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Stock-Based Compensation and Other Benefit Plans | 12 Months Ended
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Dec. 31, 2022
Share-Based Payment Arrangement [Abstract] |
Stock-Based Compensation and Other Benefit Plans | 11. Stock-Based Compensation and Other Benefit Plans The Company has issued nonqualified stock options, RSUs (as defined below), and PSUs (as defined below) under the Advantage Solutions Inc. 2020 Incentive Award Plan (the “Plan”). The Company’s RSUs and PSUs, as described below, are expensed and reported as non-vested shares. The Company recognized stock-based compensation expense of $36.9 million and $39.4 million for the year ended December 31, 2022 and 2021, respectively. The related deferred tax benefit for stock-based compensation recognized was $7.9 million and $6.6 million for the year ended December 31, 2022 and 2021, respectively. Performance Restricted Stock Units Performance restricted stock units (“PSUs”) are subject to the achievement of certain performance conditions based on the Company’s revenues (“PSU Revenues”) and Adjusted EBITDA (“PSU EBITDA”) targets in the respective measurement period and the recipient’s continued service to the Company. The PSUs are scheduled to vest over a three-year period from the date of grant and may vest from 0% to 150% of the number of shares set forth in the table below. The number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each aforementioned defined term for each grant have been provided in the table below. During the first quarter of 2022, the Compensation Committee determined that the achievement of the performance objective applicable to the PSU EBITDA 2021 objective was 64.6% of target and the achievement of the performance objective applicable to the PSU Revenues 2021 objective was 126.2% of target. In the first quarter of 2022, the Compensation Committee determined that the PSU Revenues and PSU EBITDA metrics will be measured separately when determining whether above-target performance has been maintained for future year performance. Such determination is applicable to the PSUs grants made in 2021 and in 2022. As a result, the 26.2% above-target performance on PSU Revenues for 2021 must be maintained in 2022 and 2023 in order for the corresponding above-target PSUs to vest in January 2024. Assuming there is no decline in performance with respect to PSU Revenues in 2022 and 2023, an amount equal to approximately 9.2% of the target number of PSUs granted in January 2021 will vest in full in January 2024 as a result of the above-target PSU Revenues performance for fiscal 2021. The performance period for those awards ended on December 31, 2021 but remain subject to service-based vesting conditions. Under the provision of ASC 718 Compensation—Stock Compensation, the Company determined that 2021 PSUs granted were modified as of March 11, 2022 related to 205,834 above-target PSU Revenues metrics. The stock-based compensation expense for such modification was accounted for as a cancellation of the original award and the issuance of a new award using the fair value of the award on the date of modification. The fair value of PSU grants was equal to the closing price of the Company's stock on the date of the applicable grant. The maximum potential expense if the Maximum Goals were met for these awards has been provided in the table below. Recognition of expense associated with performance-based stock is not permitted until achievement of the performance targets are probable of occurring.
(in thousands, except share and per share data) Performance Period |  | Number of Shares Threshold |  |  | Number of Shares Target |  |  | Number of Shares Maximum |  |  | Weighted Average Fair Value per Share |  |  | Maximum Remaining Unrecognized Compensation Expense |  |  | Weighted-average remaining requisite service periods |
January 1, 2022—December 31, 2022 |  |  | 2,534,250 |  |  |  | 5,068,499 |  |  |  | 7,584,760 |  |  | $ | 5.47 |  |  | $ | 78,316 |  |  |  | 1.4 years |
January 1, 2021—December 31, 2021 |  |  | 1,108,390 |  |  |  | 1,108,390 |  |  |  | 1,304,565 |  |  | $ | 13.19 |  |  | $ | 3,234 |  |  |  | 1.0 years |
The following table summarizes the PSU activity for the year ended December 31, 2022:
|  | Performance Share Units |  |  | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2022 |  |  | 2,609,079 |  |  | $ | 13.07 |
Granted |  |  | 5,727,905 |  |  | $ | 5.46 |
Distributed |  |  | (665,306 | ) |  | $ | 13.06 |
Forfeited |  |  | (921,042 | ) |  | $ | 7.35 |
PSU performance adjustment |  |  | (377,572 | ) |  | $ | 11.19 |
Outstanding at December 31, 2022 |  |  | 6,373,064 |  |  | $ | 7.05 |
Restricted Stock Units Restricted stock units (“RSUs”) are subject to the recipient’s continued service to the Company. The RSUs are generally scheduled to vest over three years and are subject to the provisions of the agreement under the Plan. During the year ended December 31, 2022, the following activities involving RSUs occurred under the Plan:
|  | Number of RSUs |  |  | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2022 |  |  | 3,660,553 |  |  | $ | 10.64 |
Granted |  |  | 8,497,756 |  |  | $ | 4.84 |
Distributed |  |  | (1,356,365 | ) |  | $ | 10.56 |
Forfeited |  |  | (1,225,184 | ) |  | $ | 7.46 |
Outstanding at December 31, 2022 |  |  | 9,576,760 |  |  | $ | 5.91 |
As of December 31, 2022, the total remaining unrecognized compensation cost related to RSUs amounted to $26.1 million, which will be amortized over the weighted-average remaining requisite service periods of 2.1 years. Common Series C Units and C-2 Units The Limited Partnership Agreement allows profits interests in Topco to be granted to directors, officers, employees, and consultants of Topco and its subsidiaries. The performance-based profits interests (“Common Series C Units”) are subject to certain vesting requirements, as described below. Common Series C Units were granted at no cost to employees of the Company. As the result of an amendment and restatement of the Limited Partnership Agreement, on March 15, 2018, 75% of all Common Series C Units awards are subject to vesting over four fiscal years from their respective issuance date. The remaining 25% of the units were forfeited. To the extent the Common Series C Units vest, such units may still be forfeited as a result of termination of the employment of the applicable holders or upon a non-qualifying exit event. Certain awards vest over the remaining initial four-year term, subject to the employee’s continued employment. In addition, Topco issued certain Common Series C Units in connection with the 2017 acquisition of Daymon Worldwide Inc. (“Daymon”) to certain Daymon employees, certain of which were deemed to vested upon issuance, and certain of which vested in four annual installments, subject to such employee’s continued employment with the Company. The Limited Partnership Agreement also authorizes Topco to issue 35,000 Common Series C-2 Units to employees of the Company, which are deemed to be vested upon issuance and subject to substantially similar forfeiture provisions as the Common Series C Units, including forfeiture upon certain terminations of employment with the Company of the applicable holders or a non-qualifying exit event. A valuation, including an option pricing method allocation and Monte Carlo simulation, was used to estimate the fair value of Common Series C Units and Common Series C-2 Units. The expected price volatility is based on the average of the historical volatility of comparable public companies. The risk-free rate is based on U.S. Treasury yields in effect at the time of grant over the expected term. The Company did not use a dividend yield as it has not historically paid distributions. The following weighted average assumptions were used in determining the fair value of Common Series C Unit grants made during the year ended December 31, 2020:
|  | Year Ended December 31, |  |
|  | 2020 |  |
Grant date fair value |  | $ | 201.25 |  |
Dividend yield |  |  | 0.0 | % |
Expected volatility |  |  | 75.3 | % |
Risk-free interest rate |  |  | 0.2 | % |
Lack of marketability discount |  |  | 30.5 | % |
Expected term |  |  | 1.0 years |  |
The following weighted average assumptions were used in determining the fair value of Common Series C-2 Unit grants made during the year ended December 31, 2020:
|  | Year Ended December 31, |  |
|  | 2020 |  |
Grant date fair value |  | $ | 223.00 |  |
Dividend yield |  |  | 0.0 | % |
Yield test probability |  |  | 23.3 | % |
Cost of equity capital |  |  | 11.8 | % |
Expected term |  |  | 1.0 years |  |
Topco has the option to repurchase Common Series C Units for cash. The following table summarizes the activity in the Common Series C Units:
|  | Year Ended December 31, |  |
|  | 2022 |  |
Beginning of the period |  |  | 166,790 |  |
Forfeitures |  |  | (33,900 | ) |
End of the period |  |  | 132,890 |  |
The following table summarizes the activity in the Common Series C-2 Units:
|  | Year Ended December 31, |  |
|  | 2022 |  |
Beginning of the period |  |  | 29,875 |  |
Forfeitures |  |  | (4,780 | ) |
End of the period |  |  | 25,095 |  |
The Company classified the Merger as a vesting exit event for accounting purposes associated with the Common Series C and C-2 Units. As a result, the Company recognized non-cash compensation expenses of $62.7 million in connection with the Common Series C Units and $13.3 million in connection with the Common Series C-2 Units for the year ended December 31, 2020. As the vesting exit event was at Topco, there was no impact to the Company’s outstanding shares of Common Stock. Common Series D Units In 2014, Topco issued 30,000 time-vesting profits interests (“Common Series D Units”) to entities affiliated with one equity sponsor of Topco. Time-vesting profits interests vest on a monthly basis that began on October 1, 2014 and ended on September 1, 2019. The compensation expense associated with the issuance of such awards for non-employees is recorded by the Company as the Company receives the benefit of the services being provided by the non-employees. The Company measures the fair value of the Common Series D Units quarterly throughout the five-year vesting period and recognizes this cost ratably over the vesting period. There were no grants during the years ended December 31, 2022, 2021, and 2020. The OPM was used to estimate the Common Series D Units fair value of $300 as of the grant date. The expected share price volatility is based on the average of the historical volatility of comparable public companies. The risk-free rate is based on U.S. Treasury yields in effect at the time of grant over the expected term. The Company did not use a dividend yield as it has not historically paid distributions. The fair value of these units at the end of each measurement period were $5, $143, and $644 per unit as of December 31, 2022, 2021, and 2020. Since the Common Series D Units that were issued under the Limited Partnership Agreement were for interests in Topco, which is outside of the consolidated group, the value of the profits interests were marked to market at each of the Company’s reporting periods. The following assumptions were used in determining the fair value of Common Series D Units:
|  | Year Ended December 31, |  |
|  | 2022 |  |
Grant date fair value |  | $ | 300.00 |  |
Dividend yield |  |  | 0.0 | % |
Expected volatility |  |  | 53.0 | % |
Risk-free interest rate |  |  | 4.3 | % |
Lack of marketability discount |  |  | 32.0 | % |
Expected term |  |  | 1.9 years |  |
On December 31, 2022, there were 30,000 Common Series D Units outstanding. During the years ended December 31, 2022, 2021, and 2020, the Company recorded equity-based compensation expense of $4.1 million, $15.0 million, and $13.8 million, respectively, included in “Selling, general, and administrative expenses” in the Consolidated Statements of Operations and Comprehensive (Loss) Income. Stock Options During the year ended December 31, 2022, the following activities involving stock options occurred under the Plan:
|  | Stock Options |  |  | Weighted Average Exercise Price |
Outstanding at January 1, 2022 |  |  | 261,324 |  |  | $ | 9.20 |
Granted |  |  | 2,115,664 |  |  | $ | 3.92 |
Forfeited |  |  | (261,324 | ) |  | $ | 9.20 |
Outstanding at December 31, 2022 |  |  | 2,115,664 |  |  | $ | 3.92 |
Stock-based compensation costs related to stock options granted to employees are measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Company recognizes compensation costs for awards with service vesting conditions on an accelerated method under the graded vesting method over the requisite service period of the award, which is generally the vesting term of three years. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. The assumptions used in the Company's option-pricing model represent management’s best estimates. These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management’s judgment, so that they are inherently subjective. If factors change and different assumptions are used, the Company's stock-based compensation expense could be materially different in the future. These assumptions are estimated as follows:
| • |  | Fair Value of Common Stock. Represents the publicly quoted price as the fair value of ADV common stock.
| • |  | Risk-Free Interest Rate. The Company based the risk-free interest rate used in the Black-Scholes option-pricing model on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term of the options for each option group.
| • |  | Expected Term. The expected term represents the period that the stock-based awards are expected to be outstanding. Because of the limitations on the sale or transfer or the Company's common stock as a previously privately held company, the Company does not believe its historical exercise pattern for similar awards is indicative of the pattern the Company will experience as a publicly traded company. Management has consequently used the Staff Accounting Bulletin, or SAB 110, Simplified Method to calculate the expected term, which is the average of the contractual term and vesting period. The Company plans to continue to use the SAB 110 Simplified Method until the Company has sufficient trading history as a publicly traded company.
| • |  | Volatility. Management determined the price volatility factor based on the historical volatilities of a relevant peer group as the Company did not have a sufficient trading history of common stock. Industry peers consist of several public companies that provide similar services with comparable characteristics including enterprise value, risk profiles and position within the industry. The Company intends to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of the Company's own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
| • |  | Dividend Yield. The expected dividend assumption is based on expectations about the Company's anticipated dividend policy. The Company currently does not expect to issue any dividends.
In addition to assumptions used in the Black-Scholes option-pricing model, the Company must also estimate a forfeiture rate to calculate the stock-based compensation for the Company's awards. The Company will continue to use judgment in evaluating the assumptions related to the Company's stock-based compensation on a prospective basis. As the Company continue to accumulate additional data, the Company may have refinements to the Company's estimates, which could materially impact the Company's future stock-based compensation expense. The fair value of the employee stock options was estimated using the following assumptions for the periods presented:
|  | December 31, |
|  | 2022 |  |  | 2021 |
Share Price |  | $ | 3.92 |  |  | $ | 9.20 |
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
Expected volatility |  |  | 34.4 | % |  |  | 28.7 | %
Risk-free interest rate |  |  | 2.9 | % |  |  | 1.1 | %
Expected term |  |  | 6.5 years |  |  |  | 6.5 years |
As of December 31, 2022, the Company had approximately $2.2 million of total unrecognized compensation expense related to stock options, net of related forfeiture estimates, which the Company expects to recognize over a weighted-average period of approximately 1.7 years. The intrinsic value of all outstanding options as of December 31, 2022 was zero based on the market price of the Company's common stock of $2.08 per share. Employee Stock Purchase Plan In October 2020, the board of directors adopted, and the stockholders subsequently approved, the 2020 Employee Stock Purchase Plan, as amended (the “ESPP”). The Board has delegated concurrent authority to administer the ESPP to the Compensation Committee under the terms of the Compensation Committee’s charter. Employees, may have to satisfy one or more of the following service requirements before participating in the ESPP, as determined by the administrator: (a) customary employment with the Company for more than 20 hours per week and more than five months per calendar year, or (b) continuous employment with the Company for a minimum period of time, not to exceed two years, prior to the first date of an offering. An employee may not be granted rights to purchase stock under the ESPP if such employee (x) immediately after the grant would own stock possessing five percent or more of the total combined voting power or value of the common stock, or (y) would purchase in excess of $25,000 of fair market value of such stock in an offering period. Additionally, “highly compensated employees” may not be granted rights to purchase stock under the ESPP. This includes individuals with compensation above a specified level, who is an officer and/or is subject to the disclosure requirements of Section 16(a) of the Exchange Act. The administrator may approve offerings with a duration of not more than 27 months, and may specify one or more shorter purchase periods within each offering (“Offering Period”). Each offering will have one or more purchase dates on which shares of the common stock will be purchased for the employees who are participating in the offering. The administrator, in its discretion, will determine the terms of offerings under the ESPP. The ESPP permits participants to purchase shares of the common stock through payroll deductions with up to 15% of their earnings. The purchase price of the shares will not be less than 85% of the lower of the fair market value of the common stock on the first day of an offering or on the date of purchase. Payroll deductions shall be equal to at least one percent (1%) of the participant’s compensation as of each payday of the Offering Period following the Enrollment Date, but not more than the lesser of fifteen percent (15%) of the participant’s compensation as of each payday of the Offering Period following the Enrollment Date or $25,000 per offering period. A participant may not transfer purchase rights under the ESPP other than by will, the laws of descent and distribution or as otherwise provided under the ESPP. In the event of a specified corporate transaction, such as a merger or change in control, a successor corporation may assume, continue or substitute each outstanding purchase right. If the successor corporation does not assume, continue or substitute for the outstanding purchase rights, the offering in progress will be shortened and a new exercise date will be set. The participants’ purchase rights will be exercised on the new exercise date and such purchase rights will terminate immediately thereafter. The ESPP will remain in effect until terminated by the administrator in accordance with the terms of the ESPP. The board of directors has the authority to amend, suspend or terminate the ESPP, at any time and for any reason. Employee Benefit Plans The Company sponsors 401(k) plans for certain employees who meet specified age and length of service requirements. The 401(k) plans include a deferral feature under which employees may elect to defer a portion of their salary, subject to Internal Revenue Service limitations. The Company provides a matching contribution based on a percentage of participating employees’ salaries and contributions made. Total contributions to the plan for the years ended December 31, 2022, 2021, and 2020 were $13.3 million, $12.5 million, and $10.8 million, respectively.

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