MarketWise(MKTW) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents unaudited condensed consolidated financial statements, detailing the significant impact of reverse recapitalization on financial position Condensed Consolidated Balance Sheets Balance sheets show total assets increased, liabilities decreased, and stockholders' deficit improved due to Class B Units reclassification | Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total Assets | $403,429 | $284,813 | | Total Liabilities | $845,356 | $1,205,423 | | Total Stockholders' Deficit | $(441,927) | $(920,610) | | Cash and cash equivalents | $137,588 | $114,422 | | Deferred revenue (current & noncurrent) | $704,862 | $532,748 | Condensed Consolidated Statement of Operations Statement of operations shows a substantial increase in net loss, primarily due to surging operating expenses from stock-based compensation | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :--------------------------------------------- | | Total Net Revenue | $140,667 | $98,159 | $402,511 | $257,336 | | Loss from operations | $(373,064) | $(67,317) | $(996,858) | $(164,344) | | Net Loss | $(366,285) | $(68,293) | $(989,764) | $(165,711) | | Net loss attributable to MarketWise, Inc. | $(399,533) | $(67,599) | $(1,021,881) | $(164,145) | | Total Stock-Based Compensation Expense | $412,565 | $73,451 | $1,061,085 | $172,575 | - Net income per Class A common share (basic and diluted) was $0.39 for the period from July 22, 2021, through September 30, 2021[15] Condensed Consolidated Statements of Comprehensive Loss Comprehensive loss significantly increased for both three and nine months, primarily reflecting the increased net loss | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :--------------------------------------------- | | Net loss | $(366,285) | $(68,293) | $(989,764) | $(165,711) | | Total comprehensive loss | $(366,325) | $(68,350) | $(989,905) | $(165,741) | Condensed Consolidated Statements of Changes in Shareholders' Deficit / Members' Deficit Statements detail equity changes, notably the reverse recapitalization's impact, reclassifying Class B Units to equity and improving stockholders' deficit - Reclassification of Class B Units from liability to equity on July 21, 2021, amounted to $1,528.2 million[26] - Net proceeds from the Transactions were $113.3 million[26] - Establishment of derivative warrant liabilities resulted in a $(45.0) million impact[26] - Net income attributable to MarketWise, Inc. for the post-Transaction period (July 22 - Sep 30, 2021) was $9.7 million[29] Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased, investing activities used $8.2 million, and financing activities used $27.2 million | Cash Flow Activity | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $58,620 | $72,984 | | Net cash used in investing activities | $(8,202) | $(9,588) | | Net cash used in financing activities | $(27,225) | $(79,855) | | Net increase in cash, cash equivalents and restricted cash | $23,161 | $(16,491) | Notes to the Condensed Consolidated Financial Statements Notes detail organization, accounting policies, and reverse recapitalization impact, highlighting significant changes in capital structure and accounting treatment - MarketWise, Inc. completed a reverse recapitalization with Ascendant Digital Acquisition Corp. on July 21, 2021, resulting in $113.3 million net cash proceeds and significant capital structure changes[36][37][43] - Acquired 90% ownership of Chaikin Holdings LLC for $7.1 million cash in January 2021 to expand product offerings and customer base[94] - Goodwill increased to $23.3 million at September 30, 2021, from $18.1 million at January 1, 2021, primarily due to the Chaikin acquisition[97] - Total stock-based compensation expense was $412.6 million for Q3 and $1,061.1 million for 9M 2021, largely due to accelerated vesting and fair value changes of Class B Units upon the Transactions[16][223] - As of September 30, 2021, 20.7 million public warrants and 10.3 million private warrants were outstanding, exercisable at $11.50 per share and classified as derivative liabilities[164][168] - The Board authorized a $35.0 million share repurchase program for Class A common stock on November 4, 2021, and a new $150.0 million revolving credit facility was secured on October 29, 2021[169][171] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, liquidity, and key factors, highlighting the reverse recapitalization's impact, subscriber trends, decreased billings, and surging operating expenses Overview and Key Factors Affecting Our Performance MarketWise is a leading multi-brand platform for self-directed investors, focusing on subscriber acquisition and retention, significantly impacted by the July 2021 reverse recapitalization - MarketWise is a leading multi-brand platform for self-directed investors, offering independent investment research, software, and analytical tools on a subscription basis[34][178] - The company aims for an LTV/CAC ratio of more than 5x, with a payback period of approximately seven to nine months for a Paid Subscriber's cumulative net revenue to exceed acquisition cost[186] - Average Revenue Per User (ARPU) as of September 30, 2021, was $772, a 3% increase from $752 as of September 30, 2020[188] - The reverse recapitalization on July 21, 2021, resulted in net cash proceeds of $113.3 million[181][182] Key Business Metrics Free Subscribers increased, Paid Subscribers grew YoY but declined QoQ, ARPU increased YoY but decreased QoQ, and Billings decreased YoY and QoQ | Metric | September 30, 2021 | September 30, 2020 | June 30, 2021 | | :----------------- | :------------------- | :------------------- | :------------------ | | Free Subscribers | 12,800,655 | 8,147,974 | 11,970,356 | | Paid Subscribers | 964,907 | 785,539 | 994,491 | | ARPU | $772 | $752 | $823 | | Billings (in thousands) | $138,093 | $149,907 | $185,100 | - Paid Subscribers decreased by 30 thousand (3.0%) from June 30, 2021, due to elevated advertising costs and a consumer shift towards travel and leisure activities[202] - Billings decreased by $11.8 million (8%) in Q3 2021 YoY and by $47.0 million (25%) QoQ, primarily due to reduced engagement of subscribers prioritizing travel and leisure[210][211] Components of MarketWise's Results of Operations Net revenue is from subscription services, recognized ratably; employee compensation, especially stock-based from Class B Units, is a major expense, with new awards under the 2021 Incentive Award Plan - Net revenue is primarily generated from term and lifetime subscription-based financial research, recognized ratably over the subscription duration (lifetime subscriptions over five years)[213][214][316] - Stock-based compensation expense related to Class B Units was $409.9 million for Q3 2021 and $1,058.4 million for 9M 2021, largely due to the Transactions[218][222] - Post-Transactions, Class B Units no longer generate stock-based compensation expense; new expense from the 2021 Incentive Award Plan was $2.6 million for Q3/9M 2021[219][221] - Related party expense for Q3 2021 included a discretionary, one-time, $10.0 million bonus payment to the Company's founder[146][258] Results of Operations Total net revenue increased, but total operating expenses surged due to stock-based compensation and a one-time bonus, leading to a significant net loss | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :--------------------------------------------- | | Total Net Revenue | $140,667 | $98,159 | $402,511 | $257,336 | | Total Operating Expenses | $513,731 | $165,476 | $1,399,369 | $421,680 | | Net Loss | $(366,285) | $(68,293) | $(989,764) | $(165,711) | - Operating expenses increased significantly due to Class B stock-based compensation: $31.9 million in Cost of Revenue (Q3 2021), $30.6 million in Sales and Marketing (Q3 2021), and $274.0 million in General and Administrative (Q3 2021)[251][253][255] - Related party expense increased by $10.1 million in Q3 2021, driven by a one-time $10.0 million bonus payment to the Company's founder[258] Non-GAAP Financial Measures Adjusted CFFO and Adjusted CFFO Margin are non-GAAP measures providing insight into operating performance, reflecting fluctuations in Billings and a non-recurring bonus | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :----------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :--------------------------------------------- | | Adjusted CFFO | $34,744 | $55,026 | $192,069 | $118,295 | | Adjusted CFFO Margin | 25.2% | 36.7% | 33.2% | 30.3% | - The non-recurring expense addback of $10.0 million in Q3/9M 2021 was due to a one-time bonus payment to the Company's founder[279][281] The Effect of the COVID-19 Pandemic COVID-19 has not negatively impacted net revenues to date, with the business performing well, but long-term impacts remain uncertain - COVID-19 has not negatively impacted net revenues to date, and the business has performed well[286] - The long-term impact of the COVID-19 pandemic on the business, financial condition, and results of operations remains uncertain[287] Liquidity and Capital Resources MarketWise had $138.1 million in cash, relies on operating cash flows and deferred revenue, secured a new credit facility, and authorized a share repurchase program - Cash, cash equivalents, and restricted cash totaled $138.1 million as of September 30, 2021[288] - Deferred revenue was $704.9 million as of September 30, 2021, with $338.2 million classified as current[291] - A new $150.0 million revolving credit facility was entered into on October 29, 2021, for financing acquisitions and general corporate purposes[171][301] - The Board authorized a $35.0 million share repurchase program for Class A common stock on November 4, 2021[169][297] - The company expects significant payment obligations under the Tax Receivable Agreement (TRA), to be funded by distributions from MarketWise, LLC[292][295] Cash Flows Net cash from operating activities decreased to $58.6 million (9M), investing activities used $8.2 million, and financing activities used $27.2 million | Cash Flow Activity | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $58,620 | $72,984 | | Net cash used in investing activities | $(8,202) | $(9,588) | | Net cash used in financing activities | $(27,225) | $(79,855) | - Net cash used in investing activities for 9M 2021 was primarily driven by the $7.1 million payment for the Chaikin acquisition[308] - Net cash used in financing activities for 9M 2021 included $135.5 million in distributions to members, partially offset by $113.3 million in proceeds from the Transactions[309] Critical Accounting Policies and Significant Estimates Key accounting policies involve significant judgment and estimates, including revenue recognition, valuation of goodwill and acquired intangible assets, and stock-based compensation - Revenue recognition involves estimates for customer lives (five years for lifetime subscriptions), standalone selling prices, and amortization period for capitalized contract costs (approximately four years)[315][316][318] - Valuation of goodwill and acquired intangible assets in business combinations requires significant estimates regarding future cash flows, useful lives, and discount rates[319][320] - Prior to the Transactions, Class B Units were classified as liabilities and remeasured at fair value each period, requiring complex equity valuation using market and discounted cash flow approaches[321][323] Item 3. Quantitative and Qualitative Disclosures About Market Risk MarketWise faces credit risk from cash, but interest rate, currency exchange, and inflation risks are currently not material - Credit risk primarily stems from cash and cash equivalents ($137.6 million at September 30, 2021), managed by concentrating deposits with high-quality financial institutions[327] - Interest rate risk is not material due to the short-term nature of investments and the repayment of the 2013 Credit Facility[328][331] - Currency exchange risk is not material, and the company does not currently use foreign currency derivative or hedging transactions[332] - Inflation risk is not currently material, but significant inflationary pressures could adversely affect the business if higher costs cannot be offset by price increases[333] Item 4. Controls and Procedures Disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting, with remediation efforts ongoing - Disclosure controls and procedures were not effective as of September 30, 2021[337] - Material weaknesses identified include a lack of contemporaneous documentation and account reconciliation, and the absence of a formal risk assessment process[335] - Remediation steps are ongoing, but the material weaknesses have not been fully remediated as of September 30, 2021[336] - No material change in internal control over financial reporting occurred during the period[338] PART II. OTHER INFORMATION Item 1. Legal Proceedings No legal proceedings to report for the period - Not applicable; no legal proceedings to report[340] Item 1A. Risk Factors This section outlines various risks, including subscriber dependence, marketing, reputation, competition, legal compliance, organizational structure, and Class A common stock ownership Summary Risk Factors Summary of key risks including subscriber acquisition, marketing, reputation, legal compliance, organizational structure (TRA), and public company status (material weaknesses) - The business depends on the ability to attract new subscribers and persuade existing subscribers to renew and purchase additional products[346][348] - Failure to maintain and protect the company's reputation for trustworthiness and independence may harm the business[346][360] - Material weaknesses have been identified in internal control over financial reporting, which may cause failure to meet reporting obligations or result in material misstatements[347][483] - MarketWise, Inc.'s sole material asset is its interest in MarketWise, LLC, and it depends on distributions from MarketWise, LLC to pay taxes and expenses, including payments under the Tax Receivable Agreement (TRA)[347][440] Risks Related to Our Business and Industry The company faces risks from subscriber acquisition/retention, marketing effectiveness, reputation, competition, technological changes, and operational disruptions - The company's ability to attract and retain subscribers is crucial, with renewal rates potentially declining due to various factors like product quality, pricing, and customer satisfaction[348][349] - Effective marketing, including adapting to new platforms and complying with regulations, is essential; failure could adversely affect business[351][358] - Maintaining a reputation for integrity and independence is a key competitive advantage; any harm to this reputation could negatively impact readership and financial results[360][362] - The company faces intense competition from various financial content providers, including free aggregators, traditional publishers, and institutional software providers[372] - Success depends on the ability to respond and adapt to rapid changes in technology and consumer behavior, including developing new products and distribution methods[379][380] - Operational risks include disruptions from major events (weather, cyberattacks) and reliance on third-party technology providers, which could lead to service interruptions and data loss[393][398] Risks Related to Legal and Regulatory Matters The company faces extensive legal and regulatory risks, including compliance with securities laws, data privacy, potential liability, and anti-corruption laws - The company relies on the 'publisher's exclusion' from the definition of 'investment adviser' under federal and state securities laws; changes could lead to sanctions[405][406] - Extensive and evolving data privacy laws (CCPA, CPRA, GDPR) and industry standards (PCI DSS) impose significant compliance obligations; failure could result in litigation, fines, and reputational harm[424][425][427][428] - Potential liability for information and data collected/distributed, including claims for securities law violations, defamation, or inaccurate data from third-party sources[409][410][411] - Failure to comply with anti-corruption (FCPA, Bribery Act) and economic sanctions laws could lead to reputational harm, significant sanctions, and criminal/civil penalties[435][436] - Adverse litigation judgments or settlements from legal proceedings could materially affect business, results of operations, and financial condition[432][434] Risks Related to Our Organizational Structure MarketWise, Inc. is a holding company dependent on MarketWise, LLC distributions for TRA obligations, which are substantial and may exceed tax benefits - MarketWise, Inc. is a holding company relying on distributions from MarketWise, LLC to pay taxes, operating expenses, and TRA obligations, which may be subject to limitations[440][441] - The Tax Receivable Agreement (TRA) requires substantial cash payments to MarketWise Members (85% of tax benefits), which are not available for reinvestment and may be accelerated or exceed actual tax benefits[444][445][449][450] - There is a risk that MarketWise, Inc. could be deemed an 'investment company' under the Investment Company Act of 1940, which would impose significant restrictions and adversely affect its business[453][455] Risks Related to Ownership of Our Class A Common Stock Ownership of Class A common stock carries risks from 'emerging growth company' status, dual-class structure, MarketWise Members' influence, dilution, public company requirements, and material weaknesses - The company's status as an 'emerging growth company' and 'smaller reporting company' allows for reduced disclosure, potentially making securities less attractive or increasing volatility[456][459][460] - The dual-class common stock structure may adversely affect the trading price or liquidity of Class A common stock, potentially leading to exclusion from certain stock indices[462][463] - MarketWise Members control approximately 90.6% of the voting power, giving them significant influence over corporate decisions[465] - Dilution risks exist from MarketWise Members' right to redeem/exchange units, the exercise of 30.9 million outstanding warrants, and the potential issuance of up to 5.05 million earnout shares[467][472][474] - Warrants are accounted for as derivative liabilities, with changes in fair value reported in earnings, which may cause quarterly fluctuations in financial results[473] - The requirements of being a public company demand significant resources and management attention, increasing costs and potentially diverting focus from core business activities[479][481] - Identified material weaknesses in internal control over financial reporting could lead to inaccurate or untimely financial reporting, impacting investor confidence and market price[483][486][490] - The company does not intend to pay cash dividends for the foreseeable future, meaning investment success depends on stock value appreciation[498] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report for the period - Not applicable; no unregistered sales of equity securities or use of proceeds to report[505] Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report for the period - Not applicable; no defaults upon senior securities to report[506] Item 4. Mine Safety Disclosures No mine safety disclosures to report for the period - Not applicable; no mine safety disclosures to report[507] Item 5. Other Information No other information to report for the period - Not applicable; no other information to report[508] Item 6. Exhibits This section lists exhibits filed or incorporated by reference into the Form 10-Q, including key agreements, corporate documents, and certifications - Key exhibits include Business Combination Agreements, Certificate of Incorporation, Bylaws, Registration Rights Agreement, Tax Receivable Agreement, Third A&R Operating Agreement, 2021 Incentive Award Plan, and various certifications[511] Signatures The report was signed by Dale Lynch, Chief Financial Officer of MarketWise, Inc., on November 12, 2021 - The report was signed by Dale Lynch, Chief Financial Officer of MarketWise, Inc., on November 12, 2021[516]