Vivid Seats Inc. quarterly report, Q2 FY2022

Vivid Seats Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Vivid Seats operates an online secondary ticket marketplace through its Marketplace and Resale segments. The 2021 comparisons reflect pandemic-related event restrictions and a different pre-merger reporting structure, which limits comparability.

Financial performance and liquidity

• Marketplace GOV was $814.8 million in Q2 and $1.56 billion for the first half, up 18% and 92%, respectively. Marketplace orders increased 41% in Q2 and 121% in the first half year over year.
• Marketplace revenue rose 24% in Q2 and 90% in the first half; Resale revenue rose 64% and 193%, respectively. Management attributed growth primarily to more live events and higher order volumes as restrictions eased.
• Q2 operating margin was approximately 12.1%, versus 16.9% a year earlier. First-half operating margin was approximately 11.4%, versus 11.1%. Adjusted EBITDA declined 16% in Q2 but increased 27% for the first half.
• Cash and cash equivalents were $287.8 million at June 30, down from $489.5 million at year-end 2021. Six-month cash declined $201.8 million, largely reflecting debt repayment.
• Debt was $274.3 million gross ($268.7 million net of issuance costs), with $2.8 million classified as current. The company had no revolver borrowings and a $100 million revolving facility available. The new term loan bears SOFR plus 3.25% and matures in 2029; its effective rate was 4.11% at quarter-end.
• Operating cash flow fell sharply from the prior-year period, despite net income, as working capital changes used $37.3 million. First-half investing cash outflow was $6.9 million, mainly platform development; financing cash outflow was $196.3 million, primarily debt repayment.

Material changes and unusual items

• In February 2022, Vivid Seats repaid $190.7 million of its prior first-lien loan and refinanced the remaining balance with a $275 million term loan. The refinancing reduced interest expense but generated a $4.3 million extinguishment loss for the first half.
• Other income included an $8.8 million Q2 and $6.6 million first-half gain from remeasurement of Hoya Intermediate warrants. This non-cash fair-value gain contributed to reported net income.
• Net income attributable to Class A shareholders was $9.7 million for Q2 and $10.9 million for the first half; the remainder of consolidated net income was attributable to redeemable noncontrolling interests.
• The board authorized up to $40 million of Class A share repurchases through March 31, 2023, subject to market conditions and completion or termination of the public warrant offer. The offer closed July 5; 2.7 million shares were issued in exchange for 11.4 million warrants.
• At quarter-end, cash included $49.5 million of expected recoveries related to future customer compensation; accrued customer credits were $110.0 million and accrued future customer compensation was $62.3 million.

Outlook, commentary, risks and controls

• Management said cash and cash equivalents were sufficient to fund liquidity needs for the next 12 months. The filing provides no specific revenue or earnings guidance.
• Management described recovery in ticket orders as live-event restrictions eased, but noted continuing uncertainty from COVID-19 variants and the possibility of renewed adverse effects on events, cash flows and results.
• Risks include discretionary consumer spending and event supply/demand, competition, seller and distribution-partner relationships, cybersecurity, litigation, and sales-tax exposure. The company recorded a $6.4 million liability for potential uncollected sales taxes and said assessments could differ materially from accrued amounts.
• Disclosure controls were concluded to be ineffective at reasonable assurance levels due to a material weakness in internal control over financial reporting, involving segregation of duties, defined finance-function responsibilities and technical accounting/SEC reporting expertise. Remediation efforts include reviewing controls and hiring qualified personnel.
• The cover page marks “No” for whether required Exchange Act reports had been filed during the preceding 12 months and whether the company had been subject to those requirements for the past 90 days; investors should verify the meaning and status of this response.
• The filing reports a settled Canadian class action concerning service-fee disclosures and customer-compensation litigation related primarily to cancellations. Management stated ordinary-course claims were not expected to have a material effect, while certain tax and litigation estimates remain subject to change.

Key facts for investors to verify

• Whether order growth and marketplace contribution margins can be sustained as live-event demand and marketing costs evolve.
• Why first-half operating cash flow was only $1.4 million despite $27.2 million of net income, and how working capital may normalize.
• The potential range and timing of sales-tax liabilities, customer-compensation obligations and litigation costs.
• Progress remediating the material weakness and the status of the filing’s “No” response on prior reporting compliance.
• Use of the $40 million repurchase authorization, dilution from outstanding equity awards and warrants, and the impact of redeemable noncontrolling interests and the tax receivable agreement.