Vivid Seats Inc. quarterly report, Q3 FY2021

Vivid Seats Inc. — Q3 2021 Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2021. The operating results and balance sheet are for Hoya Intermediate, LLC and its subsidiaries, the pre-combination operating business; Vivid Seats Inc. itself had no activity or assets at September 30. The business combination with Horizon closed on October 18, 2021, after the reporting date.

Business context and results

Vivid Seats operates a secondary ticket marketplace and a ticket resale business. Marketplace acts as an intermediary between buyers and third-party sellers; Resale sells tickets acquired and held in inventory. Results reflect a sharp recovery in live events from pandemic-disrupted 2020 comparisons. Amounts below are in millions unless indicated.

Q3 contribution margin was $58.7 million, compared with a loss of $9.0 million; nine-month contribution margin was $120.0 million, compared with a loss of $23.7 million. The filing does not provide a single consolidated gross-margin percentage. Q3 Marketplace orders were 2.354 million and Resale orders 73,000; nine-month totals were 4.360 million and 121,000, respectively.

Liquidity, debt, and capital structure

• At September 30, cash and cash equivalents were $488.5 million. Current assets were $656.4 million and current liabilities $573.3 million.
• Gross debt under the term loan facilities was $918.1 million at September 30, excluding discounts and debt issuance costs. Debt was floating-rate; the May 2020 loan’s effective rate was 11.5%, and the June 2017 loan’s was 4.5%.
• Nine-month operating cash flow benefited from working-capital inflows, particularly higher accounts payable associated with marketplace seller obligations. Investing cash outflow was $7.3 million; financing cash outflow was $4.8 million.
• At the October 18 business-combination closing, approximately $787.1 million of cash proceeds became available from Horizon and the PIPE. The company used $482.4 million to repay debt, $236.0 million to redeem preferred units, and $54.3 million for transaction fees. The filing also describes repayment of the May 2020 loan and a partial payment on the June 2017 loan.
• A special dividend of $17.7 million, or $0.23 per Class A share, was declared at closing and paid November 2, 2021. A tax receivable agreement requires payment of 85% of certain realized or deemed tax benefits to Hoya Topco and other holders. The company estimated a hypothetical immediate termination payment of approximately $417 million using a $10 share price and September 30 financial information; actual future obligations are uncertain.

Changes, commentary, and outlook

• Revenue and order volume rebounded as live events resumed and cancellations fell. Management said Q3 2021 ticket orders exceeded pre-pandemic levels. Marketplace revenue increased to $120.5 million and Resale revenue to $19.1 million.
• For the first nine months, cancellation charges reduced Marketplace revenue by $25.6 million, compared with $67.1 million in 2020. Pandemic-related cancellations and customer compensation had caused negative revenue and order figures in certain 2020 comparisons.
• Marketing and selling expense rose to $50.4 million in Q3 and $104.7 million year to date, largely due to increased online advertising. Sales-tax expense was $21.6 million in Q3 and $34.6 million year to date, including an approximately $8.4 million Q3 adjustment for prior-period orders.
• The 2020 nine-month net loss included $573.8 million of pandemic-triggered impairment charges; there were no impairment charges in 2021. Management said goodwill’s fair value significantly exceeded carrying value at its latest assessment, while noting estimates and pandemic conditions remain uncertain.
• No specific financial guidance was provided. Management expects seasonality, with typically greater activity in Q4, but cautioned that the duration and effects of COVID-19, event cancellations, restrictions, consumer demand, and the pace of recovery remain uncertain. The company stated it believed available cash was sufficient for liquidity needs over the next 12 months.

Risks, contingencies, and unusual items

• Sales-tax obligations are uncertain because of complex state rules for secondary ticket sales and ongoing jurisdiction discussions. The recorded liability was $51.4 million at September 30; assessed amounts could differ materially.
• Customer credits, future cancellation compensation, and related recoveries require estimates that may change with event cancellations and customer behavior. Accrued customer credits were $132.9 million and accrued future customer compensation $100.2 million at September 30.
• Legal matters include Canadian resale litigation and customer-compensation class actions. Related recorded liabilities were $1.1 million and $5.7 million, respectively; a separate $3.0 million insurance recovery asset was recorded for customer-compensation matters.
• Disclosure controls were not effective at reasonable assurance levels at September 30 due to a material weakness involving segregation of duties, defined finance and accounting roles, and personnel with appropriate technical accounting and SEC-reporting experience. Remediation efforts were underway.
• Other material risks include event-industry dependence, competition, reliance on search traffic and third-party payment providers, cybersecurity and privacy exposure, variable-rate debt, seasonality, and concentrated control by Hoya Topco. The company is a controlled company and expects to rely on certain Nasdaq governance exemptions.

Important facts for investors to verify

• Confirm post-combination debt balances and cash available after the stated debt repayment, preferred-unit redemption, transaction fees, and dividend.
• Monitor the sales-tax liability, jurisdiction outcomes, and any adjustments relating to historical orders.
• Track event cancellations, customer credits and compensation accruals, and the related seller-recovery assumptions.
• Assess whether the material weakness is remediated and whether subsequent filings report effective disclosure and financial-reporting controls.
• Review the tax receivable agreement’s actual payment obligations and the effects of future unit exchanges, tax benefits, and potential early termination.
• Distinguish GAAP results from Adjusted EBITDA and account for unusually weak pandemic-era comparison periods and event seasonality.