

 
222

 
222

Contribution to non-GAAP organic revenue growth (decline)
 
(6,547
)
 
(1,780
)
—

(8,327
)
Prior year revenue from dispositions
 
—

 
(15,503
)
 
(15,503
)
Non-GAAP acquisitions (dispositions), net
 
$
11,335

 
$
(12,898
)
 
$
(1,563
)
The geographic mix in revenues for the twelve months ended December 31, 2019 and 2018 was as follows:
 
2019
 
2018
United States
78.8
%
 
78.1
%
Canada
7.4
%
 
8.4
%
Other
13.8
%
 
13.5
%

Operating Income
Operating income for the twelve months ended December 31, 2019 was $79.5 million compared to $1.4 million for the twelve months ended December 31, 2018, representing a change of $78.0 million. The improvement was driven by a lower impairment charge in 2019 of $8.6 million associated with the write-down of the carrying value of goodwill, right-of-use lease assets and related leasehold improvements compared to $87.2 million in 2018 primarily in connection with a write-down of goodwill. The decline in revenues was mostly offset by a reduction in expenses.
Interest Expense and Finance Charges, Net
Interest expense and finance charges, net, for the twelve months ended December 31, 2019 was $64.9 million compared to $67.1 million for the twelve months ended December 31, 2018, representing a decrease of $2.2 million, primarily driven by a decline in the average amounts outstanding under the Company’s revolving credit facility in 2019.
Foreign Exchange Transaction Gain (Loss)
The foreign exchange gain for the twelve months ended December 31, 2019 was $8.8 million compared to a loss of $23.3 million for the twelve months ended December 31, 2018. The change in foreign exchange was primarily attributable to the strengthening of the Canadian dollar against the U.S. dollar, in connection with a U.S. dollar denominated indebtedness that is an obligation of our Canadian parent company.
Other, Net
Other, net, for the twelve months ended December 31, 2019 was a loss of $2.4 million compared to income of $0.2 million for the twelve months ended December 31, 2018. In 2019, we recognized a loss of $4.3 million primarily on the sale of Kingsdale Partners LP and Kingsdale Shareholder Services US LLC (collectively, “Kingsdale”), partially offset by a gain of $2.3 million primarily related to the sale of certain investments.

11


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Income Tax Expense (Benefit)
Income tax expense for the twelve months ended December 31, 2019 was $10.3 million (on income of $20.9 million resulting in an effective tax rate of 49.4%), driven by the taxation of foreign operations and non-deductible stock compensation for which a tax benefit was not recognized. Income tax expense for the twelve months ended December 31, 2018 was $29.6 million (on a loss of $88.7 million resulting in an effective tax rate of negative 33.4%), driven by impairments and non-deductible stock compensation for which a tax benefit was not recognized.
Equity in Earnings (Losses) of Non-Consolidated Affiliates
Equity in earnings (losses) of non-consolidated affiliates represents the income or losses attributable to equity method investments. The Company recorded $0.4 million of income for the twelve months ended December 31, 2019 compared to $0.1 million of income for the twelve months ended December 31, 2018.
Noncontrolling Interests
The effect of noncontrolling interests for the twelve months ended December 31, 2019 was $16.2 million compared to $11.8 million for the twelve months ended December 31, 2018, attributable to an increase in operating results at Partner Firms with a noncontrolling interest.
Net Loss Attributable to MDC Partners Inc. Common Shareholders
As a result of the foregoing and the impact of accretion on and net income allocated to convertible preference shares, the net loss attributable to MDC Partners Inc. common shareholders for the twelve months ended December 31, 2019 was $17.6 million, or $0.25 per diluted loss per share, compared to a net loss attributable to MDC Partners Inc. common shareholders of $138.4 million, or $2.42 per diluted loss per share, for the twelve months ended December 31, 2018.
Integrated Networks - Group A
The change in operating results in the Integrated Networks - Group A reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Integrated Networks - Group A
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
392,101

 
 
 
$
393,890

 
 
 
$
(1,789
)
 
(0.5
)%
Operating expenses
 
 
 
 
 
 
 
 
 

 

Cost of services sold
 
283,421

 
72.3
%
 
263,005

 
66.8
%
 
20,416

 
7.8
 %
Office and general expenses
 
60,012

 
15.3
%
 
62,153

 
15.8
%
 
(2,141
)
 
(3.4
)%
Depreciation and amortization
 
8,559


2.2
%

9,602

 
2.4
%
 
(1,043
)
 
(10.9
)%
Goodwill and other asset impairment
 
4,879


1.2
%

—

 
—
%
 
4,879

 
—
 %
 
 
356,871

 
91.0
%
 
334,760

 
85.0
%
 
22,111

 
6.6
 %
Operating income
 
$
35,230

 
9.0
%
 
$
59,130

 
15.0
%
 
$
(23,900
)
 
(40.4
)%
Revenue decline was primarily attributed to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients of $0.2 million, or 0.0%, and unfavorable impact of foreign exchange of $2.0 million, or 0.5%.
 
The change in operating profit was attributable to a decline in revenue, and higher operating expenses, as outlined below.

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The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group A reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Integrated Networks - Group A
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
51,795

 
13.2
%
 
$
50,830


12.9
%
 
$
965

 
1.9
 %
Staff costs
 
221,456

 
56.5
%
 
220,197


55.9
%
 
1,259

 
0.6
 %
Administrative
 
44,029

 
11.2
%
 
47,254


12.0
%
 
(3,225
)
 
(6.8
)%
Deferred acquisition consideration
 
1,733

 
0.4
%
 
1,085


0.3
%
 
648

 
59.7
 %
Stock-based compensation
 
24,420

 
6.2
%
 
5,792


1.5
%
 
18,628

 
NM

Depreciation and amortization
 
8,559

 
2.2
%
 
9,602


2.4
%
 
(1,043
)
 
(10.9
)%
Goodwill and other asset impairment
 
4,879

 
1.2
%
 
—


—
%
 
4,879

 
—
 %
Total operating expenses
 
$
356,871

 
91.0
%
 
$
334,760


85.0
%
 
$
22,111

 
6.6
 %
 
The decrease in administrative costs was driven by lower spending across various categories in connection with savings initiatives.
The increase in stock-based compensation expense was driven by favorable operating results in connection with awards tied to performance.
For the twelve months ended December 31, 2019, an impairment charge of $4.9 million was primarily attributed to the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit in Anomaly Alliance.
For more information see Note 8 of the Notes to the Consolidated Financial Statements included herein.

Integrated Networks - Group B
The change in operating results in the Integrated Networks - Group B reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Integrated Networks - Group B
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
531,717

 
 
 
$
551,317


 
 
$
(19,600
)
 
(3.6
)%
Operating expenses
 
 
 
 
 
 

 
 
 
 
 
Cost of services sold
 
328,165

 
61.7
%
 
355,346


64.5
%
 
(27,181
)
 
(7.6
)%
Office and general expenses
 
124,298

 
23.4
%
 
124,452


22.6
%
 
(154
)
 
(0.1
)%
Depreciation and amortization
 
15,904

 
3.0
%
 
19,032


3.5
%
 
(3,128
)
 
(16.4
)%
Goodwill and other asset impairment
 
1,933

 
0.4
%
 
17,828


3.2
%
 
(15,895
)
 
(89.2
)%
 
 
470,300

 
88.4
%
 
516,658


93.7
%
 
(46,358
)
 
(9.0
)%
Operating income
 
$
61,417

 
11.6
%
 
$
34,659


6.3
%
 
$
26,758

 
77.2
 %
Revenue decline was primarily attributed to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients of $26.2 million, or 4.8% and unfavorable impact of foreign exchange of $4.7 million, or 0.9%, offset by a contribution of $11.3 million, or 2.1%, from an acquired Partner Firm.
 
The change in operating profit was attributable to a decline in revenue, more than offset by lower operating expenses, as outlined below.

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The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group B reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Integrated Networks - Group B
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
73,775

 
13.9
%
 
$
56,755


10.3
 %
 
$
17,020

 
30.0
 %
Staff costs
 
306,549

 
57.7
%
 
345,853


62.7
 %
 
(39,304
)
 
(11.4
)%
Administrative
 
66,574

 
12.5
%
 
74,618


13.5
 %
 
(8,044
)
 
(10.8
)%
Deferred acquisition consideration
 
1,262

 
0.2
%
 
(4,318
)

(0.8
)%
 
5,580

 
NM

Stock-based compensation
 
4,303

 
0.8
%
 
6,890


1.2
 %
 
(2,587
)
 
(37.5
)%
Depreciation and amortization
 
15,904

 
3.0
%
 
19,032


3.5
 %
 
(3,128
)
 
(16.4
)%
Goodwill and other asset impairment
 
1,933

 
0.4
%
 
17,828


3.2
 %
 
(15,895
)
 
(89.2
)%
Total operating expenses
 
$
470,300

 
88.4
%
 
$
516,658


93.7
 %
 
$
(46,358
)
 
(9.0
)%
Direct costs were higher, inclusive of higher billable costs for client arrangements accounted for as principal.
The decrease in staff costs was attributable to staffing reductions at certain Partner Firms in connection with the decline in revenue and cost savings initiatives.
The decrease in administrative costs was driven by lower spending across various categories in connection with savings initiatives.
Deferred acquisition consideration change for the twelve months ended December 31, 2019 was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations.
The decrease in stock-based compensation expense was driven by operating results in connection with awards tied to performance.
For the twelve months ended December 31, 2019, an impairment charge of $1.9 million was attributed to an impairment in connection with the sublet of a leased property, to reduce the carrying value of a right-of-use lease asset and related leasehold improvements.
For the twelve months ended December 31, 2018, an impairment charge of $17.8 million primarily attributed to the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit in Doner Partner Network.
For more information see Note 8 of the Notes to the Consolidated Financial Statements included herein.
Media & Data Network
The change in operating results in the Media & Data Network reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Media & Data Network
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
161,451

 
 
 
$
183,287


 
 
$
(21,836
)
 
(11.9
)%
Operating expenses
 
 
 
 
 
 

 
 

 


Cost of services sold
 
118,189

 
73.2
%
 
129,296


70.5
 %
 
(11,107
)
 
(8.6
)%
Office and general expenses
 
35,654

 
22.1
%
 
42,424


23.1
 %
 
(6,770
)
 
(16.0
)%
Depreciation and amortization
 
4,303

 
2.7
%
 
3,820


2.1
 %
 
483

 
12.6
 %
   Goodwill and other asset impairment
 
929

 
0.6
%
 
59,188

 
32.3
 %
 
(58,259
)
 
(98.4
)%
 
 
159,075

 
98.5
%
 
234,728


128.1
 %
 
(75,653
)
 
(32.2
)%
Operating income (loss)
 
$
2,376

 
1.5
%
 
$
(51,441
)

(28.1
)%
 
$
53,817

 
NM

The decrease in revenue was primarily attributable to client losses and a reduction in spending by certain clients.

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The change in operating profit was attributable to a decline in revenue, more than offset by lower operating expenses.
The change in the categories of expenses as a percentage of revenue in the Media & Data Network reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Media & Data Network
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
43,232

 
26.8
%
 
$
43,363

 
23.7
%
 
$
(131
)
 
(0.3
)%
Staff costs
 
85,627

 
53.0
%
 
101,267

 
55.3
%
 
(15,640
)
 
(15.4
)%
Administrative
 
24,846

 
15.4
%
 
26,452

 
14.4
%
 
(1,606
)
 
(6.1
)%
Deferred acquisition consideration
 
75

 
—
%
 
318

 
0.2
%
 
(243
)
 
(76.4
)%
Stock-based compensation
 
63

 
—
%
 
320

 
0.2
%
 
(257
)
 
(80.3
)%
Depreciation and amortization
 
4,303

 
2.7
%
 
3,820

 
2.1
%
 
483

 
12.6
 %
Goodwill and other asset impairment
 
929

 
0.6
%
 
59,188

 
32.3
%
 
(58,259
)
 
(98.4
)%
Total operating expenses
 
$
159,075

 
98.5
%
 
$
234,728

 
128.1
%
 
$
(75,653
)
 
(32.2
)%
The decrease in staff costs was attributable to staffing reductions in connection with client losses.
For the twelve months ended December 31, 2019, an impairment charge of $0.9 million was recognized, in connection with the sublet of a leased property, to reduce the carrying value of a right-of-use lease asset and related leasehold improvements.
For the twelve months ended December 31, 2018, an impairment charge of $59.2 million was recognized primarily attributed to the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit.
All Other
The change in operating results in the All Other category for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
All Other
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
330,534

 
 
 
$
346,594

 
 
 
$
(16,060
)
 
(4.6
)%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
231,301

 
70.0
%
 
243,568

 
70.3
%
 
(12,267
)
 
(5.0
)%
Office and general expenses
 
64,322

 
19.5
%
 
67,932

 
19.6
%
 
(3,610
)
 
(5.3
)%
Depreciation and amortization
 
8,695

 
2.6
%
 
12,980

 
3.7
%
 
(4,285
)
 
(33.0
)%
   Goodwill impairment
 
11

 
—
%
 
7,871

 
2.3
%
 
(7,860
)
 
(99.9
)%
 
 
304,329

 
92.1
%
 
332,351

 
95.9
%
 
(28,022
)
 
(8.4
)%
Operating income
 
$
26,205

 
7.9
%
 
$
14,243

 
4.1
%
 
$
11,962

 
84.0
 %
The change in revenue included contributions of $3.3 million, or 1.0%, and revenue from existing Partner Firms of $1.8 million, or 0.5%, more than offset by a negative revenue impact of $16.2 million, or 4.7%, from the disposition of a Partner Firm and unfavorable impact of foreign exchange of $4.9 million, or 1.4%. In addition, revenue from existing Partner Firms increased $1.8 million, or 0.5%, at certain Partner Firms.
The change in the categories of expenses as a percentage of revenue in the All Other category for the twelve months ended December 31, 2019 and 2018 was as follows:

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Table of Contents


 
 
2019
 
2018
 
Change
All Other
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
67,868

 
20.5
%
 
$
62,406


18.0
%
 
$
5,462

 
8.8
 %
Staff costs
 
186,785

 
56.5
%
 
205,142


59.2
%
 
(18,357
)
 
(8.9
)%
Administrative
 
38,263

 
11.6
%
 
40,739


11.8
%
 
(2,476
)
 
(6.1
)%
Deferred acquisition consideration
 
2,333

 
0.7
%
 
2,458


0.7
%
 
(125
)
 
(5.1
)%
Stock-based compensation
 
374

 
0.1
%
 
755


0.2
%
 
(381
)
 
(50.5
)%
Depreciation and amortization
 
8,695

 
2.6
%
 
12,980


3.7
%
 
(4,285
)
 
(33.0
)%
Goodwill and other asset impairment
 
11

 
—
%
 
7,871


2.3
%
 
(7,860
)
 
(99.9
)%
Total operating expenses
 
$
304,329

 
92.1
%
 
$
332,351


95.9
%
 
$
(28,022
)
 
(8.4
)%
The decrease in staff costs was primarily attributable to staff reductions and the disposition of a Partner Firm.
The decrease in administrative costs was driven by lower spending across various categories in connection with savings initiatives.

The decrease in deferred acquisition consideration was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations.
For the twelve months ended December 31, 2019, the impairment charge was recognized in connection with the sublet of a leased property, to reduce the carrying value of a right-of-use lease asset and related leasehold improvements.
For the twelve months ended December 31, 2018, the impairment charge was primarily attributed to the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit.

Corporate
The change in operating expenses for Corporate for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Corporate
 
$
 
$
 
$
 
%
 
 
(Dollars in Thousands)
Staff costs
 
$
29,434

 
$
30,179

 
$
(745
)
 
(2.5
)%
Administrative
 
12,739

 
17,240

 
(4,501
)
 
(26.1
)%
Stock-based compensation
 
1,880

 
4,659

 
(2,779
)
 
(59.6
)%
Depreciation and amortization
 
868

 
762

 
106

 
13.9
 %
Other asset impairment
 
847

 
2,317

 
(1,470
)
 
(63.4
)%
Total operating expenses
 
$
45,768

 
$
55,157

 
$
(9,389
)
 
(17.0
)%
Staff costs declined in connection with a reduction in staff.
The decrease in administrative costs was primarily related to lower professional fees and various other costs in connection with cost savings initiatives.
Stock-based compensation was lower in the twelve months ended December 31, 2019 due to the reversal of expense previously recognized in connection with the forfeiture of a performance-based equity award.
YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017
Consolidated Results of Operations
Revenues
Revenue was $1.48 billion for the twelve months ended December 31, 2018, compared to revenue of $1.51 billion for the twelve months ended December 31, 2017. The components of the fluctuations in revenues for the twelve months ended December 31, 2018 compared to the twelve months ended December 31, 2017 were as follows:

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Table of Contents


 
 
Total
 
United States
 
Canada
 
Other
 
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
 
 
(Dollars in Thousands)
December 31, 2017
 
$
1,513,779

 
 
 
$
1,172,319

 
 
 
$
123,138

 
 
 
$
218,322

 
 
Components of revenue change:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange impact
 
(342
)
 
—
 %
 
—

 
—

 
(301
)
 
(0.2
)%
 
(41
)
 
—
 %
Non-GAAP acquisitions (dispositions), net
 
13,644

 
0.9
 %
 
14,466

 
1.2
 %
 
—

 
—
 %
 
(822
)
 
(0.4
)%
Impact of adoption of ASC 606
 
(51,636
)
 
(3.4
)%
 
(20,698
)
 
(1.8
)%
 
1,288

 
1.0
 %
 
(32,226
)
 
(14.8
)%
Non-GAAP organic revenue growth (decline)
 
(357
)
 
—
 %
 
(14,032
)
 
(1.2
)%
 
(102
)
 
(0.1
)%
 
13,777

 
6.3
 %
Total Change
 
(38,691
)
 
(2.6
)%
 
(20,264
)
 
(1.7
)%
 
885

 
0.7
 %
 
(19,312
)
 
(8.8
)%
December 31, 2018
 
$
1,475,088

 
 
 
$
1,152,055

 
 
 
$
124,023

 
 
 
$
199,010

 
 
Revenue was $1.48 billion for the twelve months ended December 31, 2018, compared to revenue of $1.51 billion for the twelve months ended December 31, 2017, representing a decrease of $38.7 million, or 2.6%. The impact of the adoption of ASC 606 reduced revenue by $51.6 million, or 3.4%, primarily due to the shift in treatment of third-party costs from principal to agent for various client arrangements of certain Partner Firms and timing of revenue recognition.
The negative foreign exchange impact of $0.3 million was primarily due to the fluctuation of the U.S. dollar against British Pound, Euro, Canadian dollar and Swedish Króna.
The other components of the change in revenue included an adverse impact from dispositions of $14.7 million, or 1.0%, offset by revenue from acquisitions of $28.3 million, or 1.9%, and a decline in revenue from existing Partner Firms of $0.4 million. Excluding the impact of the adoption of ASC 606, the change in revenue was attributable to contribution from new client wins that was partially offset by client losses and reduction in spending by some clients. Additionally, the change in revenue was driven by growth in categories including transportation, consumer products, financials and healthcare offset by declines in automotive, and retail.
The Company also utilizes non-GAAP metrics called organic revenue growth (decline), and non-GAAP acquisitions (dispositions) as defined above. For the twelve months ended December 31, 2018, organic revenue decline was $0.4 million, or 0.0%, of which growth of $7.6 million, or 0.5% was generated through acquired Partner Firms and decline of $8.0 million or 0.5% was related to Partner Firms which the Company has held throughout each of the comparable periods presented.
The table below provides a reconciliation between the revenue from acquired businesses in the statement of operations to non-GAAP acquisitions (dispositions), net for the twelve months ended December 31, 2018:
Acquisition Revenue Reconciliation
 
Integrated Networks - Group B
 
Media & Data Network
 
All Other
 
Total
GAAP revenue from 2018 acquisitions
 
$
34,841

 
$
—

 
$
1,276

 
$
36,117

Impact of adoption of ASC 606 from 2018
acquisition
 
(168
)
 
—

 
—

 
(168
)
Contribution to non-GAAP organic revenue growth
 
(7,606
)
 
—

 
—

 
(7,606
)
Prior year revenue from dispositions
 
(1,910
)
 
(11,569
)
 
(1,220
)
 
(14,699
)
Non-GAAP acquisitions (dispositions), net
 
$
25,157

 
$
(11,569
)
 
$
56

 
$
13,644

The geographic mix in revenues for the years ended December 31, 2018 and 2017 was as follows:
                
 
2018
 
2017
United States
78.1
%
 
77.5
%
Canada
8.4
%
 
8.1
%
Other
13.5
%
 
14.4
%
The impact of the adoption of ASC 606 decreased revenue in the United States by $20.7 million, or 1.8%, and $32.2 million, or 14.8%, in other regions outside of North America with a minimal impact in Canada.

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Table of Contents


Organic revenue performance was attributable to a contribution from net client wins and additional spending by some clients. The United States had organic revenue decline of $14.0 million, or 1.2%. In Canada, organic revenue declined $0.1 million, or 0.1%. Organic revenue growth outside of North America was $13.8 million, or 6.3%, consisting of contributions from existing Partner Firms due to net new client wins.
Operating Income
Operating income for the twelve months ended December 31, 2018 was $1.4 million, compared to $130.9 million for the twelve months ended December 31, 2017, representing a decrease of $129.5 million, or 98.9%. Operating income decreased by $115.2 million, or 67.1%, while Corporate operating expenses increased by $14.3 million, or 35.0%. The decrease in operating income was largely due to a write-down of goodwill and other assets and a decrease in revenue. The impact of adoption of ASC 606 increased operating income by $10.7 million. Adjusted to exclude the impact of the adoption of ASC 606, operating loss would have been $9.3 million, representing a decrease of $140.2 million compared to 2017.
Interest Expense and Finance Charges, Net
Interest expense and finance charges, net, for the twelve months ended December 31, 2018 was $67.1 million compared to $64.4 million for the twelve months ended December 31, 2017, representing an increase of $2.7 million. The increase was primarily due to higher interest rates in the current year as well as increased borrowings under the Company’s revolving Credit Agreement in comparison to the prior period. See Note 11 of the Notes to the Consolidated Financial Statements included herein for additional information on the Credit Agreement.
Foreign Exchange Transaction Gain (Loss)
Foreign exchange loss was $23.3 million for the twelve months ended December 31, 2018 compared to a foreign exchange gain of $18.1 million for the twelve months ended December 31, 2017. The foreign exchange loss is primarily attributable to the weakening of the Canadian dollar against the U.S. dollar in 2018, in connection with a U.S. dollar denominated indebtedness that is an obligation of our Canadian parent company.
Goodwill and Other Asset Impairment
The Company recognized an impairment of goodwill and other assets of $87.2 million in the twelve months ended December 31, 2018. The impairment primarily consisted of the write-down of goodwill equal to the excess carrying value above the fair value of three reporting units one in each of the Integrated Networks - Group B, Media & Data Network, and within the All Other category and the full write-down of a trademark for a reporting unit also within All Other category. The trademark is no longer in active use given its merger with another reporting unit in the third quarter of 2018.
Other, Net
Other income, net was $0.2 million for the twelve months ended December 31, 2018 compared to $1.3 million for the twelve months ended December 31, 2017.
Income Tax Expense (Benefit)
Income tax expense for the twelve months ended December 31, 2018 was $29.6 million (associated with a pretax loss of $88.7 million) compared to an income tax benefit of $168.4 million (associated with pretax income of $86.0 million) for the twelve months ended December 31, 2017. Income tax expense in 2018 included the impact of increasing the valuation allowance by $49.4 million primarily associated with Canadian deferred tax assets and the income tax benefit in 2017 included the impact of a release of a valuation allowance of $232.6 million in certain jurisdictions as well as the incremental tax benefit associated with the Tax Cuts and Jobs Act of 2017.
Equity in Earnings (Losses) of Non-Consolidated Affiliates
The Company recorded income of $0.1 million for the twelve months ended December 31, 2018 compared to $2.1 million for the twelve months ended December 31, 2017.
Noncontrolling Interests
Net income attributable to noncontrolling interests was $11.8 million for the twelve months ended December 31, 2018, compared to $15.4 million for the twelve months ended December 31, 2017, representing a decrease of $3.6 million. This decrease was attributable to a reduction in operating results at Partner Firms with a noncontrolling interest.
Net Income (Loss) Attributable to MDC Partners Inc. Common Shareholders
As a result of the foregoing, and the impact of accretion on and net income allocated to convertible preferences shares, net loss attributable to MDC Partners Inc. common shareholders for the twelve months ended December 31, 2018 was $138.4 million or $2.42 per diluted share, compared to a net income of $204.8 million, or $3.70 per diluted share reported for the twelve months ended December 31, 2017.

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Integrated Networks - Group A
The change in operating results in the Integrated Networks - Group A reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:

 
 
2018
 
2017
 
Change
Integrated Networks - Group A
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
393,890

 
 
 
$
337,104

 
 
 
$
56,786


16.8
%
Operating expenses
 
 
 
 
 

 
 
 




Cost of services sold
 
263,005

 
66.8
%
 
227,319

 
67.4
%
 
35,686


15.7
%
Office and general expenses
 
62,153

 
15.8
%
 
50,422

 
15.0
%
 
11,731


23.3
%
Depreciation and amortization
 
9,602

 
2.4
%
 
8,599

 
2.6
%
 
1,003


11.7
%
 
 
334,760

 
85.0
%
 
286,340

 
84.9
%
 
48,420


16.9
%
Operating income
 
$
59,130

 
15.0
%
 
$
50,764

 
15.1
%
 
$
8,366


16.5
%
The impact of the adoption of ASC 606 reduced the Integrated Networks - Group A reportable segment revenue by $6.5 million or 1.9%. The other components of the change included an increase in revenue from existing Partner Firms of $50.3 million, or 14.9%, as well as foreign exchange impact of $0.1 million.
The change in operating profit was primarily attributable to increase in revenue, more than offset by increase in expenses (as outlined below) and other asset impairment recognized in 2018.
The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group A reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:
 
 
2018
 
2017
 
Change
Integrated Networks - Group A
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
50,830

 
12.9
%
 
$
38,590

 
11.4
%
 
$
12,240


31.7
 %
Staff costs
 
220,197

 
55.9
%
 
190,551

 
56.5
%
 
29,646


15.6
 %
Administrative
 
47,254

 
12.0
%
 
38,879

 
11.5
%
 
8,375


21.5
 %
Deferred acquisition consideration
 
1,085

 
0.3
%
 
464

 
0.1
%
 
621


NM

Stock-based compensation
 
5,792

 
1.5
%
 
9,257

 
2.7
%
 
(3,465
)

(37.4
)%
Depreciation and amortization
 
9,602

 
2.4
%
 
8,599

 
2.6
%
 
1,003


11.7
 %
Total operating expenses
 
$
334,760

 
85.0
%
 
$
286,340

 
84.9
%
 
$
48,420


16.9
 %

Deferred acquisition consideration change for the twelve months ended December 31, 2018 was primarily due to the aggregate performance of certain Partner Firms in 2018 relative to the previously projected expectations.
Stock-based compensation change for the twelve months ended December 31, 2018 was primarily driven by unfavorable operating results in connection with awards tied to performanceof certain Partner Firms relative to the previously projected expectations.



Integrated Networks - Group B

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The change in operating results in the Integrated Networks - Group B reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:

 
 
2018
 
2017
 
Change
Integrated Networks - Group B
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
551,317

 
 
 
$
591,630

 
 
 
$
(40,313
)
 
(6.8
)%
Operating expenses
 
 
 
 
 
 
 
 
 

 

Cost of services sold
 
355,346

 
64.5
%
 
387,112

 
65.4
%
 
(31,766
)
 
(8.2
)%
Office and general expenses
 
124,452

 
22.6
%
 
120,165

 
20.3
%
 
4,287

 
3.6
 %
Depreciation and amortization
 
19,032

 
3.5
%
 
14,401

 
2.4
%
 
4,631

 
32.2
 %
Goodwill and other asset impairment
 
17,828

 
3.2
%
 
3,797

 
0.6
%
 
14,031

 
NM

 
 
516,658

 
93.7
%
 
525,475

 
88.8
%
 
(8,817
)
 
(1.7
)%
Operating income
 
$
34,659

 
6.3
%
 
$
66,155

 
11.2
%
 
$
(31,496
)
 
(47.6
)%
The impact of the adoption of ASC 606 reduced the Integrated Networks - Group B reportable segment revenue by $27.4 million, or 4.6%. The other components of the change included a contribution of $27.1 million, or 4.6%, from an acquired Partner Firm, a decline in revenue from existing Partner Firms of $38.4 million, or 6.5%, as well as a favorable foreign exchange impact of $0.3 million, offset by a negative impact from dispositions of $1.9 million, or 0.3%.
The change in operating profit was primarily attributable to the decline in revenue, and decline in expenses (as outlined below) and goodwill and other asset impairment recognized in 2018. The impact of the adoption of ASC 606 increased operating profit by $4.3 million. Excluding the impact of the adoption of ASC 606, operating profit would have been $30.4 million in 2018, representing a decrease of $35.8 million compared to 2017.
The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group B reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:
 
 
2018
 
2017
 
Change
Integrated Networks - Group B
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
56,755

 
10.3
 %
 
$
80,361

 
13.6
 %
 
$
(23,606
)
 
(29.4
)%
Staff costs
 
345,853

 
62.7
 %
 
339,040

 
57.3
 %
 
6,813

 
2.0
 %
Administrative
 
74,618

 
13.5
 %
 
81,179

 
13.7
 %
 
(6,561
)
 
(8.1
)%
Deferred acquisition consideration
 
(4,318
)
 
(0.8
)%
 
(2,361
)
 
(0.4
)%
 
(1,957
)
 
82.9
 %
Stock-based compensation
 
6,890

 
1.2
 %
 
9,058

 
1.5
 %
 
(2,168
)
 
(23.9
)%
Depreciation and amortization
 
19,032

 
3.5
 %
 
14,401

 
2.4
 %
 
4,631

 
32.2
 %
Goodwill and other asset impairment
 
17,828

 
3.2
 %
 
3,797

 
0.6
 %
 
14,031

 
NM

Total operating expenses
 
$
516,658

 
93.7
 %
 
$
525,475

 
88.8
 %
 
$
(8,817
)
 
(1.7
)%
The decrease in direct costs was primarily attributable to the adoption of ASC 606 in which various client arrangements of certain Partner Firms previously accounted for as principal are now accounted for as agent under ASC 606. The change resulted in a decrease in third-party costs included in revenue of $29.3 million.
Deferred acquisition consideration change for the twelve months ended December 31, 2018 was primarily due to the aggregate performance of certain Partner Firms in 2018 relative to the previously projected expectations.
Stock-based compensation change for the twelve months ended December 31, 2018 was primarily due to the aggregate performance of certain Partner Firms in 2018 relative to the previously projected expectations.
For the twelve months ended December 31, 2018, an impairment charge of $17.8 million primarily attributed to the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit in Doner Partner Network.

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Table of Contents


Media & Data Network
The change in operating results in the Media & Data Network reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:
 
 
2018
 
2017
 
Change
Media & Data Network
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
183,287

 
 
 
$
200,757

 
 
 
$
(17,470
)
 
(8.7
)%
Operating expenses
 
 
 
 
 
 
 
 
 

 

Cost of services sold
 
129,296

 
70.5
 %
 
135,574

 
67.5
%
 
(6,278
)
 
(4.6
)%
Office and general expenses
 
42,424

 
23.1
 %
 
41,300

 
20.6
%
 
1,124

 
2.7
 %
Depreciation and amortization
 
3,820

 
2.1
 %
 
4,605

 
2.3
%
 
(785
)
 
(17.0
)%
  Goodwill and other asset impairment
 
59,188

 
32.3
 %
 
—

 
—
%
 
59,188

 
—
 %
 
 
234,728

 
128.1
 %
 
181,479

 
90.4
%
 
53,249

 
29.3
 %
Operating income (loss)
 
$
(51,441
)
 
(28.1
)%
 
$
19,278

 
9.6
%
 
$
(70,719
)
 
NM

The impact of the adoption of ASC 606 increased revenue in the Media & Data Network reportable segment by $0.7 million, or 0.4%. The decline in revenue was primarily attributable to client losses and a reduction in spending by certain clients.
The operating loss in 2018 was driven by the goodwill impairment. The change in operating profit was also due to a decline in revenue, partially offset by a decrease in operating expenses, as outlined below.
The adoption of ASC 606 did not have a significant impact on operating profit.
The change in the categories of expenses as a percentage of revenue in the Media & Data Network reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:
 
 
2018
 
2017
 
Change
Media & Data Network
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
43,363

 
23.7
%
 
$
49,995

 
24.9
 %
 
$
(6,632
)
 
(13.3
)%
Staff costs
 
101,267

 
55.3
%
 
100,175

 
49.9
 %
 
1,092

 
1.1
 %
Administrative
 
26,452

 
14.4
%
 
26,880

 
13.4
 %
 
(428
)
 
(1.6
)%
Deferred acquisition consideration
 
318

 
0.2
%
 
(819
)
 
(0.4
)%
 
1,137

 
NM

Stock-based compensation
 
320

 
0.2
%
 
643

 
0.3
 %
 
(323
)
 
(50.2
)%
Depreciation and amortization
 
3,820

 
2.1
%
 
4,605

 
2.3
 %
 
(785
)
 
(17.0
)%
Goodwill impairment
 
59,188

 
32.3
%
 
—

 
—
 %
 
59,188

 
—
 %
Total operating expenses
 
$
234,728

 
128.1
%
 
$
181,479

 
90.4
 %
 
$
53,249

 
29.3
 %
The decline in direct costs was primarily attributable to costs incurred in the prior year for a disposed Partner Firm.
The goodwill impairment in 2018 primarily consisted of the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit.
For more information see Note 8 of the Notes to the Consolidated Financial Statements included herein.

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Table of Contents


All Other
The change in operating results in the All Other category for the for the years ended December 31, 2018 and 2017 was as follows:
 
 
2018
 
2017
 
Change
All Other
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
346,594

 
 
 
$
384,288

 
 
 
$
(37,694
)
 
(9.8
)%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
243,568

 
70.3
%
 
273,471

 
71.2
%
 
(29,903
)
 
(10.9
)%
Office and general expenses
 
67,932

 
19.6
%
 
59,987

 
15.6
%
 
7,945

 
13.2
 %
Depreciation and amortization
 
12,980

 
3.7
%
 
14,771

 
3.8
%
 
(1,791
)
 
(12.1
)%
Goodwill impairment
 
7,871

 
2.3
%
 
497

 
0.1
%
 
7,374

 
NM

 
 
332,351

 
95.9
%
 
348,726

 
90.7
%
 
(16,375
)
 
(4.7
)%
Operating income
 
$
14,243

 
4.1
%
 
$
35,562

 
9.3
%
 
$
(21,319
)
 
(59.9
)%
The impact of the adoption of ASC 606 decreased revenue in the All Other category by $31.4 million, or 8.2%. The other components of the change included revenue decline from existing Partner Firms of $5.4 million, or 1.4%, and negative foreign exchange impact of $0.9 million.
These decrease in operating profit was primarily due to lower expenses (as outlined below), being more than offset by a decrease in revenue. The impact of the adoption of ASC 606 decreased operating profit by $31.4 million, or 8.2%.
The change in the categories of expenses as a percentage of revenue in the All Other category for the years ended December 31, 2018 and 2017 was as follows:
 
 
2018
 
2017
 
Change
All Other
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
62,406

 
18.0
%
 
$
91,831

 
23.9
 %
 
$
(29,425
)
 
(32.0
)%
Staff costs
 
205,142

 
59.2
%
 
199,802

 
52.0
 %
 
5,340

 
2.7
 %
Administrative
 
40,739

 
11.8
%
 
40,749

 
10.6
 %
 
(10
)
 
—
 %
Deferred acquisition consideration
 
2,458

 
0.7
%
 
(2,182
)
 
(0.6
)%
 
4,640

 
NM

Stock-based compensation
 
755

 
0.2
%
 
3,258

 
0.8
 %
 
(2,503
)
 
(76.8
)%
Depreciation and amortization
 
12,980

 
3.7
%
 
14,771

 
3.8
 %
 
(1,791
)
 
(12.1
)%
Goodwill and other asset impairment
 
7,871

 
2.3
%
 
497

 
0.1
 %
 
7,374

 
NM

Total operating expenses
 
$
332,351

 
95.9
%
 
$
348,726

 
90.7
 %
 
$
(16,375
)
 
(4.7
)%
The decrease in direct costs was primarily attributable to the adoption of ASC 606 in which various client arrangements of certain Partner Firms previously accounted for as principal are now accounted for as agent under ASC 606. The change resulted in a decrease in third-party costs included in revenue of $34.1 million.
The goodwill impairment in 2018 was primarily comprised of a partial impairment relating to a Partner Firm that was classified as Held For Sale as of December 31, 2018. For more information see Note 4 and 8 of the Notes to the Consolidated Financial Statements included herein.
Corporate
The change in operating expenses for Corporate for the twelve months ended December 31, 2018 and 2017 was as follows:

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2018
 
2017
 
Change
Corporate
 
$
 
$
 
$
 
%
 
 
(Dollars in Thousands)
Staff costs
 
$
30,179

 
$
20,926

 
$
9,253

 
44.2
 %
Administrative
 
17,240

 
15,521

 
1,719

 
11.1
 %
Stock-based compensation
 
4,659

 
2,134

 
2,525

 
NM

Depreciation and amortization
 
762

 
1,098

 
(336
)
 
(30.6
)%
Other asset impairment
 
2,317

 
1,177

 
1,140

 
96.9
 %
Total operating expenses
 
$
55,157

 
$
40,856

 
$
14,301

 
35.0
 %
The increase in staff costs for Corporate was primarily attributable to severance expense related to certain corporate actions taken in 2018 in comparison to 2017.
The increase in administrative costs was primarily related to an increase in professional fees of $5.4 million, primarily related to fees for the implementation of ASC 606, which was adopted effective January 1, 2018.
Liquidity and Capital Resources:
Liquidity
The following table provides summary information about the Company’s liquidity position:

2019
 
2018
 
2017
 
(In Thousands, Except for Long-Term Debt to
Shareholders’ Equity Ratio)

Cash and cash equivalents
$
106,933

 
$
30,873

 
$
46,179

Working capital deficit
$
(197,678
)
 
$
(153,797
)
 
$
(232,859
)
Cash provided by operating activities
$
86,539

 
$
17,280

 
$
71,786

Cash provided by (used in) investing activities
$
115

 
$
(50,431
)
 
$
(20,884
)
Cash provided by (used in) financing activities
$
(11,729
)
 
$
21,434

 
$
(32,599
)
Ratio of long-term debt to shareholders' deficit
(4.66)

 
(3.87)

 
(5.68)

The Company expects to maintain sufficient cash and/or available borrowings to fund operations for the next twelve months. The Company has historically been able to maintain and expand its business using cash generated from operating activities, funds available under its Credit Agreement, and other initiatives, such as obtaining additional debt and equity financing. At December 31, 2019, the Company had no borrowings outstanding and $245.2 million available under the Credit Agreement. The Company expects to use any advances under the Credit Agreement for working capital and general corporate purposes, in each case pursuant to the terms of the Credit Agreement.
The Company’s obligations extending beyond twelve months primarily consist of deferred acquisition payments, capital expenditures, scheduled lease obligation payments, and interest payments on borrowings under the 6.50% Notes. Based on the current outlook, the Company believes future cash flows from operations, together with the Company’s existing cash balance and availability of funds under the Company’s Credit Agreement, will be sufficient to meet the Company’s anticipated cash needs for the next twelve months. The Company’s ability to make scheduled deferred acquisition payments, principal and interest payments, to refinance indebtedness or to fund planned capital expenditures will depend on future performance, which is subject to general economic conditions, the competitive environment and other factors, including those described in the Company’s 2019 Annual Report on Form 10-K and in the Company’s other SEC filings, including under “Risk Factors” and elsewhere.
As market conditions warrant, the Company may from time to time seek to purchase its 6.50% Notes, in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing its indebtedness, any purchase made by the Company may be funded with the net proceeds from any asset dispositions or the use of cash on its balance sheet. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material.
Working Capital
At December 31, 2019, the Company had a working capital deficit of $197.7 million compared to a deficit of $153.8 million at December 31, 2018. The Company’s working capital is impacted by seasonality in media buying, amounts spent by clients, and timing of amounts received from clients and subsequently paid to suppliers. Media buying is impacted by the timing of certain events, such as major sporting competitions and national holidays, and there can be a quarter to quarter lag between the time

23


Table of Contents


amounts received from clients for the media buying are subsequently paid to suppliers. The Company intends to maintain sufficient cash or availability of funds under the Credit Agreement at any particular time to adequately fund working capital should there be a need to do so from time to time.
Cash Flows
Operating Activities
Cash flows provided by operating activities for the twelve months ended December 31, 2019 was $86.5 million, primarily driven by cash flows from earnings, accompanied by nominal unfavorable working capital requirements.
Cash flows provided by operating activities for the twelve months ended December 31, 2018 was $17.3 million, primarily reflecting unfavorable working capital requirements, driven by media and other supplier payments, deferred acquisition consideration payments as well as net income (loss) adjusted to reconcile to net cash used in operating activities.
Cash flows provided by operating activities for the twelve months ended December 31, 2017 was $71.8 million, primarily reflecting unfavorable working capital requirements, driven by timing of accounts receivable, as well as acquisition related contingent consideration payments, being more than offset by the net income adjusted to reconcile to net cash provided by operating activities.
Investing Activities
During the twelve months ended December 31, 2019, cash flows provided by investing activities was $0.1 million, which primarily consisted of proceeds of $23.1 million from the sale of the Company’s equity interest in Kingsdale, partially offset by $18.6 million of capital expenditures and $4.8 million paid for acquisitions.
During the twelve months ended December 31, 2018, cash flows used in investing activities was $50.4 million, primarily consisting of cash paid of $32.7 million for acquisitions and capital expenditures of $20.3 million.
During the twelve months ended December 31, 2017, cash flows used in investing activities was $20.9 million, primarily consisting of capital expenditures of $33.0 million, partially offset by net proceeds from sale of three subsidiaries of $10.6 million.
Financing Activities
During the twelve months ended December 31, 2019, cash flows used in financing activities was $11.7 million, primarily driven by $98.6 million in proceeds, net of fees, from the issuance of common and preferred shares, more than offset by $68.1 million in net repayments under the Credit Agreement, $30.2 million in deferred acquisition consideration payments and $11.4 million in distribution payments.
During the twelve months ended December 31, 2018, cash flows provided by financing activities was $21.4 million, primarily driven by $68.1 million in net borrowings under the Credit Agreement and $32.2 million of acquisition related payments.
During the twelve months ended December 31, 2017, cash flows used in financing activities was $32.6 million, primarily driven by $54.4 million in net repayments under the Credit Agreement, $57.1 million of acquisition related payments and distributions to noncontrolling partners of $8.9 million. These amounts were partially offset by $95.0 million of gross proceeds from the issuance of convertible preference shares.
Total Debt
Debt, inclusive of amounts drawn under the credit facility, net of debt issuance costs, as of December 31, 2019 was $887.6 million as compared to $954.1 million outstanding at December 31, 2018. The decrease of $66.5 million in debt was primarily a result of the Company’s net repayments on the Credit Agreement. See Note 11 of the Notes to the Consolidated Financial Statements for information regarding the Company’s $900 million aggregate principal amount of its 6.50% Notes and $250 million available under the Credit Agreement.
The Company is in compliance with all of the terms and conditions of the Credit Agreement, and management believes, based on its current financial projections, that the Company will continue to be in compliance with its covenants over the next twelve months.
If the Company loses all or a substantial portion of its lines of credit under the Credit Agreement, or if the Company uses the maximum available amount under the Credit Agreement, it will be required to seek other sources of liquidity. If the Company were unable to find these sources of liquidity, for example through an equity offering, access to the capital markets or asset sales, the Company’s ability to fund its working capital needs and any contingent obligations with respect to acquisitions and redeemable noncontrolling interests would be adversely affected.
Pursuant to the Credit Agreement, the Company must comply with certain financial covenants including, among other things, covenants for (i) senior leverage ratio, (ii) total leverage ratio, (iii) fixed charges ratio, and (iv) minimum earnings before interest, taxes and depreciation and amortization, in each case as such term is specifically defined in the Credit Agreement. For the period

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ended December 31, 2019, the Company’s calculation of each of these covenants, and the specific requirements under the Credit Agreement, respectively, were calculated based on the trailing twelve months as follows:
 
December 31, 2019
Total Senior Leverage Ratio
(0.37
)
Maximum per covenant
2.00

 
 

Total Leverage Ratio
4.52

Maximum per covenant
6.25

 
 

Fixed Charges Ratio
2.55

Minimum per covenant
1.00

 
 

Earnings before interest, taxes, depreciation and amortization (in millions)
$
184.2

Minimum per covenant (in millions)
$
105.0

These ratios and measures are not based on generally accepted accounting principles and are not presented as alternative measures of operating performance or liquidity. Some of these ratios and measures include, among other things, pro forma adjustments for acquisitions, one-time charges, and other items, as defined in the Credit Agreement. They are presented here to demonstrate compliance with the covenants in the Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company.
Contractual Obligations and Other Commercial Commitments
The following table provides a payment schedule of present and future obligations. Management anticipates that the obligations outstanding at December 31, 2019 will be repaid with new financing, equity offerings, asset sales and/or cash flow from operations:
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than
1 Year
 
1 – 3 Years
 
3 – 5 Years
 
After
5 Years
 
 
(Dollars in Thousands)
Indebtedness (1)
 
$
900,000

 
$
—

 
$
—

 
$
900,000

 
$
—

Operating lease obligations
 
339,562

 
60,504

 
99,147

 
79,925

 
99,986

Interest on debt
 
263,250

 
58,500

 
117,000

 
87,750

 
—

Deferred acquisition consideration (2)
 
75,220

 
45,521

 
29,699

 
—

 
—

Other long-term liabilities
 
2,830

 
782

 
2,048

 
—

 
—

Total contractual obligations (3)
 
$
1,580,862

 
$
165,307

 
$
247,894

 
$
1,067,675

 
$
99,986

On February 27, 2020, in connection with the centralization of our New York real estate portfolio, the Company entered into an agreement to lease space at One World Trade Center. The lease term is for approximately eleven years commencing on April 1, 2020, with rental payments totaling approximately $115 million. As part of the centralization initiative, the Company will sublease existing properties currently under lease, resulting in the recovery of a significant portion of our rent obligation under such arrangements.
  
(1) 
Indebtedness includes no borrowings under the Credit Agreement which is due in 2021.
(2) 
Deferred acquisition consideration excludes future payments with an estimated fair value of $8.6 million that are contingent upon employment terms as well as financial performance and will be expensed as stock-based compensation over the required retention period. Of this amount, the Company estimates $3.3 million will be paid in 2020 and $5.3 million will be paid in one to three years.
(3) 
Pension obligations of $15.8 million are not included since the timing of payments are not known.
Liquidity and Capital Resources:
Other-Balance Sheet Commitments
Media and Production

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The Company’s agencies enter into contractual commitments with media providers and agreements with production companies on behalf of its clients at levels that exceed the revenue from services. Some of our agencies purchase media for clients and act as an agent on behalf of their clients. These commitments are included in Accruals and other liabilities when the media services are delivered by the media providers. MDC takes precautions against default on payment for these services and has historically had a very low incidence of default. MDC is still exposed to the risk of significant uncollectible receivables from our clients. The risk of a material loss could significantly increase in periods of severe economic downturn.
Deferred Acquisition Consideration
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, and to a lesser extent, contingent and fixed retention payments tied to continued employment of specific personnel. See Note 2 and 9 of the Notes to the Consolidated Financial Statements for additional information regarding contingent deferred acquisition consideration.
The following table presents the changes in the deferred acquisition consideration by segment for the year ended December 31, 2019:
 
 
 
December 31, 2019
 
Integrated Networks - Group A
 
Integrated Networks - Group B
 
Media & Data Network
 
All Other
 
Total
 
(Dollars in Thousands)
Beginning balance of contingent payments
$
31,243

 
$
38,058

 
$
2,689

 
$
10,608

 
$
82,598

Payments
(11,231
)
 
(14,927
)
 
(2,763
)
 
(1,798
)
 
(30,719
)
Additions - acquisitions and step-up transactions
6,344

 
801

 
—

 
—

 
7,145

Redemption value adjustments (1)
1,740

 
1,466

 
74

 
2,122

 
5,402

Stock-based compensation
8,030

 
1,668

 
—

 
350

 
10,048

Other (2)
(2
)
 
(6
)
 
—

 
205

 
197

Ending balance of contingent payments
36,124

 
27,060

 
—

 
11,487

 
74,671

Fixed payments
—

 
549

 
—

 
—

 
549

 
$
36,124

 
$
27,609

 
$
—

 
$
11,487

 
$
75,220

(1)Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition payments, including the accretion of present value and stock-based compensation charges relating to acquisition payments that are tied to continued employment.
(2) 
Other primarily consists of translation adjustments.
Redeemable Noncontrolling Interest
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling interests in the equity section of the Company’s balance sheet. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity. See Notes 2 and 13 of the Notes to the Consolidated Financial Statements included herein for further information.
Guarantees
Generally, the Company has indemnified the purchasers of certain of its assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amounts has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements have been prepared in accordance with GAAP. Preparation of the Consolidated Financial Statements and related disclosures requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed in the accompanying financial statements and footnotes. Our significant accounting policies are discussed

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in Note 2 of the Consolidated Financial Statements. Our critical accounting policies are those that are considered by management to require significant judgment and use of estimates and that could have a significant impact on our financial statements. An understanding of our critical accounting policies is necessary to analyze our financial results.
Our critical accounting policies include our accounting for revenue recognition, business combinations, deferred acquisition consideration, redeemable noncontrolling interests, goodwill and intangible assets, income taxes and stock-based compensation. The financial statements are evaluated on an ongoing basis and estimates are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances. Actual results can differ from those estimates, and it is possible that the differences could be material.
Revenue Recognition.  The Company’s revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. See Note 5 of the Notes to the Consolidated Financial Statements included herein for further information.
Business Combinations.  The Company has historically made, and may continue to make, selective acquisitions of marketing communications businesses. In making acquisitions, the price paid is determined by various factors, including service offerings, competitive position, reputation and geographic coverage, as well as prior experience and judgment. Due to the nature of advertising, marketing and corporate communications services companies, the companies acquired frequently have significant identifiable intangible assets, which primarily consist of customer relationships.
For each of the Company’s acquisitions, a detailed review is undertaken to identify other intangible assets and a valuation is performed for all such identified assets. The Company uses several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. Like most service businesses, a substantial portion of the intangible asset value that the Company acquires is the specialized know-how of the workforce, which is treated as part of goodwill and is not required to be valued separately. The majority of the value of the identifiable intangible assets that the Company acquires is derived from customer relationships, including the related customer contracts, as well as trademarks.
Deferred Acquisition Consideration. Consistent with our past practice of acquiring a majority ownership position, most acquisitions include an initial payment at the time of closing and provide for future additional contingent purchase price payments. Contingent purchase price obligations for these transactions is recorded as a deferred acquisition consideration liability, are derived from the performance of the acquired entity and are based on predetermined formulas. These various contractual valuation formulas may be dependent on future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period, and, in some cases, the currency exchange rate on the date of payment. The liability is adjusted quarterly based on changes in current information affecting each subsidiary’s current operating results and the impact this information will have on future results included in the calculation of the estimated liability. In addition, changes in various contractual valuation formulas as well as adjustments to present value impact quarterly adjustments. These adjustments are recorded in results of operations.
Redeemable Noncontrolling Interests.  Many of the Company’s acquisitions include contractual arrangements where the noncontrolling shareholders have an option to purchase, or may require the Company to purchase, such noncontrolling shareholders’ incremental ownership interests under certain circumstances and the Company has similar call options under the same contractual terms. The amount of consideration under these contractual arrangements is not a fixed amount, but rather is dependent upon various valuation formulas, such as the average earnings of the relevant subsidiary through the date of exercise or the growth rate of the earnings of the relevant subsidiary during that period. In the event that an incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity on the Consolidated Balance Sheet at their acquisition date fair value and adjusted for changes to their estimated redemption value through Common stock and other paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values.
Goodwill and Other Intangibles.  The Company reviews goodwill and other intangible assets with indefinite lives not subject to amortization for impairment annually as of October 1st of each year or more frequently if indicators of potential impairment exist. The Company performs its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value provided the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit.
For the annual impairment testing, the Company has the option of assessing qualitative factors to determine whether it is more likely than not that the carrying amount of a reporting unit exceeds its fair value or performing a quantitative goodwill impairment test. Qualitative factors considered in the assessment include industry and market considerations, the competitive environment, overall financial performance, changing cost factors such as labor costs, and other factors specific to each reporting unit such as change in management or key personnel.

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If the Company elects to perform the qualitative assessment and concludes that it is more likely than not that the fair value of the reporting unit is more than its carrying amount, then goodwill is not considered impaired and the quantitative impairment test is not necessary. For reporting units for which the qualitative assessment concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount and for reporting units for which the qualitative assessment is not performed, the Company will perform the quantitative impairment test, which compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not considered impaired and additional analysis is not required. However, if the carrying amount of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the recognition of an impairment charge is required.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. For the 2019 annual impairment test, the Company used an income approach, which incorporates the use of the discounted cash flow (“DCF”) method. The income approach requires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.
The DCF estimates incorporate expected cash flows that represent a spectrum of the amount and timing of possible cash flows of each reporting unit from a market participant perspective. The expected cash flows are developed from the Company’s long-range planning process using projections of operating results and related cash flows based on assumed long-term growth rates and demand trends and appropriate discount rates based on a reporting units weighted average cost of capital (“WACC”) as determined by considering the observable WACC of comparable companies and factors specific to the reporting unit. The terminal value is estimated using a constant growth method which requires an assumption about the expected long-term growth rate. The estimates are based on historical data and experience, industry projections, economic conditions, and the Company’s expectations. We performed the quantitative impairment test in 2019. See Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding the Company’s impairment test and impairment charges recognized.
The assumptions used for the long-term growth rate and WACC in the annual goodwill impairment test are as follows:
 
October 1,
 
2019
Long-term growth rate
2.0%
WACC
9.91%
For the 2019 annual goodwill impairment test, the Company had 25 reporting units, all of which were subject to the quantitative goodwill impairment test. The range of the excess of fair value over the carrying amount for the Company’s reporting units was from 24% to over 100%. The Company performed a sensitivity analysis which included a 1% increase to the WACC. Based on the results of that analysis, no other reporting unit failed the quantitative impairment test.
The Company believes the estimates and assumptions used in the calculations are reasonable. However, if there was an adverse change in the facts and circumstances, then an impairment charge may be necessary in the future. Should the fair value of any of the Company’s reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. The Company monitors its reporting units to determine if there is an indicator of potential impairment.
Indefinite-lived intangible assets are primarily evaluated on an annual basis, generally in conjunction with the Company’s evaluation of goodwill balances. See Note 8 of the Notes to the Consolidated Financial Statements for additional information.
Income Taxes. The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management evaluates on a quarterly basis all available positive and negative evidence considering factors such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies, changes in tax laws and other factors. The periodic assessment of the net carrying value of the Company’s deferred tax assets under the applicable accounting rules requires significant management judgment. A change to any of these factors could impact the estimated valuation allowance and income tax expense.
Stock-based Compensation.  The fair value method is applied to all awards granted, modified or settled. Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the service period that is the award’s vesting period. Awards based on performance conditions are recorded as compensation expense when the performance conditions are expected to be met. See Note 15 of the Notes to the Consolidated Financial Statements for further information.
From time to time, certain acquisitions and step-up transactions include an element of compensation related payments. The Company accounts for those payments as stock-based compensation.

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New Accounting Pronouncements
Information regarding new accounting pronouncements can be found in Note 3 of the Notes to the Consolidated Financial Statements included herein.

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Item 8. Financial Statements and Supplementary Data

MDC PARTNERS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page
Financial Statements:
  
31
32
33
34
35
37
39


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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
MDC Partners Inc.
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MDC Partners Inc. (the “Company”) and subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedules presented in Item 15 (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 5, 2020 expressed an adverse opinion thereon.
Change in Accounting Principles
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for leases on January 1, 2019 due to the adoption of Accounting Standards
Codification, Leases (“ASC 842”).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ BDO USA, LLP
We have served as the Company's auditor since 2006.
New York, New York
March 5, 2020, (except for matters discussed in Notes 1, 4, 5, 6, 8, 10, 17, 21 and 22 as to which the date is August 31, 2020)


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MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of United States dollars, except per share amounts)
 
Years Ended December 31,
 
2019
 
2018
 
2017
Revenue:
 
 
 
 
 
Services
$
1,415,803

 
$
1,475,088

 
$
1,513,779

Operating Expenses:
 
 
 
 
 
Cost of services sold
961,076

 
991,198

 
1,023,476

Office and general expenses
328,339

 
349,056

 
310,455

Depreciation and amortization
38,329

 
46,196

 
43,474

Goodwill and other asset impairment
8,599

 
87,204

 
5,471

 
1,336,343

 
1,473,654

 
1,382,876

Operating income
79,460

 
1,434

 
130,903

Other Income (expense):
 
 
 
 
 
Interest expense and finance charges, net
(64,942
)
 
(67,075
)
 
(64,364
)
Foreign exchange gain (loss)
8,750

 
(23,258
)
 
18,137

Other, net
(2,401
)
 
230

 
1,346

 
(58,593
)
 
(90,103
)
 
(44,881
)
Income (loss) before income taxes and equity in earnings of non-consolidated affiliates
20,867

 
(88,669
)
 
86,022

Income tax expense (benefit)
10,316

 
29,615

 
(168,358
)
Income (loss) before equity in earnings of non-consolidated affiliates
10,551

 
(118,284
)
 
254,380

Equity in earnings of non-consolidated affiliates
352

 
62

 
2,081

Net income (loss)
10,903

 
(118,222
)
 
256,461

Net income attributable to the noncontrolling interest
(16,156
)
 
(11,785
)
 
(15,375
)
Net income (loss) attributable to MDC Partners Inc.
(5,253
)
 
(130,007
)
 
241,086

Accretion on and net income allocated to convertible preference shares
(12,304
)
 
(8,355
)
 
(36,254
)
Net income (loss) attributable to MDC Partners Inc. common shareholders
$
(17,557
)
 
$
(138,362
)
 
$
204,832

Income (loss) Per Common Share:
 
 
 
 
 
Basic
 
 
 
 
 
Net income (loss) attributable to MDC Partners Inc. common shareholders
$
(0.25
)
 
$
(2.42
)
 
$
3.71

Diluted
 
 
 
 
 
Net income (loss) attributable to MDC Partners Inc. common shareholders
$
(0.25
)
 
$
(2.42
)
 
$
3.70

Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
  Basic
69,132,100

 
57,218,994

 
55,255,797

  Diluted
69,132,100

 
57,218,994

 
55,481,786

Stock-based compensation expense is included in the following line items above:
 
 
 
 
 
Cost of services sold
$
29,160

 
$
12,513

 
$
19,015

Office and general expenses
1,880

 
5,903

 
5,335

Total
$
31,040

 
$
18,416

 
$
24,350


See notes to the Consolidated Financial Statements.

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MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(thousands of United States dollars)
 
Years Ended December 31,
 
2019
 
2018
 
2017
Comprehensive Income (Loss)
 
 
 
 
 
Net income (loss)
$
10,903

 
$
(118,222
)
 
$
256,461

 
 
 
 
 
 
Other comprehensive income (loss), net of applicable tax:
 
 
 
 
 
Foreign currency translation adjustment
(6,691
)
 
3,158

 
3,611

Benefit plan adjustment, net of income tax expense (benefit) of ($740) for 2019, $223 for 2018 and nil for 2017
(1,911
)
 
555

 
(1,336
)
Other comprehensive income (loss)
(8,602
)
 
3,713

 
2,275

Comprehensive income (loss) for the period
2,301

 
(114,509
)
 
258,736

Comprehensive income attributable to the noncontrolling interests
(16,543
)
 
(8,824
)
 
(17,780
)
Comprehensive income (loss) attributable to MDC Partners Inc.
$
(14,242
)
 
$
(123,333
)
 
$
240,956

See notes to the Consolidated Financial Statements.

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MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of United States dollars)
 
December 31,
2019
 
December 31,
2018
 
 
 
 
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
106,933

 
$
30,873

Accounts receivable, less allowance for doubtful accounts of $3,304 and $1,879
449,288

 
394,085

Expenditures billable to clients
30,133

 
42,369

Assets held for sale
—

 
78,913

Other current assets
35,613

 
42,499

Total Current Assets
621,967

 
588,739

Fixed assets, at cost, less accumulated depreciation of $129,579 and $128,546
81,054

 
88,189

Right-of-use assets - operating leases
223,622

 
—

Investments in non-consolidated affiliates
—

 


Goodwill
731,691

 
732,752

Other intangible assets, net
54,893

 
67,765

Deferred tax assets
84,900

 
91,436

Other assets
30,179

 
32,069

Total Assets
$
1,828,306

 
$
1,600,950

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ DEFICIT
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
200,148

 
$
221,995

Accruals and other liabilities
353,575

 
313,141

Liabilities held for sale
—

 
35,967

Advance billings
171,742

 
138,505

Current portion of lease liabilities - operating leases
48,659

 
—

Current portion of deferred acquisition consideration
45,521

 
32,928

Total Current Liabilities
819,645

 
742,536

Long-term debt
887,630

 
954,107

Long-term portion of deferred acquisition consideration
29,699

 
50,767

Long-term lease liabilities - operating leases
219,163

 
—

Other liabilities
21,584

 
54,255

Deferred tax liabilities
4,187

 
5,329

Total Liabilities
1,981,908

 
1,806,994

Redeemable Noncontrolling Interests
36,973

 
51,546

Commitments, Contingencies and Guarantees (Note 14)
 
 
 
Shareholders’ Deficit:
 
 
 
Convertible preference shares, 145,000 authorized, issued and outstanding at December 31, 2019 and 95,000 at December 31, 2018
152,746

 
90,123

Common stock and other paid-in capital
101,469

 
58,579

Accumulated deficit
(480,779
)
 
(475,526
)
Accumulated other comprehensive (loss) income
(4,269
)
 
4,720

MDC Partners Inc. Shareholders' Deficit
(230,833
)
 
(322,104
)
Noncontrolling interests
40,258

 
64,514

Total Shareholders' Deficit
(190,575
)
 
(257,590
)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Deficit
$
1,828,306

 
$
1,600,950

See notes to the Consolidated Financial Statements.

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MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of United States dollars)



 
Years Ended December 31,

2019
 
2018
 
2017
Cash flows from operating activities:
 

 
 

 
 
Net income (loss)
$
10,903

 
$
(118,222
)
 
$
256,461

Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
 
 
Stock-based compensation
31,040

 
18,416

 
24,350

Depreciation
25,133

 
27,111

 
23,873

Amortization of intangibles
13,196

 
19,085

 
19,601

Amortization of deferred finance charges and debt discount
3,346

 
3,193

 
3,022

Goodwill and other asset impairment
8,599

 
87,204

 
5,471

Adjustment to deferred acquisition consideration
5,403

 
(374
)
 
(4,819
)
Deferred income taxes (benefits)
4,791

 
21,585

 
(173,313
)
(Gain) loss on disposition of assets
3,237

 
(1,867
)
 
(1,600
)
Earnings of non-consolidated affiliates
(352
)
 
(62
)
 
(2,081
)
Other non-current assets and liabilities
(863
)
 
392

 
(4,420
)
Foreign exchange
(9,475
)
 
20,795

 
(17,637
)
Changes in working capital:
 
 
 
 
 
Accounts receivable
(37,763
)
 
31,326

 
(50,030
)
Expenditures billable to clients
12,236

 
(11,223
)
 
1,892

Prepaid expenses and other current assets
3,474

 
(17,189
)
 
6,569

Accounts payable, accruals and other current liabilities
(14,077
)
 
(18,222
)
 
13,398

Acquisition related payments
(5,223
)
 
(29,141
)
 
(42,790
)
Cash in trusts
—

 
(656
)
 
(709
)
Advance billings
32,934

 
(14,871
)
 
14,548

Net cash provided by operating activities
86,539


17,280

 
71,786

Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(18,596
)
 
(20,264
)
 
(32,958
)
Proceeds from sale of assets
23,050

 
2,082

 
10,631

Acquisitions, net of cash acquired
(4,823
)
 
(32,713
)
 
—

Distributions from non-consolidated affiliates
—

 
963

 
3,672

Other investments
484

 
(499
)
 
(2,229
)
Net cash provided by (used in) investing activities
115


(50,431
)
 
(20,884
)
Cash flows from financing activities:
 

 
 

 
 
Repayment of revolving credit facility
(1,303,350
)
 
(1,625,862
)
 
(1,479,632
)
Proceeds from revolving credit facility
1,235,205

 
1,694,005

 
1,425,207

Proceeds from issuance of common and convertible preference shares, net of issuance costs
98,620

 
—

 
90,220

Acquisition related payments
(30,155
)
 
(32,172
)
 
(57,083
)
Distributions to noncontrolling interests
(11,392
)
 
(13,419
)
 
(8,865
)
Payment of dividends
(56
)
 
(196
)
 
(284
)
Purchase of shares
(601
)
 
(776
)
 
(1,758
)
Other
—

 
(146
)
 
(404
)
Net cash provided by (used in) financing activities
(11,729
)

21,434

 
(32,599
)
Effect of exchange rate changes on cash, cash equivalents, and cash held in trusts
1

 
77

 
(754
)

35

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MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(thousands of United States dollars)


 
Years Ended December 31,

2019
 
2018
 
2017
Net increase (decrease) in cash, cash equivalents, and cash held in trusts including cash classified within assets held for sale
74,926

 
(11,640
)
 
17,549

Change in cash and cash equivalents held in trusts classified within held for sale
(3,307
)
 
(8,298
)
 
—

Change in cash and cash equivalents classified within assets held for sale
4,441

 
—

 
—

Net increase (decrease) in cash and cash equivalents
76,060

 
(19,938
)
 
17,549

Cash and cash equivalents at beginning of period
30,873

 
50,811

 
33,262

Cash and cash equivalents at end of period
$
106,933

 
$
30,873

 
$
50,811

Supplemental disclosures:
 

 
 

 
 
Cash income taxes paid
$
2,296

 
$
3,836

 
$
8,099

Cash interest paid
$
62,223

 
$
64,012

 
$
62,895

See notes to the Consolidated Financial Statements.

36

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MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(thousands of United States dollars, except per share amounts)


 
Twelve Months Ended
 
December 31, 2019
 
Convertible Preference Shares
 
Common Shares
 
Common Stock and Other Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
MDC Partners Inc. Shareholders' Deficit
 
Noncontrolling Interests
 
Total Shareholder's Deficit
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
 
 
 
 
 
Balance at December 31, 2018
95,000

 
$
90,123

 
57,521,323

 
$
58,579

 
$
(475,526
)
 
$
4,720

 
$
(322,104
)
 
$
64,514

 
$
(257,590
)
Net income attributable to MDC Partners Inc.
—

 
—

 
—

 
—

 
(5,253
)
 
—

 
(5,253
)
 
—

 
(5,253
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
(8,989
)
 
(8,989
)
 
387

 
(8,602
)
Issuance of common and convertible preference shares
50,000

 
62,623

 
14,285,714

 
35,997

 
—

 
—

 
98,620

 
—

 
98,620

Issuance of restricted stock
—

 
—

 
576,932

 
—

 
—

 
—

 
—

 
—

 
—

Shares acquired and cancelled
—

 
—

 
(229,366
)
 
(601
)
 
—

 
—

 
(601
)
 
—

 
(601
)
Stock-based compensation
—

 
—

 
—

 
3,655

 
—

 
—

 
3,655

 
—

 
3,655

Changes in redemption value of redeemable noncontrolling interests
—

 
—

 
—

 
3,160

 
—

 
—

 
3,160

 
—

 
3,160

Business acquisitions and step-up transactions, net of tax
—

 
—

 
—

 
1,911

 
—

 
—

 
1,911

 
—

 
1,911

Changes in ownership interest
—

 
—

 
—

 
(91
)
 
—

 
—

 
(91
)
 
(24,642
)
 
(24,733
)
Other
—

 
—

 
—

 
(1,141
)
 
—

 
—

 
(1,141
)
 
(1
)
 
(1,142
)
Balance at December 31, 2019
145,000

 
$
152,746

 
72,154,603

 
$
101,469

 
$
(480,779
)
 
$
(4,269
)
 
$
(230,833
)
 
$
40,258

 
$
(190,575
)

 
Twelve Months Ended
 
December 31, 2018
 
Convertible Preference Shares
 
Common Shares
 
Common Stock and Other Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
MDC Partners Inc. Shareholders' Deficit
 
Noncontrolling Interests
 
Total Shareholder's Deficit
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
 
 
 
 
 
Balance at December 31, 2017
95,000

 
$
90,220

 
56,375,131

 
$
38,191

 
$
(344,349
)
 
$
(1,954
)
 
$
(217,892
)
 
$
58,030

 
$
(159,862
)
Net loss attributable to MDC Partners Inc.
—

 
—

 
—

 
—

 
(130,007
)
 
—

 
(130,007
)
 
—

 
(130,007
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
6,674

 
6,674

 
(2,961
)
 
3,713

Expenses for convertible preference shares
—

 
(97
)
 
—

 
—

 
—

 
—

 
(97
)
 
—

 
(97
)
Issuance of restricted stock
—

 
—

 
243,529

 
—

 
—

 
—

 
—

 
—

 
—

Shares acquired and cancelled
—

 
—

 
(108,898
)
 
(776
)
 
—

 
—

 
(776
)
 
—

 
(776
)
Shares issued, acquisitions
—

 
—

 
1,011,561

 
7,030

 
—

 
—

 
7,030

 
—

 
7,030

Stock-based compensation
—

 
—

 
—

 
8,165

 
—

 
—

 
8,165

 
—

 
8,165

Changes in redemption value of redeemable noncontrolling interests
—

 
—

 
—

 
(4,171
)
 
—

 
—

 
(4,171
)
 
—

 
(4,171
)
Business acquisitions and step-up transactions, net of tax
—

 
—

 
—

 
10,140

 
—

 
—

 
10,140

 
15,410

 
25,550

Changes in ownership interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(5,965
)
 
(5,965
)
Cumulative effect of adoption of ASC 606
—

 
—

 
—

 
—

 
(1,170
)
 
—

 
(1,170
)
 
—

 
(1,170
)
Balance at December 31, 2018
95,000

 
$
90,123

 
57,521,323

 
$
58,579

 
$
(475,526
)
 
$
4,720

 
$
(322,104
)
 
$
64,514

 
$
(257,590
)







37

Table of Contents

MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT - (continued)
(thousands of United States dollars, except per share amounts)


 
Twelve Months Ended
 
December 31, 2017
 
Convertible Preference Shares
 
Common Shares
 
Common Stock and Other Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
MDC Partners Inc. Shareholders' Deficit
 
Noncontrolling Interests
 
Total Shareholder's Deficit
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
 
 
 
 
 
Balance at December 31, 2016
—

 
$
—

 
52,802,058

 
$
8,563

 
$
(585,435
)
 
$
(1,824
)
 
$
(578,696
)
 
$
65,633

 
$
(513,063
)
Net income attributable to MDC Partners Inc.
—

 
—

 
—

 
—

 
241,086

 
—

 
241,086

 
—

 
241,086

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
(130
)
 
(130
)
 
2,405

 
2,275

Issuance of common and convertible preference shares
95,000

 
90,220

 
—

 
—

 
—

 
—

 
90,220

 
—

 
90,220

Issuance of restricted stock
—

 
—

 
380,669

 
—

 
—

 
—

 
—

 
—

 
—

Shares acquired and cancelled
—

 
—

 
(161,535
)
 
(1,758
)
 
—

 
—

 
(1,758
)
 
—

 
(1,758
)
Deferred acquisition consideration settled through issuance of shares
—

 
—

 
3,353,939

 
27,852

 
—

 
—

 
27,852

 
—

 
27,852

Stock-based compensation
—

 
—

 
—

 
8,028

 
—

 
—

 
8,028

 
—

 
8,028

Changes in redemption value of redeemable noncontrolling interests
—

 
—

 
—

 
(1,498
)
 
—

 
—

 
(1,498
)
 
—

 
(1,498
)
Business acquisitions and step-up transactions, net of tax
—

 
—

 
—

 
2,315

 
—

 
—

 
2,315

 
(11,965
)
 
(9,650
)
Changes in ownership interest
—

 
—

 
—

 
(5,654
)
 
—

 
—

 
(5,654
)
 
12,614

 
6,960

Dispositions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(10,657
)
 
(10,657
)
Other
—

 
—

 
—

 
343

 
—

 
—

 
343

 
—

 
343

Balance at December 31, 2017
95,000

 
$
90,220

 
56,375,131

 
$
38,191

 
$
(344,349
)
 
$
(1,954
)
 
$
(217,892
)
 
$
58,030

 
$
(159,862
)

See notes to the Consolidated Financial Statements.

38


Table of Contents


MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
1. Basis of Presentation and Recent Developments
The accompanying consolidated financial statements include the accounts of MDC Partners Inc. (the “Company” or “MDC”) and its subsidiaries and variable interest entities for which the Company is the primary beneficiary. References herein to “Partner Firms” generally refer to the Company’s subsidiary agencies.
MDC has prepared the consolidated financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting financial information on Form 10-K. The preparation of financial statements in conformity with GAAP, which requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed. Actual results could differ from these estimates and assumptions.
The accompanying financial statements reflect all adjustments, consisting of normally recurring accruals, which in the opinion of management are necessary for a fair presentation, in all material respects, of the information contained therein. Intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.The Company reorganized its management structure effective January 1, 2020 which resulted in a change to our reportable segments. Prior periods presented have been recast to reflect the change in reportable segments. See Note 21 of the Notes to the Consolidated Financial Statements included herein.

Nature of Operations
MDC is a leading provider of global marketing, advertising, activation, communications and strategic consulting solutions. MDC’s Partner Firms deliver a wide range of customized services in order to drive growth and business performance for its clients.
MDC Partners Inc., formerly MDC Corporation Inc., is incorporated under the laws of Canada. The Company commenced using the name MDC Partners Inc. on November 1, 2003 and legally changed its name through amalgamation with a wholly-owned subsidiary on January 1, 2004. The Company operates in North America, Europe, Asia, South America, and Australia.
Recent Developments
The COVID-19 pandemic has negatively impacted the Company's results of operations, cash flows and financial position. While it is difficult to predict the full scale of the impact, the Company took actions beginning of March 2020 to address the impact of the pandemic, such as working closely with our clients, reducing our expenses and monitoring liquidity.
On February 14, 2020, the Company sold substantially all the assets and certain liabilities of Sloane and Company LLC (“Sloane”), an indirectly wholly owned subsidiary of the Company, to an affiliate of The Stagwell Group LLC (“Stagwell”), for an aggregate purchase price of approximately $26 million, consisting of cash paid at closing plus contingent deferred payments expected to be paid over the next two years. The sale resulted in a gain estimated at approximately $16 million. An affiliate of Stagwell has a minority ownership interest in the Company.  Mark Penn is the CEO and Chairman of the Board of Directors (the "Board") of the Company and is also manager of Stagwell.

On February 27, 2020, in connection with the centralization of our New York real estate portfolio, the Company entered into an agreement to lease space at One World Trade Center. The lease term is for approximately eleven years commencing on April 1, 2020, with rental payments totaling approximately $115 million. As part of the centralization initiative, the Company will sublease existing properties currently under lease, resulting in the recovery of a significant portion of our rent obligation under such arrangements.






39

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)

2. Significant Accounting Policies
The Company’s significant accounting policies are summarized as follows:
Principles of Consolidation.  The accompanying consolidated financial statements include the accounts of MDC Partners Inc. and its domestic and international controlled subsidiaries that are not considered variable interest entities, and variable interest entities for which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates.  The preparation of consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including goodwill, intangible assets, contingent deferred acquisition consideration, redeemable noncontrolling interests, deferred tax assets and the amounts of revenue and expenses reported during the period. These estimates are evaluated on an ongoing basis and are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances. These estimates require the use of assumptions about future performance, which are uncertain at the time of estimation. To the extent actual results differ from the assumptions used, results of operations and cash flows could be materially affected.
Fair Value.  The Company applies the fair value measurement guidance for financial assets and liabilities that are required to be measured at fair value and for non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis, including goodwill and other identifiable intangible assets. The measurement of fair value requires the use of techniques based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions.
When available, the Company uses quoted market prices in active markets to determine the fair value of its financial instruments and classifies such items in Level 1. In some cases, quoted market prices are used for similar instruments in active markets and the Company classifies such items in Level 2. See Note 19 of the Notes to the Consolidated Financial Statements included herein for additional information regarding fair value measurements.
Concentration of Credit Risk.  The Company provides marketing communications services to clients who operate in most industry sectors. Credit is granted to qualified clients in the ordinary course of business. Due to the diversified nature of the Company’s client base, the Company does not believe that it is exposed to a concentration of credit risk. No client accounted for more than 10% of the Company’s consolidated accounts receivable as of December 31, 2019 or December 31, 2018. No sales to an individual client or country other than in the United States accounted for more than 10% of revenue for the fiscal years ended December 31, 2019, 2018, or 2017. As the Company operates in foreign markets, it is always considered at least reasonably possible foreign operations will be disrupted in the near term.
Cash and Cash Equivalents.  The Company’s cash equivalents are primarily comprised of investments in overnight interest-bearing deposits, money market instruments and other short-term investments with original maturity dates of three months or less at the time of purchase. The Company has a concentration of credit risk in that there are cash deposits in excess of federally insured amounts.
Allowance for Doubtful Accounts.  Trade receivables are stated at invoiced amounts less allowances for doubtful accounts. The allowances represent estimated uncollectible receivables associated with potential customer defaults usually due to customers’ potential insolvency. The allowances include amounts for certain customers where a risk of default has been specifically identified. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience and existing economic conditions.
Expenditures Billable to Clients.  Expenditures billable to clients consist principally of outside vendor costs incurred on behalf of clients when providing services that have not yet been invoiced to clients. Such amounts are invoiced to clients at various times over the course of the production process.
Fixed Assets.  Fixed assets are stated at cost, net of accumulated depreciation. Computers, furniture and fixtures are depreciated on a straight-line basis over periods of three to seven years. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset. Repairs and maintenance costs are expensed as incurred.
Leases. Effective January 1, 2019, the Company adopted ASC 842, Leases. As a result, comparative prior periods have not been adjusted and continue to be reported under ASC 840, Leases. The Company recognizes on the balance sheet at the time of

40

Table of Contents

MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
2. Significant Accounting Policies - (continued)

lease commencement a right-of-use lease asset and a lease liability, initially measured at the present value of the lease payments. All right-of-use lease assets are reviewed for impairment. See Note 3 and Note 10 of the Notes to the Consolidated Financial Statements included herein for further information on leases.
Impairment of Long-lived Assets.  A long-lived asset or asset group is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, the Company compares the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of such asset or asset group. If this comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flows where observable fair values are not readily determinable. The discount rate applied to these cash flows is based on the Company’s weighted average cost of capital (“WACC”), risk adjusted where appropriate, or other appropriate discount rate.
Equity Method Investments.  Equity method investments are investments in entities in which the Company has an ownership interest of less than 50% and has significant influence, or joint control by contractual arrangement, (i) over the operating and financial policies of the affiliate or (ii) has an ownership interest greater than 50%; however, the substantive participating rights of the noncontrolling interest shareholders preclude the Company from exercising unilateral control over the operating and financial policies of the affiliate. The Company’s proportionate share of the net income or loss of equity method investments is included in the results of operations and any dividends and distributions reduce the carrying value of the investments. The Company’s equity method investments, include various interests in investment funds, are included in Investments in non-consolidated affiliates within the Consolidated Balance Sheets. The Company’s management periodically evaluates these investments to determine if there has been a decline in value that is other than temporary.
Other Investments.  From time to time, the Company makes investments in start-ups, such as advertising technology and innovative consumer product companies, where the Company does not exercise significant influence over the operating and financial policies of the investee. Non-marketable equity investments (cost method investments) do not have a readily determinable fair value and are recorded at cost, less any impairment, adjusted for qualifying observable investment balance changes. The carrying amount for these investments, which are included in Other assets within the Consolidated Balance Sheets as of December 31, 2019 and 2018 was $9,854 and $8,072, respectively.
The Company is required to measure these other investments at fair value and recognize any changes in fair value within net income or loss unless for investments that don’t have readily determinable fair values and don’t qualify for certain criteria an alternative for measurement exists. The alternative is to measure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company has elected to measure these investments under the alternative method. The Company performs a qualitative assessment to review these investments for impairment by identifying any impairment indicators, such as significant deterioration of earnings or significant change in the industry. If the qualitative assessment indicates an investment is impaired, the Company estimates the fair value and reduces the carrying value of the investment down to its fair value with the loss recorded within net income or loss.
Goodwill and Indefinite Lived Intangibles.  Goodwill (the excess of the acquisition cost over the fair value of the net assets acquired) and an indefinite life intangible asset (a trademark) acquired as a result of a business combination which are not subject to amortization are tested for impairment annually as of October 1st of each year, or more frequently if indicators of potential impairment exist. For goodwill, impairment is assessed at the reporting unit level.
For the annual impairment test, the Company has the option of assessing qualitative factors to determine whether it is more likely than not that the carrying amount of a reporting unit exceeds its fair value or performing a quantitative goodwill impairment test. Qualitative factors considered in the assessment include industry and market considerations, the competitive environment, overall financial performance, changing cost factors such as labor costs, and other factors specific to each reporting unit such as change in management or key personnel.
If the Company elects to perform the qualitative assessment and concludes that it is more likely than not that the fair value of the reporting unit is more than its carrying amount, then goodwill is not considered impaired and the quantitative impairment test is not necessary. For reporting units for which the qualitative assessment concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount and for reporting units for which the qualitative assessment is not performed, the Company will perform the quantitative impairment test, which compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill

41

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
2. Significant Accounting Policies - (continued)

is not considered impaired. However, if the fair value of the reporting unit is lower than the carrying amount of the net assets assigned to the reporting unit, an impairment charge is recognized equal to the excess of the carrying amount over the fair value.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. For the 2019 annual impairment test, the Company used an income approach, which incorporates the use of the discounted cash flow (“DCF”) method. The income approach requires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.
The DCF estimates incorporate expected cash flows that represent a spectrum of the amount and timing of possible cash flows of each reporting unit from a market participant perspective. The expected cash flows are developed from the Company’s long-range planning process using projections of operating results and related cash flows based on assumed long-term growth rates, demand trends and appropriate discount rates based on a reporting unit’s WACC as determined by considering the observable WACC of comparable companies and factors specific to the reporting unit. The terminal value is estimated using a constant growth method which requires an assumption about the expected long-term growth rate. The estimates are based on historical data and experience, industry projections, economic conditions, and the Company’s expectations. See Note 8 of the Notes to the Consolidated Financial Statements included herein for additional information regarding the Company’s impairment test.
Indefinite-lived intangible assets are primarily evaluated on an annual basis, generally in conjunction with the Company’s evaluation of goodwill balances. 
Definite Lived Intangible Assets.  Definite lived intangible assets are subject to amortization over their useful lives. The method of amortization selected reflects the pattern in which the economic benefits of the specific intangible asset is consumed or otherwise used. If that pattern cannot be reliably determined, a straight-line amortization method is used over the estimated useful life. Intangible assets that are subject to amortization are reviewed for potential impairment at least annually or whenever events or circumstances indicate that carrying amounts may not be recoverable. See Note 8 of the Notes to the Consolidated Financial Statements included herein for further information.
Business Combinations. Business combinations are accounted for using the acquisition method and accordingly, the assets acquired (including identified intangible assets), the liabilities assumed and any noncontrolling interest in the acquired business are recorded at their acquisition date fair values. The Company’s acquisition model typically provides for an initial payment at closing and for future additional contingent purchase price obligations. Contingent purchase price obligations are recorded as deferred acquisition consideration on the balance sheet at the acquisition date fair value and are remeasured at each reporting period. Changes in such estimated values are recorded in the results of operations.
For each acquisition, the Company undertakes a detailed review to identify other intangible assets and a valuation is performed for all such identified assets. The Company uses several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. A substantial portion of the intangible assets value that the Company acquires is the specialized know-how of the workforce, which is treated as part of goodwill and is not required to be valued separately. The majority of the value of the identifiable intangible assets acquired is derived from customer relationships, including the related customer contracts, as well as trademarks.
Deferred Acquisition Consideration. Consistent with past practice of acquiring a majority ownership position, most acquisitions include an initial payment at the time of closing and provide for future additional contingent purchase price payments. Contingent purchase price obligations for these transactions are recorded as deferred acquisition consideration liabilities, and are derived from the projected performance of the acquired entity and are based on predetermined formulas. These various contractual valuation formulas may be dependent on future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period. The liability is adjusted quarterly based on changes in current information affecting each subsidiary’s current operating results and the impact this information will have on future results included in the calculation of the estimated liability. In addition, changes in various contractual valuation formulas as well as adjustments to present value impact quarterly adjustments. These adjustments are recorded in results of operations.
Redeemable Noncontrolling Interests. Many of the Company’s acquisitions include contractual arrangements where the noncontrolling shareholders have an option to purchase, or may require the Company to purchase, such noncontrolling shareholders’ incremental ownership interests under certain circumstances. The Company has similar call options under the same contractual terms. The amount of consideration under these contractual arrangements is not a fixed amount, but rather is dependent upon various valuation formulas, such as the average earnings of the relevant subsidiary through the date of exercise or the growth rate of the earnings of the relevant subsidiary during that period. In the event that an incremental purchase may be required by the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity on the Consolidated Balance

42

Table of Contents

MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
2. Significant Accounting Policies - (continued)

Sheets at their acquisition date fair value and adjusted for changes to their estimated redemption value through Common stock and other paid-in capital in the Consolidated Balance Sheets (but not less than their initial redemption value), except for foreign currency translation adjustments. These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. See Note 13 of the Notes to the Consolidated Financial Statements for detail on the impact on the Company’s earnings (loss) per share calculation.
Subsidiary and Equity Investment Stock Transactions. Transactions involving the purchase, sale or issuance of stock of a subsidiary where control is maintained are recorded as a reduction in the redeemable noncontrolling interests or noncontrolling interests, as applicable. Any difference between the purchase price and noncontrolling interest is recorded to Common stock and other paid-in capital in the Consolidated Balance Sheets. In circumstances where the purchase of shares of an equity investment results in obtaining control, the existing carrying value of the investment is remeasured to the acquisition date fair value and any gain or loss is recognized in results of operations.
Revenue Recognition.  The Company’s revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. See Note 5 of the Notes to the Consolidated Financial Statements included herein for additional information.
Cost of Services Sold.  Cost of services sold primarily consists of staff costs, and does not include depreciation charges for fixed assets.
Interest Expense.  The Company uses the effective interest method to amortize deferred financing costs and any original issue premium or discount, if applicable. The Company also uses the straight-line method, which approximates the effective interest method, to amortize the deferred financing costs on the Credit Agreement.
Income Taxes. The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management evaluates on a quarterly basis all available positive and negative evidence considering factors such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies, changes in tax laws and other factors. The periodic assessment of the net carrying value of the Company’s deferred tax assets under the applicable accounting rules requires significant management judgment. A change to any of these factors could impact the estimated valuation allowance and income tax expense.
Stock-Based Compensation.  Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the service period, generally the award’s vesting period. The Company uses its historical volatility derived over the expected term of the award to determine the volatility factor used in determining the fair value of the award. The Company recognizes forfeitures as they occur.
Stock-based awards that are settled in cash or equity at the option of the Company are recorded at fair value on the date of grant. The fair value measurement of the compensation cost for these awards is based on using the Black-Scholes option pricing-model or other acceptable method and is recorded in operating income over the service period, in this case the award’s vesting period.
The Company has adopted the straight-line attribution method for determining the compensation cost to be recorded during each accounting period. The Company commences recording compensation expense related to awards that are based on performance conditions under the straight-line attribution method when it is probable that such performance conditions will be met.
From time to time, certain acquisitions and step-up transactions include an element of compensation related payments. The Company accounts for those payments as stock-based compensation.
Retirement Costs.  Several of the Company’s subsidiaries offer employees access to certain defined contribution retirement programs. Under the defined contribution plans, these subsidiaries, in some cases, make annual contributions to participants’ accounts which are subject to vesting. The Company’s contribution expense pursuant to these plans was $11,909, $11,136 and $10,031 for the years ended December 31, 2019, 2018, and 2017, respectively. The Company also has a defined benefit pension plan. See Note 12 of the Notes to the Consolidated Financial Statements included herein for additional information on the defined benefit plan.
Income (Loss) per Common Share.  Basic income (loss) per common share is based upon the weighted average number of common shares outstanding during each period. Diluted income (loss) per common share is based on the above, in addition, if dilutive, common share equivalents, which include outstanding options, stock appreciation rights, and unvested restricted stock

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
2. Significant Accounting Policies - (continued)

units. In periods of net loss, all potentially issuable common shares are excluded from diluted net loss per common share because they are anti-dilutive.
The Company has 145,000 authorized and issued convertible preference shares. The two-class method is applied to calculate basic net income (loss) attributable to MDC Partners Inc. per common share in periods in which shares of convertible preference shares are outstanding, as shares of convertible preference shares are participating securities due to their dividend rights. See Note 15 of the Notes to the Consolidated Financial Statements included herein for additional information. The two-class method is an earnings allocation method under which earnings per share is calculated for common stock considering a participating security’s rights to undistributed earnings as if all such earnings had been distributed during the period. Either the two-class method or the if-converted method is applied to calculate diluted net income per common share, depending on which method results in more dilution. The Company’s participating securities are not included in the computation of net loss per common share in periods of net loss because the convertible preference shareholders have no contractual obligation to participate in losses.
Foreign Currency Translation.  The functional currency of the Company is the Canadian dollar; however, it has decided to use U.S. dollars as its reporting currency for consolidated reporting purposes. Generally, the Company’s subsidiaries use their local currency as their functional currency. Accordingly, the currency impacts of the translation of the Consolidated Balance Sheets of the Company and its non-U.S. dollar based subsidiaries to U.S. dollar statements are included as cumulative translation adjustments in Accumulated other comprehensive (loss) income. Translation of intercompany debt, which is not intended to be repaid, is included in cumulative translation adjustments. Cumulative translation adjustments are not included in net earnings (loss) unless they are actually realized through a sale or upon complete, or substantially complete, liquidation of the Company’s net investment in the foreign operation. Translation of current intercompany balances are included in net earnings (loss). The balance sheets of non-U.S. dollar based subsidiaries are translated at the period end rate. The Consolidated Statements of Operation of the Company and its non-U.S. dollar based subsidiaries are translated at average exchange rates for the period.
Gains and losses arising from the Company’s foreign currency transactions are reflected in net earnings. Unrealized gains or losses arising on the translation of certain intercompany foreign currency transactions that are of a long-term nature (that is settlement is not planned or anticipated in the future) are included as cumulative translation adjustments in Accumulated other comprehensive (loss) income.
3. New Accounting Pronouncements
Adopted In The Current Reporting Period
Effective January 1, 2019, the Company adopted ASC 842. As a result, comparative prior periods have not been adjusted and continue to be reported under ASC 840, Leases. With the adoption of ASC 842, the Company has elected to apply the package of practical expedients: (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. Additionally, the Company elected the practical expedient to not separate non-lease components from lease components for all operating leases.
The adoption of ASC 842 had a material impact on the Company’s Consolidated Balance Sheets, resulting in the recognition, on January 1, 2019, of a lease liability of $299,243 which represents the present value of the remaining lease payments, and a right-of-use lease asset of $254,245 which represents the lease liability, offset by adjustments as appropriate under ASC 842. The adoption of ASC 842 did not have a material impact on the Company’s other Consolidated Financial Statements.
4. Acquisitions and Dispositions
2019 Acquisition
On November 15, 2019, the Company acquired the remaining 35% ownership interest of Laird + Partners it did not own for an aggregate purchase price of $2,389, comprised of a closing cash payment of $1,588 and contingent deferred acquisition payments with an estimated present value at the acquisition date of $801. The contingent deferred payments are based on the financial results of the underlying business from 2018 to 2020 with final payment due in 2021. As of the acquisition date, the fair value of the additional interest acquired was $6,005. The fair value was measured using a discounted cash flow model. As a result of the transaction, the Company reduced redeemable noncontrolling interests by $5,045. The difference between the purchase price and the redeemable noncontrolling interest of $2,656 was recorded in common stock and other paid-in capital in the Consolidated Balance Sheets.
Effective April 1, 2019, the Company acquired the remaining 35% ownership interest of HPR Partners LLC (Hunter) it did not own for an aggregate purchase price of $10,234, comprised of a closing cash payment of $3,890 and additional contingent

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MDC PARTNERS INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
4. Acquisitions and Dispositions - (continued)

deferred acquisition payments with an estimated present value at the acquisition date of $6,344. The contingent deferred payments are based on the financial results of the underlying business from 2018 to 2020 with final payment due in 2021. As of the acquisition date, the fair value of the additional interest acquired was $20,178. The fair value was measured using a discounted cash flow model. As a result of the transaction, the Company reduced redeemable noncontrolling interests by $9,486. The difference between the purchase price and the noncontrolling interest of $745 was recorded in common stock and other paid-in capital in the Consolidated Balance Sheets.
2019 Disposition
On March 8, 2019, the Company consummated the sale of Kingsdale, an operating segment with operations in Toronto and New York City that provides shareholder advisory services. As consideration for the sale, the Company received cash plus the assumption of certain liabilities totaling approximately $50 million in the aggregate. The sale resulted in a loss of approximately $3 million, which was included in Other, net within the Condensed Consolidated Statement of Operations.
Assets and Liabilities Held for Sale - Change in Plan to Sell
In the fourth quarter of 2018, the Company initiated a process to sell its ownership interest in a foreign office within the Integrated Networks - Group B reportable segment. The assets and liabilities of the entity were classified as Assets and Liabilities held for sale, at their fair value less cost to sell, within the Consolidated Balance Sheet as of December 31, 2018. In the second quarter of 2019, following the appointment of Mark Penn as CEO, management changed its strategy and plan to sell the foreign office. In the second quarter of 2019, in connection with management’s decision, the amounts classified within assets and liabilities held for sale were reclassified into the respective line items within the Consolidated Balance Sheets.
2018 Acquisitions
In 2018, the Company entered into various transactions in connection with certain of its majority-owned entities. These transactions were for an aggregate purchase price of $56,463, resulting in an increase in contingent deferred consideration liabilities as of the acquisition dates of $16,174, reduced redeemable noncontrolling interests of $9,790, a net increase in noncontrolling interests equity of $15,411, increased additional paid-in capital of $4,975, and the issuance of 1,011,561 shares of the Company’s Class A subordinate voting stock.
5. Revenue
The Company’s revenue recognition policies are established in accordance with ASC 606, and accordingly, revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The MDC network provides an extensive range of services to our clients offering a variety of marketing and communication capabilities including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast), public relations services including strategy, editorial, crisis support or issues management, media training, influencer engagement and events management. We also provide media buying and planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast), experiential marketing and application/website design and development.
The primary source of the Company’s revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses, depending on the terms of the client contract. In all circumstances, revenue is only recognized when collection is reasonably assured. Certain of the Company’s contractual arrangements have more than one performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its relative stand-alone selling price. Stand-alone selling prices are determined based on the prices charged to clients or using expected cost plus margin.
The determination of our performance obligations is specific to the services included within each contract. Based on a client’s requirements within the contract, and how these services are provided, multiple services could represent separate performance obligations or be combined and considered one performance obligation. Contracts that contain services that are not significantly integrated or interdependent, and that do not significantly modify or customize each other, are considered separate performance obligations. Typically, we consider media planning, media buying, creative (or strategy), production and experiential marketing services to be separate performance obligations if included in the same contract as each of these services can be provided on a stand-alone basis, and do not significantly modify or customize each other. Public relations services and application/website design

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
5. Revenue - (continued)


and development are typically each considered one performance obligation as there is a significant integration of these services into a combined output.
We typically satisfy our performance obligations over time, as services are performed. Fees for services are typically recognized using input methods (direct labor hours, materials and third-party costs) that correspond with efforts incurred to date in relation to total estimated efforts to complete the contract. Point in time recognition primarily relates to certain commission-based contracts, which are recognized upon the placement of advertisements in various media when the Company has no further performance obligation.                                            
Revenue is recognized net of sales and other taxes due to be collected and remitted to governmental authorities. The Company’s contracts typically provide for termination by either party within 30 to 90 days. Although payment terms vary by client, they are typically within 30 to 60 days. In addition, the Company generally has the right to payment for all services provided through the end of the contract or termination date.
Within each contract, we identify whether the Company is principal or agent at the performance obligation level. In arrangements where the Company has substantive control over the service before transferring it to the client, and is primarily responsible for integrating the services into the final deliverables, we act as principal. In these arrangements, revenue is recorded at the gross amount billed. Accordingly, for these contracts the Company has included reimbursed expenses in revenue. In other arrangements where a third-party supplier, rather than the Company, is primarily responsible for the integration of services into the final deliverables, and thus the Company is solely arranging for the third-party supplier to provide these services to our client, we generally act as agent and record revenue equal to the net amount retained, when the fee or commission is earned. The role of MDC’s agencies under a production services agreement is to facilitate a client’s purchasing of production capabilities from a third-party production company in accordance with the client’s strategy and guidelines. The obligation of MDC’s agencies under media buying services is to negotiate and purchase advertising media from a third-party media vendor on behalf of a client to execute its media plan. We do not obtain control prior to transferring these services to our clients; therefore, we primarily act as agent for production and media buying services.                                    
A small portion of the Company’s contractual arrangements with clients include performance incentive provisions, which allow the Company to earn additional revenues as a result of its performance relative to both quantitative and qualitative goals. Incentive compensation is primarily estimated using the most likely amount method and is included in revenue up to the amount that is not expected to result in a reversal of a significant amount of cumulative revenue recognized. We recognize revenue related to performance incentives as we satisfy the performance obligation to which the performance incentives are related.
Disaggregated Revenue Data
The Company provides a broad range of services to a large base of clients across the full spectrum of industry verticals on a global basis. The primary source of revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses. Certain clients may engage with the Company in various geographic locations, across multiple disciplines, and through multiple Partner Firms. Representation of a client rarely means that MDC handles marketing communications for all brands or product lines of the client in every geographical location. The Company’s Partner firms often cooperate with one another through referrals and the sharing of both services and expertise, which enables MDC to service clients’ varied marketing needs by crafting custom integrated solutions. Additionally, the Company maintains separate, independent operating companies to enable it to effectively manage potential conflicts of interest by representing competing clients across the MDC network.
The following table presents revenue disaggregated by client industry vertical for the twelve months ended December 31, 2019, 2018 and 2017:

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
5. Revenue - (continued)


 
 
 
Twelve Months Ended December 31,
Industry
Reportable Segment
 
2019
 
2018
 
2017
Food & Beverage
All
 
$
280,094

 
$
313,368

 
$
313,786

Retail
All
 
148,851

 
152,552

 
178,152

Consumer Products
All
 
167,324

 
162,524

 
162,307

Communications
All
 
184,870

 
178,410

 
208,701

Automotive
All
 
78,985

 
88,807

 
127,023

Technology
All
 
118,169

 
104,479

 
99,325

Healthcare
All
 
102,221

 
127,547

 
124,261

Financials
All
 
112,351

 
110,069

 
104,713

Transportation and Travel/Lodging
All
 
88,958

 
86,419

 
56,955

Other
All
 
133,980

 
150,913

 
138,556

 
 
 
$
1,415,803

 
$
1,475,088

 
$
1,513,779


MDC has historically largely focused where the Company was founded in North America, the largest market for its services in the world. The Company has expanded its global footprint to support clients looking for help to grow their businesses in new markets. MDC’s Partner Firms are located in the United States, Canada, and an additional twelve countries around the world. In the past, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which included discretionary components that are easier to reduce in the short term than other operating expenses.
The following table presents revenue disaggregated by geography for the twelve months ended December 31, 2019, 2018 and 2017:
 
Twelve Months Ended December 31,
Geographic Location
Reportable Segment
 
2019
 
2018
 
2017
United States
All
 
$
1,116,047

 
$
1,152,055

 
$
1,172,319

Canada
All
 
105,066

 
124,023

 
123,138

Other
All
 
194,690

 
199,010

 
218,322

 
 
 
$
1,415,803

 
$
1,475,088

 
$
1,513,779


Contract assets and liabilities
Contract assets consist of fees and reimbursable outside vendor costs incurred on behalf of clients when providing advertising, marketing and corporate communications services that have not yet been invoiced to clients. Unbilled service fees were $65,004 and $63,247 at December 31, 2019 and December 31, 2018, respectively, and are included as a component of accounts receivable on the Consolidated Balance Sheets. Outside vendor costs incurred on behalf of clients which have yet to be invoiced were $30,133 and $42,369 at December 31, 2019 and December 31, 2018, respectively, and are included on the Consolidated Balance Sheets as expenditures billable to clients. Such amounts are invoiced to clients at various times over the course of providing services.
Contract liabilities consist of fees billed to clients in excess of fees recognized as revenue and are classified as advance billings on the Company’s Consolidated Balance Sheets. Advance billings at December 31, 2019 and December 31, 2018 were $171,742 and $138,505, respectively. The increase in the advance billings balance of $33,237 for the twelve months ended December 31, 2019 was primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $121,659 of revenues recognized that were included in the advance billings balances as of December 31, 2018 and reductions due to the incurrence of third-party costs.
Changes in the contract asset and liability balances during the twelve months ended December 31, 2019 and December 31, 2018 were not materially impacted by write offs, impairment losses or any other factors.
Practical Expedients

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
5. Revenue - (continued)


As part of the adoption of ASC 606, the Company applied the practical expedient to not disclose information about remaining performance obligations that have original expected durations of one year or less. The majority of our contracts are for periods of one year or less. For those contracts with a term of more than one year, we had approximately $49,013 of unsatisfied performance obligations as of December 31, 2019, of which we expect to recognize approximately 42% in 2020 and 58% in 2021.
6. Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted income (loss) per common share:
 
 
Twelve Months Ended December 31,
 
 
2019
 
2018
 
2017
Numerator:
 
 
 
 
 
 
Net income (loss) attributable to MDC Partners Inc.
 
$
(5,253
)
 
$
(130,007
)
 
$
241,086

Accretion on convertible preference shares
 
(12,304
)
 
(8,355
)
 
(6,352
)
Net income allocated to convertible preference shares
 
—

 
—

 
(29,902
)
Net income (loss) attributable to MDC Partners Inc. common shareholders
 
$
(17,557
)
 
$
(138,362
)
 
$
204,832

 
 
 
 
 
 
 
Adjustment to net income allocated to convertible preference shares
 
—

 
—

 
106

Numerator for dilutive income (loss) per common share:
 
 
 
 
 
 
Net income (loss) attributable to MDC Partners Inc. common shareholders
 
$
(17,557
)
 
$
(138,362
)
 
$
204,938

Denominator:
 
 
 
 
 
 
Basic weighted average number of common shares outstanding
 
69,132,100

 
57,218,994

 
55,255,797

Effect of dilutive securities:
 
 
 
 
 
 
Impact of stock options and non-vested stock under employee stock incentive plans
 
—

 
—

 
225,989

Diluted weighted average number of common shares outstanding
 
69,132,100

 
57,218,994

 
55,481,786

Basic
 
$
(0.25
)
 
$
(2.42
)
 
$
3.71

Diluted
 
$
(0.25
)
 
$
(2.42
)
 
$
3.70


Anti-dilutive stock awards                  5,450,426 1,442,518      0

Restricted stock and restricted stock unit awards of 135,386, 1,012,637 and 1,443,921 as of December 31, 2019, 2018 and 2017 respectively, which are contingent upon the Company meeting a cumulative three year earnings target and contingent upon continued employment, are excluded from the computation of diluted income per common share as the contingencies were not satisfied at December 31, 2019, 2018 and 2017, respectively. In addition, there were 145,000, 95,000, and 95,000 Preference Shares outstanding which were convertible into 26,656,285, 10,970,714, and 10,135,244 Class A common shares at December 31, 2019, 2018, and 2017, respectively. These Preference Shares were anti-dilutive for each period presented in the table above and are therefore excluded from the diluted income (loss) per common share calculation.


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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)

7. Fixed Assets  
The following is a summary of the Company’s fixed assets as of December 31:
 
2019
 
2018
  
Cost
 
Accumulated Depreciation
 
Net Book Value
 
Cost
 
Accumulated Depreciation
 
Net Book Value
Computers, furniture and fixtures
$
93,224

 
$
(69,687
)
 
$
23,537

 
$
100,276

 
$
(73,060
)
 
$
27,216

Leasehold improvements
117,409

 
(59,892
)
 
57,517

 
116,459

 
(55,486
)
 
60,973

  
$
210,633

 
$
(129,579
)
 
$
81,054

 
$
216,735

 
$
(128,546
)
 
$
88,189


Depreciation expense for the years ended December 31, 2019, 2018, and 2017 was $25,133, $27,111 and $23,873, respectively.
8. Goodwill and Intangible Assets  
As of December 31, goodwill was as follows:
Goodwill
Integrated Networks - Group A
 
Integrated Networks -Group B
 
Media & Data Network
 
All Other
 
Total
Balance at December 31, 2017
$
139,452

 
$
252,645

 
$
190,481

 
$
252,301

 
$
834,879

Acquired goodwill
—

 
32,776

 
—

 
4,816

 
37,592

Impairment loss recognized
—

 
(17,828
)
 
(59,188
)
 
(4,691
)
 
(81,707
)
Transfer of goodwill between segments

—

 
211

 
(29,143
)
 
28,932

 
—

Transfer of goodwill to asset held for sale (1)
—

 
—

 
—

 
(45,224
)
 
(45,224
)
Foreign currency translation
—

 
(745
)
 
(382
)
 
(11,661
)
 
(12,788
)
Balance at December 31, 2018
$
139,452

 
$
267,059

 
$
101,768

 
$
224,473

 
$
732,752

Acquired goodwill
—

 
1,025

 
—

 
—

 
1,025

Impairment loss recognized
(4,879
)
 
—

 
—

 
—

 
(4,879
)
Transfer of goodwill between segments (2)
—

 
(120
)
 
3,612

 
(3,492
)
 
—

Foreign currency translation
—

 
423

 
217

 
2,153

 
2,793

Balance at December 31, 2019
$
134,573

 
$
268,387

 
$
105,597

 
$
223,134

 
$
731,691

(1) See Note 4 of the Notes to the Consolidated Financial Statements included herein for additional information.
(2) Transfers of goodwill relate to changes in segments.
The Company recognized an impairment of goodwill of $4,879 for the twelve months ended December 31, 2019. The impairment consisted of the write-down of goodwill equal to the excess carrying value above the fair value of one reporting unit within the Integrated Networks - Group A.
The Company recognized an impairment of goodwill and other assets of $87,204 for the twelve months ended December 31, 2018. The impairment primarily consisted of the write-down of goodwill equal to the excess carrying value above the fair value of three reporting units, one in each of the Integrated Network - Group B reportable segment, the Media & Data Network reportable segment and within the All Other category. In 2018, the Company also recognized the full write-down of a trademark totaling $3,180 for a reporting unit within the Integrated Networks - Group B reportable segment. The trademark is no longer in active use given its merger with another reporting unit.
The Company recognized an impairment of goodwill of $5,471 for the twelve months ended December 31, 2017. The impairment primarily consisted of the write-down of goodwill equal to the excess carrying value above the fair value of two reporting units, one in each of the Integrated Networks - Group B reportable segment and within All Other category.
The total accumulated goodwill impairment charges as of December 31, 2019 and 2018, were $177,304 and $173,205, respectively.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
8. Goodwill and Intangible Assets - (continued)


As of December 31, the gross and net amounts of acquired intangible assets other than goodwill were as follows:
 
 
Years Ended December 31,
Intangible Assets
 
2019
 
2018
Trademark (indefinite life)
 
$
14,600

 
$
14,600

Customer relationships – gross
 
$
58,211

 
$
76,365

Less accumulated amortization
 
(32,671
)
 
(42,180
)
Customer relationships – net
 
$
25,540

 
$
34,185

Other intangibles – gross
 
$
28,695

 
$
31,421

Less accumulated amortization
 
(13,942
)
 
(12,441
)
Other intangibles – net
 
$
14,753

 
$
18,980

Total intangible assets
 
$
101,506

 
$
122,386

Less accumulated amortization
 
(46,613
)
 
(54,621
)
Total intangible assets – net
 
$
54,893

 
$
67,765


The weighted average amortization period for customer relationships is seven years and other intangible assets is nine years. In total, the weighted average amortization period is eight years. Amortization expense related to amortizable intangible assets for the years ended December 31, 2019, 2018, and 2017 was $11,828, $17,290, and $17,125, respectively.
The estimated amortization expense for the five succeeding years is as follows:
Year
 
Amortization
2020
 
$
9,481

2021
 
8,098

2022
 
7,547

2023
 
7,089

Thereafter
 
8,078


        
9. Deferred Acquisition Consideration
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, and to a lesser extent, contingent and fixed retention payments tied to continued employment of specific personnel. Contingent deferred acquisition consideration is recorded at the acquisition date fair value and adjusted at each reporting period through operating income, for contingent purchase price payments, or net interest expense, for fixed purchase price payments. The Company accounts for retention payments through operating income as stock-based compensation over the required retention period.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
9. Deferred Acquisition Consideration - (continued)


The following table presents changes in contingent deferred acquisition consideration, which is measured at fair value on a recurring basis using significant unobservable inputs, and a reconciliation to the amounts reported on the balance sheets as of December 31, 2019 and December 31, 2018.
 
December 31,
 
2019
 
2018
Beginning balance of contingent payments
$
82,598

 
$
119,086

Payments
(30,719
)
 
(54,947
)
Redemption value adjustments (1)
15,450

 
3,512

Additions - acquisitions and step-up transactions
7,145

 
14,943

Other (2)
197

 
4

Ending balance of contingent payments
$
74,671

 
$
82,598

Fixed payments
549

 
1,097

 
$
75,220

 
$
83,695

(1) Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition payments and stock-based compensation charges relating to acquisition payments that are tied to continued employment. Redemption value adjustments are recorded within cost of services sold and office and general expenses on the Consolidated Statements of Operations.
(2) Other primarily consists of translation adjustments.
The following table presents the impact to the Company’s statement of operations due to the redemption value adjustments for the contingent deferred acquisition consideration for the twelve months ended December 31, 2019 and 2018:
 
 
2019
 
2018
(Income) loss attributable to fair value adjustments
 
$
5,402

 
$
(3,679
)
Stock-based compensation
 
10,048

 
7,191

Redemption value adjustments
 
$
15,450

 
$
3,512


10. Leases

Effective January 1, 2019, the Company adopted ASC 842. As a result, comparative prior periods have not been adjusted and continue to be reported under ASC 840. See Note 3 of the Notes to the Consolidated Financial Statements included herein for additional information regarding the Company’s adoption of ASC 842. The policies described herein refer to those in effect as of January 1, 2019.
The Company leases office space in North America, Europe, Asia, South America, and Australia. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. These leases are classified as operating leases and expire between years 2020 through 2032. The Company’s finance leases are immaterial.
The Company’s leasing policies are established in accordance with ASC 842, and accordingly, the Company recognizes on the balance sheet at the time of lease commencement a right-of-use lease asset and a lease liability, initially measured at the present value of the lease payments. Right-of-use lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. All right-of-use lease assets are reviewed for impairment. As the Company’s implicit rate in its leases is not readily determinable, in determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the commencement date. Lease payments included in the measurement of the lease liability are comprised of noncancelable lease payments, payments based upon an index or rate, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease costs are recognized in the Consolidated Statement of Operations over the lease term on a straight-line basis. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset. 

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
10. Leases - (continued)


Some of the Company’s leases contain variable lease payments, including payments based upon an index or rate. Variable lease payments based upon an index or rate are initially measured using the index or rate in effect at the lease commencement date and are included within the lease liabilities. Lease liabilities are not remeasured as a result of changes in the index or rate, rather changes in these types of payments are recognized in the period in which the obligation for those payments is incurred. In addition, some of our leases contain variable payments for utilities, insurance, real estate tax, repairs and maintenance, and other variable operating expenses. Such amounts are not included in the measurement of the lease liability and are recognized in the period when the facts and circumstances on which the variable lease payments are based upon occur.
The Company’s leases include options to extend or renew the lease through 2040. The renewal and extension options are not included in the lease term as the Company is not reasonably certain that it will exercise its option.
From time to time, the Company enters into sublease arrangements both with unrelated third-parties and with our partner agencies. These leases are classified as operating leases and expire between 2020 through 2032. Sublease income is recognized over the lease term on a straight-line basis. Currently, the Company subleases office space in North America, Europe and Australia.
As of December 31, 2019, the Company has entered into five operating leases for which the commencement date has not yet occurred as the space is being prepared for occupancy by the landlord. Accordingly, these leases represent an obligation of the Company that is not on the Consolidated Balance Sheet as of December 31, 2019. The aggregate future liability related to these leases is approximately $13.9 million.
The discount rate used for leases accounted for under ASC 842 is the Company’s collateralized credit adjusted borrowing rate.
The following table presents lease costs and other quantitative information for the twelve months ended December 31, 2019:
 
 
Twelve Months Ended December 31,
 
 
2019
Lease Cost:
 
 
Operating lease cost
 
$
67,044

Variable lease cost
 
18,879

Sublease rental income
 
(8,965
)
Total lease cost
 
$
76,958

Additional information:
 
 
Cash paid for amounts included in the measurement of lease liabilities for operating leases
 

Operating cash flows
 
$
69,735

 
 
 
Right-of-use assets obtained in exchange for operating lease liabilities
 
$
269,801

Weighted average remaining lease term (in years) - Operating leases
 
5.3

Weighted average discount rate - Operating leases
 
8.6



In the twelve months ended December 31, 2019, the Company recorded an impairment charge of $3.7 million to reduce the carrying value of four of its right-of-use lease assets and related leasehold improvements. These right-of-use assets were within the Integrated Networks - Group B and Media & Data Network reportable segments as well as at Corporate. The Company evaluated the facts and circumstances related to the use of the assets which indicated that they may not be recoverable. Using adjusted quoted market prices to develop expected future cash flows, it was determined that the fair value of the assets were less than their carrying value. This impairment charge is included in Goodwill and other asset impairment within the Consolidated Statement of Operations.
Operating lease expense is included in office and general expenses in the Consolidated Statement of Operations. The Company’s lease expense for leases with a term of 12 months or less is immaterial.
Rental expense for the twelve months ended December 31, 2018 and 2017 was $65,093 and $64,086, respectively, offset by $3,671 and $2,797, respectively, in sublease rental income.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
10. Leases - (continued)


The following table presents minimum future rental payments under the Company’s leases at December 31, 2019 and their reconciliation to the corresponding lease liabilities:
 
Maturity Analysis
2020
$
69,563

2021
59,216

2022
48,593

2023
43,878

2024
37,260

2025 and thereafter
102,552

Total
361,062

Less: Present value discount
(93,240
)
Lease liability
$
267,822


11. Debt
As of December 31, 2019 and 2018, the Company’s indebtedness was comprised as follows:

December 31, 2019

December 31, 2018
Revolving credit agreement
$
—

 
$
68,143

6.50% Senior Notes due 2024
900,000

 
900,000

Debt issuance costs
(12,370
)
 
(14,036
)
 
$
887,630

 
$
954,107


Interest expense related to long-term debt for the years ended December 31, 2019, 2018, and 2017 was $62,210, $64,420 and $62,001, respectively.
The amortization of deferred finance costs included in interest expense was $3,346, $3,193 and $3,022 for the years ended December 31, 2019, 2018, and 2017, respectively.
6.50% Notes
On March 23, 2016, MDC entered into an indenture (the “Indenture”) among MDC, its existing and future restricted subsidiaries that guarantee, are co-borrowers under, or grant liens to secure, the Credit Agreement, as guarantors (the “Guarantors”) and The Bank of New York Mellon, as trustee, relating to the issuance by MDC of $900,000 aggregate principal amount of the senior notes due 2024 (the “6.50% Notes”). The 6.50% Notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933. The 6.50% Notes bear interest, payable semiannually in arrears on May 1 and November 1, at a rate of 6.50% per annum. The 6.50% Notes mature on May 1, 2024, unless earlier redeemed or repurchased.
The 6.50% Notes are guaranteed on a senior unsecured basis by all of MDC’s existing and future restricted subsidiaries that guarantee, are co-borrowers under, or grant liens to secure, the Credit Agreement. The 6.50% Notes are unsecured and unsubordinated obligations of MDC and rank (i) equally in right of payment with all of MDC’s or any Guarantor’s existing and future senior indebtedness, (ii) senior in right of payment to MDC’s or any Guarantor’s existing and future subordinated indebtedness, (iii) effectively subordinated to all of MDC’s or any Guarantor’s existing and future secured indebtedness to the extent of the collateral securing such indebtedness, including the Credit Agreement, and (iv) structurally subordinated to all existing and future liabilities of MDC’s subsidiaries that are not Guarantors.
MDC may, at its option, redeem the 6.50% Notes in whole at any time or in part from time to time, at varying prices based on the timing of the redemption.
If MDC experiences certain kinds of changes of control (as defined in the Indenture), holders of the 6.50% Notes may require MDC to repurchase any 6.50% Notes held by them at a price equal to 101% of the principal amount of the 6.50% Notes plus

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
11. Debt - (continued)


accrued and unpaid interest. In addition, if MDC sells assets under certain circumstances, it must apply the proceeds from such sale and offer to repurchase the 6.50% Notes at a price equal to 100% of the principal amount plus accrued and unpaid interest.
The Indenture includes covenants that, among other things, restrict MDC’s ability and the ability of its restricted subsidiaries (as defined in the Indenture) to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC; make certain types of investments; create restrictions on the payment of dividends or other amounts from MDC’s restricted subsidiaries; sell assets; enter into transactions with affiliates; create liens; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of MDC’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The 6.50% Notes are also subject to customary events of default, including a cross-payment default and cross-acceleration provision. The Company was in compliance with all covenants at December 31, 2019.
Amendment to Credit Agreement
The Company is party to a $250,000 secured revolving credit facility due May 3, 2021.
On March 12, 2019 (the “Amendment Effective Date”), the Company, Maxxcom Inc. (a subsidiary of the Company) (“Maxxcom”) and each of their subsidiaries party thereto entered into an Amendment to the existing senior secured revolving credit facility, dated as of May 3, 2016 (as amended, the “Credit Agreement”), among the Company, Maxxcom, each of their subsidiaries party thereto, Wells Fargo Capital Finance, LLC, as agent (“Wells Fargo”), and the lenders from time to time party thereto. Advances under the Credit Agreement are to be used for working capital and general corporate purposes, in each case pursuant to the terms of the Credit Agreement.
Advances under the Credit Agreement bear interest as follows: (a)(i) LIBOR Rate Loans bear interest at the LIBOR Rate and (ii) Base Rate Loans bear interest at the Base Rate, plus (b) an applicable margin. The initial applicable margin for borrowing is 0.75% in the case of Base Rate Loans and 1.50% in the case of LIBOR Rate Loans. In addition to paying interest on outstanding principal under the Credit Agreement, MDC is required to pay an unused revolver fee to lenders under the Credit Agreement in respect of unused commitments thereunder.
The Amendment provides financial covenant relief by increasing the total leverage ratio applicable on each testing date after the Amendment Effective Date through the period ending December 31, 2020 from 5.5:1.0 to 6.25:1.0. The total leverage ratio applicable on each testing date after December 31, 2020 will revert to 5.5:1.0.
In connection with the Amendment, the Company reduced the aggregate maximum amount of revolving commitments provided by the lenders under the Credit Agreement to $250 million from $325 million.
The Credit Agreement, which includes financial and non-financial covenants, is guaranteed by substantially all of MDC’s present and future subsidiaries, other than immaterial subsidiaries and subject to customary exceptions and collateralized by a portion of MDC’s outstanding receivable balance. The Company was in compliance with all of the terms and conditions of its Credit Agreement as of December 31, 2019.
At December 31, 2019 and December 31, 2018, the Company had issued undrawn outstanding letters of credit of $4,836 and $4,701, respectively.
Future Principal Repayments
Future principal repayments on the 6.50% Notes in the aggregate principal amount of $900 million are due in 2024.
12. Employee Benefit Plans
A subsidiary of the Company, sponsors a defined benefit plan with benefits based on each employee’s years of service and compensation. The benefits under the defined benefit pension plan are frozen.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
12. Employee Benefit Plans - (continued)


Net Periodic Pension Cost and Pension Benefit Obligation
Net periodic pension cost consists of the following components for the years ended December 31:
 
Pension Benefits
  
2019
 
2018
 
2017
Service cost
$
—

 
$
—

 
$
—

Interest cost on benefit obligation
1,640

 
1,641

 
1,725

Expected return on plan assets
(1,604
)
 
(1,948
)
 
(1,830
)
Curtailment and settlements
626

 
1,039

 
—

Amortization of actuarial (gains) losses
266

 
258

 
222

Net periodic benefit cost
$
928

 
$
990

 
$
117


The above costs are included within Other, net on the Consolidated Statements of Operations.
The following weighted average assumptions were used to determine net periodic costs at December 31:
 
Pension Benefits
  
2019
 
2018
 
2017
Discount rate
4.42
%
 
3.83
%
 
4.32
%
Expected return on plan assets
7.00
%
 
7.00
%
 
7.40
%
Rate of compensation increase
N/A

 
N/A

 
N/A


The expected return on plan assets is a long-term assumption established by considering historical and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes.
Other changes in plan assets and benefit obligation recognized in Other comprehensive income (loss) consist of the following components for the years ended December 31:
 
Pension Benefits
  
2019
 
2018
 
2017
Current year actuarial (gain) loss
$
2,917

 
$
(520
)
 
$
1,558

Amortization of actuarial loss
(266
)
 
(258
)
 
(222
)
Total recognized in other comprehensive (income) loss
2,651

 
(778
)
 
1,336

Total recognized in net periodic benefit cost and other comprehensive loss
$
3,579

 
$
212

 
$
1,453



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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
12. Employee Benefit Plans - (continued)


The following table summarizes the change in benefit obligations and fair values of plan assets for the years ended December 31:
  
2019
 
2018
 
2017
Change in benefit obligation:
  

 
  

 
 
Benefit obligation, Beginning balance
$
37,938

 
$
43,750

 
$
40,722

Interest Cost
1,640

 
1,641

 
1,725

Actuarial (gains) losses
6,127

 
(3,522
)
 
3,088

Benefits paid
(2,693
)
 
(3,931
)
 
(1,785
)
Benefit obligation, Ending balance
43,012

 
37,938

 
43,750

Change in plan assets:
  

 
  

 


Fair value of plan assets, Beginning balance
23,181

 
27,977

 
24,482

Actual return on plan assets
4,188

 
(2,093
)
 
3,360

Employer contributions
2,530

 
1,228

 
1,920

Benefits paid
(2,693
)
 
(3,931
)
 
(1,785
)
Fair value of plan assets, Ending balance
27,206

 
23,181

 
27,977

Unfunded status
$
15,806

 
$
14,757

 
$
15,773


Amounts recognized in the balance sheet at December 31 consist of the following:
 
Pension Benefits
  
2019
 
2018
Non-current liability
$
15,806

 
$
14,757

Net amount recognized
$
15,806

 
$
14,757


Amounts recognized in Accumulated Other Comprehensive Loss before income taxes consists of the following components for the years ended December 31:
 
Pension Benefits
  
2019
 
2018
Accumulated net actuarial losses
$
15,530

 
$
12,878

Amount recognized
$
15,530

 
$
12,878


In 2020, the Company estimates that it will recognize $340 of amortization of net actuarial losses from accumulated other comprehensive loss, net into net periodic cost related to the pension plan.
The following weighted average assumptions were used to determine benefit obligations as of December 31:
 
Pension Benefits
  
2019
 
2018
Discount rate
3.39
%
 
4.42
%
Rate of compensation increase
N/A

 
N/A


The discount rate assumptions at December 31, 2019 and 2018 were determined independently. The discount rate was derived from the effective interest rate of a hypothetical portfolio of high-quality bonds, whose cash flows match the expected future benefit payments from the plan as of the measurement date.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
12. Employee Benefit Plans - (continued)


Fair Value of Plan Assets and Investment Strategy
The fair value of the plan assets as of December 31, is as follows:
 
December 31, 2019
 
Level 1
 
Level 2
 
Level 3
Asset Category:
  

 
  

 
  

 
  

Money market fund – Short term investments
$
1,275

 
$
1,275

 
$
—

 
$
—

Mutual funds
25,931

 
25,931

 
—

 
—

Total
$
27,206

 
$
27,206

 
$
—

 
$
—


 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
Asset Category:
  

 
  

 
  

 
  

Money market fund – Short term investments
$
1,736

 
$
1,736

 
$
—

 
$
—

Mutual funds
21,445

 
21,445

 
—

 
—

Total
$
23,181

 
$
23,181

 
$
—

 
$
—


The pension plans weighted-average asset allocation for the years ended December 31, 2019 and 2018 are as follows:
 
Target Allocation
 
Actual Allocation
  
2019
 
2019
 
2018
Asset Category:
  

 
  

 
  

Equity securities
65.0
%
 
66.7
%
 
67.0
%
Debt securities
30.0
%
 
28.6
%
 
25.5
%
Cash/cash equivalents and Short term investments
5.0
%
 
4.7
%
 
7.5
%
  
100.0
%
  
100.0
%
  
100.0
%

The goals of the pension plan investment program are to fully fund the obligation to pay retirement benefits in accordance with the plan documents and to provide returns that, along with appropriate funding from the Company, maintain an asset/liability ratio that is in compliance with all applicable laws and regulations and assures timely payment of retirement benefits.
Equity securities primarily include investments in large-cap and mid-cap companies located in the United States. Debt securities are diversified across different asset types with bonds issued in the United States as well as outside the United States. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the preceding tables.
Cash Flows                                                        
The pension plan contributions are deposited into a trust, and the pension plan benefit payments are made from trust assets. During 2019, the Company contributed $2,530 to the pension plan. The Company estimates that it will make approximately $2,344 in contributions to the pension plan in 2020. Fluctuations in actual market returns as well as changes in general interest rates will result in changes in the market value of plan assets and may result in increased or decreased retirement benefit costs and contributions in future periods.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
12. Employee Benefit Plans - (continued)


The following estimated benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years ending December 31:
Period
 
Amount
2020
 
$
1,885

2021
 
1,885

2022
 
1,924

2023
 
2,198

2024
 
2,323

Thereafter
 
11,396


13. Noncontrolling and Redeemable Noncontrolling Interests
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling interests in the equity section of the Company’s Consolidated Balance Sheets. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity at their estimated acquisition date redemption value and adjusted at each reporting period for changes to their estimated redemption value through common stock and other paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. On occasion, the Company may initiate a renegotiation to acquire an incremental ownership interest and the amount of consideration paid may differ materially from the amounts recorded in the Company’s Consolidated Balance Sheets.
Noncontrolling Interests
Changes in amounts due to noncontrolling interest holders included in Accruals and other liabilities on the Consolidated Balance Sheets for the twelve months ended December 31, 2019 and 2018 were as follows:
 
Noncontrolling
Interests
Balance, December 31, 2017
$
11,030

Income attributable to noncontrolling interests
11,785

Distributions made
(13,419
)
Other (1)
(118
)
Balance, December 31, 2018
$
9,278

Income attributable to noncontrolling interests
16,156

Distributions made
(11,392
)
Other (1)
(14
)
Balance, December 31, 2019
$
14,028

(1)Other primarily consists of cumulative translation adjustments.
Changes in the Company’s ownership interests in our less than 100% owned subsidiaries during the three years ended December 31, were as follows:

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
13. Noncontrolling & Redeemable Noncontrolling Interests - (continued)



 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Net income (loss) attributable to MDC Partners Inc.
 
$
(5,253
)
 
$
(130,007
)
 
$
241,086

Transfers from the noncontrolling interest:
 
 
 
 
 


Increase (decrease) in MDC Partners Inc. paid-in capital for purchase of redeemable noncontrolling interests and noncontrolling interests
 
1,911

 
10,140

 
2,315

Net transfers from noncontrolling interests
 
$
1,911

 
$
10,140

 
$
2,315

Change from net income (loss) attributable to MDC Partners Inc. and transfers to noncontrolling interests
 
$
(3,342
)
 
$
(119,867
)
 
$
243,401


Redeemable Noncontrolling Interests
The following table presents changes in redeemable noncontrolling interests as of December 31, 2019 and 2018:
 
Years Ended December 31,
 
2019
 
2018
Beginning Balance
$
51,546

 
$
62,886

Redemptions
(14,530
)
 
(11,943
)
Granted
—

 
—

Changes in redemption value
(3,163
)
 
1,067

Currency translation adjustments
3

 
(464
)
Other (1)
3,117

 
—

Ending Balance
$
36,973

 
$
51,546

(1) Other primarily consists of the redeemable noncontrolling interest balance related to a foreign entity that was classified as held for sale as of December 31, 2018 and reclassified in 2019. See Note 4 of the Notes to the Consolidated Financial Statements included herein for further information.
The noncontrolling shareholders’ ability to exercise any such option right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise and specific employment termination conditions. In addition, these rights cannot be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the related amounts during 2019 to 2024. It is not determinable, at this time, if or when the owners of these rights will exercise all or a portion of these rights.
The redeemable noncontrolling interest of $36,973 as of December 31, 2019, consists of $18,891 assuming that the subsidiaries perform over the relevant future periods at their discounted cash flows earnings level and such rights are exercised, $15,336 upon termination of such owner’s employment with the applicable subsidiary or death and $2,746 representing the initial redemption value (required floor) recorded for certain acquisitions in excess of the amount the Company would have to pay should the Company acquire the remaining ownership interests for such subsidiaries.
These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. For the twelve months ended December 31, 2019, 2018, and 2017, there was a $0 related impact on the Company’s loss per share calculation.  
14. Commitments, Contingencies, and Guarantees
Legal Proceedings. The Company’s operating entities are involved in legal proceedings of various types. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters. Additionally, while any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.
Deferred Acquisition Consideration and Options to Purchase. See Notes 9 and 13 of the Notes to the Consolidated Financial Statements included herein for information regarding potential payments associated with deferred acquisition consideration and the acquisition of noncontrolling shareholders’ ownership interest in subsidiaries.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
14. Commitments, Contingencies, and Guarantees - (continued)


Natural Disasters. Certain of the Company’s operations are located in regions of the United States which typically are subject to hurricanes. During the twelve months ended December 31, 2019, 2018, and 2017 these operations did not incur any material costs related to damages resulting from hurricanes.
Guarantees. Generally, the Company has indemnified the purchasers of certain assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
Commitments. At December 31, 2019, the Company had $4,836 of undrawn letters of credit.
15. Share Capital
The authorized and outstanding share capital of the Company is as follows:
Series 6 Convertible Preference Shares
On March 14, 2019 (the “Series 6 Issue Date”), the Company entered into a securities purchase agreement with Stagwell Agency Holdings LLC (“Stagwell Holdings”), an affiliate of Stagwell, pursuant to which Stagwell Holdings agreed to purchase (i) 14,285,714 newly authorized Class A shares (the “Stagwell Class A Shares”) for an aggregate contractual purchase price of $50,000 and (ii) 50,000 newly authorized Series 6 convertible preference shares (“Series 6 Preference Shares”) for an aggregate contractual purchase price of $50,000. The Company received proceeds of approximately $98,620, net of fees and estimated expenses, which were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. The proceeds allocated to the Stagwell Class A Shares were $35,997 and to Series 6 Preference Shares were $62,623 based on their relative fair value calculated by utilizing a Monte Carlo Simulation model. In connection with the closing of the transaction, the Company increased the size of its Board and appointed two nominees designated by Stagwell Holdings. Except as required by law, the Series 6 Preference Shares do not have voting rights and are not redeemable at the option of Stagwell Holdings.
The holders of the Series 6 Preference Shares have the right to convert their Series 6 Preference Shares in whole at any time and from time to time, and in part at any time and from time to time, into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation preference per share of each Series 6 Preference Share is $1,000. The initial Conversion Price is $5.00 per Series 6 Preference Share, subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities.
The Series 6 Preference Shares’ liquidation preference accretes at 8.0% per annum, compounded quarterly until the five-year anniversary of the Series 6 Issue Date. During the twelve months ended December 31, 2019, the Series 6 Preference Shares accreted at a monthly rate of $6.96, for total accretion of $3,261, bringing the aggregate liquidation preference to $53,261 as of December 31, 2019. The accretion is considered in the calculation of net loss attributable to MDC Partners Inc. common shareholders. See Note 6 of the Notes to the Consolidated Financial Statements included herein for further information regarding the Series 6 Preference Shares.
Holders of the Series 6 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 6 Preference Shares. The Series 6 Preference Shares are convertible at the Company’s option (i) on and after the two-year anniversary of the Series 6 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least 125% of the Conversion Price or (ii) after the fifth anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 6 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at 7%), and (ii) the Company will have a right to redeem the Series 6 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
15. Share Capital - (continued)


Effective March 18, 2019, the Company’s Board appointed Mark Penn as the Chief Executive Officer (“CEO”) and as a director of the Board. Mr. Penn is manager of Stagwell. Effective April 18, 2019, Mr. Penn was also appointed as Chairman of the Board.
Series 4 Convertible Preference Shares
On March 7, 2017 (the “Series 4 Issue Date”), the Company issued 95,000 newly created Preference Shares (“Series 4 Preference Shares”) to affiliates of The Goldman Sachs Group, Inc. (collectively, the “Purchaser”) pursuant to a $95,000 private placement. The Company received proceeds of approximately $90,123, net of fees and estimated expenses, which were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. In connection with the closing of the transaction, the Company increased the size of its Board and appointed one nominee designated by the Purchaser. Except as required by law, the Series 4 Preference Shares do not have voting rights and are not redeemable at the option of the Purchaser.
Subsequent to the ninetieth day following the Series 4 Issue Date, the holders of the Series 4 Preference Shares have the right to convert their Series 4 Preference Shares in whole at any time and from time to time and in part at any time and from time to time into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation preference per share of each Series 4 Preference Share is $1,000. The Conversion Price of a Series 4 Preference Share is subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities. In connection with the anti-dilution protection provision triggered by the issuance of equity securities to Stagwell Holdings, the Conversion Price per Series 4 Preference Share was reduced to $7.42 from the initial Conversion Price of $10.00.
The Series 4 Preference Shares’ liquidation preference accretes at 8.0% per annum, compounded quarterly until the five-year anniversary of the Series 4 Issue Date. During the twelve months ended December 31, 2019 and 2018, the Series 4 Preference Shares accreted at a monthly rate of approximately $8.17 and $7.55 per Series 4 Preference Share, for total accretion of $9,043 and $8,355, respectively, bringing the aggregate liquidation preference to $118,751 as of December 31, 2019. The accretion is considered in the calculation of net income (loss) attributable to MDC Partners Inc. common shareholders. See Note 6 of the Notes to the Consolidated Financial Statements included herein for further information regarding the Series 4 Preference Shares.
Holders of the Series 4 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 4 Preference Shares. The Series 4 Preference Shares are convertible at the Company’s option (i) on and after the two-year anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least 125% of the Conversion Price or (ii) after the fifth anniversary of the Series 4 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 4 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at 7%), and (ii) the Company will have a right to redeem the Series 4 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
Class A Common Shares (“Class A Shares”)
These are an unlimited number of subordinate voting shares, carrying one vote each, with a par value of $0, entitled to dividends equal to or greater than Class B Shares, convertible at the option of the holder into one Class B Share for each Class A Share after the occurrence of certain events related to an offer to purchase all Class B shares. There were 72,150,854 (including the Class A Shares issued to Stagwell) and 57,517,568 Class A Shares issued and outstanding as of December 31, 2019 and 2018, respectively.
Class B Common Shares (“Class B Shares”)
These are an unlimited number of voting shares, carrying twenty votes each, with a par value of $0, convertible at any time at the option of the holder into one Class A share for each Class B share. There were 3,749 and 3,755 Class B Shares issued and outstanding as of December 31, 2019 and 2018, respectively.
Employee Stock Incentive Plan
As of December 31, 2019, a total of 15,650,000 shares have been authorized under our employee stock incentive plan.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
15. Share Capital - (continued)


The following table summarizes information about financial performance based and time based restricted stock and restricted stock unit awards:
 
Performance Based Awards
 
Time Based Awards
  
Shares
 
Weighted Average Grant Date Fair
Value
 
Shares
 
Weighted Average
Grant Date
Fair Value
Balance at December 31, 2018
452,912

 
$
9.15

 
626,940

 
$
9.83

Granted
2,738,141

 
3.08

 
490,000

 
2.54

Vested
(276,952
)
 
3.03

 
(294,980
)
 
12.46

Forfeited
(470,300
)
 
8.79

 
(253,000
)
 
3.38

Balance at December 31, 2019
2,443,801

 
$
3.11

 
568,960

 
$
5.53


Performance based and time-based awards granted in the twelve months ended December 31, 2018 had a weighted average grant date fair value of $9.17 and $7.38, respectively. Time-based awards granted in the twelve months ended December 31, 2017 had a weighted average grant date fair value of $8.98. No performance based awards were granted in 2017. The vesting of the performance based awards is contingent upon the Company meeting cumulative earnings targets over one to three years and continued employment through the vesting date. The term of the time based awards is generally three years with vesting up to generally three years. The vesting period of the time-based and performance awards is generally commensurate with the requisite service period.
The total fair value of restricted stock and restricted stock unit awards, which vested during the years ended December 31, 2019, 2018 and 2017 was $4,517, $3,583 and $7,316, respectively. At December 31, 2019, the weighted average remaining contractual life for time based and performance based awards was 1.93 and 2.10 years, respectively.
At December 31, 2019, the unrecognized compensation expense for performance based awards was $5,341 to be recognized over a weighted average period of 2.10 years. At December 31, 2019, the unrecognized compensation expense for time based awards was $919 to be recognized over a weighted average period of 1.93 years.
The following table summarizes information about share option awards:
 
Share Option Awards
  
Shares
 
Weighted Average
Grant Date Fair Value
 
Weighted Average Exercise Price
Balance at December 31, 2018
111,866

 
$
2.23

 
$
4.85

Granted
—

 
—

 
—

Vested
—

 
—

 
—

Forfeited
—

 
—

 
—

Exercised
—

 
—

 
—

Balance at December 31, 2019
111,866

 
$
2.23

 
$
4.85


We use the Black-Scholes option-pricing model to estimate the fair value of options granted. No options were granted in 2019.
The grant date fair value of the options granted in 2018 was determined to be $2.23. The assumptions for the model were as follows: expected life of 4.9 years, risk free interest rate of 2.9%, expected volatility of 52.9% and dividend yield of 0%. Options granted in 2018 vest in three years. The term of these awards is 5 years. The vesting period of these awards is generally commensurate with the requisite service period. At December 31, 2019, the weighted average remaining contractual life for these awards was 2 years. No options were granted in 2017.    
No options were exercised during 2019 and 2018. The intrinsic value of options exercised during 2017 was $125. The aggregate intrinsic value of options outstanding as of December 31, 2019 is nil. As of December 31, 2019, no options were exercisable. No options vested in 2018 and 2017.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
15. Share Capital - (continued)


At December 31, 2019, the unrecognized compensation expense for these awards was $150 to be recognized over a weighted average period of 2 years. The cash received from the stock options exercised in 2017 was nil.
The following table summarizes information about stock appreciation rights (“SAR”) awards:
 
SAR Awards
  
Shares
 
Weighted Average
Grant Date Fair Value
 
Weighted Average Exercise Price
Balance at December 31, 2018
250,800

 
$
2.35

 
$
6.60

Granted
2,425,000

 
1.04

 
3.07

Vested
—

 
—

 
—

Forfeited
(350,000
)
 
1.31

 
5.57

Exercised
—

 
—

 
—

Balance at December 31, 2019
2,325,800

 
$
1.14

 
$
3.07


We use the Black-Scholes option-pricing model to estimate the fair value of the SAR awards. SAR awards granted in 2019 vest in equal installments on each of the first three anniversaries of the grant date and have grant date fair values ranging from $0.68 to $1.41. The assumptions for the model were as follows: expected life of 3 to 4 years, risk free interest rate of 1.8% to 2.3%, expected volatility of 62.5% to 67.1% and dividend yield of 0%. The term of these awards is 5 years. The vesting period of awards granted is generally commensurate with the requisite service period.
No SAR awards were granted in 2018.
SAR awards granted in 2017 vest on the third anniversary of the grant date and have a grant date fair value of $2.35. The assumptions for the model were as follows: expected life of 4 years, risk free interest rate of 1.7%, expected volatility of 46.2% and dividend yield of 0%. The term of these awards is 5 years. The vesting period of awards granted is generally commensurate with the requisite service period.
As of December 31, 2019, no SAR awards were exercisable. As of December 31, 2019, there were no SAR awards that were vested. The aggregate intrinsic value of the SAR awards outstanding as of December 31, 2019 is $885. No SAR awards were exercised during 2019 and 2018. No SAR awards vested in 2018 and 2017. At December 31, 2019, the weighted average remaining contractual life for the SAR awards was 1.22 years.
At December 31, 2019, the unrecognized compensation expense for these awards was $1,298 to be recognized over a weighted average period of 1.22 years.
For the years ended December 31, 2019, 2018 and 2017, $2,460, $5,892, and $5,335 was recognized in stock compensation related to all stock compensation awards, respectively. The related income tax benefit for the years ended December 31, 2019, 2018 and 2017 was $643, $472, and $1,401, respectively.


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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)

16. Changes in Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) for the twelve months ended December 31, were:
 
Defined
Benefit
Pension
 
Foreign Currency Translation
 
Total
Balance December 31, 2017
$
(13,656
)
 
$
11,702

 
$
(1,954
)
Other comprehensive income before reclassifications
—

 
6,119

 
6,119

Amounts reclassified from accumulated other comprehensive income (net of tax expense of $223)
555

 
—

 
555

Other comprehensive income
555

 
6,119

 
6,674

Balance December 31, 2018
$
(13,101
)
 
$
17,821

 
$
4,720

Other comprehensive loss before reclassifications
—

 
(7,078
)
 
(7,078
)
Amounts reclassified from accumulated other comprehensive loss (net of tax benefit of $740)
(1,911
)
 
—

 
(1,911
)
Other comprehensive loss
(1,911
)
 
(7,078
)
 
(8,989
)
Balance December 31, 2019
$
(15,012
)
 
$
10,743

 
$
(4,269
)

17. Income Taxes
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code including but not limited to a reduction in the U.S. federal corporate tax rate from 35.0% to 21.0%, effective for tax years beginning after December 31, 2017 and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings.
The components of the Company’s income (loss) before income taxes and equity in earnings of non-consolidated affiliates by taxing jurisdiction for the years ended December 31, were:
 
2019
 
2018
 
2017
Income (Loss):
  

 
  

 
  

U.S.
$
(17,491
)
 
$
(76,960
)
 
$
46,997

Non-U.S.
38,358

 
(11,709
)
 
39,025

  
$
20,867

 
$
(88,669
)
 
$
86,022


The provision (benefit) for income taxes by taxing jurisdiction for the years ended December 31, were:
 
2019
 
2018
 
2017
Current tax provision
  

 
  

 
  

U.S. federal
$
2,638

 
$
444

 
$
(1,657
)
U.S. state and local
12

 
2

 
98

Non-U.S.
2,875

 
7,584

 
6,514

  
5,525

 
8,030

 
4,955

Deferred tax provision (benefit):
  

 
  

 
  

U.S. federal
4,635

 
(10,817
)
 
(173,095
)
U.S. state and local
1,130

 
(3,476
)
 
(7,847
)
Non-U.S.
(974
)
 
35,878

 
7,629

  
4,791

 
21,585

 
(173,313
)
Income tax expense (benefit)
$
10,316

 
$
29,615

 
$
(168,358
)

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
17. Income Taxes - (continued)


A reconciliation of income tax expense (benefit) using the U.S. federal income tax rate compared with actual income tax expense for the years ended December 31, is as follows:
 
2019
 
2018
 
2017
Income (loss) before income taxes, equity in non-consolidated affiliates and noncontrolling interest
$
20,867

 
$
(88,669
)
 
$
86,022

Statutory income tax rate
21.0
%
 
21.0
%
 
35.0
%
Tax expense (benefit) using U.S. statutory income tax rate
4,382

 
(18,621
)
 
30,108

State and foreign taxes
1,141

 
(3,475
)
 
8,791

Non-deductible stock-based compensation
3,823

 
1,512

 
1,441

Other non-deductible expense
709

 
10,091

 
(220
)
Change to valuation allowance
(2,830
)
 
49,482

 
(103,212
)
Effect of the difference in U.S. federal and local statutory rates
1,422

 
(152
)
 
(2,939
)
Impact of tax reform
—

 
—

 
(100,472
)
Noncontrolling interests
(3,566
)
 
(2,674
)
 
(4,413
)
Impact of foreign operations
3,646

 
1,711

 
(2,453
)
Adjustment to deferred tax balances
—

 
(8,865
)
 
—

Other, net
1,589

 
606

 
5,011

Income tax expense (benefit)
$10,316
 
$29,615
 
$(168,358)
Effective income tax rate
49.4%
 
(33.4)%
 
(195.7)%

The Company has evaluated the usefulness of our rate reconciliation presented in prior periods which utilized the Canadian statutory tax rate of 26.5%. As the majority of our business operations and shareholders are located in the U.S., we believe using the U.S. statutory rate is more informative. The period 2017 in the table above has been conformed to reflect the U.S. statutory rate.
Income tax expense for the twelve months ended December 31, 2019 was $10,316 (associated with a pretax income of $20,867) compared to an income tax expense of $29,615 (associated with pretax loss of $88,669) for the twelve months ended December 31, 2018. Income tax expense in 2019 included the impact of reducing a valuation allowance primarily associated with Canadian deferred tax assets. Income tax expense in 2018 included the impact of increasing a valuation allowance primarily associated with Canadian deferred tax assets.
Income taxes receivable were $5,025 and $4,388 at December 31, 2019 and 2018, respectively, and were included in other current assets on the balance sheet. Income taxes payable were $11,722 and $10,045 at December 31, 2019 and 2018, respectively, and were included in accrued and other liabilities on the balance sheet. It is the Company’s policy to classify interest and penalties arising in connection with unrecognized tax benefits as a component of income tax expense.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
17. Income Taxes - (continued)


The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, were as follows:
 
2019
 
2018
Deferred tax assets:
  

 
  

Capital assets and other
$
—

 
$
905

Net operating loss carry forwards
70,265

 
67,059

Interest deductions
16,797

 
8,911

Refinancing charge
669

 
2,926

Goodwill and intangibles
117,421

 
125,786

Stock compensation
1,736

 
2,101

Pension plan
4,414

 
3,872

Unrealized foreign exchange
11,373

 
14,645

Capital loss carry forwards
13,081

 
11,827

Right-of-use assets and accounting reserves
77,824

 
8,280

Gross deferred tax asset
313,580

 
246,312

Less: valuation allowance
(65,649
)
 
(68,479
)
Net deferred tax assets
247,931

 
177,833

Deferred tax liabilities:
  

 
  

Lease liabilities
$
(67,613
)
 
$
—

Withholding taxes
(546
)
 
—

Capital assets
(382
)
 
—

Goodwill amortization
(98,677
)
 
(91,726
)
Total deferred tax liabilities
(167,218
)
 
(91,726
)
Net deferred tax asset (liability)
$
80,713

 
$
86,107

Disclosed as:
  

 
  

Deferred tax assets
$
84,900

 
$
91,436

Deferred tax liabilities
(4,187
)
 
(5,329
)
  
$
80,713

 
$
86,107


The Company has U.S. federal net operating loss carry forwards of $41,507 and non-U.S. net operating loss carry forwards of $146,037, which expire in years 2020 through 2039. The Company also has total indefinite loss carry forwards of $205,050. These indefinite loss carry forwards consist of $106,329 relating to the U.S. and $98,721 related to capital losses from the Canadian operations. In addition, the Company has net operating loss carry forwards for various state taxing jurisdictions of approximately $172,587.
The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management evaluates all positive and negative evidence and considers factors such as the reversal of taxable temporary differences, future taxable income, and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense.
As of December 31, 2018, the Company maintained a valuation allowance against foreign net deferred tax assets of $68,479 as it believed it was more likely than not that some or all of the deferred tax assets would not be realized. This assessment was based on the Company’s historical losses and uncertainties as to the amount of future taxable income.
As of December 31, 2019, the Company evaluated positive and negative evidence in determining the likelihood that it will be able to realize all or some portion of its deferred tax assets prior to their expiration. As of December 31, 2019, the Company’s Canadian three-year cumulative pre-tax income increased compared to the period ended December 31, 2018 and the Company decreased its overall valuation allowance by $2,830. The related effect on the accompanying consolidated statements of operations

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
17. Income Taxes - (continued)


and comprehensive income or loss resulted in the Company recording a U.S. income tax benefit of $2,830 for the year ended December 31, 2019.
The Company has historically asserted that its unremitted foreign earnings are permanently reinvested, and therefore has not recorded income taxes on such amounts. The Company reevaluated its global cash needs and as a result determined that approximately $5,462 of undistributed foreign earnings from certain international entities are no longer subject to the permanent reinvestment assertion. We recorded a tax expense of $546 representing our estimate of the tax costs associated with this change to our assertion. We have not changed our permanent reinvestment assertion with respect to any other international entities as we intend to use the related historical earnings and profits to fund international operations and investments.
As of December 31, 2019 and 2018, the Company recorded a liability for unrecognized tax benefits as well as applicable penalties and interest in the amount of $1,107 and $973, respectively. As of December 31, 2019 and 2018, accrued penalties and interest included in unrecognized tax benefits were approximately $111 and $87, respectively. The Company identified an uncertainty relating to the future tax deductibility of certain intercompany fees. To the extent that such future benefit will be established, the resolution of this position will have no effect with respect to the consolidated financial statements. If these unrecognized tax benefits were to be recognized, it would affect the Company’s effective tax rate.
 
2019
 
2018
 
2017
A reconciliation of the change in unrecognized tax benefits is as follows:
 
 
 
 
 
Unrecognized tax benefit - Beginning Balance
$
887

 
$
1,433

 
$
1,465

Current year positions
275

 
—

 
489

Prior period positions
—

 
7

 
(436
)
Settlements
—

 
(314
)
 
—

Lapse of statute of limitations
(166
)
 
(239
)
 
(85
)
Unrecognized tax benefits - Ending Balance
$
996

 
$
887

 
$
1,433


It is reasonably possible that the amount of unrecognized tax benefits could decrease by a range of $200 to $300 in the next twelve months as a result of expiration of certain statute of limitations.
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal Revenue Service (“IRS”) concluded its review of the 2016 tax year and all years prior to 2016 are closed. The statute of limitations has also expired in non-U.S. jurisdictions through 2014.
18. Financial Instruments
Financial assets, which include cash and cash equivalents and accounts receivable, have carrying values which approximate fair value due to the short-term nature of these assets. Financial liabilities with carrying values approximating fair value due to short-term maturities include accounts payable. Deferred acquisition consideration is recorded at fair value. The revolving credit agreement is a variable rate debt, the carrying value of which approximates fair value. The Company’s notes are a fixed rate debt instrument recorded at carrying value. See Note 19 of the Notes to the Consolidated Financial Statements included herein for additional information on the fair value. The fair value of financial commitments and letters of credit are based on the stated value of the underlying instruments, if any.
19. Fair Value Measurements
A fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. The hierarchy for observable and unobservable inputs used to measure fair value into three broad levels are described below: 
•
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
•
Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
19. Fair Value Measurements - (continued)

•
Level 3 - Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Financial Liabilities that are not Measured at Fair Value on a Recurring Basis
The following table presents certain information for our financial liability that is not measured at fair value on a recurring basis at December 31, 2019 and 2018:
 
December 31, 2019

December 31, 2018
 
Carrying
Amount

Fair Value

Carrying
Amount

Fair Value
Liabilities:
 


 


 


 

6.50% Senior Notes due 2024
$
900,000

 
$
812,250

 
$
900,000

 
$
834,750


Our long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices in markets that are not active. Therefore, this debt is classified as Level 2 within the fair value hierarchy.
Financial Liabilities Measured at Fair Value on a Recurring Basis
Contingent deferred acquisition consideration is recorded at the acquisition date fair value and adjusted at each reporting period. The estimated liability is determined in accordance with various contractual valuation formulas that may be dependent upon future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period and, in some cases, the currency exchange rate as of the date of payment (Level 3). See Note 9 of the Notes to the Consolidated Financial Statements included herein for additional information regarding contingent deferred acquisition consideration.
At December 31, 2019 and 2018, the carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximated fair value because of their short-term maturity.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Certain non-financial assets are measured at fair value on a nonrecurring basis, primarily goodwill, intangible assets (a Level 3 fair value assessment) and right-of-use lease assets (a Level 2 fair value assessment). Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment. The Company recognized an impairment of goodwill of $4.9 million for the twelve months ended December 31, 2019 as compared to an impairment of goodwill, intangible assets, and other assets of $87.2 million for the twelve months ended December 31, 2018. See Note 2 and 8 of the Notes to the Consolidated Financial Statements for information related to the measurement of the fair value of goodwill. In addition, the Company recognized an impairment charge of $3.7 million to reduce the carrying value of certain right-of-use lease assets and related leasehold improvements in the twelve months ended December 31, 2019. See Note 10 of the Notes to the Consolidated Financial Statements included herein for further information.
20. Related Party Transactions
In the ordinary course of business, the Company enters into transactions with related parties, including Stagwell and its affiliates. The transactions may range in the nature and value of services underlying the arrangements. Below are the related party transactions that are significant in nature:
In October 2019, a Partner Firm of the Company entered into an arrangement with an affiliate of Stagwell, in which the affiliate and the Partner Firm will collaborate to provide various services to a client of the Partner Firm. Under the arrangement the Partner Firm will pay the affiliate, for services provided by the affiliate, approximately $655 which is expected to be recognized through the end of 2020. As of December 31, 2019, $393 was owed to the affiliate.
On February 14, 2020, Sloane sold substantially all its assets and certain liabilities to an affiliate of Stagwell. See Note 1 of the Notes to the Consolidated Financial Statements for information related to this transaction. 

The Company entered into an agreement commencing on January 1, 2020 to sublease office space through July 2021 to a company whose chairman is a member of the Company’s Board of Directors. The total future rental income related to the sublease is approximately $350.

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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)

21. Segment Information
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by Mark Penn, Chief Executive Officer and Chairman of the Company, our Chief Operating Decision Maker (“CODM”), to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
The CODM uses Adjusted EBITDA (defined below) as a key metric, to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions. Adjusted EBITDA is defined as Net income (loss) attributable to MDC Partners Inc. common shareholders plus or minus adjustments to operating income (loss) plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, distributions from non-consolidated affiliates and other items. Distributions from non-consolidated affiliates includes (i) cash received for profit distributions from non-consolidated affiliates, and (ii) consideration from the sale of ownership interests in non-consolidated affiliates less contributions to date plus undistributed earnings (losses). Other items includes items such as severance expense and other restructuring expenses.
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mr. Penn appointed key agency executives, that report directly into him, to lead each Network. In connection with the reorganization, we reassessed our reportable segments to align our external reporting with how we operate the Networks under our new organizational structure. Prior periods presented have been recast to reflect the change in reportable segments.
The three reportable segments that resulted from our reassessment are as follows: “Integrated Networks - Group A”, “Integrated Networks - Group B”; and “Media & Data Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described in Note 2 to the Consolidated Financial Statements included herein.
•
The Integrated Networks - Group A reportable segment is comprised of the Anomaly Alliance (Anomaly, Concentric Partners, Hunter, Mono, Y Media Labs) and Colle McVoy operating segments.
•
The Integrated Networks - Group B reportable segment is comprised of the Constellation (72andSunny, CPB, Instrument and Redscout) and Doner Partner Network (6degrees, Doner, KWT, Union, Veritas and Yamamoto) operating segments.
The operating segments aggregated within the Integrated Networks - Group A and B reportable segments provide a range of services for their clients, primarily including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast) as well as public relations and communications services, experiential, social media and influencer marketing. These operating segments share similar characteristics related to (i) the nature of their services; (ii) the type of clients and the methods used to provide services; and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these operating segments compete with each other for new business and from time to time have business move between them. While the operating segments are similar in nature, the distinction between the Integrated Networks - Group A and B is the aggregation of operating segments that have the most similar historical and expected average long-term profitability.
•
The Media & Data Network reportable segment is comprised of a single operating segment that combines media buying and planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast) with technology and data capabilities.
•
All Other consists of the Company’s remaining operating segments that provide a range of services including advertising, public relations and marketing communication services, but generally do not have similar services offerings or financial characteristics as those aggregated in the reportable segments. The All Other category includes Allison & Partners, Bruce Mau, Forsman & Bodenfors, Hello, Team and Vitro.
•
Corporate consists of corporate office expenses incurred in connection with the strategic resources provided to the operating segments, as well as certain other centrally managed expenses that are not fully allocated to the operating segments. These office and general expenses include (i) salaries and related expenses for corporate office employees,

69

Table of Contents

MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
21. Segment Information - (continued)


including employees dedicated to supporting the operating segments, (ii) occupancy expenses relating to properties occupied by all corporate office employees, (iii) other office and general expenses including professional fees for the financial statement audits and other public company costs, and (iv) certain other professional fees managed by the corporate office. Additional expenses managed by the corporate office that are directly related to the operating segments are allocated to the appropriate reportable segment and the All Other category.

 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Revenue:
 
 
 
 
 
 
Integrated Networks - Group A
 
$
392,101

 
$
393,890

 
$
337,104

Integrated Networks - Group B
 
531,717

 
551,317

 
591,630

Media & Data Network
 
161,451

 
183,287

 
200,757

All Other
 
330,534

 
346,594

 
384,288

Total
 
$
1,415,803

 
$
1,475,088

 
$
1,513,779

 
 
 
 
 
 
 
Adjusted EBITDA
 
 
 
 
 
 
Integrated Networks - Group A
 
$
74,822

 
$
75,609

 
$
69,084

Integrated Networks - Group B

84,568


74,091


91,155

Media & Data Network

7,746


12,205


23,707

All Other

37,618


38,307


51,906

Corporate

(30,601
)

(38,761
)

(32,360
)
Total Adjusted EBITDA
 
$
174,153

 
$
161,451

 
$
203,492

 
 
 
 
 
 
 
Depreciation and amortization

$
(38,329
)

$
(46,196
)

$
(43,474
)
Goodwill and other impairment

(8,599
)

(87,204
)

(5,471
)
Stock compensation expense

(31,040
)

(18,416
)

(24,350
)
Deferred acquisition consideration expense/(income)

(5,403
)

457


4,898

Gain/(Loss) on investments

(2,048
)

(779
)

(3,939
)
Other expense/(income)

(9,274
)

(7,879
)

(253
)
Total Operating Income

$
79,460


$
1,434


$
130,903

 
 
 
 
 
 
 
Other Income (expense):
 
 
 
 
 
 
Interest expense and finance charges, net
 
$
(64,942
)
 
$
(67,075
)
 
$
(64,364
)
Foreign exchange gain (loss)
 
8,750

 
(23,258
)
 
18,137

Other, net
 
(2,401
)
 
230

 
1,346

Income (loss) before income taxes and equity in earnings of non-consolidated affiliates
 
20,867

 
(88,669
)
 
86,022

Income tax expense (benefit)
 
10,316

 
29,615

 
(168,358
)
Income (loss) before equity in earnings of non-consolidated affiliates
 
10,551

 
(118,284
)
 
254,380

Equity in earnings of non-consolidated affiliates
 
352

 
62

 
2,081

Net income (loss)
 
10,903

 
(118,222
)
 
256,461

Net income attributable to the noncontrolling interest
 
(16,156
)
 
(11,785
)
 
(15,375
)
Net income (loss) attributable to MDC Partners Inc.
 
$
(5,253
)
 
$
(130,007
)
 
$
241,086

 
 
 
 
 
 
 



70

Table of Contents

MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
21. Segment Information - (continued)


 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Depreciation and amortization:
 
 
 
 
 
 
Integrated Networks - Group A
 
$
8,559

 
$
9,602

 
$
8,599

Integrated Networks - Group B
 
15,904

 
19,032

 
14,401

Media & Data Network
 
4,303

 
3,820

 
4,605

All Other
 
8,695

 
12,980

 
14,771

Corporate
 
868

 
762

 
1,098

Total
 
$
38,329

 
$
46,196

 
$
43,474

 
 
 
 
 
 
 
Stock-based compensation:
 
 
 
 
 
 
Integrated Networks - Group A
 
$
24,420

 
$
5,792

 
$
9,257

Integrated Networks - Group B
 
4,303

 
6,890

 
9,058

Media & Data Network
 
63

 
320

 
643

All Other
 
374

 
755

 
3,258

Corporate
 
1,880

 
4,659

 
2,134

Total
 
$
31,040

 
$
18,416

 
$
24,350

 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
Integrated Networks - Group A
 
$
5,934

 
$
8,228

 
$
10,242

Integrated Networks - Group B
 
9,270

 
6,352

 
15,739

Media & Data Network
 
627

 
1,632

 
4,026

All Other
 
2,729

 
3,985

 
2,928

Corporate
 
36

 
67

 
23

Total
 
$
18,596

 
$
20,264

 
$
32,958


A summary of the Company’s long-lived assets, comprised of fixed assets, goodwill and intangibles, net, by geographic region at December 31, is set forth in the following table.
 
United States
 
Canada
 
Other
 
Total
Long-lived Assets
 
 
 
 
 
 
 
2019

$
68,497

 
$
4,475

 
$
8,082

 
$
81,054

2018

$
76,781

 
$
4,779

 
$
6,629

 
$
88,189

 
 
 
 
 
 
 
 
Goodwill and Intangible Assets
 
 
 
 
 
 
 
2019

$
659,584

 
$
64,842

 
$
62,158

 
$
786,584

2018

$
671,141

 
$
61,748

 
$
67,628

 
$
800,517

The Company’s CODM does not use segment assets to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.


71

Table of Contents

MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
21. Segment Information - (continued)


A summary of the Company’s revenue by geographic region at December 31 is set forth in the following table.
 
United States
 
Canada
 
Other
 
Total
Revenue:
  

 
  

 
  

 
  

2019
$
1,116,047

 
$
105,066

 
$
194,690

 
$
1,415,803

2018
$
1,152,055

 
$
124,023

 
$
199,010

 
$
1,475,088

2017
$
1,172,319

 
$
123,138

 
$
218,322

 
$
1,513,779


22. Quarterly Results of Operations (Unaudited)
The following table sets forth a summary of the Company’s consolidated unaudited quarterly results of operations for the years ended December 31, in thousands of dollars, except per share amounts. The Company identified certain errors related to prior periods that were not material to any of the Company’s prior period financial statements; however, the cumulative effect of these errors could be considered material to the Company's financial statements subsequent to December 31, 2019. As such, the Company revised the prior period financial statements.
As a result of the errors, the balance sheet as of December 31, 2019 changed as follows: Accounts receivable, Goodwill and Deferred tax assets declined by $1,115, $8,983 and $1,088, respectively, and Accumulated deficit increased by $11,186. In addition, in the fourth quarter of 2019, the change to the Consolidated Statement of Operations was to increase the Goodwill and other asset impairment by $780 and decrease income tax expense by $217 resulting in a decline in Net income (loss) attributable to MDC Partners Inc. by $563.
As a result of the errors, the balance sheet as of December 31, 2018 changed as follows: Accounts receivable, Goodwill and Deferred tax assets declined by $1,115, $8,203 and $1,305, respectively, and Accumulated deficit increased by $10,623. In addition, in the fourth quarter of 2018, the change to the Consolidated Statement of Operations was to decrease Revenue by $1,115, increase Goodwill and other asset impairment by $7,147 and decrease income tax expense by $1,988 resulting in a decline in Net income (loss) attributable to MDC Partners Inc. by $6,274.


72

Table of Contents


MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)

 
Quarters
 
First
 
Second
 
Third
 
Fourth (As adjusted)
Revenue:
 
 
 
 
 
 
 
2019
$
328,791

 
$
362,130

 
$
342,907

 
$
381,975

2018
$
326,968

 
$
379,743

 
$
375,830

 
$
392,547

Cost of services sold:
 
 
 
 
 
 
 
2019
$
237,153

 
$
240,749

 
$
222,448

 
$
260,726

2018
$
243,030

 
$
253,390

 
$
238,690

 
$
256,088

Net Income (loss):
 
 
 
 
 
 
 
2019
$
316

 
$
7,333

 
$
5,513

 
$
(2,259
)
2018
$
(28,519
)
 
$
5,951

 
$
(13,667
)
 
$
(81,987
)
Net income (loss) attributable to MDC Partners Inc.:
 
 
 
 
 
 
 
2019
$
(113
)
 
$
4,290

 
$
(1,752
)
 
$
(7,678
)
2018
$
(29,416
)
 
$
3,406

 
$
(16,125
)
 
$
(87,872
)
Income (loss) per common share:
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
2019
$
(0.04
)
 
$
0.01

 
$
(0.07
)
 
$
(0.14
)
2018
$
(0.56
)
 
$
0.02

 
$
(0.32
)
 
$
(1.57
)
Diluted
 
 
 
 
 
 
 
2019
$
(0.04
)
 
$
0.01

 
$
(0.07
)
 
$
(0.14
)
2018
$
(0.56
)
 
$
0.02

 
$
(0.32
)
 
$
(1.57
)

The above revenue, cost of services sold, and income (loss) have primarily been affected by acquisitions and divestitures.
Historically, with some exceptions, the Company’s fourth quarter generates the highest quarterly revenues in a year. The fourth quarter has historically been the period in the year in which the highest volumes of media placements and retail related consumer marketing occur.
Income (loss) have been affected as follows:
•
The fourth quarter of 2019 and 2018 included a foreign exchange gain of $4,348 and a loss of $13,323, respectively.
•
The fourth quarter of 2019 and 2018 included stock-based compensation charges of $18,408 and $1,533, respectively.
•
The fourth quarter of 2019 and 2018 included changes in deferred acquisition resulting in income of $9,030 and $8,979, respectively.
•
The fourth quarter of 2019 and 2018 included goodwill, right-of-use assets and related leasehold improvement impairment charges of $6,655 and goodwill and other asset impairment charges of $63,879, respectively.
•
The fourth quarter of 2019 included income tax benefit of $2,830 relating to the decrease to the Company’s valuation allowance. The fourth quarter of 2018 included income tax expense related to the increase of the Company’s valuation allowance of $49,447.

73

Exhibit 99.2

EXPLANATORY NOTE
MDC Partners, Inc. (“MDC Partners,” “MDC, “ the “Company,” “we,” “us” or “our”) is filing this Exhibit 99.2 to its Current Report on Form 8-K to revise certain segment information included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 (the “2020 Q1 10-Q”).
The Company previously reported its financial results in four reportable segments, plus an All Other category: Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications, Media Services, and All Other. The Company reorganized its management structure in 2020 which resulted in a change to our reportable segments.
The Company began to present the Integrated Agencies Network reportable segment, which aggregated four operating segments (Constellation, Anomaly Alliance, Doner Partner Network and Colle McVoy), in the first quarter of 2020. In connection with our discussions with the SEC, the Company changed the prior presentation for the Integrated Agencies Network. Beginning in the second quarter of 2020, the Company separated the Integrated Agencies Network into two reportable segments: Integrated Networks - Group A (Anomaly Alliance and Colle McVoy) and Integrated Networks - Group B (Constellation and Doner Partner Network). The change was made to aggregate the operating segments that have the most similar historical average long-term profitability. The three reportable segments that result from applying the aggregation criteria are as follows: “Integrated Networks - Group A”, “Integrated Networks - Group B”; and “Media & Data Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other”.
The Company has revised the relevant parts of the following portions of the 2020 Q1 10-Q:
•
Item 1: Financial Statements and Notes to the Financial Statements
•Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operation
The revised items included in this Exhibit 99.2 have been updated to reflect the change in the Company’s segment reporting described above and to provide a definition of the measurement metric. In addition, in connection with the preparation of its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 (the “2020 Q2 10-Q”), the Company identified certain errors related to prior periods that were not material to any of the Company’s prior period financial statements; however, the cumulative effect of these errors could be considered material to our current year financial statements. As such, the Company revised the prior period financial statements as disclosed in the 2020 Q2 10-Q. The Company has not otherwise updated for activities or events occurring after the date the Company filed the 2020 Q1 10-Q, and the items included in this Exhibit 99.2 do not modify or update any other disclosures therein in any way. Without limitation of the foregoing, this filing does not purport to update the Note About Forward-Looking Statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations or the Risk Factors sections of the 2020 Q1 10-Q for any information, uncertainties, transactions, risks, events or trends occurring, or becoming known to management subsequent to the date of filing of the 2020 Q1 10-Q. Therefore, this Exhibit 99.2 should be read in conjunction with the 2020 Q1 10-Q. For more updated information, refer to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 and the Company’s subsequent current reports on Form 8-K and other filings with the SEC.




















Table of Contents





MDC PARTNERS INC.
 
 
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1.
3
 
3
 
4
 
5
 
6
 
7
 
8
Item 2.
24

                

2
Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
MDC PARTNERS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of United States dollars, except per share amounts)
 
Three Months Ended March 31,
 
2020
 
2019
Revenue:
 

 
 

Services
$
327,742

 
$
328,791

Operating Expenses:
 
 
 
Cost of services sold
222,693

 
237,153

Office and general expenses
66,353

 
67,118

Depreciation and amortization
9,206

 
8,838

Other asset impairment
161

 
—

 
298,413

 
313,109

Operating income
29,329

 
15,682

Other Income (Expenses):
 
 
 
Interest expense and finance charges, net
(15,612
)
 
(16,760
)
Foreign exchange gain (loss)
(14,757
)
 
5,442

Other, net
16,334

 
(3,383
)
 
(14,035
)
 
(14,701
)
Income before income taxes and equity in earnings of non-consolidated affiliates
15,294

 
981

Income tax expense
13,500

 
748

Income before equity in earnings of non-consolidated affiliates
1,794

 
233

Equity in earnings of non-consolidated affiliates
—

 
83

Net income
1,794

 
316

Net income attributable to the noncontrolling interest
(791
)
 
(429
)
Net income (loss) attributable to MDC Partners Inc.
1,003

 
(113
)
Accretion on and net income allocated to convertible preference shares
(3,440
)
 
(2,383
)
Net loss attributable to MDC Partners Inc. common shareholders
$
(2,437
)
 
$
(2,496
)
Loss Per Common Share:
 

 
 

Basic
 

 
 

Net loss attributable to MDC Partners Inc. common shareholders
$
(0.03
)
 
$
(0.04
)
Diluted
 
 
 
Net loss attributable to MDC Partners Inc. common shareholders
$
(0.03
)
 
$
(0.04
)
Weighted Average Number of Common Shares Outstanding:
 

 
 

  Basic
72,397,661

 
60,258,102

  Diluted
72,397,661

 
60,258,102


See notes to the Unaudited Condensed Consolidated Financial Statements.

3
Table of Contents

MDC PARTNERS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(thousands of United States dollars)
 
Three Months Ended March 31,
 
2020
 
2019
Comprehensive Income (Loss)
 
 
 

Net income
$
1,794

 
$
316

Other comprehensive income (loss), net of applicable tax:
 

 
 

Foreign currency translation adjustment
7,429

 
(4,659
)
Other comprehensive income (loss)
7,429

 
(4,659
)
Comprehensive income (loss) for the period
9,223

 
(4,343
)
Comprehensive income attributable to the noncontrolling interests
(282
)
 
(780
)
Comprehensive income (loss) attributable to MDC Partners Inc.
$
8,941

 
$
(5,123
)
See notes to the Unaudited Condensed Consolidated Financial Statements.

4
Table of Contents

MDC PARTNERS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of United States dollars)
 
March 31,
2020
 
December 31,
2019
 
(As Adjusted)
 
 
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
221,102

 
$
106,933

Accounts receivable, less allowance for doubtful accounts of $2,118 and $3,304
406,196

 
449,288

Expenditures billable to clients
22,763

 
30,133

Other current assets
44,689

 
35,613

Total Current Assets
694,750

 
621,967

Fixed assets, at cost, less accumulated depreciation of $132,174 and $129,579
75,767

 
81,054

Right-of-use assets - operating leases
216,194

 
223,622

Goodwill
716,407

 
731,691

Other intangible assets, net
50,640

 
54,893

Deferred tax assets
76,289

 
84,900

Other assets
29,622

 
30,179

Total Assets
$
1,859,669

 
$
1,828,306

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ DEFICIT
 
 
 

Current Liabilities:
 

 
 

Accounts payable
$
153,490

 
$
200,148

Accruals and other liabilities
325,826

 
353,575

Advance billings
146,803

 
171,742

Current portion of lease liabilities - operating leases
48,022

 
48,659

Current portion of deferred acquisition consideration
46,337

 
45,521

Total Current Liabilities
720,478

 
819,645

Long-term debt
1,014,260

 
887,630

Long-term portion of deferred acquisition consideration
26,399

 
29,699

Long-term lease liabilities - operating leases
211,254

 
219,163

Other liabilities
35,523

 
25,771

Total Liabilities
2,007,914

 
1,981,908

Redeemable Noncontrolling Interests
35,698

 
36,973

Commitments, Contingencies, and Guarantees (Note 9)


 


Shareholders’ Deficit:
 
 
 
Convertible preference shares, 145,000 authorized, issued and outstanding at March 31, 2020 and December 31, 2019
152,746

 
152,746

Common stock and other paid-in capital
99,587

 
101,469

Accumulated deficit
(479,694
)
 
(480,779
)
Accumulated other comprehensive (loss) income
3,669

 
(4,269
)
MDC Partners Inc. Shareholders' Deficit
(223,692
)
 
(230,833
)
Noncontrolling interests
39,749

 
40,258

Total Shareholders' Deficit
(183,943
)
 
(190,575
)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Deficit
$
1,859,669

 
$
1,828,306

See notes to the Unaudited Condensed Consolidated Financial Statements.

5
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MDC PARTNERS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of United States dollars)


 
Three Months Ended March 31,

2020
 
2019
Cash flows from operating activities:
 

 
 

Net income
$
1,794

 
$
316

Adjustments to reconcile net income to cash used in operating activities:
 
 
 
Stock-based compensation
3,070

 
2,972

Depreciation and amortization
9,206

 
8,838

Other asset impairment
161

 
—

Adjustment to deferred acquisition consideration
(4,600
)
 
(7,643
)
Deferred income taxes
8,511

 
748

Foreign exchange and other
4,489

 
(2,608
)
Changes in working capital:
 
 
 
Accounts receivable
41,148

 
(29,957
)
Expenditures billable to clients
7,370

 
(4,294
)
Prepaid expenses and other current assets
(3,385
)
 
(3,373
)
Accounts payable, accruals and other current liabilities
(62,120
)
 
(75,105
)
Acquisition related payments
(782
)
 
(3,657
)
Advance billings
(24,816
)
 
32,563

Net cash used in operating activities
(19,954
)

(81,200
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(1,546
)
 
(3,606
)
Proceeds from sale of assets
18,920

 
23,050

Acquisitions, net of cash acquired
(729
)
 
(1,050
)
Other
—

 
(293
)
Net cash provided by investing activities
16,645


18,101

Cash flows from financing activities:
 

 
 

Net increase (decrease) in revolving credit facility
125,000

 
(35,340
)
Proceeds from issuance of common and convertible preference shares, net of issuance costs
—

 
97,629

Acquisition related payments
(750
)
 
—

Other
(4,608
)
 
(1,536
)
Net cash provided by financing activities
119,642


60,753

Effect of exchange rate changes on cash, cash equivalents, and cash held in trusts
(2,164
)
 
(576
)
Net increase (decrease) in cash and cash equivalents, including cash classified within current assets held for sale
114,169

 
(2,922
)
Change in cash and cash equivalents held in trusts classified within held for sale
—

 
(3,307
)
Change in cash and cash equivalents classified within assets held for sale
—

 
1,728

Net increase (decrease) in cash and cash equivalents
114,169

 
(4,501
)
Cash and cash equivalents at beginning of period
106,933

 
30,873

Cash and cash equivalents at end of period
$
221,102

 
$
26,372

Supplemental disclosures:
 

 
 

Cash income taxes paid
$
849

 
$
1,677

Cash interest paid
$
145

 
$
1,629

See notes to the Unaudited Condensed Consolidated Financial Statements.

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MDC PARTNERS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(thousands of United States dollars, except share amounts)

 
Three Months Ended
 
March 31, 2020
 
Convertible Preference Shares
 
Common Shares
 
Common Stock and Other Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
MDC Partners Inc. Shareholders' Deficit
 
Noncontrolling Interests
 
Total Shareholder's Deficit
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
 
 
 
 
 
Balance at December 31, 2019
145,000

 
$
152,746

 
72,154,603

 
$
101,469

 
$
(480,779
)
 
$
(4,269
)
 
$
(230,833
)
 
$
40,258

 
$
(190,575
)
Net income attributable to MDC Partners Inc.
—

 
—

 
—

 
—

 
1,003

 
—

 
1,003

 
—

 
1,003

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
7,938

 
7,938

 
(509
)
 
7,429

Issuance of restricted stock
—

 
—

 
587,227

 
—

 
—

 
—

 
—

 
—

 
—

Shares acquired and cancelled
—

 
—

 
(258,664
)
 
(637
)
 
—

 
—

 
(637
)
 
—

 
(637
)
Stock-based compensation
—

 
—

 
—

 
476

 
—

 
—

 
476

 
—

 
476

Changes in redemption value of redeemable noncontrolling interests
—

 
—

 
—

 
(1,218
)
 
—

 
—

 
(1,218
)
 
—

 
(1,218
)
Business acquisitions and step-up transactions, net of tax
—

 
—

 
—

 
(503
)
 
—

 
—

 
(503
)
 
—

 
(503
)
Other
—

 
—

 
—

 
—

 
82

 
—

 
82

 
—

 
82

Balance at March 31, 2020 (As adjusted)
145,000

 
$
152,746

 
72,483,166

 
$
99,587

 
$
(479,694
)
 
$
3,669

 
$
(223,692
)
 
$
39,749

 
$
(183,943
)


 
Three Months Ended
 
March 31, 2019
 
Convertible Preference Shares
 
Common Shares
 
Common Stock and Other Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
MDC Partners Inc. Shareholders' Deficit
 
Noncontrolling Interests
 
Total Shareholder's Deficit
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
 
 
 
 
 
Balance at December 31, 2018
95,000

 
$
90,123

 
57,521,323

 
$
58,579

 
$
(475,526
)
 
$
4,720

 
$
(322,104
)
 
$
64,514

 
$
(257,590
)
Net loss attributable to MDC Partners Inc.
—

 
—

 
—

 
—

 
(113
)
 
—

 
(113
)
 
—

 
(113
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
(5,010
)
 
(5,010
)
 
351

 
(4,659
)
Issuance of common and convertible preference shares
50,000

 
61,994

 
14,285,714

 
35,635

 
—

 
—

 
97,629

 
—

 
97,629

Issuance of restricted stock
—

 
—

 
117,000

 
—

 
—

 
—

 
—

 
—

 
—

Shares acquired and cancelled
—

 
—

 
(34,016
)
 
(56
)
 
—

 
—

 
(56
)
 
—

 
(56
)
Stock-based compensation
—

 
—

 
—

 
(1,291
)
 
—

 
—

 
(1,291
)
 
—

 
(1,291
)
Changes in redemption value of redeemable noncontrolling interests
—

 
—

 
—

 
5,919

 
—

 
—

 
5,919

 
—

 
5,919

Changes in ownership interest
—

 
—

 
—

 
(93
)
 
—

 
—

 
(93
)
 
(24,642
)
 
(24,735
)
Balance at March 31, 2019 (As adjusted)
145,000

 
$
152,117

 
71,890,021

 
$
98,693

 
$
(475,639
)
 
$
(290
)
 
$
(225,119
)
 
$
40,223

 
$
(184,896
)


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MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
1. Basis of Presentation and Recent Developments
MDC Partners Inc. (the “Company” or “MDC”), incorporated under the laws of Canada, is a leading provider of global marketing, advertising, activation, communications and strategic consulting solutions. Through its Networks (and underlying agencies generally referred to as “Partner Firms”), MDC delivers a wide range of customized services in order to drive growth and business performance for its clients.
The accompanying consolidated financial statements include the accounts of MDC, its subsidiaries and variable interest entities for which the Company is the primary beneficiary. MDC has prepared the unaudited condensed consolidated interim financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting interim financial information on Form 10-Q. Accordingly, the financial statements have been condensed and do not include certain information and disclosures pursuant to these rules. The preparation of financial statements in conformity with GAAP requires us to make judgments, assumptions and estimates about current and future results of operations and cash flows that affect the amounts reported and disclosed. Actual results could differ from these estimates and assumptions. The consolidated results for interim periods are not necessarily indicative of results for the full year and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”).
The Company expects the effects of the COVID-19 pandemic to negatively impact its results of operations, cash flows and financial position. While it is difficult to predict the full scale of the impact, the Company has been taking actions to address the impact of the pandemic, such as working closely with our clients, reducing our expenses and monitoring liquidity. The impact of the pandemic and the corresponding actions were reflected into our judgments, assumptions and estimates to prepare the financial statements. However, if the duration of the COVID-19 pandemic is longer and the operational impact is greater than estimated, the judgments, assumptions and estimates will be updated and could result in different results in the future.
The accompanying financial statements reflect all adjustments, consisting of normally recurring accruals, which in the opinion of management are necessary for a fair presentation, in all material respects, of the information contained therein. Intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.
The Company reorganized its management structure in 2020 which resulted in a change to our reportable segments. Prior periods presented have been recast to reflect the change in reportable segments. See Note 14 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information.
Recent Developments
In April 2020, the Company repurchased approximately $30,000 of the total $900,000 6.50% Notes due in May 2024, at a weighted average price equal to 74% of the principal amount totaling approximately $22,000, and accrued interest of approximately $946. As a result of the repurchase, we will recognize an estimated extinguishment gain of $8,000.
 
2. Acquisitions and Dispositions
2020 Acquisition
On March 19, 2020, the Company acquired the remaining 22.5% ownership interest of KWT Global it did not already own for an aggregate purchase price of $2,118, comprised of a closing cash payment of $729 and contingent deferred acquisition payments with an estimated present value at the acquisition date of $1,389. The contingent deferred payments are based on the financial results of the underlying business from 2019 to 2020 with final payment due in 2021. As a result of the transaction, the Company reduced redeemable noncontrolling interests by $1,615. The difference between the purchase price and the redeemable noncontrolling interest of $503 was recorded in Common stock and other paid-in capital in the Unaudited Condensed Consolidated Balance Sheets.

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2020 Disposition
On February 14, 2020, the Company sold substantially all the assets and certain liabilities of Sloane and Company LLC (“Sloane”), an indirectly wholly owned subsidiary of the Company, to an affiliate of The Stagwell Group LLC (“Stagwell”), for an aggregate purchase price of approximately $26,000, consisting of cash paid at closing plus contingent deferred payments expected to be paid over the next two years. The sale resulted in a gain of approximately $16,131, which is included in Other, net within the Unaudited Condensed Consolidated Statement of Operations. Sloane was included within Allison & Partners which is included within the All Other category.
2019 Acquisitions
On November 15, 2019, the Company acquired the remaining 35% ownership interest of Laird + Partners it did not already own for an aggregate purchase price of $2,389, comprised of a closing cash payment of $1,588 and contingent deferred acquisition payments with an estimated present value at the acquisition date of $801. The contingent deferred payments are based on the financial results of the underlying business from 2018 to 2020 with final payment due in 2021. As a result of the transaction, the Company reduced redeemable noncontrolling interests by $5,045. The difference between the purchase price and the redeemable noncontrolling interest of $2,656 was recorded in Common stock and other paid-in capital in the Unaudited Condensed Consolidated Balance Sheets.
Effective April 1, 2019, the Company acquired the remaining 35% ownership interest of HPR Partners LLC (Hunter) it did not already own for an aggregate purchase price of $10,234, comprised of a closing cash payment of $3,890 and additional contingent deferred acquisition payments with an estimated present value at the acquisition date of $6,344. The contingent deferred payments are based on the financial results of the underlying business from 2018 to 2020 with final payment due in 2021. As a result of the transaction, the Company reduced redeemable noncontrolling interests by $9,486. The difference between the purchase price and the redeemable noncontrolling interest of $745 was recorded in Common stock and other paid-in capital in the Unaudited Condensed Consolidated Balance Sheets.
2019 Disposition
On March 8, 2019, the Company consummated the sale of Kingsdale, an operating segment with operations in Toronto and New York City that provides shareholder advisory services. As consideration for the sale, the Company received cash plus the assumption of certain liabilities totaling approximately $50,000 in the aggregate. The sale resulted in a loss of approximately $3,000, which was included in Other, net within the Unaudited Condensed Consolidated Statement of Operations.
3. Revenue
The Company’s revenue recognition policies are established in accordance with ASC 606, and accordingly, revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The MDC network provides an extensive range of services to our clients offering a variety of marketing and communication capabilities including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast), public relations services including strategy, editorial, crisis support or issues management, media training, influencer engagement and events management. We also provide media buying and planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast), experiential marketing and application/website design and development.
The primary source of the Company’s revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses, depending on the terms of the client contract. In all circumstances, revenue is only recognized when collection is reasonably assured. Certain of the Company’s contractual arrangements have more than one performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its relative stand-alone selling price. Stand-alone selling prices are determined based on the prices charged to clients or using expected cost plus margin.
The determination of our performance obligations is specific to the services included within each contract. Based on a client’s requirements within the contract, and how these services are provided, multiple services could represent separate performance obligations or be combined and considered one performance obligation. Contracts that contain services that are not significantly integrated or interdependent, and that do not significantly modify or customize each other, are considered separate performance obligations. Typically, we consider media planning, media buying, creative (or strategy), production and experiential marketing services to be separate performance obligations if included in the same contract as each of these services can be provided on a stand-alone basis, and do not significantly modify or customize each other. Public relations services and application/website design and development are typically each considered one performance obligation as there is a significant integration of these services into a combined output.

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We typically satisfy our performance obligations over time, as services are performed. Fees for services are typically recognized using input methods (direct labor hours, materials and third-party costs) that correspond with efforts incurred to date in relation to total estimated efforts to complete the contract. Point in time recognition primarily relates to certain commission-based contracts, which are recognized upon the placement of advertisements in various media when the Company has no further performance obligation.                                            
Revenue is recognized net of sales and other taxes due to be collected and remitted to governmental authorities. The Company’s contracts typically provide for termination by either party within 30 to 90 days. Although payment terms vary by client, they are typically within 30 to 60 days. In addition, the Company generally has the right to payment for all services provided through the end of the contract or termination date.
Within each contract, we identify whether the Company is principal or agent at the performance obligation level. In arrangements where the Company has substantive control over the service before transferring it to the client, and is primarily responsible for integrating the services into the final deliverables, we act as principal. In these arrangements, revenue is recorded at the gross amount billed. Accordingly, for these contracts the Company has included reimbursed expenses in revenue. In other arrangements where a third-party supplier, rather than the Company, is primarily responsible for the integration of services into the final deliverables, and thus the Company is solely arranging for the third-party supplier to provide these services to our client, we generally act as agent and record revenue equal to the net amount retained, when the fee or commission is earned. The role of MDC’s agencies under a production services agreement that is to facilitate a client’s purchasing of production capabilities from a third-party production company in accordance with the client’s strategy and guidelines. The obligation of MDC’s agencies under media buying services is to negotiate and purchase advertising media from a third-party media vendor on behalf of a client to execute its media plan. We do not obtain control prior to transferring these services to our clients; therefore, we primarily act as agent for production and media buying services.                                    
A small portion of the Company’s contractual arrangements with clients include performance incentive provisions, which allow the Company to earn additional revenues as a result of its performance relative to both quantitative and qualitative goals. Incentive compensation is primarily estimated using the most likely amount method and is included in revenue up to the amount that is not expected to result in a reversal of a significant amount of cumulative revenue recognized. We recognize revenue related to performance incentives as we satisfy the performance obligation to which the performance incentives are related.
Disaggregated Revenue Data
The Company provides a broad range of services to a large base of clients across the full spectrum of industry verticals on a global basis. The primary source of revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses. Certain clients may engage with the Company in various geographic locations, across multiple disciplines, and through multiple Partner Firms. Representation of a client rarely means that MDC handles marketing communications for all brands or product lines of the client in every geographical location. The Company maintains separate, independent operating companies to enable it to effectively manage potential conflicts of interest by representing competing clients across the Company.
The following table presents revenue disaggregated by client industry vertical for the three months ended March 31, 2020 and 2019:
 
 
 
Three Months Ended March 31,
Industry
Reportable Segment
 
2020
 
2019
Food & Beverage
All
 
$
58,091

 
$
66,663

Retail
All
 
36,303

 
32,580

Consumer Products
All
 
39,769

 
35,001

Communications
All
 
41,045

 
39,798

Automotive
All
 
25,192

 
18,191

Technology
All
 
25,535

 
26,616

Healthcare
All
 
24,066

 
23,297

Financials
All
 
24,005

 
25,126

Transportation and Travel/Lodging
All
 
20,486

 
17,441

Other
All
 
33,250

 
44,078

 
 
 
$
327,742

 
$
328,791




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MDC has historically largely focused where the Company was founded in North America, the largest market for its services in the world. MDC’s Partner Firms are located in the United States, Canada, and an additional eleven countries around the world. In the past, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which included discretionary components that are easier to reduce in the short term than other operating expenses.

The following table presents revenue disaggregated by geography for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,
Geographic Location
Reportable Segment
 
2020
 
2019
United States
All
 
$
264,561

 
$
263,017

Canada
All
 
18,256

 
22,378

Other
All
 
44,925

 
43,396

 
 
 
$
327,742

 
$
328,791



Contract assets and liabilities
Contract assets consist of fees and reimbursable outside vendor costs incurred on behalf of clients when providing advertising, marketing and corporate communications services that have not yet been invoiced to clients. Unbilled service fees were $75,638 and $65,004 at March 31, 2020 and December 31, 2019, respectively, and are included as a component of accounts receivable on the Unaudited Condensed Consolidated Balance Sheets. Outside vendor costs incurred on behalf of clients which have yet to be invoiced were $22,763 and $30,133 at March 31, 2020 and December 31, 2019, respectively, and are included on the Unaudited Condensed Consolidated Balance Sheets as expenditures billable to clients. Such amounts are invoiced to clients at various times over the course of providing services.
Contract liabilities consist of fees billed to clients in excess of fees recognized as revenue and are classified as advance billings on the Company’s Unaudited Condensed Consolidated Balance Sheets. Advance billings at March 31, 2020 and December 31, 2019 were $146,803 and $171,742, respectively. The decrease in the advance billings balance of $24,939 for the three months ended March 31, 2020 was primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $104,937 of revenues recognized that were included in the advance billings balances as of December 31, 2019 and reductions due to the incurrence of third-party costs.
Changes in the contract asset and liability balances during the three months ended March 31, 2020 and December 31, 2019 were not materially impacted by write offs, impairment losses or any other factors.
The majority of our contracts are for periods of one year or less. For those contracts with a term of more than one year, we had approximately $35,771 of unsatisfied performance obligations as of March 31, 2020, of which we expect to recognize approximately 87% in 2020, 11% in 2021 and 2% in 2022.
4. Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted income (loss) per common share:
 
Three Months Ended March 31,
 
2020
 
2019
Numerator:
 


 

Net income (loss) attributable to MDC Partners Inc.
$
1,003

 
$
(113
)
Accretion on convertible preference shares
(3,440
)

(2,383
)
Net loss attributable to MDC Partners Inc. common shareholders
$
(2,437
)

$
(2,496
)
Denominator:
 
 
 
Basic weighted average number of common shares outstanding
72,397,661


60,258,102

Diluted weighted average number of common shares outstanding
72,397,661


60,258,102

Basic
$
(0.03
)

$
(0.04
)
Diluted
$
(0.03
)
 
$
(0.04
)

Anti-dilutive stock awards 2,835,770 1,633,464


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Restricted stock and restricted stock unit awards of 2,203,717 and 257,280 as of March 31, 2020 and 2019 respectively, are excluded from the computation of diluted income (loss) per common share because the performance contingency necessary for vesting has not been met as of the reporting date or all the terms and conditions to establish a grant date were not yet known. In addition, there were 145,000 Preference Shares outstanding which were convertible into 27,189,411 and 25,118,813 Class A common shares at March 31, 2020 and 2019, respectively. These Preference Shares were anti-dilutive for each period presented in the table above and are therefore excluded from the diluted income (loss) per common share calculation.

5. Deferred Acquisition Consideration
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, and to a lesser extent, contingent and fixed retention payments tied to continued employment of specific personnel. Contingent deferred acquisition consideration is recorded at the acquisition date fair value and adjusted at each reporting period through operating income, for contingent purchase price payments, or net interest expense, for fixed purchase price payments. The Company accounts for retention payments through operating income as stock-based compensation over the required retention period.
The following table presents changes in contingent deferred acquisition consideration, which is measured at fair value on a recurring basis using significant unobservable inputs, and a reconciliation to the amounts reported on the balance sheets as of March 31, 2020 and December 31, 2019.
 
March 31,
 
December 31,
 
2020
 
2019
Beginning Balance of contingent payments
$
74,671

 
$
82,598

Payments
(1,125
)
 
(30,719
)
Redemption value adjustments (1)
(2,575
)
 
15,450

Additions - acquisitions and step-up transactions
1,389

 
7,145

Other (2)
(185
)
 
197

Ending Balance of contingent payments
$
72,175

 
$
74,671

Fixed payments
561

 
549

 
$
72,736

 
$
75,220

    
(1) Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition payments and stock-based compensation charges relating to acquisition payments that are tied to continued employment. Redemption value adjustments are recorded within cost of services sold and office and general expenses on the Unaudited Condensed Consolidated Statement of Operations.
(2) Other primarily consists of translation adjustments.
The following table presents the impact to the Company’s statement of operations due to the redemption value adjustments for the contingent deferred acquisition consideration:
 
Three Months Ended March 31,
 
2020
 
2019
Income attributable to fair value adjustments
$
(4,600
)
 
$
(7,643
)
Stock-based compensation
2,025

 
809

Redemption value adjustments
$
(2,575
)
 
$
(6,834
)

6. Leases
The Company leases office space in North America, Europe, Asia, South America, and Australia. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. These leases are classified as operating leases and expire between years 2020 through 2032. The Company’s finance leases are immaterial.
The Company’s leasing policies are established in accordance with ASC 842, and accordingly, the Company recognizes on the balance sheet at the time of lease commencement a right-of-use lease asset and a lease liability, initially measured at the present value of the lease payments. Right-of-use lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. All right-of-use lease assets

12
Table of Contents

are reviewed for impairment. As the Company’s implicit rate in its leases is not readily determinable, in determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the commencement date. Lease payments included in the measurement of the lease liability are comprised of noncancelable lease payments, payments based upon an index or rate, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease costs are recognized in the Consolidated Statement of Operations over the lease term on a straight-line basis. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset. 
Some of the Company’s leases contain variable lease payments, including payments based upon an index or rate. Variable lease payments based upon an index or rate are initially measured using the index or rate in effect at the lease commencement date and are included within the lease liabilities. Lease liabilities are not remeasured as a result of changes in the index or rate, rather changes in these types of payments are recognized in the period in which the obligation for those payments is incurred. In addition, some of our leases contain variable payments for utilities, insurance, real estate tax, repairs and maintenance, and other variable operating expenses. Such amounts are not included in the measurement of the lease liability and are recognized in the period when the facts and circumstances on which the variable lease payments are based upon occur.
The Company’s leases include options to extend or renew the lease through 2040. The renewal and extension options are not included in the lease term as the Company is not reasonably certain that it will exercise its option.
From time to time, the Company enters into sublease arrangements both with unrelated third-parties and with our partner agencies. These leases are classified as operating leases and expire between years 2020 through 2032. Sublease income is recognized over the lease term on a straight-line basis. Currently, the Company subleases office space in North America, Europe and Australia.
As of March 31, 2020, the Company has entered into three operating leases for which the commencement date has not yet occurred as the premises are in the process of being prepared for occupancy by the landlord. One of the operating leases is related to the Company’s agreement, entered into on February 27, 2020, to lease space at One World Trade Center in connection with the centralization of our New York real estate portfolio. The lease term is for approximately eleven years, with rental payments totaling approximately $112,000, net of landlord reimbursements. As part of the centralization initiative, the Company will sublease existing properties currently under lease, resulting in the recovery of a portion of our rent obligation under such arrangements.
Accordingly, these three leases represent an obligation of the Company that is not reflected within the Unaudited Consolidated Balance Sheet as of March 31, 2020. The aggregate future liability related to these leases is approximately $124,233.
The discount rate used for leases accounted for under ASC 842 is the Company’s collateralized credit adjusted borrowing rate.
The following table presents lease costs and other quantitative information for the three months ended March 31, 2020 and 2019:

 
Three Months Ended March 31,
 
2020
 
2019
Lease Cost:
 
 
 
Operating lease cost
$
16,391

 
$
16,441

Variable lease cost
4,655

 
4,964

Sublease rental income
(2,805
)
 
(1,599
)
Total lease cost
$
18,241

 
$
19,806

Additional information:
 
 
 
Cash paid for amounts included in the measurement of lease liabilities for operating leases

 

Operating cash flows
$
17,635

 
$
15,652

 
 
 
 
Right-of-use assets obtained in exchange for operating lease liabilities
$
7,119

 
$
256,818

Weighted average remaining lease term (in years) - Operating leases
7.0

 
7.3

Weighted average discount rate - Operating leases
8.7

 
8.7




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In the three months ended March 31, 2020, the Company recorded an impairment charge of $161 to reduce the carrying value of a right-of-use lease asset of one of its agencies within its Integrated Agencies Network reportable segment. The Company evaluated the facts and circumstances related to the use of the asset which indicated that it may not be recoverable. Using adjusted quoted market prices to develop expected future cash flows, it was determined that the fair value of the asset was less than its carrying value. This impairment charge is included in Other asset impairment within the Unaudited Condensed Consolidated Statement of Operations.
In the three months ended March 31, 2019, the Company did not record any impairment charge to reduce the carrying value of its right-of-use lease assets or related leasehold improvements.
Operating lease expense is included in office and general expenses in the Unaudited Condensed Consolidated Statement of Operations. The Company’s lease expense for leases with a term of 12 months or less is immaterial.
The following table presents minimum future rental payments under the Company’s leases at March 31, 2020 and their reconciliation to the corresponding lease liabilities:
 
Maturity Analysis
Remaining 2020
$
52,025

2021
59,901

2022
49,774

2023
44,573

2024
38,111

Thereafter
103,505

Total
347,889

Less: Present value discount
(88,613
)
Lease liability
$
259,276


7. Debt
As of March 31, 2020 and December 31, 2019, the Company’s indebtedness was comprised as follows:

March 31, 2020

December 31, 2019
Revolving credit agreement
$
125,000

 
$
—

6.50% Notes due 2024
900,000

 
900,000

Debt issuance costs
(10,740
)
 
(12,370
)
 
$
1,014,260

 
$
887,630


6.50% Notes
On March 23, 2016, MDC entered into an indenture (the “Indenture”) among MDC, its existing and future restricted subsidiaries that guarantee, are co-borrowers under, or grant liens to secure, the Credit Agreement, as guarantors (the “Guarantors”) and The Bank of New York Mellon, as trustee, relating to the issuance by MDC of $900,000 aggregate principal amount of the senior notes due 2024 (the “6.50% Notes”). The 6.50% Notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933. The 6.50% Notes bear interest, payable semiannually in arrears on May 1 and November 1, at a rate of 6.50% per annum. The 6.50% Notes mature on May 1, 2024, unless earlier redeemed or repurchased.
In April 2020, the Company repurchased approximately $30,000 of the 6.50% Notes. See Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information.
MDC may, at its option, redeem the 6.50% Notes in whole at any time or in part from time to time, at varying prices based on the timing of the redemption.
If MDC experiences certain kinds of changes of control (as defined in the Indenture), holders of the 6.50% Notes may require MDC to repurchase any 6.50% Notes held by them at a price equal to 101% of the principal amount of the 6.50% Notes plus accrued and unpaid interest. In addition, if MDC sells assets under certain circumstances, it must apply the proceeds from such sale and offer to repurchase the 6.50% Notes at a price equal to 100% of the principal amount plus accrued and unpaid interest.
The Indenture includes covenants that among other things, restrict MDC’s ability and the ability of its restricted subsidiaries (as defined in the Indenture) to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital

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stock of MDC; make certain types of investments; create restrictions on the payment of dividends or other amounts from MDC’s restricted subsidiaries; sell assets; enter into transactions with affiliates; create liens; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of MDC’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The 6.50% Notes are also subject to customary events of default, including a cross-payment default and cross-acceleration provision. The Company was in compliance with all covenants at March 31, 2020.
Revolving Credit Agreement
The Company is party to a $250,000 secured revolving credit facility due May 3, 2021.
On March 12, 2019 (the “Amendment Effective Date”), the Company, Maxxcom Inc. (a subsidiary of the Company) (“Maxxcom”) and each of their subsidiaries party thereto entered into an Amendment to the existing senior secured revolving credit facility, dated as of May 3, 2016 (as amended, the “Credit Agreement”), among the Company, Maxxcom, each of their subsidiaries party thereto, Wells Fargo Capital Finance, LLC, as agent (“Wells Fargo”), and the lenders from time to time party thereto. Advances under the Credit Agreement are to be used for working capital and general corporate purposes, in each case pursuant to the terms of the Credit Agreement.
Advances under the Credit Agreement bear interest as follows: (a)(i) LIBOR Rate Loans bear interest at the LIBOR Rate and (ii) Base Rate Loans bear interest at the Base Rate, plus (b) an applicable margin. The initial applicable margin for borrowing is 0.75% in the case of Base Rate Loans and 1.50% in the case of LIBOR Rate Loans. In addition to paying interest on outstanding principal under the Credit Agreement, MDC is required to pay an unused revolver fee to lenders under the Credit Agreement in respect of unused commitments thereunder. The Amendment provides financial covenant relief by increasing the total leverage ratio applicable on each testing date after the Amendment Effective Date through the period ending December 31, 2020 from 5.5:1.0 to 6.25:1.0. The total leverage ratio applicable on each testing date after December 31, 2020 will revert to 5.5:1.0.
In connection with the Amendment, the Company reduced the aggregate maximum amount of revolving commitments provided by the lenders under the Credit Agreement to $250,000 from $325,000.
The Credit Agreement, which includes financial and non-financial covenants, is guaranteed by substantially all of MDC’s present and future subsidiaries, other than immaterial subsidiaries and subject to customary exceptions and collateralized by a portion of MDC’s outstanding receivable balance. The Company is currently in compliance with all of the terms and conditions of its Credit Agreement as of March 31, 2020.
At March 31, 2020 and December 31, 2019, the Company had issued undrawn outstanding letters of credit of $17,576 and $4,836, respectively.
8. Noncontrolling and Redeemable Noncontrolling Interests
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling interests in the equity section of the Company’s Unaudited Condensed Consolidated Balance Sheets. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity at their estimated acquisition date redemption value and adjusted at each reporting period for changes to their estimated redemption value through additional paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. On occasion, the Company may initiate a renegotiation to acquire an incremental ownership interest and the amount of consideration paid may differ materially from the amounts recorded in the Company’s Unaudited Condensed Consolidated Balance Sheets.

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Noncontrolling Interests
Changes in amounts due to noncontrolling interest holders included in accruals and other liabilities on the Unaudited Condensed Consolidated Balance Sheets for the year ended December 31, 2019 and three months ended March 31, 2020 were as follows:
 
Noncontrolling
Interests
Balance, December 31, 2018
$
9,278

Income attributable to noncontrolling interests
16,156

Distributions made
(11,392
)
Other (1)
(14
)
Balance, December 31, 2019
$
14,028

Income attributable to noncontrolling interests
791

Distributions made
(3,973
)
Other (1)
(856
)
Balance, March 31, 2020
$
9,990


(1) Other primarily consists of translation adjustments.
Changes in the Company’s ownership interests in our less than 100% owned subsidiaries during the three months ended March 31, 2020 and 2019 were as follows:
 
Three Months Ended March 31,
 
2020
 
2019
Net income (loss) attributable to MDC Partners Inc.
$
1,003

 
$
(113
)
Transfers from the noncontrolling interest:
 
 
 
Increase (decrease) in MDC Partners Inc. paid-in capital for purchase of redeemable noncontrolling interests and noncontrolling interests
(503
)
 
—

Net transfers from noncontrolling interests
$
(503
)
 
$
—

Change from net income (loss) attributable to MDC Partners Inc. and transfers to noncontrolling interests
$
500

 
$
(113
)

Redeemable Noncontrolling Interests
The following table presents changes in redeemable noncontrolling interests:
 
Three Months Ended March 31, 2020
 
Year Ended December 31, 2019
Beginning Balance
$
36,973

 
$
51,546

Redemptions
(1,615
)
 
(14,530
)
Granted
—

 
—

Changes in redemption value
1,218

 
(3,163
)
Currency translation adjustments
(878
)
 
3

Other (1)
—

 
3,117

Ending Balance
$
35,698

 
$
36,973

(1) Other primarily consists of the redeemable noncontrolling interest balance related to a foreign entity that was classified as held for sale as of December 31, 2018 and reclassified in 2019.
The noncontrolling shareholders’ ability to exercise any such option right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise and specific employment termination conditions. In addition, these rights cannot be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the related amounts during 2020 to 2024. It is not determinable, at this time, if or when the owners of these rights will exercise all or a portion of these rights.

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The redeemable noncontrolling interest of $35,698 as of March 31, 2020, consists of $22,494 assuming that the subsidiaries perform over the relevant future periods at their discounted cash flows earnings level and such rights are exercised, $10,931 upon termination of such owner’s employment with the applicable subsidiary or death and $2,273 representing the initial redemption value (required floor) recorded for certain acquisitions in excess of the amount the Company would have to pay should the Company acquire the remaining ownership interests for such subsidiaries.
These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. For the three months ended March 31, 2020 and 2019, there was no related impact on the Company’s loss per share calculation.  
9. Commitments, Contingencies, and Guarantees
Legal Proceedings. The Company’s operating entities are involved in legal proceedings of various types. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.
Deferred Acquisition Consideration and Options to Purchase. See Notes 5 and 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for information regarding potential payments associated with deferred acquisition consideration and the acquisition of noncontrolling shareholders’ ownership interest in subsidiaries.
Natural Disasters. Certain of the Company’s operations are located in regions of the United States which typically are subject to hurricanes. During the three months ended March 31, 2020 and 2019, these operations did not incur any material costs related to damages resulting from hurricanes.
Guarantees. Generally, the Company has indemnified the purchasers of certain assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
Commitments.  At March 31, 2020, the Company had $17,576 of undrawn letters of credit.
The Company entered into operating leases for which the commencement date has not yet occurred as of March 31, 2020. See Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional information.
10. Share Capital
The authorized and outstanding share capital of the Company is as follows:
Series 6 Convertible Preference Shares
On March 14, 2019 (the “Series 6 Issue Date”), the Company entered into a securities purchase agreement with Stagwell Agency Holdings LLC (“Stagwell Holdings”), an affiliate of Stagwell, pursuant to which Stagwell Holdings agreed to purchase (i) 14,285,714 newly authorized Class A shares (the “Stagwell Class A Shares”) for an aggregate contractual purchase price of $50,000 and (ii) 50,000 newly authorized Series 6 convertible preference shares (“Series 6 Preference Shares”) for an aggregate contractual purchase price of $50,000. The Company received proceeds of approximately $98,620 net of fees and estimated expenses, which were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. The proceeds allocated to the Stagwell Class A Shares were $35,997 and to Series 6 Preference Shares were $62,623 based on their relative fair value calculated by utilizing a Monte Carlo Simulation model. In connection with the closing of the transaction, the Company increased the size of its Board and appointed two nominees designated by Stagwell Holdings. Except as required by law, the Series 6 Preference Shares do not have voting rights and are not redeemable at the option of Stagwell Holdings.
The holders of the Series 6 Preference Shares have the right to convert their Series 6 Preference Shares in whole at any time and from time to time, and in part at any time and from time to time, into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation preference per share of each Series 6 Preference Share is $1,000. The initial Conversion Price is $5.00 per Series 6 Preference Share, subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities.
The Series 6 Preference Shares’ liquidation preference accretes at 8.0% per annum, compounded quarterly until the five-year anniversary of the Series 6 Issue Date. During the three months ended March 31, 2020, the Series 6 Preference Shares accreted at a monthly rate of $7.10, for total accretion of $1,065, bringing the aggregate liquidation preference to $54,326 as of March 31, 2020. The accretion is considered in the calculation of net loss attributable to MDC Partners Inc. common shareholders. See Note

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4 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information regarding the Series 6 Preference Shares.
Holders of the Series 6 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 6 Preference Shares. The Series 6 Preference Shares are convertible at the Company’s option (i) on and after the two-year anniversary of the Series 6 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least 125% of the Conversion Price or (ii) after the fifth anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 6 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at 7%), and (ii) the Company will have a right to redeem the Series 6 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
Series 4 Convertible Preference Shares
On March 7, 2017 (the “Series 4 Issue Date”), the Company issued 95,000 newly created Preference Shares (“Series 4 Preference Shares”) to affiliates of The Goldman Sachs Group, Inc. (collectively, the “Purchaser”) pursuant to a $95,000 private placement. The Company received proceeds of approximately $90,123, net of fees and estimated expenses, which were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. In connection with the closing of the transaction, the Company increased the size of its Board and appointed one nominee designated by the Purchaser. Except as required by law, the Series 4 Preference Shares do not have voting rights and are not redeemable at the option of the Purchaser.
Subsequent to the ninetieth day following the Series 4 Issue Date, the holders of the Series 4 Preference Shares have the right to convert their Series 4 Preference Shares in whole at any time and from time to time and in part at any time and from time to time into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation preference per share of each Series 4 Preference Share is $1,000. The Conversion Price of a Series 4 Preference Share is subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities. In connection with the anti-dilution protection provision triggered by the issuance of equity securities to Stagwell Holdings, the Conversion Price per Series 4 Preference Share was reduced to $7.42 from the initial Conversion Price of $10.00.
The Series 4 Preference Shares’ liquidation preference accretes at 8.0% per annum, compounded quarterly until the five-year anniversary of the Series 4 Issue Date. During the three months ended March 31, 2020, the Series 4 Preference Shares accreted at a monthly rate of approximately $8.33 per Series 4 Preference Share, for total accretion of $2,375, bringing the aggregate liquidation preference to $121,126 as of March 31, 2020. The accretion is considered in the calculation of net income (loss) attributable to MDC Partners Inc. common shareholders. See Note 4 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information regarding the Series 4 Preference Shares.
Holders of the Series 4 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 4 Preference Shares. The Series 4 Preference Shares are convertible at the Company’s option (i) on and after the two-year anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least 125% of the Conversion Price or (ii) after the fifth anniversary of the Series 4 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 4 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at 7%), and (ii) the Company will have a right to redeem the Series 4 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
Class A Common Shares (“Class A Shares”)
These are an unlimited number of subordinate voting shares, carrying one vote each, with a par value of $0, entitled to dividends equal to or greater than Class B Shares, convertible at the option of the holder into one Class B Share for each Class A Share after the occurrence of certain events related to an offer to purchase all Class B shares. There were 72,479,417 and 72,150,854 Class A Shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.

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Class B Common Shares (“Class B Shares”)
These are an unlimited number of voting shares, carrying twenty votes each, with a par value of $0, convertible at any time at the option of the holder into one Class A share for each Class B share. There were 3,749 and 3,749 Class B Shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.
11. Fair Value Measurements
A fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. The hierarchy for observable and unobservable inputs used to measure fair value into three broad levels are described below: 
•
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
•
Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
•
Level 3 - Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Financial Liabilities that are not Measured at Fair Value on a Recurring Basis
The following table presents certain information for our financial liability that is not measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019:
 
March 31, 2020

December 31, 2019
 
Carrying
Amount

Fair Value

Carrying
Amount

Fair Value
Liabilities:
 


 


 


 

6.50% Senior Notes due 2024
$
900,000

 
$
675,000

 
$
900,000

 
$
812,250


Our long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices in markets that are not active. Therefore, this debt is classified as Level 2 within the fair value hierarchy.
Financial Liabilities Measured at Fair Value on a Recurring Basis
Contingent deferred acquisition consideration (Level 3 fair value measurement) is recorded at the acquisition date fair value and adjusted at each reporting period. The estimated liability is determined in accordance with various contractual valuation formulas and is dependent upon significant assumptions, such as the growth rate of the earnings of the relevant subsidiary during the contractual period and the discount rate. These growth rates are consistent with the Company's long-term forecasts. As of March 31, 2020, the discount rate used to measure these liabilities was 9.91%.
As these estimates require the use of assumptions about future performance, which are uncertain at the time of estimation, the fair value measurement presented on the Consolidated Balance Sheet is subject to material uncertainty.
See Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional information regarding contingent deferred acquisition consideration.
At March 31, 2020 and December 31, 2019, the carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximated fair value because of their short-term maturity.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Certain non-financial assets are measured at fair value on a nonrecurring basis, primarily goodwill, intangible assets (Level 3 fair value measurement) and right-of-use lease assets (Level 2 fair value measurement). Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment. The Company did not recognize an impairment of goodwill or intangible assets in the three months ended March 31, 2020 and 2019.
The Company recognized an impairment charge of $161 to reduce the carrying value of a right-of-use lease asset in the three months ended March 31, 2020. See Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information.
12. Supplemental Information
Accruals and Other Liabilities

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At March 31, 2020 and December 31, 2019, accruals and other liabilities included accrued media of $213,915 and $216,931, respectively; and also included amounts due to noncontrolling interest holders for their share of profits. See Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional information regarding noncontrolling interest holders’ share of profits.
Goodwill and Intangible Assets
Goodwill acquired as a result of business combinations which is not subject to amortization is tested for impairment annually as of October 1st of each year, or more frequently if indicators of potential impairment exist. For goodwill, impairment is assessed at the reporting unit level. Given the impact of the COVID-19 pandemic, the Company performed an interim goodwill impairment test in the first quarter of 2020. The interim test did not result in an impairment of goodwill but did result in the fair value of certain reporting units, with goodwill of approximately $223,000, exceeding their carrying value by a minimal percentage. If the duration of the COVID-19 pandemic is longer and the operational impact is greater than estimated, the Company could recognize an impairment of goodwill in the future. The Company used an income approach to measure its goodwill for impairment. This methodology incorporates the use of the discounted cash flow (“DCF”) method. The income approach requires the exercise of significant judgment and inputs, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.
Goodwill balances as of March 31, 2020 and December 31, 2019, were $716,407 and $731,691, respectively.
During the first quarter of 2020, the Company reassessed its estimate of the useful life of a trademark in the amount of $14,600, acquired as a result of a business combination. The Company revised the useful life to 5 years from indefinite lived.
Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in interim periods.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law and the new legislation contains several key tax provisions, including the five-year net operating loss carryback, an adjusted business interest limitation, and payroll tax deferral. The Company is required to recognize the effect of tax law changes in the period of enactment, which required the Company to reassess the net realizability of its deferred tax assets and liabilities. The Company has assessed the applicability of the CARES Act and determined there is no impact.
Income tax expense for the three months ended March 31, 2020 was $13,500 (on income of $15,294 resulting in an effective tax rate of 88.3%) compared to an expense of $748 (on income of $981 resulting in an effective tax rate of 76.2%) for the three months ended March 31, 2019.
The income tax expense and benefit for the three months ended March 31, 2020 were impacted by capital gains, non-deductible stock compensation for which a tax benefit was not recognized, and the jurisdictional mix of earnings.
Revision of Previously Issued Financial Statements for Immaterial Misstatements
The Company identified certain errors related to prior periods that were not material to any of the Company’s prior period financial statements; however, the cumulative effect of these errors could be considered material to our current year financial statements. As such, the Company revised the prior period financial statements, as presented below.
The adjustments by year and financial statement area are as follows:
•
Calendar Years 2019 through 2017 - The Company identified an understatement of its deferred tax assets and the related impact on goodwill impairment charges recognized in previous years. This resulted in correcting adjustments to increase deferred tax assets and reduce deferred tax expense by $217 in 2019, $1,988 in 2018 and $294 in 2017 and to recognize an incremental goodwill impairment charge and reduction of goodwill by $780 in 2019, $7,147 in 2018 and $1,056 in 2017. These amounts were recorded to reflect required adjustments in connection with the impairment of tax deductible goodwill.
•
Calendar Year 2018 - The Company recorded a correcting adjustment of $1,115 to reduce revenue and accounts receivable that was incorrectly recognized in 2018 in connection with the adoption of ASC 606.
•
Calendar Year 2016 - The Company recorded a correcting adjustment to increase tax expense and reduce deferred tax assets by $3,587 for previously unidentified deemed dividends treated as U.S. taxable income in connection with certain U.S. controlled foreign corporation assets which were pledged as security for a U.S. loan.
As a result of the items noted above, the balance sheet as of March 31, 2020 changed as follows: Accounts receivable, Goodwill and Deferred tax assets declined by $1,115, $8,983 and $1,088, respectively, and Accumulated deficit increased by $11,186.
13. Related Party Transactions

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In the ordinary course of business, the Company enters into transactions with related parties, including Stagwell and its affiliates. The transactions may range in the nature and value of services underlying the arrangements. Below are the related party transactions that are significant in nature:
In October 2019, a Partner Firm of the Company entered into an arrangement with a Stagwell affiliate, in which the Stagwell affiliate and the Partner Firm will collaborate to provide various services to a client of the Partner Firm. The Partner Firm and the Stagwell affiliate pitched and won this business together, with the client ultimately determining the general scope of work for each agency. Under the arrangement, which was structured as a sub-contract due to client preference, the Partner Firm is expected to pay the Stagwell affiliate, for services provided by the Stagwell affiliate in connection with serving the client, approximately $655 which is expected to be recognized through the end of 2020. As of March 31, 2020, $565 was owed to the affiliate.
In January 2020, a Partner Firm of the Company entered into an arrangement with a Stagwell affiliate to develop advertising technology for the Partner Firm. Under the arrangement the Partner Firm is expected to pay the Stagwell affiliate approximately $460, which is expected to be recognized through May 2020. As of March 31, 2020, $170 was owed to the affiliate.
On February 14, 2020, Sloane sold substantially all its assets and certain liabilities to an affiliate of Stagwell. See Note 2 of the Notes to the Consolidated Financial Statements for information related to this transaction. 
The Company entered into an agreement commencing on January 1, 2020 to sublease office space through July 2021 to a company whose chairman is a member of the Company’s Board of Directors. The total future rental income related to the sublease is approximately $229.
14. Segment Information
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by Mark Penn, Chief Executive Officer and Chairman of the Company, our Chief Operating Decision Maker (“CODM”) to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
The CODM uses Adjusted EBITDA (defined below) as a key metric, to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions. Adjusted EBITDA is defined as Net income (loss) attributable to MDC Partners Inc. common shareholders plus or minus adjustments to operating income (loss) plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, distributions from non-consolidated affiliates and other items. Distributions from non-consolidated affiliates includes (i) cash received for profit distributions from non-consolidated affiliates, and (ii) consideration from the sale of ownership interests in non-consolidated affiliates less contributions to date plus undistributed earnings (losses). Other items includes items such as severance expense and other restructuring expenses.
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mr. Penn appointed key agency executives, that report directly into him, to lead each Network. In connection with the reorganization, we reassessed our reportable segments to align our external reporting with how we operate the Networks under our new organizational structure. Prior periods presented have been recast to reflect the change in reportable segments.
The three reportable segments that resulted from our reassessment are as follows: “Integrated Networks - Group A”, “Integrated Networks - Group B”; and “Media & Data Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.”All segments follow the same basis of presentation and accounting policies as those described throughout the Notes to the Unaudited Condensed Consolidated Financial Statements included herein and Note 2 of the Company’s 2019 Form 10-K.

•
The Integrated Networks - Group A reportable segment is comprised of the Anomaly Alliance (Anomaly, Concentric Partners, Hunter, Mono, Y Media Labs) and Colle McVoy operating segments.
•
The Integrated Networks - Group B reportable segment is comprised of the Constellation (72andSunny, CPB, Instrument and Redscout) and Doner Partner Network (6degrees, Doner, KWT, Union, Veritas and Yamamoto) operating segments.
The operating segments aggregated within the Integrated Networks - Group A and B reportable segments provide a range of services for their clients, primarily including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast) as well as public relations and communications services, experiential, social media and influencer marketing. These operating segments share similar characteristics related to (i) the nature of their services;

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(ii) the type of clients and the methods used to provide services; and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these operating segments compete with each other for new business and from time to time have business move between them. While the operating segments are similar in nature, the distinction between the Integrated Networks - Group A and B is the aggregation of operating segments that have the most similar historical and expected average long-term profitability.
•
The Media & Data Network reportable segment is comprised of a single operating segment that combines media buying and planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast) with technology and data capabilities.
•
All Other consists of the Company’s remaining operating segments that provide a range of services including advertising, public relations and marketing communication services, but generally do not have similar services offerings or financial characteristics as those aggregated in the reportable segments. The All Other category includes Allison & Partners, Bruce Mau, Forsman & Bodenfors, Hello, Team and Vitro.
•
Corporate consists of corporate office expenses incurred in connection with the strategic resources provided to the operating segments, as well as certain other centrally managed expenses that are not fully allocated to the operating segments. These office and general expenses include (i) salaries and related expenses for corporate office employees, including employees dedicated to supporting the operating segments, (ii) occupancy expenses relating to properties occupied by all corporate office employees, (iii) other office and general expenses including professional fees for the financial statement audits and other public company costs, and (iv) certain other professional fees managed by the corporate office. Additional expenses managed by the corporate office that are directly related to the operating segments are allocated to the appropriate reportable segment and the All Other category.

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Three Months Ended March 31,
 
2020
 
2019
Revenue:
 
 
 
Integrated Networks - Group A
$
90,621


$
73,739

Integrated Networks - Group B
117,707


133,171

Media & Data Network
41,058

 
43,232

All Other
78,356

 
78,649

Total
$
327,742

 
$
328,791

 
 
 
 
 
 
 
 
Adjusted EBITDA:



Integrated Networks - Group A
$
16,303

 
$
915

Integrated Networks - Group B
17,135


18,280

Media & Data Network
1,787


31

All Other
9,905


6,801

Corporate
(5,562
)

(4,552
)
Total Adjusted EBITDA
$
39,568


$
21,475

 
 
 
 
Depreciation and amortization
$
(9,206
)
 
$
(8,838
)
Impairment and other losses
(161
)
 
—

Stock-based compensation

(3,070
)
 
(2,972
)
Deferred acquisition consideration adjustments
4,600

 
7,643

Distributions from non-consolidated affiliates
14

 
—

Other items, net
(2,416
)
 
(1,626
)
Total Operating Income
$
29,329

 
$
15,682

 
 
 
 
Other Income (Expenses):
 
 
 
Interest expense and finance charges, net
$
(15,612
)
 
$
(16,760
)
Foreign exchange gain (loss)
(14,757
)
 
5,442

Other, net
16,334

 
(3,383
)
Income before income taxes and equity in earnings of non-consolidated affiliates
15,294

 
981

Income tax expense
13,500

 
748

Income before equity in earnings of non-consolidated affiliates
1,794

 
233

Equity in earnings of non-consolidated affiliates
—

 
83

Net income
1,794

 
316

Net income attributable to the noncontrolling interest
(791
)
 
(429
)
Net income (loss) attributable to MDC Partners Inc.
$
1,003

 
$
(113
)




23
Table of Contents

 
Three Months Ended March 31,
 
2020
 
2019
Depreciation and amortization:
 
 
 
Integrated Networks - Group A
$
1,741


$
1,942

Integrated Networks - Group B
4,526


3,773

Media & Data Network
808


993

All Other
1,899


1,913

Corporate
232


217

Total
$
9,206


$
8,838

 
 
 
 
Stock-based compensation:
 
 
 
Integrated Networks - Group A
$
1,961


$
3,595

Integrated Networks - Group B
900


864

Media & Data Network
(13
)

—

All Other
80


86

Corporate
142


(1,573
)
Total
$
3,070


$
2,972

 
 
 
 
Capital expenditures:
 
 
 
Integrated Networks - Group A
$
358


$
1,881

Integrated Networks - Group B
477


1,168

Media & Data Network
86


138

All Other
323


418

Corporate
302


1

Total
$
1,546


$
3,606


The Company’s CODM does not use segment assets to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
See Note 3 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for a summary of the Company’s revenue by geographic region for three months ended March 31, 2020 and 2019.
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, references to the “Company” or “MDC” mean MDC Partners Inc. and its subsidiaries, and references to a “fiscal year” mean the Company’s year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 2020 means the period beginning January 1, 2020, and ending December 31, 2020).
The Company reports its financial results in accordance with GAAP. In addition, the Company has included certain non-GAAP financial measures and ratios, which management uses to operate the business, which it believes provide useful supplemental information to both management and readers of this report in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by GAAP and should not be construed as an alternative to other titled measures determined in accordance with GAAP.
Two such non-GAAP measures are “organic revenue growth” or “organic revenue decline” that refer to the positive or negative results, respectively, of subtracting both the foreign exchange and acquisition (disposition) components from total revenue growth. The acquisition (disposition) component is calculated by aggregating the prior period revenue for any acquired businesses, less the prior period revenue of any businesses that were disposed of in the current period. The organic revenue growth (decline) component reflects the constant currency impact (a) of the change in revenue of the Partner Firms which the Company has held throughout each of the comparable periods presented and (b) “non-GAAP acquisitions (dispositions), net.” Non-GAAP acquisitions (dispositions), net consists of (i) for acquisitions during the current year, the revenue effect from such acquisition as if the acquisition had been owned during the equivalent period in the prior year and (ii) for acquisitions during the previous year, the revenue effect from such acquisitions as if they had been owned during that entire year or same period as the current reportable period, taking into account their respective pre-acquisition revenues for the applicable periods and (iii) for dispositions, the revenue effect from such disposition as if they had been disposed of during the equivalent period in the prior year. The Company believes that isolating

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the impact of acquisition activity and foreign currency impacts is an important and informative component to understand the overall change in the Company’s consolidated revenue. The change in the consolidated revenue that remains after these adjustments illustrates the underlying financial performance of the Company’s businesses. Specifically, it represents the impact of the Company’s management oversight, investments and resources dedicated to supporting the businesses’ growth strategy and operations. In addition, it reflects the network benefit of inclusion in the broader portfolio of firms that includes, but is not limited to, cross-selling and sharing of best practices. This approach isolates changes in performance of the business that take place under the Company’s stewardship, whether favorable or unfavorable, and thereby reflects the potential benefits and risks associated with owning and managing a talent-driven services business.
Accordingly, during the first twelve months of ownership by the Company, the organic growth measure may credit the Company with growth from an acquired business that is dependent on work performed prior to the acquisition date, and may include the impact of prior work in progress, existing contracts and backlog of the acquired businesses. It is the presumption of the Company that positive developments that may have taken place at an acquired business during the period preceding the acquisition will continue to result in value creation in the post-acquisition period.
While the Company believes that the methodology used in the calculation of organic revenue change is entirely consistent with our closest U.S. competitors, the calculations may not be comparable to similarly titled measures presented by other publicly traded companies in other industries. Additional information regarding the Company’s acquisition activity as it relates to potential revenue growth is provided in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Certain Factors Affecting our Business.”
The following discussion focuses on the operating performance of the Company for the three months ended March 31, 2020 and 2019 and the financial condition of the Company as of March 31, 2020. This analysis should be read in conjunction with the interim Unaudited Condensed Consolidated Financial Statements presented in this interim report and the annual Audited Consolidated Financial Statements and Management’s Discussion and Analysis presented in the 2019 Form 10-K.
Direct costs represent billable or non-billable internal and third-party expenses that are directly tied to providing services to our clients where we are principal in the arrangement. Direct costs exclude staff costs, which are presented separately.
All amounts are in dollars unless otherwise stated. Amounts reported in millions herein are computed based on the amounts in thousands. As a result, the sum of the components, and related calculations, reported in millions may not equal the total amounts due to rounding.
The percentage changes included in the tables herein Item 2 that are not considered meaningful are presented as “NM”.
Executive Summary
The novel coronavirus (COVID-19) is a pandemic that has altered how society interacts across the world. The outbreak of COVID-19 and the measures put in place to reduce its transmission, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, have adversely impacted the global economy. The Company implemented comprehensive controls and procedures to protect our employees, families, clients, and their communities. This included implementing a world-wide work-from-home policy and stress-testing our infrastructure to ensure that all employees had the tools and resources to work virtually. Our leadership and business continuity teams also proactively took thorough measures to ensure the highest level of continued service and partnership for our clients.
The effects of the COVID-19 pandemic will negatively impact our results of operations, cash flows and financial position; however, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of COVID-19. While it is difficult to predict the full scale of the impact, the Company has been taking swift and decisive actions over the last few weeks in order to address the pandemic. Our Partner Firms have altered how they work and responded to client challenges around the world, generating impactful creative work, rapid pivots, and inventive business solutions for brands in every sector. We have also moved quickly to align our operating expenses with changes in revenue. We have implemented freezes on hiring, staff reductions, furloughs, salary reductions, benefit reductions and a significant reduction in discretionary spending. In addition to expense reductions, we tightened our capital expenditures where possible to preserve our cash flow. Given these measures, the Company believes it is well positioned to successfully work through the effects of COVID-19.
MDC conducts its business through its network of Partner Firms, which provide marketing and business solutions that realize the potential of combining data and creativity. MDC’s strategy is to build, grow and acquire market-leading business that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. MDC’s differentiation lies in its best-in-class creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. MDC leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The Company’s work is designed to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.

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Table of Contents

MDC manages its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are revenues, operating expenses and capital expenditures. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) growth by client industry vertical, (iii) growth from existing clients and the addition of new clients, (iv) growth by primary discipline, (v) growth from currency changes, and (vi) growth from acquisitions. In addition to monitoring the foregoing financial indicators, the Company assesses and monitors several non-financial performance indicators relating to the business performance of our Partner Firms. These indicators may include a Partner Firm’s recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the Partner Firm’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mark Penn, Chief Executive Officer and Chairman of the Company, appointed key agency executives, that report directly into him, to lead each Network. In connection with the reorganization, we reassessed our reportable segments to align our external reporting with how we operate the Networks under our new organizational structure. Prior periods presented have been recast to reflect the change in reportable segments.
The three reportable segments that resulted from our reassessment are as follows: “Integrated Networks - Group A”, “Integrated Networks - Group B”; and “Media & Data Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described throughout the Notes to the Unaudited Condensed Consolidated Financial Statements included herein and Note 2 of the Company’s 2019 Form 10-K.
See Note 14 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for a description of each of our reportable segments and the All Other category.
In addition, MDC reports its corporate office expenses incurred in connection with the strategic resources provided to the Partner Firms, as well as certain other centrally managed expenses that are not fully allocated to the operating segments as Corporate, including interest expense and public company overhead costs. Corporate provides client and business development support to the Partner Firms as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions.
Certain Factors Affecting Our Business
See the Executive Summary section of Item 7 of the Company’s 2019 Form 10-K for information regarding certain factors affecting our business.



26
Table of Contents

Results of Operations:
 
Three Months Ended March 31,
 
2020
 
2019
Revenue:
(Dollars in Thousands)
Integrated Networks - Group A
$
90,621

 
$
73,739

Integrated Networks - Group B
117,707

 
133,171

Media & Data Network
41,058

 
43,232

All Other
78,356

 
78,649

Total
$
327,742

 
$
328,791

 
 
 
 
Operating Income (Loss):
 
 
 
Integrated Networks - Group A
$
12,032

 
$
(3,852
)
Integrated Networks - Group B
17,161

 
19,364

Media & Data Network
617

 
(1,649
)
All Other
7,857

 
6,641

Corporate
(8,338
)
 
(4,822
)
Total Operating Income
$
29,329

 
$
15,682

 
 
 
 
Other Income (Expenses):
 
 
 
Interest expense and finance charges, net
$
(15,612
)
 
$
(16,760
)
Foreign exchange gain (loss)
(14,757
)
 
5,442

Other, net
16,334

 
(3,383
)
Income before income taxes and equity in earnings of non-consolidated affiliates
15,294

 
981

Income tax expense
13,500

 
748

Income before equity in earnings of non-consolidated affiliates
1,794

 
233

Equity in earnings of non-consolidated affiliates
—

 
83

Net income
1,794

 
316

Net income attributable to the noncontrolling interest
(791
)
 
(429
)
Net income (loss) attributable to MDC Partners Inc.
$
1,003

 
$
(113
)
 
 
 
 
Adjusted EBITDA:
 
 
 
Integrated Networks - Group A
$
16,303

 
$
915

Integrated Networks - Group B
17,135

 
18,280

Media & Data Network
1,787

 
31

All Other
9,905

 
6,801

Corporate
(5,562
)
 
(4,552
)
Total Adjusted EBITDA
$
39,568

 
$
21,475


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Table of Contents

 
Three Months Ended March 31,
 
2020
 
2019
Capital expenditures:
 
 
 
Integrated Networks - Group A
$
358

 
$
1,881

Integrated Networks - Group B
477

 
1,168

Media & Data Network
86

 
138

All Other
323

 
418

Corporate
302

 
1

Total
$
1,546

 
$
3,606




The following table reconciles operating income (loss) (GAAP) by segment and the Company to Adjusted EBITDA (non-GAAP) for the three months ended March 31, 2020 and 2019.

 
Three Months Ended March 31, 2020
 
Integrated Networks - Group A
 
Integrated Networks - Group B
 
Media & Data Network
 
All Other
 
Corporate
 
Total
Net loss attributable to MDC Partners Inc. common shareholders
 
 

 

 

 

 
$
(2,437
)
Adjustments
 
 
 
 
 
 
 
 
 
 
31,766

Operating income (loss)
$
12,032

 
$
17,161

 
$
617

 
$
7,857

 
$
(8,338
)
 
$
29,329



 
 
 
 
 
 
 
 
 
 
Adjustments:

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
1,741

 
4,526


808


1,899


232


9,206

Impairment and other losses
—

 
161


—


—


—


161

Stock-based compensation
1,961

 
900


(13
)

80


142


3,070

Deferred acquisition consideration adjustments
569

 
(5,613
)

375


69


—


(4,600
)
Distributions from non- consolidated affiliates
—

 
—


—


—


(14
)

(14
)
Other items, net
—

 
—

 
—

 
—

 
2,416

 
2,416

Adjusted EBITDA
$
16,303

 
$
17,135

 
$
1,787

 
$
9,905

 
$
(5,562
)
 
$
39,568




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Table of Contents

 
Three Months Ended March 31, 2019
 
Integrated Networks - Group A
 
Integrated Networks - Group B
 
Media & Data Network
 
All Other
 
Corporate
 
Total
Net loss attributable to MDC Partners Inc. common shareholders
 
 

 

 

 

 
$
(2,496
)
Adjustments
 
 
 
 
 
 
 
 
 
 
18,178

Operating income (loss)
$
(3,852
)
 
$
19,364

 
$
(1,649
)
 
$
6,641

 
$
(4,822
)
 
$
15,682

 
 
 
 
 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
1,942

 
3,773

 
993

 
1,913

 
217

 
8,838

Stock-based compensation
3,595

 
864

 
—

 
86

 
(1,573
)
 
2,972

Deferred acquisition consideration adjustments
(770
)
 
(5,721
)
 
687

 
(1,839
)
 
—

 
(7,643
)
Other items, net
—

 
—

—

—

 
—

 
1,626

 
1,626

Adjusted EBITDA
$
915

 
$
18,280

 
$
31

 
$
6,801

 
$
(4,552
)
 
$
21,475





THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THREE MONTHS ENDED MARCH 31, 2019
Consolidated Results of Operations
Revenues
Revenue was $327.7 million for the three months ended March 31, 2020 compared to revenue of $328.8 million for the three months ended March 31, 2019.
The components of the fluctuations in revenues for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 are as follows:
 
Total
 
United States
 
Canada
 
Other
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
 
(Dollars in Thousands)
March 31, 2019
$
328,791

 
 
 
$
263,017

 
 
 
$
22,378

 
 
 
$
43,396

 
 
Components of revenue change:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange impact
(1,800
)
 
(0.5
)%
 
—

 
—
 %
 
(29
)
 
(0.1
)%
 
(1,771
)
 
(4.1
)%
Non-GAAP acquisitions (dispositions), net
(5,683
)
 
(1.7
)%
 
(1,978
)
 
(0.8
)%
 
(3,705
)
 
(16.6
)%
 
—

 
—
 %
Organic revenue
6,434

 
2.0
 %
 
3,522

 
1.3
 %
 
(388
)
 
(1.7
)%
 
3,300

 
7.6
 %
Total Change
$
(1,049
)
 
(0.3
)%
 
$
1,544

 
0.6
 %
 
$
(4,122
)
 
(18.4
)%
 
$
1,529

 
3.5
 %
March 31, 2020
$
327,742

 
 
 
$
264,561

 
 
 
$
18,256

 
 
 
$
44,925

 
 
The negative foreign exchange impact of $1.8 million, or 0.5%, was attributable to the fluctuation of the U.S. dollar against the Canadian dollar, Swedish Króna, Euro and British Pound.
The Company also utilizes non-GAAP metrics called organic revenue growth (decline) and non-GAAP acquisitions (dispositions), net, as defined above. For the three months ended March 31, 2020, organic revenue increased $6.4 million, or 2.0%, attributable to higher spending by clients and new client wins, partially offset client losses and a reduction in spending by certain other clients.

29
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The table below provides a reconciliation between revenue from acquired/disposed businesses in the statement of operations to non-GAAP acquisitions (dispositions), net for the three months ended March 31, 2020:
        
 
All Other
 
Total
 
(Dollars in Thousands)
GAAP revenue from 2019 and 2020 acquisitions
$
—

 
$
—

Foreign exchange impact
(248
)
 
(248
)
Contribution to non-GAAP organic revenue growth (decline)
(411
)
—

(411
)
Prior year revenue from dispositions
(5,024
)
 
(5,024
)
Non-GAAP acquisitions (dispositions), net
$
(5,683
)
 
$
(5,683
)
The geographic mix in revenues for the three months ended March 31, 2020 and 2019 is as follows:
        
 
2020
 
2019
United States
80.7
%
 
80.0
%
Canada
5.6
%
 
6.8
%
Other
13.7
%
 
13.2
%
Operating Income
Operating income for the three months ended March 31, 2020 was $29.3 million, compared to $15.7 million for the three months ended March 31, 2019, representing an increase of $13.6 million, primarily driven by lower operating expenses in connection with cost savings initiatives.
Given the impact of the COVID-19 pandemic, the Company performed an interim goodwill impairment test in the first quarter of 2020. The interim test did not result in an impairment of goodwill but did result in the fair value of certain reporting units, with goodwill of approximately $223 million, exceeding their carrying value by a minimal percentage. If the duration of the COVID-19 pandemic is longer and the operational impact is greater than estimated, the Company could recognize an impairment of goodwill in the future.
Other, Net
Other, net, for the three months ended March 31, 2020 was income of $16.3 million, primarily driven by a gain on the sale of a Partner Firm, compared to a loss of $3.4 million for the three months ended March 31, 2019.
Foreign Exchange Transaction Gain (Loss)
The foreign exchange loss for the three months ended March 31, 2020 was $14.8 million compared to a gain of $5.4 million for the three months ended March 31, 2019. The change in the foreign exchange impact was primarily attributable to the weakening of the Canadian dollar against the U.S. dollar. The change primarily related to U.S. dollar denominated indebtedness that is an obligation of our Canadian parent company.
Interest Expense and Finance Charges, Net
Interest expense and finance charges, net, for the three months ended March 31, 2020 was $15.6 million compared to $16.8 million for the three months ended March 31, 2019, representing a decrease of $1.1 million, primarily driven by a decline in the average amounts outstanding under the Company’s revolving credit facility.
Income Tax Expense (Benefit)
Income tax expense for the three months ended March 31, 2020 was $13.5 million (on income of $15.3 million resulting in an effective tax rate of 88.3%) compared to an expense of $0.7 million (on income of $1.0 million resulting in an effective tax rate of 76.2%) for the three months ended March 31, 2019. The income tax expense for the three months ended March 31, 2020 was impacted by capital gains, non-deductible stock compensation for which a tax benefit was not recognized, and the jurisdictional mix of earnings.
Noncontrolling Interests
The effect of noncontrolling interests for the three months ended March 31, 2020 was $0.8 million compared to $0.4 million for the three months ended March 31, 2019.

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Table of Contents

Net Loss Attributable to MDC Partners Inc. Common Shareholders
As a result of the foregoing and the impact of accretion on and net income allocated to convertible preference shares, net loss attributable to MDC Partners Inc. common shareholders for the three months ended March 31, 2020 was $2.4 million, or $0.03 diluted loss per share, compared to net loss attributable to MDC Partners Inc. common shareholders of $2.5 million, or $0.04 diluted loss per share, for the three months ended March 31, 2019.
Integrated Networks - Group A
The change in expenses and operating income (loss) as a percentage of revenue in the Integrated Networks - Group A reportable segment for the three months ended March 31, 2020 and 2019 was as follows:
 
 
2020
 
2019
 
Change
Integrated Networks - Group A
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue:
 
$
90,621

 
 
 
$
73,739

 
 
 
$
16,882

 
22.9
 %
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
62,524

 
69.0
%
 
61,835

 
83.9
 %
 
689

 
1.1
 %
Office and general expenses
 
14,324

 
15.8
%
 
13,814

 
18.7
 %
 
510

 
3.7
 %
Depreciation and amortization
 
1,741


1.9
%

1,942


2.6
 %

(201
)

(10.4
)%
 
 
$
78,589

 
86.7
%
 
$
77,591

 
105.2
 %
 
$
998

 
1.3
 %
Operating income (loss)
 
$
12,032

 
13.3
%
 
$
(3,852
)
 
(5.2
)%
 
$
15,884

 
NM

The increase in revenue was attributable to higher spending by clients and client wins, partially offset by client losses and a reduction in spending by certain other clients.

The increase in operating income was attributable to the increase in revenue.
The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group A reportable segment for the three months ended March 31, 2020 and 2019 was as follows:
 
 
2020
 
2019
 
Change
Integrated Networks - Group A
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
10,772

 
11.9
%
 
$
8,813

 
12.0
 %
 
$
1,959

 
22.2
 %
Staff costs
 
53,510

 
59.0
%
 
53,265

 
72.2
 %
 
245

 
0.5
 %
Administrative
 
10,036

 
11.1
%
 
10,746

 
14.6
 %
 
(710
)
 
(6.6
)%
Deferred acquisition consideration
 
569

 
0.6
%
 
(770
)
 
(1.0
)%
 
1,339

 
NM

Stock-based compensation
 
1,961

 
2.2
%
 
3,595

 
4.9
 %
 
(1,634
)
 
(45.5
)%
Depreciation and amortization
 
1,741

 
1.9
%
 
1,942

 
2.6
 %
 
(201
)
 
(10.4
)%
Total operating expenses
 
$
78,589

 
86.7
%
 
$
77,591

 
105.2
 %
 
$
998

 
1.3
 %
Direct costs increased in line with the increase in revenues as discussed above.
Deferred acquisition consideration change for the three months ended March 31, 2020 was primarily attributable to an increase in the projected performance of certain Partner Firms relative to previously projected expectations.
Stock-based compensation declined primarily as a result of a reduced level of awards outstanding.



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Table of Contents

Integrated Networks - Group B
The change in expenses and operating income as a percentage of revenue in the Integrated Networks - Group B reportable segment for the three months ended March 31, 2020 and 2019 was as follows:
 
 
2020
 
2019
 
Change
Integrated Networks - Group B
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue:
 
$
117,707

 
 
 
$
133,171

 
 
 
$
(15,464
)
 
(11.6
)%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
74,021

 
62.9
%
 
85,779

 
64.4
%
 
(11,758
)
 
(13.7
)%
Office and general expenses
 
21,838

 
18.6
%
 
24,255

 
18.2
%
 
(2,417
)
 
(10.0
)%
Depreciation and amortization
 
4,526

 
3.8
%
 
3,773

 
2.8
%
 
753

 
20.0
 %
Other asset impairment
 
161

 
0.1
%
 
—

 
—
%
 
161

 
—
 %
 
 
$
100,546

 
85.4
%
 
$
113,807

 
85.5
%
 
$
(13,261
)
 
(11.7
)%
Operating income
 
$
17,161

 
14.6
%
 
$
19,364

 
14.5
%
 
$
(2,203
)
 
(11.4
)%
The decline in revenue was attributable to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients.

The change in operating income was attributable to the lower revenue more than offset by a decline in operating expenses, as outlined below.
The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group B reportable segment for the three months ended March 31, 2020 and 2019 was as follows:
 
 
2020
 
2019
 
Change
Integrated Networks - Group B
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
14,440

 
12.3
 %
 
$
18,205

 
13.7
 %
 
$
(3,765
)
 
(20.7
)%
Staff costs
 
70,576

 
60.0
 %
 
79,383

 
59.6
 %
 
(8,807
)
 
(11.1
)%
Administrative
 
15,556

 
13.2
 %
 
17,303

 
13.0
 %
 
(1,747
)
 
(10.1
)%
Deferred acquisition consideration
 
(5,613
)
 
(4.8
)%
 
(5,721
)
 
(4.3
)%
 
108

 
(1.9
)%
Stock-based compensation
 
900

 
0.8
 %
 
864

 
0.6
 %
 
36

 
4.2
 %
Depreciation and amortization
 
4,526

 
3.8
 %
 
3,773

 
2.8
 %
 
753

 
20.0
 %
Other asset impairment
 
161

 
0.1
 %
 
—

 
—
 %
 
161

 
—
 %
Total operating expenses
 
$
100,546

 
85.4
 %
 
$
113,807

 
85.5
 %
 
$
(13,261
)
 
(11.7
)%
Direct costs were lower driven by a decline in non-billable expenses.
The decline in staff costs was attributable to staffing reductions in connection with cost savings initiatives.
Media & Data Network
The change in expenses and operating income (loss) as a percentage of revenue in the Media & Data Network reportable segment for the three months ended March 31, 2020 and 2019 was as follows:

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Table of Contents

 
 
2020
 
2019
 
Change
Media & Data Network
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
41,058

 
 
 
$
43,232

 
 
 
$
(2,174
)
 
(5.0
)%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
29,906

 
72.8
%
 
34,180

 
79.1
 %
 
(4,274
)
 
(12.5
)%
Office and general expenses
 
9,727

 
23.7
%
 
9,708

 
22.5
 %
 
19

 
0.2
 %
Depreciation and amortization
 
808

 
2.0
%
 
993

 
2.3
 %
 
(185
)
 
(18.6
)%
 
 
$
40,441

 
98.5
%
 
$
44,881

 
103.8
 %
 
$
(4,440
)
 
(9.9
)%
Operating income (loss)
 
$
617

 
1.5
%
 
$
(1,649
)
 
(3.8
)%
 
$
2,266

 
NM

The decline in revenue was attributable to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients.
The change in operating income (loss) was attributable to a decline in revenue, more than offset by lower operating expenses, as outlined below.
The change in the categories of expenses as a percentage of revenue in the Media & Data Network reportable segment for the three months ended March 31, 2020 and 2019 was as follows:
 
 
2020
 
2019
 
Change
Media & Data Network
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
12,128

 
29.5
 %
 
$
14,675

 
33.9
%
 
$
(2,547
)
 
(17.4
)%
Staff costs
 
20,600

 
50.2
 %
 
21,863

 
50.6
%
 
(1,263
)
 
(5.8
)%
Administrative
 
6,543

 
15.9
 %
 
6,663

 
15.4
%
 
(120
)
 
(1.8
)%
Deferred acquisition consideration
 
375

 
0.9
 %
 
687

 
1.6
%
 
(312
)
 
(45.4
)%
Stock-based compensation
 
(13
)
 
—
 %
 
—

 
—
%
 
(13
)
 
—
 %
Depreciation and amortization
 
808

 
2.0
 %
 
993

 
2.3
%
 
(185
)
 
(18.6
)%
Total operating expenses
 
$
40,441

 
98.5
 %
 
$
44,881

 
103.8
%
 
$
(4,440
)
 
(9.9
)%
Direct costs declined in line with the decrease in revenues as discussed above.
The decrease in staff costs was attributable to staffing reductions at certain Partner Firms in connection with cost savings initiatives.

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Table of Contents

All Other
The change in expenses and operating income as a percentage of revenue in the All Other category for the three months ended March 31, 2020 and 2019 was as follows:
 
 
2020
 
2019
 
Change
All Other
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
78,356

 
 
 
$
78,649

 
 
 
$
(293
)
 
(0.4
)%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
56,242

 
71.8
%
 
55,627

 
70.7
%
 
615

 
1.1
 %
Office and general expenses
 
12,358

 
15.8
%
 
14,468

 
18.4
%
 
(2,110
)
 
(14.6
)%
Depreciation and amortization
 
1,899

 
2.4
%
 
1,913

 
2.4
%
 
(14
)
 
(0.7
)%
 
 
$
70,499

 
90.0
%
 
$
72,008

 
91.6
%
 
$
(1,509
)
 
(2.1
)%
Operating income
 
$
7,857

 
10.0
%
 
$
6,641

 
8.4
%
 
$
1,216

 
18.3
 %
Revenue was relatively flat as an increase in revenue at certain Partner Firms, due to higher spending and client wins, was offset by a decline in revenue at Partner Firms that have been sold.
The increase in operating income was primarily attributable to lower operating expenses, as outlined below.
The change in the categories of expenses as a percentage of revenue in the All Other category for the three months ended March 31, 2020 and 2019 was as follows:
 
 
2020
 
2019
 
Change
All Other
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
19,224

 
24.5
%
 
$
14,756

 
18.8
 %
 
$
4,468

 
30.3
 %
Staff costs
 
42,083

 
53.7
%
 
47,047

 
59.8
 %
 
(4,964
)
 
(10.6
)%
Administrative
 
7,144

 
9.1
%
 
10,045

 
12.8
 %
 
(2,901
)
 
(28.9
)%
Deferred acquisition consideration
 
69

 
0.1
%
 
(1,839
)
 
(2.3
)%
 
1,908

 
(103.8
)%
Stock-based compensation
 
80

 
0.1
%
 
86

 
0.1
 %
 
(6
)
 
(7.0
)%
Depreciation and amortization
 
1,899

 
2.4
%
 
1,913

 
2.4
 %
 
(14
)
 
(0.7
)%
Total operating expenses
 
$
70,499

 
90.0
%
 
$
72,008

 
91.6
 %
 
$
(1,509
)
 
(2.1
)%
The increase in direct costs were in line with the higher revenue at certain Partner Firms.
The decrease in staff costs was primarily attributable to staffing reductions in connection with cost savings initiatives.
The decrease in administrative costs was primarily attributable to a reduction in occupancy costs.
Corporate
The change in operating expenses for Corporate for the three months ended March 31, 2020 and 2019 was as follows:
 
 
2020
 
2019
 
Change
Corporate
 
$
 
$
 
$
 
%
 
 
(Dollars in Thousands)
Staff costs
 
$
4,918

 
$
2,525

 
$
2,393

 
94.8
 %
Administrative
 
3,046

 
3,653

 
(607
)
 
(16.6
)%
Stock-based compensation
 
142

 
(1,573
)
 
1,715

 
(109.0
)%
Depreciation and amortization
 
232

 
217

 
15

 
6.9
 %
Total operating expenses
 
$
8,338

 
$
4,822

 
$
3,516

 
72.9
 %
Staff costs were higher primarily due to severance expense associated with cost savings initiatives.

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Table of Contents

Administrative costs declined in connection with lower professional fees.
Stock-based compensation in 2019 included a reversal of expense related to the forfeiture of awards.
Liquidity and Capital Resources:
Liquidity
The following table provides summary information about the Company’s liquidity position:

March 31, 2020
 
March 31, 2019
Cash used in operating activities
$
(19,954
)
 
$
(81,200
)
Cash provided by investing activities
$
16,645

 
$
18,101

Cash provided by financing activities
$
119,642

 
$
60,753

The effects of the COVID-19 pandemic will negatively impact cash flows; however, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of COVID-19. While it is difficult to predict the full scale of the impact, the Company has been taking various actions as discussed in the Executive Summary section above. In order to maintain financial flexibility, we borrowed $125 million under our revolving credit facility.
The Company intends to maintain sufficient cash and/or available borrowings to fund operations for the next twelve months. The Company has historically been able to maintain and expand its business using cash generated from operating activities, funds available under its Credit Agreement, and other initiatives, such as obtaining additional debt and equity financing. At March 31, 2020, the Company had $125.0 million of borrowings outstanding and $86.2 million available under the Credit Agreement.
The Company’s obligations extending beyond twelve months primarily consist of deferred acquisition payments, capital expenditures, scheduled lease obligation payments, and interest payments on borrowings under the Company’s 6.50% Notes due 2024. Based on the current outlook, the Company believes future cash flows from operations, together with the Company’s existing cash balance and availability of funds under the Company’s Credit Agreement, will be sufficient to meet the Company’s anticipated cash needs for the next twelve months. The Company’s ability to make scheduled deferred acquisition payments, principal and interest payments, to refinance indebtedness or to fund planned capital expenditures will depend on future performance, which is subject to general economic conditions, the competitive environment and other factors, including those described in the Company’s 2019 Form 10-K and in the Company’s other SEC filings.
As market conditions warrant, the Company may from time to time seek to purchase its 6.50% Notes, in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing its indebtedness, any purchase made by the Company may be funded with the net proceeds from any asset dispositions or the use of cash on its balance sheet. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material.
Cash Flows
Operating Activities
Cash flows used in operating activities for the three months ended March 31, 2020 was $20.0 million, primarily reflecting unfavorable working capital requirements, driven by media and other supplier payments.
Cash flows used in operating activities for the three months ended March 31, 2019 was $81.2 million, primarily reflecting unfavorable working capital requirements, driven by media and other supplier payments.
Investing Activities
During the three months ended March 31, 2020, cash flows provided by investing activities was $16.6 million, which primarily consisted of proceeds of $18.9 million from the sale of the Company’s equity interest in Sloane, partially offset by $1.5 million of capital expenditures and $0.7 million paid for acquisitions.
During the three months ended March 31, 2019, cash flows provided by investing activities was $18.1 million, which primarily consisted of proceeds of $23.1 million from the sale of the Company’s equity interest in Kingsdale, partially offset by $3.6 million of capital expenditures.
Financing Activities
During the three months ended March 31, 2020, cash flows provided by financing activities was $119.6 million, primarily driven by $125.0 million in new borrowings under the Credit Agreement.

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Table of Contents

During the three months ended March 31, 2019, cash flows provided by financing activities was $60.8 million, driven by $100.0 million in proceeds from the issuance of common and preferred shares, partially offset by $35.3 million in net repayments under the Credit Agreement.
Total Debt
Debt, net of debt issuance costs, as of March 31, 2020 was $1,014.3 million as compared to $887.6 million outstanding at December 31, 2019. The increase of $126.6 million in debt was primarily a result of the Company’s borrowings under the Credit Agreement. See Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements for information regarding the Company’s $900 million aggregate principal amount of its senior unsecured notes due 2024 and $250 million senior secured revolving credit agreement due May 3, 2021 (the “Credit Agreement”).
In April 2020, the Company repurchased approximately $30 million of the 6.50% Notes. See Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information.
The Company is currently in compliance with all of the terms and conditions of the Credit Agreement, and management believes, based on its current financial projections, that the Company will be in compliance with its covenants over the next twelve months.
If the Company loses all or a substantial portion of its lines of credit under the Credit Agreement, or if the Company uses the maximum available amount under the Credit Agreement, it will be required to seek other sources of liquidity. If the Company were unable to find these sources of liquidity, for example through an equity offering or access to the capital markets, the Company’s ability to fund its working capital needs and any contingent obligations with respect to acquisitions and redeemable noncontrolling interests would be adversely affected.
Pursuant to the Credit Agreement, the Company must comply with certain financial covenants including, among other things, covenants for (i) senior leverage ratio, (ii) total leverage ratio, (iii) fixed charges ratio, and (iv) minimum earnings before interest, taxes and depreciation and amortization, in each case as such term is specifically defined in the Credit Agreement. For the period ended March 31, 2020, the Company’s calculation of each of these covenants, and the specific requirements under the Credit Agreement, respectively, were calculated based on the trailing twelve months as follows:
 
March 31, 2020
Total Senior Leverage Ratio
(0.20
)
Maximum per covenant
2.00

 
 

Total Leverage Ratio
4.29

Maximum per covenant
6.25

 
 

Fixed Charges Ratio
2.95

Minimum per covenant
1.00

 
 

Earnings before interest, taxes, depreciation and amortization (in millions)
$
200.7

Minimum per covenant (in millions)
$
105.0

These ratios and measures are not based on generally accepted accounting principles and are not presented as alternative measures of operating performance or liquidity. Some of these ratios and measures include, among other things, pro forma adjustments for acquisitions, one-time charges, and other items, as defined in the Credit Agreement. They are presented here to demonstrate compliance with the covenants in the Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company.
Contractual Obligations and Other Commercial Commitments
The Company’s agencies enter into contractual commitments with media providers and agreements with production companies on behalf of its clients at levels that exceed the revenue from services. Some of our agencies purchase media for clients and act as an agent for a disclosed principal. These commitments are included in accounts payable when the media services are delivered by the media providers. MDC takes precautions against default on payment for these services and has historically had a very low incidence of default. MDC is still exposed to the risk of significant uncollectible receivables from our clients. The risk of a material loss could significantly increase in periods of severe economic downturn.

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Table of Contents

Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, and to a lesser extent, contingent and fixed retention payments tied to continued employment of specific personnel. See Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding contingent deferred acquisition consideration.
The following table presents the changes in the deferred acquisition consideration by segment for the three months ended March 31, 2020:
 
March 31, 2020
 
Integrated Networks - Group A
 
Integrated Networks - Group B
 
Media & Data Network
 
All Other
 
Total
Beginning Balance of contingent payments
$
36,124

 
$
27,060

 
$
—

 
$
11,487

 
$
74,671

Payments
(750
)
 
—

 
(375
)
 
—

 
(1,125
)
Additions - acquisitions and step-up transactions
—

 
1,389

 
—

 
—

 
1,389

Redemption value adjustments (1)
569

 
(5,613
)
 
375

 
69

 
(4,600
)
Stock-based compensation
1,575

 
450

 
—

 
—

 
2,025

Other (2)
—

 
—

 


 
(185
)
 
(185
)
Ending Balance of contingent payments
37,518

 
23,286

 
—

 
11,371

 
72,175

Fixed payments


 
561

 


 


 
561

 
$
37,518

 
$
23,847

 
$
—

 
$
11,371

 
$
72,736


(1) 
Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition payments and stock-based compensation charges relating to acquisition payments that are tied to continued employment.
(2) Other primarily consists of translation adjustments.
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity. See Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding redeemable noncontrolling interests.
The Company intends to finance the cash portion of these contingent payment obligations using available cash from operations, borrowings under the Credit Agreement (and refinancings thereof), and, if necessary, through the incurrence of additional debt and/or issuance of additional equity. The ultimate amount payable and the incremental operating income in the future relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised.
The Company intends to finance the cash portion of these contingent payment obligations using available cash from operations, borrowings under the Credit Agreement (and refinancings thereof), and, if necessary, through the incurrence of additional debt and/or issuance of additional equity. The ultimate amount payable and the incremental operating income in the future relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised.


37
Table of Contents

Critical Accounting Policies
See the Company’s 2019 Form 10-K for information regarding the Company’s critical accounting policies.
Website Access to Company Reports and Information
MDC Partners Inc.’s Internet website address is www.mdc-partners.com. The Company’s Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act” ), will be made available free of charge through the Company’s website as soon as reasonably practical after those reports are electronically filed with, or furnished to, the SEC.  The information found on, or otherwise accessible through, the Company’s website is not incorporated into, and does not form a part of, this quarterly report on Form 10-Q. From time to time, the Company may use its website as a channel of distribution of material company information.

38