Vivid Seats Inc. 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 54 Consolidated Balance Sheets as of December 31, 2021 and 2020 55 Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 56 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021, 2020 and 2019 57 Consolidated Statements of Equity (Deficit) for the years ended December 31, 2021, 2020 and 2019 58 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 60 Notes to the Consolidated Financial Statements 62 53 Report of Independent Registered Public Accounting Firm To the shareholders and the Board of Directors of Vivid Seats Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Vivid Seats Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, equity (deficit), and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion. Emphasis of Matter As discussed in Note 1 to the financial statements, the Company consummated a merger on October 18, 2021, which has been accounted for as a reverse recapitalization. The financial statements of the Company represent a continuation of the financial statements of Hoya Intermediate, LLC. /s/ Deloitte & Touche LLP Chicago, Illinois March 15, 2022 We have served as the Company’s auditor since 2021. 54 VIVID SEATS INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share/unit data) December 31, December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 489,530 $ 285,337 Restricted cash 280 — Accounts receivable – net 36,124 35,250 Inventory – net 11,773 7,462 Prepaid expenses and other current assets 72,504 80,066 Total current assets 610,211 408,115 Property and equipment – net 1,082 — Intangible assets – net 78,511 67,024 Goodwill 718,204 683,327 Other non-current assets 787 664 Total assets $ 1,408,795 $ 1,159,130 Liabilities and equity (deficit) Current liabilities: Accounts payable $ 191,201 $ 62,769 Accrued expenses and other current liabilities 281,156 256,134 Deferred revenue 25,139 5,956 Current maturities of long-term debt — 6,412 Total current liabilities 497,496 331,271 Long-term debt – net 460,132 870,903 Other liabilities 25,834 510 Total long-term liabilities 485,966 871,413 Commitments and contingencies (Note 15 ) Redeemable Preferred Units and noncontrolling interests Redeemable Senior Preferred Units - $ 0 par value; 0 and 100 units authorized, issued, and outstanding at December 31, 2021 and 2020, respectively (aggregate involuntary liquidation preference of $ 0 and $ 214,008 at December 31, 2021 and 2020, respectively) — 218,288 Redeemable Preferred Units - $ 0 par value; 0 and 100 units authorized, issued, and outstanding at December 31, 2021 and 2020, respectively — 9,939 Redeemable noncontrolling interests 1,286,016 — Shareholders' deficit Class A common stock, $ 0.0001 par value; 500,000,000 shares authorized, 79,091,871 issued and outstanding at December 31, 2021; 0 shares authorized, issued, and outstanding at December 31, 2020 8 — Class B common stock, $ 0.0001 par value; 250,000,000 shares authorized, 118,200,000 issued and outstanding at December 31, 2021; 0 shares authorized, issued, and outstanding at December 31, 2020 12 — Additional paid-in capital 182,091 755,716 Accumulated deficit ( 1,042,794 ) ( 1,026,675 ) Accumulated other comprehensive loss — ( 822 ) Total Shareholders' deficit ( 860,683 ) ( 271,781 ) Total liabilities, Redeemable Preferred Units and noncontrolling interests, and Shareholders' deficit $ 1,408,795 $ 1,159,130 The accompanying notes are an integral part of these financial statements. 55 VIVID SEATS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share/unit and per share/unit data) Years Ended December 31, 2021 2020 2019 Revenues $ 443,038 $ 35,077 $ 468,925 Costs and expenses: Cost of revenues (exclusive of depreciation and amortization shown separately below) 90,617 24,690 106,003 Marketing and selling 181,358 38,121 178,446 General and administrative 92,170 66,199 101,335 Depreciation and amortization 2,322 48,247 93,078 Impairment charges — 573,838 — Income (loss) from operations 76,571 ( 716,018 ) ( 9,937 ) Other expenses: Interest expense – net 58,179 57,482 41,497 Loss on extinguishment of debt 35,828 685 2,414 Other expenses 1,389 — — Loss before income taxes $ ( 18,825 ) $ ( 774,185 ) $ ( 53,848 ) Income tax expense 304 — — Net loss ( 19,129 ) ( 774,185 ) ( 53,848 ) Net loss attributable to Hoya Intermediate, LLC shareholders prior to reverse recapitalization ( 12,836 ) ( 774,185 ) ( 53,848 ) Net loss attributable to redeemable noncontrolling interests ( 3,010 ) — — Net loss attributable to Class A Common Stockholders $ ( 3,283 ) $ — $ — Loss per Class A Common Stock (1) : Basic $ ( 0.04 ) Diluted $ ( 0.04 ) Weighted average Class A Common Stock outstanding (1) : Basic 77,498,775 Diluted 77,498,775 (1) Represents loss per common share and weighted-average common shares outstanding for the period following the Merger Transaction and PIPE Financing as defined in Note 1, Background, Description of Business and Basis of Presentation . The accompanying notes are an integral part of these financial statements. 56 VIVID SEATS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Years Ended December 31, 2021 2020 2019 Net loss $ ( 19,129 ) $ ( 774,185 ) $ ( 53,848 ) Other comprehensive income (loss): Unrealized gain (loss) on derivative instruments 822 1,095 ( 7,225 ) Comprehensive loss, net of taxes $ ( 18,307 ) $ ( 773,090 ) $ ( 61,073 ) Comprehensive loss attributable to Hoya Intermediate, LLC shareholders prior to reverse recapitalization ( 12,836 ) ( 773,090 ) ( 61,073 ) Comprehensive loss attributable to redeemable noncontrolling interests ( 3,010 ) — — Comprehensive loss attributable to Class A Common Stockholders $ ( 2,461 ) $ — $ — The accompanying notes are an integral part of these financial statements. 57 VIVID SEATS INC. CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) (in thousands, except share/unit data) Redeemable senior preferred units Redeemable preferred units Common units Class A Common Shares Class B Common Shares Units Amount Units Amount Redeemable noncontrolling interests Units Amount Shares Amount Shares Amount Additional paid-in capital Accumulated deficit Accumulated other comprehensive (income) loss Total shareholders' deficit Balances at January 1, 2019 100 $ 182,755 100 $ 9,939 $ — 100 $ — — $ — — $ — $ 790,003 $ ( 198,642 ) $ 5,308 $ 596,669 Net loss — — — — — — — — — — — ( 53,848 ) — ( 53,848 ) Unrealized loss on derivative instruments — — — — — — — — — — — — ( 7,225 ) ( 7,225 ) Deemed contribution from former parent — — — — — — — — — — — 5,174 — — 5,174 Accretion of senior preferred units — 14,399 — — — — — — — — — ( 14,399 ) — — ( 14,399 ) Distributions to former parent — — — — — — — — — — — ( 8,095 ) — — ( 8,095 ) Balances at December 31, 2019 100 $ 197,154 100 $ 9,939 $ — 100 $ — — $ — — $ — $ 772,683 $ ( 252,490 ) $ ( 1,917 ) $ 518,276 Net loss — — — — — — — — — — — — ( 774,185 ) — ( 774,185 ) Unrealized gain on derivative instruments — — — — — — — — — — — — — 887 887 Loss reclassified from accumulated other comprehensive loss to earnings — — — — — — — — — — — — — 208 208 Deemed contribution from former parent — — — — — — — — — — — 4,287 — — 4,287 Accretion of senior preferred units — 21,134 — — — — — — — — — ( 21,134 ) — — ( 21,134 ) Distributions to former parent — — — — — — — — — — — ( 120 ) — — ( 120 ) Balances at December 31, 2020 100 $ 218,288 100 $ 9,939 $ — 100 $ — — $ — — $ — $ 755,716 $ ( 1,026,675 ) $ ( 822 ) $ ( 271,781 ) Net loss prior to reverse recapitalization — — — — — — — — — — — — ( 12,836 ) — ( 12,836 ) Loss reclassified from accumulated other comprehensive loss to earnings prior to reverse recapitalization — — — — — — — — — — — — — 822 822 Deemed contribution from former parent prior to reverse recapitalization — — — — — — — — — — — 3,692 — — 3,692 Accretion of senior preferred units prior to reverse recapitalization — 17,738 — — — — — — — — — ( 17,738 ) — — ( 17,738 ) Reverse recapitalization, net ( 100 ) ( 236,026 ) ( 100 ) ( 9,939 ) 84,874 ( 100 ) — 76,948,433 8 118,200,000 12 637,341 — — 637,361 Net loss after reverse recapitalization — — — — ( 3,010 ) — — — — — — — ( 3,283 ) — ( 3,283 ) Deemed contribution from former parent after reverse recapitalization — — — — 438 — — — — — — 293 — — 293 Equity-based compensation after reverse recapitalization — — — — — — — — — — — 1,624 — — 1,624 58 VIVID SEATS INC. CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) (in thousands, except share/unit data) Change in fair value of warrants — — — — — — — — — — — 1,269 — — 1,269 Issuance of shares related to Betcha acquisition — — — — — — — 2,143,438 — — — 21,306 — — 21,306 Dividends paid to Class A Common Shareholders — — — — — — — — — — — ( 17,698 ) — — ( 17,698 ) Subsequent remeasurement of Redeemable noncontrolling interests — — — — 1,203,714 — — — — — — ( 1,203,714 ) — — ( 1,203,714 ) Balances at December 31, 2021 — $ — — $ — $ 1,286,016 — $ — 79,091,871 $ 8 118,200,000 $ 12 $ 182,091 $ ( 1,042,794 ) $ — $ ( 860,683 ) The accompanying notes are an integral part of these financial statements. 59 VIVID SEATS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2021 2020 2019 Cash flows from operating activities Net loss $ ( 19,129 ) $ ( 774,185 ) $ ( 53,848 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,322 48,247 93,078 Amortization of deferred financing costs and interest rate cap 4,472 3,863 2,860 Loss on disposal of long-lived assets — 169 960 Equity-based compensation expense 6,047 4,287 5,174 Loss on extinguishment of debt 35,828 685 2,414 Interest expense paid-in-kind 25,214 15,678 — Change in fair value of warrants 1,389 — — Impairment charges — 573,838 — Changes in operating assets and liabilities, net of impact of acquisitions: Accounts receivable ( 874 ) ( 10,250 ) 225 Inventory ( 4,311 ) 4,094 ( 1,628 ) Prepaid expenses and other current assets 7,623 ( 67,584 ) 642 Accounts payable 128,160 ( 28,674 ) 1,792 Accrued expenses and other current liabilities 14,196 195,404 23,272 Deferred revenue 19,183 24 2,005 Other assets and liabilities ( 189 ) 512 ( 468 ) Net cash provided by (used in) operating activities 219,931 ( 33,892 ) 76,478 Cash flows from investing activities Cash acquired (paid) in acquisition 301 — ( 31,118 ) Purchases of property and equipment ( 1,132 ) ( 341 ) ( 1,258 ) Proceeds from the sale of personal seat licenses — — 170 Purchases of personal seat licenses ( 76 ) — — Investments in developed technology ( 8,438 ) ( 7,264 ) ( 7,949 ) Net cash used in investing activities ( 9,345 ) ( 7,605 ) ( 40,155 ) Cash flows from financing activities Proceeds from PIPE Financing 475,172 — — Proceeds from the Merger Transaction 277,738 — — Redemption of Redeemable Senior Preferred Units ( 236,026 ) — — Payments of May 2020 First Lien Loan ( 304,141 ) — — Payments of June 2017 First Lien Loan ( 153,009 ) ( 5,856 ) ( 6,967 ) Payments of June 2017 Second Lien Loan — — ( 40,000 ) Prepayment penalty on extinguishment of debt ( 27,974 ) — — Proceeds from May 2020 First Lien Loan — 260,000 — Proceeds from Revolving Facility — 50,000 — Payments of Revolving Facility — ( 50,000 ) — Payments of deferred financing costs and other debt-related costs — ( 8,479 ) ( 400 ) Distributions — ( 120 ) ( 8,095 ) Payment of reverse recapitalization costs ( 20,175 ) — — Dividends paid to Class A Common Stock Shareholders ( 17,698 ) — — Net cash (used in) provided by financing activities ( 6,113 ) 245,545 ( 55,462 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 204,473 204,048 ( 19,139 ) 60 VIVID SEATS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Cash and cash equivalents – beginning of period 285,337 81,289 100,428 Cash, cash equivalents, and restricted cash – end of period $ 489,810 $ 285,337 $ 81,289 Supplemental disclosure of cash flow information: Paid-in-kind interest added to May 2020 First Lien Loan principal $ 28,463 $ 15,678 $ — Cash paid for interest $ 28,595 $ 34,592 $ 38,653 Betcha acquisition non-cash consideration $ 21,306 $ — $ — The accompanying notes are an integral part of these financial statements. 61 VIVID SEATS INC. NOTES to the Consolidated Financial Statements 1. Background, Description of Business and Basis of Presentation Vivid Seats Inc. and its subsidiaries including Hoya Intermediate, LLC and Vivid Seats LLC (collectively the “Company,” “us,” “we,” and “our”), provide an online secondary ticket marketplace, that enables ticket buyers to discover and easily purchase tickets to sports, concerts, theater, and other live events in the United States and Canada. Through our Marketplace segment, we operate an online platform enabling ticket buyers to purchase tickets to live events, while enabling ticket sellers to seamlessly manage their operations. In our Resale segment, we acquire tickets to resell on secondary ticket marketplaces, including our own. Our consolidated financial statements include all of our accounts, including those of our consolidated subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We have included all adjustments necessary for a fair presentation of the results for the full year. These adjustments consist of normal and recurring items. Vivid Seats Inc. was incorporated in Delaware on March 29, 2021 as a wholly owned subsidiary of Hoya Intermediate, LLC (“Hoya Intermediate”). Vivid Seats Inc. was formed for the purpose of completing the transactions contemplated by the definitive transaction agreement, dated April 21, 2021 (the “Transaction Agreement”), by and among Horizon Acquisition Corporation (“Horizon”), a publicly traded special purpose acquisition company, Hoya Intermediate, Hoya Topco, LLC (“Hoya Topco”), a Delaware limited liability company, the Company and the other parties thereto. As more fully described below, on October 18, 2021, the transactions contemplated by the Transaction Agreement were completed. As a result, Vivid Seats Inc. holds approximately 40.1 % of the common units of Hoya Intermediate, which represents a controlling interest in Hoya Intermediate. The Merger Transaction and PIPE Financing —On October 18, 2021, we consummated a series of transactions (collectively, the "Merger Transaction") between Horizon, Vivid Seats Inc., and Hoya Intermediate. The Merger Transaction was accounted for as a reverse recapitalization, with Hoya Intermediate treated as the accounting acquirer. Accordingly, our consolidated financial statements represent a continuation of the financial statements of Hoya Intermediate with net assets of Hoya Intermediate stated at historical cost. In connection with the Merger Transaction, Vivid Seats Inc.: • Issued 29,431,260 shares of Class A common stock to former shareholders of Horizon, whereby $ 293.2 million in cash and cash equivalents (after the payment of $ 18.7 million in transaction costs incurred by Horizon) of Horizon became avail able to Vivid Seats Inc. We subsequently paid an additional $ 15.5 million in transaction costs incurred by Horizon using the cash and cash equivalents that became available to Vivid Seats Inc.; • Issued 118,200,000 shares of Class B common stock and 6,000,000 warrants at an exercise price of $ 0.001 per share to purchase Class B common stock ("Class B Warrants"), which are only exercisable upon the exercise of a corresponding Hoya Intermediate Warrant (defined below), to Hoya Topco in exchange for the outstanding shares of Hoya Intermediate, LLC; • Received $ 475.2 million in aggregate consideration from certain investors, including Horizon Sponsor, LLC, in exchange for 47,517,173 shares of Class A common stock, pursuant to a private investment in public equity (“PIPE Financing”). • Used proceeds from Horizon and the PIPE Financing to pay (i) $ 482.4 million towards our outstanding debt, (ii) $ 236.0 million to facilitate the redemption of preferred units held in Hoya Intermediate, and (iii) $ 54.3 million for tr ansaction fees incurred in connection with the business combination; • Issued to Horizon Sponsor, LLC (i) warrants to purchase 17,000,000 shares of Class A common stock at an exercise price of $ 10.00 per share , (ii) warrants to purchase 17,000,000 shares of Class A common 62 VIVID SEATS INC. NOTES to the Consolidated Financial Statements stock at an exercise of $ 15.00 per share (collectively, the "Exercise Warrants"), and (iii) 50,000 shares of Class A common stock; and • Issued private warrants to purchase 6,519,791 shares of Class A common stock of Vivid Seats Inc., at an exercise price of $ 11.50 per share ("Private Warrants"), and public warrants to purchase 18,132,776 shares of Class A common stock of Vivid Seats Inc., at an exercise price of $ 11.50 per share ("Public Warrants"), to former holders of Horizon warrants; In connection with the Merger Transaction, Hoya Intermediate issued to Hoya Topco (i) warrants to purchase 3,000,000 shares of Hoya Intermediate common units at an exercise price of $ 10.00 per share, and (ii) warrants to purchase 3,000,000 shares of Hoya Intermediate common units at an exercise of $ 15.00 per share (collectively, the "Hoya Intermediate Warrants"). A portion of the Hoya Intermediate Warrants consists of warrants to purchase 1,000,000 Hoya Intermediate common units at exercise prices of $ 10.00 and $ 15.00 per unit, respectively, were issued in tandem with stock options issued by Vivid Seats, Inc. to members of our management team (“Option Contingent Warrants”). The Option Contingent Warrants only become available to exercise by Hoya Topco in the event that a corresponding management option is forfeited . For additional details regarding the issuance of warrants in connection with the Merger Transaction, refer to Note 18, Warrants . Following the business combination, the legacy unit holders of Hoya Intermediate own a controlling interest in Vivid Seats Inc. through their ownership of Class B common stock in Vivid Seats Inc. COVID-19 Update —The COVID-19 pandemic has materially impacted our business and results of operations in the years ended December 31, 2021 and 2020. During the year ended December 31, 2020, we recognized impairment charges resulting in a reduction in the carrying values of goodwill, indefinite-lived trademarks, definite-lived intangible assets, and other long-lived assets. Beginning in the second quarter of 2021, and continuing through the fourth quarter of 2021, we have seen a recovery in ticket orders as mitigation measures ease. The COVID-19 pandemic is evolving, and as new variants emerge the ultimate pace and timing of recovery continues to remain uncertain. We expect uncertainties around our key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our consolidated financial statements. If economic conditions caused by the pandemic do not continue to recover, our financial condition, cash flows, and results of operations may be further materially impacted. 2. Summary of Significant Accounting Policies Use of Estimates —We use estimates and assumptions in the preparation of our consolidated financial statements in accordance with GAAP. Our estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Our actual financial results could differ significantly from these estimates. The significant estimates underlying our consolidated financial statements include the accrual for future customer compensation and the related recovery of future customer compensation asset; inventory valuation; accounts receivable valuation; valuation of equity-based compensation; valuation of warrants; valuation of acquired intangible assets and goodwill and valuation of earnouts issued in connection with our acquisition of Betcha Sports, Inc.; breakage rates related to customer credits; useful life of definite-lived intangible assets and other long-lived assets; and impairments of goodwill, indefinite-lived intangible assets, definite-lived intangible assets, and long-lived assets. C ash and Cash Equivalents —Cash and cash equivalents include all cash balances and highly liquid investments purchased with original maturities of three months or less. Our cash and cash equivalents consist primarily of domestic bank accounts, interest-bearing deposit accounts, and money market accounts managed by third-party financial institutions. 63 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Cash and cash equivalents held in interest-bearing accounts may exceed the Federal Deposit Insurance Corporation insurance limits. To reduce credit risk, we monitor the credit standing of the financial institutions that hold our cash and cash equivalents. However, balances could be impacted in the future if underlying financial institutions fail. As of December 31, 2021 and 2020, we have not experienced any loss or lack of access to its cash and cash equivalents. Restricted Cash —Restricted cash consists of user funds which are separate from our operational funds and is reserved for users. Accounts Receivable and Credit Policies —Due to the significant number of COVID-19 pandemic related event cancellations experienced during 2021 and 2020, $ 7.2 million and $ 23.4 million of the Accounts receivable balance at December 31, 2021 and 2020, respectively, consisted of a mounts due from marketplace ticket sellers for cancelled event tickets. There is a concentration of risk associated with that cohort of creditors due to the unfavorable impact of the COVID-19 pandemic on the live event industry. We recorded an allowance for doubtful accounts of $ 1.4 millio n and $ 5.7 million at December 31, 2021 and 2020, respectively to reflect potential challenges in collecting funds from marketplace ticket sellers. The allowance for doubtful accounts decreased during 2021 as ticket sellers on the marketplace platform repaid their outstanding balances. Accounts receivable balances are stated net of allowance for doubtful a ccounts. Bad debt expense is presented as a reduction of Revenues in the Consolidated Statements of Operations. Write-offs were $ 1.0 million for the year ended December 31, 2021 and immaterial for the years ended December 31, 2020, and 2019. Inventory —Inventory consists of tickets to live events purchased by our Resale segment. All inventory is valued at the lower of cost or net realizable value, determined by the specific identification method. A provision is recorded to adjust inventory to its estimated realizable value when inventory is determined to be in excess of anticipated demand. During the years ended December 31, 2021, 2020, and 2019, we incurred inventory write-downs of $ 2.1 mi llion, $ 1.6 million, and $ 3.6 million, respectively, which are presented in Cost of revenues in the Consolidated Statements of Operations. Property and Equipment— Property and equipment are stated at cost, net of depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives: Asset Class Useful Life Computer Equipment 5 years Purchased Software 3 years Furniture and Fixtures 7 years Leasehold improvements are amortized over the shorter of the term of the lease or the improvements’ estimated useful lives. Long-Lived Assets Impairment Assessments —We review our long-lived assets (property and equipment – net and personal seat licenses – net) for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. The fair value of our long-lived assets is determined using both the market approach and income approach, utilizing Level 3 inputs. If circumstances require a long-lived asset or asset group to be held and used be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent the carrying amount exceeds its fair value. During the second quarter of 2020, we determined a triggering event occurred that required us to evaluate our long-lived assets for impairment. We recorded an impairment charge as a result of those assessments. Refer to Note 5, Impairments , for additional information. Goodwill and Intangible Assets —Goodwill represents the excess purchase price over the fair value of the net assets acquired. Intangible assets other than goodwill primarily consists of customer and supplier relationships, developed technology, non-compete agreements, and trademarks. 64 VIVID SEATS INC. NOTES to the Consolidated Financial Statements We evaluate goodwill and our indefinite-lived intangible asset for impairment annually on October 31 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. We have the option to assess goodwill and our indefinite-lived intangible asset for impairment by first performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit or the indefinite-lived intangible asset is less than its carrying value. If it is determined that the reporting unit’s or the indefinite-lived intangible asset’s fair value is more-likely-than-not less than its carrying value, or if we do not elect the option to perform an initial qualitative assessment, we perform a quantitative assessment of the reporting unit’s or the indefinite-lived intangible asset’s fair value. If the fair value of the reporting unit or the indefinite-lived intangible asset is in excess of its carrying value, the related goodwill or the indefinite-lived intangible asset is not impaired. If the fair value of the reporting unit is less than the carrying value, we recognize an impairment equal to the difference between the carrying value of the reporting unit and its fair value, not to exceed the carrying value of goodwill. If the fair value of the indefinite-lived intangible asset is less than the carrying value, we recognize an impairment equal to the difference. The fair value of our definite-lived intangible assets is determined using both the market approach and income approach, utilizing Level 3 inputs. We review our definite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If circumstances require a definite-lived intangible asset or its asset group to be held and used be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that definite-lived intangible asset or asset group to its carrying amount. If the carrying amount of the definite-lived intangible asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Definite-lived intangible assets are amortized on a straight-line basis over their estimated period of benefit, over the following estimated useful lives: Asset Class Useful Life Non-competition agreements 3 years Supplier relationships 4 years Developed technology 3 - 5 years Customer relationships 2 - 5 years During the second quarter of 2020, we determined a triggering event occurred that required us to evaluate our goodwill, indefinite-lived intangible asset, and definite-lived intangible assets for impairment, and we recorded an impairment charge as a result of those assessments. Refer to Note 5, Impairments , for additional information. Capitalized Development Costs —We incur costs related to internal-use software and website development. Costs incurred in both the preliminary project stage and post-implementation stage of development are expensed as incurred. Qualifying development costs, including those incurred for upgrades and enhancements that result in additional functionality to existing software, are capitalized. Capitalized development costs are classified as Intangible assets – net on the Consolidated Balance Sheets and amortized using the straight-line method over the estimated useful life of the applicable software. The amortization is presented in Depreciation and amortization expense in the Consolidated Statements of Operations. Accrued Customer Credits —We may issue credits to customers for cancelled events that can be applied to future purchases on our marketplace. The amount recognized in Accrued expenses and other current liabilities in the Consolidated Balance Sheets represents the balance owed to customers on credit. Breakage income from customer credits that are not expected to be used is estimated and recognized as revenue in proportion to the pattern of redemption for the customer credits that are used. When customer credits are used to make a purchase, revenue is recognized for the new transaction. Accrued Future Customer Compensation —Provisions for accrued future customer compensation are included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets and represent compensation to be paid to customers for event cancellations or other service issues related to previously recorded sales transactions. 65 VIVID SEATS INC. NOTES to the Consolidated Financial Statements The expected recoveries of these obligations are included in Prepaid expenses and other current assets. These provisions are based on historic experience, revenue volumes for future events, and management's estimate of the likelihood of future event cancellations and are recognized as a component of Revenue. This estimated accrual could be impacted by future activity differing from our estimates, the effects of which could be material to the consolidated financial statements. Income Taxes —Prior to the Merger Transaction, Hoya Intermediate is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Hoya Intermediate's taxable income and losses were passed through to and included in the taxable income of its members, including Vivid Seats Inc. Accordingly, amounts related to income taxes were zero for us prior to the Merger Transaction, and therefore, are not representative of future amounts expected to be incurred by us. Following the Merger Transaction, our parent legal entity is Vivid Seats Inc. We are subject to income taxes at the U.S. federal, state, and local levels for income tax purposes, including with respect to its allocable share of any taxable income of Hoya Intermediate. Income taxes are accounted for using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences on differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is “more-likely-than not” that some portion or all of the deferred tax assets will not be realized. The realization of the deferred tax assets is dependent on the amount of our future taxable income. We recognize interest and penalties related to underpayment of income taxes in Income tax expense on the Consolidated Statements of Operations. To date, the interest or penalties incurred related to income taxes have not been material. Tax Receivable Agreement —In connection with the Merger Transaction, Vivid Seats Inc. entered into an agreement (the "Tax Receivable Agreement") with Hoya Intermediate and Hoya Topco, among other parties ("other TRA Holders"). Pursuant to the Tax Receivable Agreement, Vivid Seats Inc. is generally required to pay Hoya Topco and the other TRA Holders 85 % of the amount of certain tax benefits, if any, that Vivid Seats Inc. and certain of its subsidiaries actually realize, or in some circumstances is deemed to realize, as a result of the various transactions occurring in connection with the Merger Transaction or in the future, including benefits arising from tax basis adjustments and certain other tax benefits attributable to payments made under the Tax Receivable Agreement. The amount and timing of future tax benefits Vivid Seats Inc. realizes as a result of future exchanges of Intermediate Common Units by Hoya Topco and other TRA Holders, and the resulting amounts Vivid Seats Inc. will be required to pay to Hoya Topco and other TRA Holders pursuant to the Tax Receivable Agreement, will vary based on, among other things, (i) the amount and timing of future exchanges of Intermediate Common Units by Hoya Topco and other TRA Holders, and the extent to which such exchanges are taxable, (ii) the price per share of the Vivid Seats Class A common stock at the time of the exchanges, (iii) the amount and timing of future income against which to offset the tax benefits, and (iv) the tax rates then in effect. To date, no exchanges of Intermediate Common Units by Hoya Topco or other TRA Holders have occurred, and as a result, we have no t recognized a liability under the Tax Receivable Agreement. Debt —Term debt is carried at the outstanding principal balance, less debt issuance costs and any unamortized discount or premium. Deferred borrowing costs and discounts are amortized to interest expense over the terms of the respective borrowings using the effective interest method. Upon the repayment of our term debt, we reflected prepayment penalties and the write-off of any unamortized borrowing costs and discounts as loss on extinguishment of debt on the Consolidated Statements of Operations. Derivatives —We recognize derivatives on the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate 66 VIVID SEATS INC. NOTES to the Consolidated Financial Statements a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of the gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the earnings effect of the hedged forecasted transactions in a cash flow hedge. We formally evaluate, both at the inception of the hedge and quarterly, whether the derivative financial instrument is highly effective in offsetting changes in cash flows of the related underlying exposure. For derivatives that are designated as, and meet all the required criteria for, a cash flow hedge, the net interest payments are recorded in Interest expense – net in the Consolidated Statements of Operations and the remaining changes in the fair value are recorded in Accumulated other comprehensive loss (“AOCL”) in the Consolidated Balance Sheets and reclassified into earnings as the underlying hedged item affects earnings. Derivative instruments related to our hedging of interest rates are classified within Prepaid expenses and other current assets or Other liabilities in the Consolidated Balance Sheets depending on the nature of the balance at the end of the period. We also entered into a series of warrant agreements in connection with the Merger Transaction. Certain of these warrants are classified as a liability within Other Liabilities in the Consolidated Balance Sheets. Fair Value of Financial Instruments —Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of our financial instruments is disclosed based on the fair value hierarchy using the following three categories: Level 1 —Measurements that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 —Measurements that include other inputs that are directly or indirectly observable in the marketplace. Level 3 —Measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. These fair value measurements require significant judgment. Warrant Accounting —In connection with the Merger Transaction, we issued several types of warrants. We separately evaluate the terms for each of these outstanding warrants in accordance with ASC 480, Distinguishing Liabilities from Equity, and ASC 815-40, Derivatives and Hedging: Contracts in an Entity’s Own Equity to determine the appropriate classification and accounting treatment. Our Public Warrants, Private Warrants, and Exercise Warrants meet the criteria to be classified as equity instruments. Hoya Intermediate Warrants are exercisable for Hoya Intermediate common units, which allow for a potential cash redemption at the discretion of the unit holder, and hence, these warrants are classified as a liability in Other liabilities on our Consolidated Balance Sheets. The warrant liability is subject to a fair value remeasurement each period with an offsetting adjustment reflected in Other expenses on our Consolidated Statements of Operations. Redeemable Noncontrolling Interests —Vivid Seats Inc. holds a 40.1 % interest in Hoya Intermediate, with the remainder held by Hoya Topco. Hoya Topco’s interest in Hoya Intermediate represents a redeemable noncontrolling interest. At its discretion, Hoya Topco has the right to exchange its common units in Hoya Intermediate for either shares of Class A common stock of Vivid Seats Inc. on a one-to-one basis or cash proceeds of equal value at the time of redemption. Any redemption of Hoya Intermediate common units in cash must be funded through a private or public offering of Class A Common Stock and is subject to Board of Director's ("Board") approval by Vivid Seats Inc. As of December 31, 2021, equity holders of Hoya Topco hold the majority of the voting rights on the Vivid Seats Inc. Board. As the redeemable noncontrolling interests are redeemable upon the occurrence of an event that is not solely within our control, we classify our redeemable noncontrolling interests as temporary equity. The redeemable 67 VIVID SEATS INC. NOTES to the Consolidated Financial Statements noncontrolling interests were initially measured at Hoya Topco’s share in the net assets of Hoya Intermediate upon consummation of the Merger Transaction. Subsequent remeasurements of our redeemable noncontrolling interests are recorded as a deemed dividend each reporting period, which reduces retained earnings, if any, or additional paid-in capital of Vivid Seats Inc. Remeasurements of our redeemable noncontrolling interests are based on the fair value of our Class A common stock. Offering costs —We incurred incremental costs associated with the Merger Transaction and PIPE Financing related legal, accounting, and other third-party fees. In accordance with Staff Accounting Bulletin (“SAB”) Topic 5.A, Expenses of Offering , we deferred certain incremental costs directly associated with the Merger Transaction and PIPE Financing. These deferred costs were capitalized by us and subsequently charged against the gross proceeds of the Merger Transaction and PIPE Financing as a reduction to additional paid-in capital on the Consolidated Balance Sheets. Our tota l transaction costs were $ 32.7 million, of which $ 20.2 million was charged against the gross proceeds of the Merger Transaction and PIPE Financing. Equity-Based Compensation —We have granted restricted stock units (RSUs), stock options, profits interest, and phantom units. We started issuing RSUs and stock options following the Merger Transaction. The restricted stock units vest on a quarterly basis over a four-year period for non-directors and on an annual basis over a five-year period for directors. The stock options vest on a quarterly basis over a four-year period and expire ten years from the date of the grant. Both are subject to the employee’s continued employment through the applicable vesting date. The fair value of stock options granted to certain employees is estimated on the grant date using the Hull-White model, a lattice model which assumes holders will exercise when they achieve certain return thresholds. We account for forfeitures in the period they occur. The RSU and stock options grants are accounted for as equity-based compensation. Prior to the Merger Transaction, certain members of management received profit interests in Hoya Topco, LLC and Phantom units in a cash bonus pool funded by Hoya Topco. Under Accounting Standards Codification ("ASC") 718, Compensation–Stock Compensation , and ASC 480, Distinguishing Liabilities from Equity , the grants of profits interest meet the criteria to be recognized as equity-classified awards, whereas the grants of Phantom units meet the criteria to be recognized as liability-classified awards. A market-based approach was used to determine the total equity value of Hoya Topco and allocate the resulting value between share classes using the Black-Scholes option pricing model to determine the grant date fair value of employee grants. The exercise prices used are based on various scenarios considering the waterfall payout structure of the units that exists at the Hoya Topco, LLC level. For liability-based compensation with service and performance conditions, we recognize a liability for the fair value of the outstanding units only when we conclude it is probable that the performance condition will be achieved. As of December 31, 2021 and 2020, it is not probable the performance condition will be achieved. Segment Reporting— Operating segments are defined as components of an entity for which discrete financial information is available and is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in making decisions regarding resource allocation and performance assessment. Our CODM is our Chief Executive Officer. We have determined that we have two operating and reportable segments: Marketplace and Resale. Revenue Recognition —We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). We adopted ASC 606 effective January 1, 2019, using the full retrospective transition method. We report revenue on a gross or net basis based on management’s assessment of whether we are acting as a principal or agent in the transaction. Revenue is reported net of sales taxes. The determination of whether we are acting as a principal or an agent in a transaction is based on the evaluation of control over the ticket, including the right to sell the ticket, before it is transferred to the ticket buyer. 68 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Marketplace We act as an intermediary between ticket buyers and ticket sellers in our online secondary ticketing marketplace. Revenue primarily consists of service fees from ticketing operations and is reduced by incentives provided to ticket buyers. We have one primary performance obligation, facilitating the Marketplace transaction between the ticket seller and ticket buyer and seller, which is satisfied at the time the order is confirmed. In this transaction, we act as an agent as it does not control the ticket prior to it transferring to the ticket buyer. Revenue is recognized net of the amount due to the seller when the ticket seller confirms an order with the ticket buyer, at which point the seller is obligated to deliver the tickets to the buyer in accordance with the original marketplace listing. Payment from the buyer is due at the time of sale. Our sales terms provide that we will compensate the ticket buyer for the total amount of the purchase if an event is cancelled, the ticket is invalid, or if the ticket is delivered after the promised time. We have determined this is considered a stand-ready obligation to provide a return that is not a separate performance obligation, but is an element of variable consideration, which results in a reduction to revenue. The revenue reversal is reflected within Accrued expenses and other current liabilities in the Consolidated Balance Sheets when the buyer has yet to be compensated. We estimate the customer compensation liability, and corresponding charge against revenue, using the expected value method, which best predicts customer compensation for future cancellations. To the extent we estimate that a portion of the refund is recoverable from the ticket seller, we record the recovery as revenue to align with the net presentation of the original transaction. The timing of event cancellations and rescheduling of postponed events versus new sales transactions can result in customer compensation costs exceeding current period sales resulting in negative marketplace revenue for that period. In certain instances, ticket buyers are compensated with credit to be used on future purchases. When a credit is redeemed, revenue is recognized for the newly placed order. Breakage income from customer credits that are not expected to be used is estimated and recognized as revenue in proportion to the pattern of redemption for the customer credits that are used. We also earn referral commissions on purchases of third-party insurance services by ticket buyers at the time of sale of the associated ticket on the Marketplace platform. Referral commissions are recognized as revenue when the ticket buyer makes a purchase from the third-party insurance provider during customer checkout. Payment from the third-party provider is due to us net 30 from when invoiced. This revenue is included within all categories of Marketplace disaggregated revenue described in Note 4, Revenue Recognition. Resale We sell tickets we own on secondary ticket marketplaces. The Resale business has one performance obligation, which is to transfer control of a live event ticket to a ticket buyer once an order has been confirmed. We act as a principal in these transactions as we own the ticket and therefore controls the ticket prior to transferring the ticket to the customer. Revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed in the secondary ticket marketplace. Payment from the marketplace is typically due upon delivery of the ticket or after the event has passed. Secondary ticket marketplace terms and conditions require sellers to repay amounts received for events that are cancelled or tickets that are invalid or delivered after the promised time. We have determined that this obligation is a stand-ready obligation to provide a return that is not a separate performance obligation, but is an element of variable consideration, which results in a reduction to revenue. We recognize a liability for known and estimated cancellation charges within Accrued expenses and other current liabilities in the Consolidated Balance Sheets. We estimate the future customer compensation liability, and corresponding charge against revenue, using the expected value method. To the extent we estimate that a portion of the charge is recoverable from the event host, we record the estimated recovery asset to Prepaid expenses and other current assets. 69 VIVID SEATS INC. NOTES to the Consolidated Financial Statements When our Resale business sells a ticket in our own marketplace, the service fee is recorded in Marketplace revenues and the sales price of the ticket is recorded in Resale revenues. Deferred Revenue Deferred revenue consists of fees received related to unsatisfied performance obligations at the end of the period. The majority of the unsatisfied performance obligations are related to our loyalty program, Vivid Seats Rewards. Vivid Seats Rewards allows customers to earn credits on certain purchases and then redeem those credits on future transactions. The credits earned in the program represent a material right to the customer and constitute an additional performance obligation for us. As such, we defer revenue based on expected future usage and recognizes the deferred revenue as credits are redeemed. Revenues of sales of contingent events, such as postseason sporting events, is initially recorded as Deferred reve nue in the Consolidated Balance Sheets and is recognized when the contingency is resolved. Sales Tax —Sales taxes are imposed by state, county, and city governmental authorities. We collect sales tax from the customer where required and remit to the appropriate governmental agency. Collected sales taxes are recorded as a liability until remitted. There is no impact on the Consolidated Statements of Operations as revenue is recorded net of sales tax. Advertising Costs —We utilize various forms of advertising, including paid search, sponsorship agreements, e-mail marketing, and other forms of media. Advertising costs are expensed as incurred and were $ 180.7 million, $ 37.5 million, and $ 175.9 million for the years ended December 31, 2021, 2020, and 2019 respectively. Advertising costs are presented as part of Marketing and selling expense in the Consolidated Statements of Operations. Shipping and Handling —Shipping and handling charges to customers are included in Revenues in the Consolidated Statements of Operations. Shipping and handling costs incurred by us are treated as fulfillment activities, and as such are included in Cost of revenues in the Consolidated Statements of Operations. These costs are accrued upon recognition of revenue. Recent Accounting Pronouncements As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we are provided the option to adopt new or revised accounting guidance either (1) within the same periods as those otherwise applicable to public business entities, or (2) within the same time periods as non-public business entities, including early adoption when permissible. The following provides a brief description of recent accounting pronouncements that could have a material effect on our financial statements: Issued accounting standards adopted Income taxes —In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The guidance was issued as part of FASB’s overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Amendments include removal of certain exceptions to the general principles of Topic 740, “Income Taxes,” and simplification in several other areas. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We adopted this guidance on January 1, 2021, and it did not have a material impact on our consolidated financial statements. Issued accounting standards not yet adopted Leases —In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease) in the balance sheet. The liability will be equal to the present value of lease payments. The asset 70 VIVID SEATS INC. NOTES to the Consolidated Financial Statements will be based on the liability, subject to adjustment, such as for initial direct costs. ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, deferred the effective date for non-public companies. ASU 2016-02 is now effective for fiscal periods beginning after December 15, 2021. We elected the extended transition period available to emerging growth companies and expects to adopt this guidance using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application, January 1, 2022. We expect that this standard will have a material effect on its consolidated financial statements. While we continue to assess all of the effects of the adoption, it currently estimates that the most significant impact upon adoption will be to record operating lease liabilities and right-of-use assets for its real estate leases in the range of approximat ely $ 6.5 million to $ 9.0 million. There is no material impact to our Consolidated Statements of Operations or its Consolidated Statements of Cash Flows. The adoption of ASU 2016-02 will also require significant new disclosures about our leases. Financial Instruments-Credit Losses —In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which changes how entities will measure credit losses for financial assets and certain other instruments that are not measured at fair value through net income. The new expected credit loss impairment model requires immediate recognition of estimated credit losses expected to occur. Additional disclosures are required regarding assumptions, models, and methods for estimating the credit losses. ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates , deferred the effective date for non-public companies. The standard is effective for non-public companies for fiscal years beginning after December 15, 2022. We elected the extended transition period available to emerging growth companies and is currently evaluating the effect of adoption of the standard on our consolidated financial statements and related disclosures. Reference Rate Reform —In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting , as modified in January 2021. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The guidance also establishes (1) a general contract modification principle that entities can apply in other areas that may be affected by reference rate reform and (2) certain elective hedge accounting expedients. The amendment is effective for all entities starting March 12, 2020 and can be adopted through December 31, 2022. We have not yet decided the date of adoption of this standard. LIBOR is used to calculate the interest on borrowings under our June 2017 First Lien Loan. We are currently evaluating whether this guidance will have a significant impact on its consolidated financial statements and related disclosures. 3. Business Acquisition On December 13, 2021 , we acquired 100 % of the equity interests of Betcha Sports, Inc. (“Betcha”). Betcha is a real money daily fantasy sports app with social and gamification features. The acquisition was accounted for as an acquisition of a business in accordance with the acquisition method of accounting. Acquisition costs directly related to the transaction were immaterial and are included in General and administrative expenses in the Consolidated Statements of Operations for the year ended December 31, 2021. The purchase consideration transferred consisted of $ 0.8 million in cash and 2,143,438 shares of Class A common stock. The purchase consideration also includes cash earnouts of $ 7.5 million as of the acquisition date representing the estimated fair value that we may be obligated to pay if Betcha mee ts certain earnings objectives following the acquisition. The earnouts are measured at fair value using a Monte Carlo simulation model. In addition, the purchase consideration includes future milestone payments of $ 9.7 million as of the acquisition date representing the estimated fair value that we may be obligated to pay upon the achievement of certain integration objectives. The 71 VIVID SEATS INC. NOTES to the Consolidated Financial Statements milestone payments are measured at fair value using a discounted cash flow valuation approach. As of December 31, 2021, we made no payments related to cash earnouts and milestone payments. As part of the acquisition, we agreed to pay cash bonuses to certain Betcha employees (the “Retention Bonus”) over three years on the payroll date following the anniversary of the acquisition date. The Retention Bonus payouts are subject to the condition of continued employment, and therefore treated as compensation and expensed. Proforma financial information has not been presented as the Betcha acquisition was not considered material to our Consolidated Financial Statements. The purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair value as of the acquisition date. The excess of the purchase price over the net assets acquired was recorded as goodwill. The goodwill recorded is not deductible for tax purposes as the Betcha acquisition was primarily a stock acquisition and is attributable to the assembled workforce as well as the anticipated synergies from the integration of Betcha's technology with our technology. The purchase consideration allocation for Betcha is preliminary because the evaluations necessary to assess the fair values of the net assets acquired are still in process. The primary areas that are not yet finalized relate to the valuations of certain intangible assets, cash earnouts, milestone payments, and acquired income tax assets and liabilities. As a result, these allocations are subject to change during the purchase price allocation period as the valuations are finalized. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands): Cash $ 21 Restricted cash 280 Prepaid expenses and other current assets 61 Intangible assets 5,320 Goodwill 34,877 Accounts payable ( 288 ) Accrued expenses and other current liabilities ( 986 ) Net assets acquired $ 39,285 The following table summarizes the purchase consideration (in thousands): Fair value of common stock $ 21,306 Cash consideration 759 Fair value of milestone payments 9,720 Fair value of earnouts 7,500 Total purchase consideration $ 39,285 The following table sets forth the components of identifiable intangible assets acquired (in thousands) and their estimated useful lives (in years) as of the date of acquisition (in thousands): Cost Estimated Useful Life Customer relationships 520 2 years Developed technology 4,800 5 years Total acquired intangible assets $ 5,320 4. Revenue Recognition We recognize revenue in accordance with ASC 606. We have two reportable segments: Marketplace and Resale. 72 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Through the Marketplace segment, we act as an intermediary between ticket buyers and sellers. We earn revenue processing ticket sales from our Owned Properties, consisting of the Vivid Seats website and mobile applications, and from our Private Label offering, which is comprised of numerous distribution partners. During the years ended December 31, 2021, 2020, and 2019 Marketplace revenues consisted of the following (in thousands): 2021 2020 2019 Marketplace revenues: Owned Properties $ 308,226 $ 24,188 $ 329,262 Private Label 81,442 ( 907 ) 74,383 Total Marketplace revenues $ 389,668 $ 23,281 $ 403,645 During the years ended December 31, 2021, 2020, and 2019 Marketplace revenues consisted of the following event categories (in thousands): 2021 2020 2019 Marketplace revenues: Concerts $ 171,149 $ 15,775 $ 187,753 Sports 175,471 3,484 169,577 Theater 41,745 3,759 44,754 Other 1,303 263 1,561 Total Marketplace revenues $ 389,668 $ 23,281 $ 403,645 Within the Resale segment, we sell tickets we hold in inventory on resale ticket marketplaces. Resale revenues were $ 53.4 m illion, $ 11.8 million, and $ 65.3 million during the years ended December 31, 2021, 2020, and 2019, respectively. At December 31, 2021, Deferred revenue in the Consolidated Balance Sheets was $ 25.1 mil lion, which primarily relates to Vivid Seats Rewards, our loyalty program. At December 31, 2020, $ 6.0 million was recorded as deferred revenue, of wh ich $ 3.3 million was recognized as revenue during the year ended December 31, 2021. Deferred revenue for contingent e vents at December 31, 2021 and 2020 was immaterial. 5. Impairments As disclosed in Note 2, Summary of Significant Accounting Policies , we assess goodwill and other indefinite-lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that an asset may be impaired. Definite-lived intangible assets and other long-lived assets are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. During the second quarter of 2020, we identified the COVID-19 pandemic as a triggering event for its long-lived assets, goodwill, indefinite-lived trademark, and definite-lived intangible assets. Due to global social distancing efforts put in place to mitigate the spread of the virus, and compliance with restrictions enacted by various governmental entities, most live events during 2020 were either postponed or cancelled. Consequently, we experienced a significant reduction of revenue during the nine months ended September 30, 2020. 73 VIVID SEATS INC. NOTES to the Consolidated Financial Statements The following summarizes the impairment charges recorded by us during the year ended December 31, 2020 (in thousands): Goodwill $ 377,101 Indefinite-lived trademark 78,734 Definite-lived intangible assets 107,365 Property and equipment 3,670 Personal seat licenses 6,968 Total impairment charges $ 573,838 Long-lived asset impairments We assessed its long-lived assets for potential impairment during the second quarter of 2020. ASC 360, Property, Plant, and Equipment , requires an impairment loss to be recognized for a long-lived asset if the carrying amount of the asset is not recoverable and exceeds its fair value. In accordance with ASC 360, we classify our long-lived assets as a single asset group, which consists primarily of property and equipment, personal seat licenses, and definite-lived intangible assets. For the fair value of the asset group, we compared the expected future undiscounted cash flows associated with the asset group to the long-lived asset group’s carrying value and concluded that the carrying value was not recoverable. We then measured the fair value of the asset group using a discounted cash flow model. The significant estimates used in the undiscounted and discounted cash flow models include projected operating cash flows; forecasted capital expenditures and working capital needs; rates of long-term growth; and the discount rate (in the discounted cash flow model). The significant unobservable inputs included forecasted revenues which reflected significant declines in earlier years as a result of the COVID-19 pandemic and included estimates regarding when revenue would return to pre-pandemic levels. The significant unobservable inputs also included forecasted costs, capital expenditures, and working capital needs which were informed by actual historical experience and estimates of the timing of when live events would return to pre-pandemic levels. Refer to Note 14, Fair Value, for quantitative disclosure of significant unobservable inputs. As a result, we recorded an impairment of $ 118.0 million, of which $ 107.4 million was related to definite-lived intangible assets. The impairment is presented in Impairment charges in the Consolidated Statements of Operations. No impairment triggering events to our long-lived assets were identified during 2021. Indefinite-lived trademark and goodwill impairments During the second quarter of 2020, we determined that the estimated carrying value of its indefinite-lived trademark was in excess of its fair value. The fair value of the indefinite-lived trademark asset, classified as a Level 3 measurement, was measured using the relief-from-royalty method. This methodology involves estimating reasonable royalty rates for the trademarks, applying the royalty rate to a net sales stream, and utilizing the discounted cash flow method. We utilized a 2.0 % royalty rate, consistent with the rate used in the initial valuation of the trademark. We recorded an impairment charge of $ 78.7 million related to the indefinite-lived trademark. The impairment charge is presented in Impairment charges in the Consolidated Statements of Operations. As part of the goodwill impairment assessment performed during the second quarter of 2020, we determined that the carrying value of its Marketplace reporting unit exceeded its estimated fair value, resulting in a goodwill impairment charge of $ 377.1 million, which is presented in Impairment charges in the Consolidated Statements of Operations. The fair value estimate of our reporting units was based on a blended analysis of the present value of future discounted cash flows and market value approach, using Level 3 inputs. The significant estimates used in the discounted cash flow models are projected operating cash flows; forecasted capital expenditures and working capital needs; weighted average cost of capital; and rates of long-term growth. These estimates considered the recent deterioration in financial performance of the reporting units, as well as the anticipated rate of recovery, and implied risk premiums based on the market prices of our equity and debt as of the assessment date. The significant estimates used in the market multiple valuation approach include identifying business factors; such as size, growth, 74 VIVID SEATS INC. NOTES to the Consolidated Financial Statements profitability, risk and return on investment; and assessing comparable revenue and earnings multiples. Following the impairment charge, the carrying value of the Marketplace reporting unit’s goodwill was $ 683.3 million. In accordance with its annual re-assessment, we assessed its goodwill and indefinite-lived trademark for impairment as of October 31, 2020, determining no further impairment had occurred. No triggering events were identified during the year ended December 31, 2021. Our goodwill and indefinite-lived trademark constitute nonfinancial assets measured at fair value on a nonrecurring basis. These nonfinancial assets are classified as Level 3 assets in the fair value hierarchy established under ASC Topic 820, Fair Value Measurement (“ASC 820”). 6. PROPERTY AND EQUIPMENT Long-lived asset impairment charges related to property and equipment of $ 3.7 million were recognized for the year ended December 31, 2020, resulting in a full impairment of all property and equipment. The impairment charges are presented in Impairment charges in the Consolidated Statements of Operations. The following table summarizes our major classes of property and equipment, net of accumulated depreciation at December 31, 2021 (in thousands): 2021 Computer equipment $ 568 Construction in progress 564 Total property and equipment 1,132 Less: accumulated depreciation 50 Total property and equipment – net $ 1,082 Depreciation expense related to property and equipment was $ 0.1 million, $ 0.6 million, and $ 1.1 million for the years ended December 31, 2021, 2020, and 2019 respectively, and is presented in Depreciation and amortization expense in the Consolidated Statements of Operations. There were no impairment charges for the years ended December 31, 2021 and 2019. 7. Goodwill and Intangible Assets Definite-lived intan gible assets includes developed technology and customer relationships, which had a net carrying amount of $ 13.8 million and $ 2.4 million at December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, accumulated amortization related to our developed technology was $ 2.5 million and $ 0.3 million, respectively. Prior to its impairment, recorded during the second quarter of 2020, our definite-lived intangible assets included supplier relationships, customer relationships, and non-compete agreements, in addition to developed technology. Our goodwill is included in our Marketplace segment. 75 VIVID SEATS INC. NOTES to the Consolidated Financial Statements The net changes in the carrying amounts of our intangible assets and goodwill were as follows (in thousands): Definite-lived Intangible Assets Trademark Goodwill Balance at January 1, 2020 $ 149,948 $ 143,400 $ 1,060,428 Capitalized development costs 7,264 — — Impairment ( 107,365 ) ( 78,734 ) ( 377,101 ) Disposals ( 124 ) — — Amortization ( 47,365 ) — — Balance at December 31, 2020 2,358 64,666 683,327 Acquisition of Betcha 5,320 — 34,877 Capitalized development costs 8,438 — — Amortization ( 2,271 ) — — Balance at December 31, 2021 $ 13,845 $ 64,666 $ 718,204 We had recorded $ 563.2 million of cumulative impairment charges related to our intangible assets and goodwill as of December 31, 2021 and 2020. Amortization expense on our definite-lived intangible assets w as $ 2.3 million, $ 47.4 million, and $ 91.5 million for the years ended December 31, 2021, 2020, and 2019, respectively, and is presented in Depreciation and amortization in the Consolidated Statements of Operations. The estimated future amortization expense related to the definite-lived intangible assets as of December 31, 2021 is a follows (in thousands): 2022 $ 4,905 2023 $ 4,641 2024 $ 2,381 2025 $ 960 2026 $ 958 Total $ 13,845 8. Prepaid expenses and other current assets Prepaid expenses and other current assets at December 31, 2021 and 2020 consist of the following (in thousands): 2021 2020 Recovery of future customer compensation $ 58,319 $ 75,257 Insurance recovery asset 480 2,500 Prepaid expenses 9,573 2,309 Other current assets 4,132 — Total prepaid expenses and other current assets $ 72,504 $ 80,066 Recovery of future customer compensation represents expected recoveries of compensation to be paid to customers for event cancellations or other service issues related to previously recorded sales transactions. Recovery of future customer compensation costs decreased by $ 16.9 million during the year ended December 31, 2021, due to a reduction in the estimated rate of future cancellations in 2021 compared to 2020, partially offset by an increase in order volume. The provision related to these expected recoveries are included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. 76 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Prepaid expenses increased by $ 7.3 million primarily related to a $ 4.5 million prepayment in a legal settlement pool. Other current assets was $ 4.1 million at December 31, 2021 due to a deposit associated with a corporate credit card. 9. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities at December 31, 2021 and 2020 consist of the following (in thousands): 2021 2020 Accrued marketing expense $ 27,304 $ 1,086 Accrued taxes 9,332 16,913 Accrued customer credits 119,355 125,481 Accrued future customer compensation 73,959 94,061 Accrued contingencies 12,686 — Other current liabilities 38,520 18,593 Total accrued expenses and other current liabilities $ 281,156 $ 256,134 Accrued customer credits represent credits issued and outstanding for event cancellations or other service issues related to recorded sales transactions. The accrued amount is reduced by the amount of credits estimated to go unused, which is recognized in proportion to the pattern of redemption for the customer credits. During the year ended December 31, 2021, $ 55.9 million of accrued customer credits were redeemed and we recognized $ 3.3 million of revenue from breakage. During the year ended December 31, 2020, $ 7.4 million of accrued customer credits were redeemed and we recognized $ 0.8 million of revenue from breakage. Accrued future customer compensation represents an estimate of the amount of customer compensation due from cancellation charges in the future. These provisions are based on historic experience, revenue volumes for future events, and management’s estimate of the likelihood of future event cancellations and are recognized as a component of Revenues. The expected recoveries of these obligations are included in Prepaid expenses and other current assets in the Consolidated Balance Sheets. This estimated accrual could be impacted by future activity differing from our estimates, the effects of which could be material. During the years ended December 31, 2021, 2020, and 2019, we recognized an increase in revenue of $ 5.1 million, a decrease in revenue of $ 15.3 million, and an increase in revenue of $ 0.4 million, respectively, from the reversals of previously recorded revenue and changes to accrued future customer compensation related to event cancellations where the performance obligations were satisfied in prior periods. Accrued contingencies includes the current portion of cash earnouts of $ 3.9 million that we may be obligated to pay if Betcha mee ts certain earnings objectives following the acquisition. In addition, it includes the current portion of future milestone payments of $ 8.8 million upon the achievement of certain integration objectives. A ccrued marketing expense and other current liabilities increased during the year ended December 31, 2021 due primarily to the increased volume of sales transactions occurring on our platform. Accrued taxes decreased as we have historically accrued sales tax expense in jurisdictions where we expected to remit sales tax payments but were not yet collecting from ticket buyers. During the second half of 2021, we began collecting sales tax from customers. The majority of the tax accrual represents the exposure for sales tax prior to the date we began collecting sales tax from customers reduced by abatements received. Refer to Note 15, Commitments and Contingencies, for further discussion of the accrued tax expense. 77 VIVID SEATS INC. NOTES to the Consolidated Financial Statements 10. DEBT Our outstanding debt at December 31, 2021 and 2020 is comprised of the following (in thousands): 2021 2020 June 2017 First Lien Loan $ 465,712 $ 618,721 May 2020 First Lien Loan — 275,678 Total long-term debt, gross 465,712 894,399 Less: unamortized debt issuance costs ( 5,580 ) ( 17,084 ) Total long-term debt, net of issuance costs 460,132 877,315 Less: current portion — ( 6,412 ) Total long-term debt, net $ 460,132 $ 870,903 First Lien Loans —On June 30, 2017, we entered into a $ 575.0 million first lien debt facility, comprised of a $ 50.0 million revolving facility (the “Revolving Facility”) and a $ 525.0 million term loan (the “June 2017 First Lien Loan”), and a second lien credit facility, comprised of a $ 185.0 million second lien term loan (the “June 2017 Second Lien Loan”). The First Lien Loan was amended to upsize the committed amount by $ 115.0 million on July 2, 2018. On October 28, 2019 , we paid off its June 2017 Second Lien Loan balance. The underlying credit facility was subsequently retired on May 22, 2020. On October 18, 2021, in connection with and using the proceeds from the Merger Transaction, we made an early payment of a portion of its May 2020 First Lien Loan balance. On May 22, 2020, we entered into a new $ 260.0 million first lien term loan (the “May 2020 First Lien Loan”) that is pari passu with the June 2017 First Lien Loan. The proceeds from the May 2020 First Lien Loan were used for general corporate purposes and to extinguish and retire the Revolving Facility in full. On October 18, 2021 , in connection with and using the proceeds from the Merger Transaction, we paid off in full its May 2020 First Lien Loan balance. All obligations under the June 2017 First Lien Loan and May 2020 First Lien Loan are unconditionally guaranteed by Hoya Intermediate and substantially all Hoya Intermediate’s existing and future direct and indirect wholly owned domestic subsidiaries. The amortization of original issue discount and debt issuance costs on the June 2017 First Lien Loan and May 2020 First Lien Loan wa s $ 3.6 million , $ 3.7 million, and $ 2.9 million for the years ended December 31, 2021, 2020, and 2019, respectively, and is presented in Interest expense – net in the Consolidated Statements of Operations. The key terms of our debt agreements are as follows: June 2017 First Lien Loan —The June 2017 First Lien Loan matures on June 30, 2024 and requires quarterly amortization payments equal to approximately 1.0 % of the original principal per annum. The Revolving Facility did not require periodic payments. All obligations under the June 2017 First Lien Loan are secured, subject to permitted liens and other exceptions, by first-priority perfected security interests in substantially all of our assets. The June 2017 First Lien Loan is required to be prepaid, subject to certain exceptions, upon the following conditions: (i) up to 50.0 % of excess cash flow subject to certain leverage ratios; (ii) all of the net cash proceeds of certain asset sales or insurance/condemnation events subject to certain leverage ratios; and (iii) all of the net cash proceeds of any issuance or incurrence of debt other than permitted debt. At our option, the June 2017 First Lien Loan bears periodic interest of either (A) the LIBOR rate plus an applicable margin, ranging from 3.00 % to 3.50 % per annum based on the our first lien net leverage ratio, or (B) the base rate plus an applicable margin, ranging from 2.00 % to 2.50 % per annum based on our first lien net leverage ratio. The LIBOR rate for the June 2017 First Lien Loan is subject to a 1.00 % floor. The effective interest rate on the June 2017 First Lien Loan was 4.5 % per annum at December 31, 2021 and 2020. May 2020 First Lien Loan —The May 2020 First Lien Loan, which we repaid in full on October 18, 2021, had a maturity date of May 22, 2026 , with springing maturity to June 30, 2024 if the June 2017 First Lien Loan, or a refinancing 78 VIVID SEATS INC. NOTES to the Consolidated Financial Statements thereof with scheduled payments of principal prior to June 30, 2024, remained outstanding as of that date. The May 2020 First Lien Loan had no required amortization payments. All obligations under the May 2020 First Lien Loan were secured, subject to permitted liens and other exceptions, by first-priority perfected security interests in substantially all of our assets. The interest rate for the May 2020 First Lien Loan was determined using a LIBOR rate plus an applicable margin of 9.50 % per annum, or a base rate plus an applicable margin of 8.50 % per annum. The LIBOR rate was subject to a 1.00 % floor and the base rate was subject to a 2.00 % floor. For any period ending prior to May 22, 2022, we had the option of submitting paid-in-kind elections, whereby the entire outstanding balance would be charged interest at 11.50 % per annum and interest amounts will be added to the outstanding principal. On and after May 22, 2022 but prior to May 22, 2023, we had the option of submitting paid-in-kind elections with respect to all or some of the outstanding balance, whereby the portion for which such paid-in-kind election was made will be charged interest at a rate equal to the sum of i) 5.0 % per annum and ii) at the Borrower’s election, a LIBOR rate plus an applicable margin of 5.00 % per annum, or a base rate plus an applicable margin of 4.00 % per annum. The effective interest rate on the May 2020 First Lien Loan was 11.50 % per annum at December 31, 2020. Under the terms of the May 2020 First Lien Loan, for certain prepayments and repricing transactions that occurred prior to May 22, 2023, we would owe a prepayment penalty of 3.0 % on the first $ 91.0 million of prepayments. For prepayments greater than $ 91.0 million prior to May 22, 2022, the amount exceeding $91.0 million would be subject to a prepayment penalty equal to the greater of i) 6.0 % and ii) the excess of the discounted measure of principal and interest due upon the second anniversary of the effective date and the outstanding principal at the time of the prepayment. For prepayments greater than $91.0 million on or after May 22, 2022 and prior to May 22, 2023, the amount exceeding $ 91.0 million would be subject to a prepayment penalty equal to 6.0 %. The following is a summary of activity related to debt instruments during the years ended December 31, 2021 and 2020: June 2017 First Lien Loan principal payments —We made quarterly principal payments of $ 4.8 million and $ 5.9 million during the years ended December 31, 2021 and 2020, respectively. On October 18, 2021, we made a principal payment of $ 148.2 million in connection with, and using the proceeds from, the Merger Transaction. We incurred a loss of $ 1.7 million for a portion of the remaining original issuance discount and issuance costs, which is presented as Loss on extinguishment of debt in the Consolidated Statements of Operations. May 2020 First Lien Loan borrowing and payoff —On May 22, 2020, we entered into the May 2020 First Lien Loan and used the $ 260.0 million in proceeds to, among other things, repay and extinguish the Revolving Facility. The total original debt discount costs and original debt issuance costs related to the May 2020 First Lien Loan borrowing were $ 6.5 million and $ 2.0 million, respectively, and are presented in Long-term debt – net in the Consolidated Balance Sheets. On October 18, 2021, in connection with, and using the proceeds from, the Merger Transaction, we paid off in full the remaining principal on the May 2020 First Lien Loan of $ 304.1 million. The debt extinguishment resulted in a loss of $ 34.1 million, which is presented in Loss on extinguishment of debt in the Consolidated Statements of Operations. The loss consists of a $ 28.0 million prepayment penalty and the remaining balance of the original issuance discount and issuance costs of $ 6.1 million. Revolving Facility drawdown and repayment —On March 17, 2020, we borrowed $ 50.0 million using its Revolving Facility. This amount was repaid (and the Revolving Facility terminated in full) on May 22, 2020. The debt extinguishment resulted in a loss of $ 0.7 million and is presented in Loss on extinguishment of debt in the Consolidated Statements of Operations. 79 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Future maturities of our outstanding debt, excluding interest, as of December 31, 2021 were as follows (in thousands): 2022 $ — 2023 — 2024 465,712 2025 — 2026 — Total $ 465,712 We are subject to certain reporting and compliance-related covenants to remain in good standing under the June 2017 First Lien Loan. These covenants, among other things, limit our ability to incur additional indebtedness, and in certain circumstances, create restrictions on the ability to enter into transactions with affiliates; create liens; merge or consolidate; and make certain payments. Non-compliance with these covenants and failure to remedy could result in the acceleration of the loans or foreclosure on the collateral. A s of December 31, 2021, we were in compliance with all of its debt covenants related to the June 2017 First Lien Loan. 11. Financial Instruments Derivatives The financial instruments entered into by us are typically executed over-the-counter. All financial instruments were measured at fair value on a recurring basis. The fair value is derived from discounted cash flows adjusted for nonperformance risk. The fair value models primarily use market observable inputs and, therefore, are classified as Level 2 assets. These models incorporate a variety of factors, including, where applicable, maturity, interest rate yield curves, and counterparty credit risks. The credit valuation adjustment associated with the derivatives, related to the likelihood of default by us and the counterparty, was not significant to the overall valuation. Refer to Note 14, Fair Value , for additional disclosure regarding fair value measurements. Interest Rate Swaps On November 10, 2017, we purchased pay-fixed, receive-float interest rate swaps with a combined notional value of $ 520.7 million on September 30, 2020. The interest rate swaps matured on September 30, 2020. The interest rate swaps had a fixed rate of 1.9 %. The interest rate swaps were purchased to reduce a portion of the exposure to fluctuations in LIBOR interest rates associated with our variable-rate term loan. The objective in using the swaps was to add stability to interest expense and to manage the exposure to interest rate movements. The interest rate swaps are designated as effective cash flow hedges involving the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreement without exchange of the underlying notional amount. We performed a regression analysis at inception of the hedging relationship to assess the effectiveness. The design of the regression analysis addresses the effectiveness of the hedging relationship by considering how the hedge instrument performs against the forecasted transaction or hypothetical interest rate swaps over historical months. The changes in the fair value of the hedge instrument and the hedged item over the historical months demonstrated the effectiveness of the hedge relationship as the prospective and retrospective test. On an ongoing basis, we assessed hedge effectiveness prospectively and retrospectively. The hedge continued to be highly effective through its maturity date. The amount recognized in Interest expense — net in the Consolidated Statements of Operations was $ 4.3 million and $ 2.1 million for the year ended December 31, 2020 and 2019. 80 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Interest Rate Cap On November 26, 2018, we entered into an interest rate cap with an effective date of September 30, 2020. We paid $ 1.0 million to enter into the cap. The notional value was $ 516.8 million on September 30, 2021. The interest rate cap matured on September 30, 2021. The interest rate cap had a strike rate of 3.5 %. The interest rate cap was purchased to reduce a portion of the exposure to fluctuations in LIBOR interest rates associated with our variable-rate term loan. The objective in using the cap is to add stability to interest expense and to manage the exposure to interest rate movements. Interest rate caps involve the borrower paying the hedge provider an initial one-time fee in exchange for the hedge provider paying the borrower the excess of the floating interest rate payment above a strike rate, in the event that the floating interest rate is greater than the strike rate during the period between the effective date and maturity date. We performed a regression analysis at inception of the hedging relationship to assess the effectiveness. The design of the regression analysis addressed the effectiveness of the hedging relationship by considering how the hedge instrument performs against the forecasted transaction or hypothetical interest rate cap over historical months. Historical changes in the fair value of the hedge instrument and the underlying item demonstrated the effectiveness of the hedging relationship. On an ongoing basis, we assess hedge effectiveness prospectively and retrospectively. The hedge continued to be highly effective through its maturity. The interest rate cap is measured at fair value, which was zero at December 31, 2020. Effect of Derivative Contracts on Accumulated Other Comprehensive Loss ("AOCL") and Earnings Since we designated the financial instruments as effective cash flow hedges that qualify for hedge accounting, net interest payments are recorded in Interest expense – net in the Consolidated Statements of Comprehensive Income (Loss), and unrealized gains or losses resulting from adjusting the financial instruments to fair value are recorded as a component of Other comprehensive loss and subsequently reclassified into earnings in the same period during which the hedged transaction affects earnings. During the years ended December 31, 2021 and 2020, we reclassified losses of $ 0.8 million and $ 0.2 million, respectively, into Interest expense – net from AOCL related to the interest rate cap. Cash flows resulting from settlements are presented as a component of cash flows from operating activities within the Consolidated Statements of Cash Flows. The following table presents the effects of hedge accounting on AOCL for the year ended December 31, 2021 for interest rate contracts designated as cash flow hedges (in thousands): Interest rate cap Beginning accumulated derivative loss in AOCL $ ( 822 ) Amount of gain (loss) recognized in AOCL — Less: Amount of loss reclassified from AOCL to income ( 822 ) Ending accumulated derivative loss in AOCL $ — 81 VIVID SEATS INC. NOTES to the Consolidated Financial Statements The following table presents the effects of hedge accounting on AOCL for the year ended December 31, 2020 for interest rate contracts designated as cash flow hedges (in thousands): Interest rate swaps Interest rate cap Total Beginning accumulated derivative loss in AOCL $ ( 887 ) $ ( 1,030 ) $ ( 1,917 ) Amount of gain recognized in AOCL 887 — 887 Less: Amount of loss reclassified from AOCL to income — ( 208 ) ( 208 ) Ending accumulated derivative loss in AOCL $ — $ ( 822 ) $ ( 822 ) We also entered into certain warrant agreements in connection with the Merger Transaction. Refer to Note 18, Warrants , for additional details on our warrants. 12. Employee Benefit Plan We have a defined contribution and profit-sharing 401(k) plan that covers substantially all employees who meet eligibility requirements. Participants may contribute to the plan, through regular payroll deductions, an amount subject to limitations imposed by the Internal Revenue Code. The plan also provides for discretionary profit-sharing contributions and matching contributions. We contributed approximately $ 0.8 million, $ 0.9 million, and $ 1.1 million in matching contributions for the years ended December 31, 2021, 2020, and 2019, respectively, and is included in General and administrative expense in the Consolidated Statements of Operations. For the years ended December 31, 2021, and 2020, there were no discretionary profit-sharing contributions. 13. income taxes We are subject to U.S. federal and state income taxes with respect to our allocable share of any taxable income or loss of Hoya Intermediate generated after the Merger Transaction, as well as any stand-alone income or loss we generate. Hoya Intermediate is organized as a limited liability company and treated as a partnership for federal tax purposes, with the exception to the Canadian operations of Vivid Seats Canada Ltd. (formerly Fanxchange Ltd.), which we acquired in 2019. Instead, Hoya Intermediate’s taxable income or loss is passed through to its members, including Vivid Seats Inc. Vivid Seats Inc. files and pays corporate income taxes for U.S. federal and state income tax purposes. We anticipate this structure to remain in existence for the foreseeable future. Components of loss from continuing operations before income taxes for the years ended December 31 were as follows (in thousands): 2021 2020 2019 United States $ ( 17,859 ) $ ( 763,664 ) $ ( 51,520 ) Foreign ( 966 ) ( 10,521 ) ( 2,328 ) Total loss before income taxes $ ( 18,825 ) $ ( 774,185 ) $ ( 53,848 ) 82 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Prior to 2021, we did not incur material amounts of income tax expense or have material income tax liability or deferred tax balances. During 2021, significant components of income tax expense were as follows (in thousands): 2021 Current U.S. Federal $ — State & Local 304 Foreign — Total current income tax expense (benefit) 304 Deferred U.S. Federal — State & Local — Foreign — Total deferred income tax expense (benefit) — Total income tax expense (benefit) $ 304 A reconciliation of income taxes computed at the U.S. federal statutory income tax rate of 21 % to our income tax expense was as follows: 2021 At U.S. statutory tax rate 21.0 % State income taxes ( 1.1 )% Foreign rate differential 0.3 % Pass-through loss / (income) ( 14.3 )% Noncontrolling interest ( 2.7 )% Change in valuation allowance ( 3.5 )% Warrants remeasurement ( 1.4 )% Other 0.1 % Total income tax expense (benefit) ( 1.6 )% As of December 31, 2021, our deferred tax balances consisted of the following (in thousands): 2021 Deferred Tax Assets Net operating loss $ 9,670 Interest carryforward 15,206 Investment in partnerships 120,706 Other 132 Total deferred tax assets 145,714 Valuation allowance ( 145,668 ) Total deferred tax assets net of valuation allowance 46 Deferred Tax Liabilities Other 46 Total Deferred Tax Liabilities 46 Net Deferred Tax Asset / Liabilities $ — We recognize deferred tax assets to the extent we believe these assets are more likely than not to be realized. Valuation allowances have been established primarily with regard to the tax benefits of certain net operating losses, tax credits, as well as its investment in partnerships. In making such a determination, we considered all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. After considering all those factors, we 83 VIVID SEATS INC. NOTES to the Consolidated Financial Statements recorded $ 145.7 million of a valuation allowance against our deferred tax assets, as these assets are not more likely than not to be realized. The deferred tax asset valuation allowance and changes were as follows (in thousands): 2021 Balance of beginning of period $ 1,828 Charged to costs and expenses 646 (Credited) charged to other accounts 143,194 Deductions — Ending balance $ 145,668 At December 31, 2021, we had U.S. state operating loss carryforwards totaling $ 16.1 million, U.S federal operating loss carryforwards totaling $ 32.0 million. The U.S. federal and state operating loss carryforwards begin to expire in 2029 with $ 33.7 million of the operating loss carryforwards having no expiration date. At December 31, 2021, with respect to our operations outside the U.S., we had foreign operating loss carryforwards totaling $ 6.1 million. The foreign operating loss carryforwards begin to expire in 2022 . At December 31, 2021, we were not indefinitely reinvested on undistributed earnings from its foreign operations and the deferred tax liability associated with the future repatriation of these earnings is expected to be immaterial. ASC 740, Income Taxes, prescribes a recognition threshold of more-likely-than not to be sustained upon examination as it relates to the accounting for uncertainty in income tax benefits recognized in an enterprise’s financial statements. We note that as of December 31, 2021, we had no uncertain tax positions recorded in any jurisdiction. We are subject to routine audits by taxing jurisdictions. The periods subject to tax audits are 2017 through 2021 . There are currently no audits for any tax periods in progress. 14. Fair Value Recurring Our financial assets and liabilities are valued using market prices on both active markets (Level 1), less active markets (Level 2) and little or no market activity (Level 3). Level 1 instrument valuations are obtained from unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using other inputs that are directly or indirectly observable in the marketplace. Level 3 instrument valuations typically reflect management’s estimate of assumptions and are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. We did not have any transfers of financial instruments between valuation levels during the years ended December 31, 2021 and 2020. Cash and cash equivalents include all cash balances and highly liquid investments purchased with maturities of three months or less. Our cash and cash equivalents consist primarily of domestic bank accounts, interest-bearing deposit accounts, and money market accounts managed by third-party financial institutions. Cash and cash equivalents are valued by us based on quoted prices in an active market, which represent a Level 1 measurement within the fair value hierarchy. The fair value for our derivative instruments is based upon inputs corroborated by observable market data with similar tenors, which are considered Level 2 inputs. Refer to Note 11, Financial Instruments, for further details on our derivative instruments. Our June 2017 First Lien Loan is held by third-party financial institutions and is carried at the outstanding principal balance, less debt issuance costs an d any unamortized discount or premium. The fair value was estimated using quoted prices that are directly observable in the marketplace, therefore, the fair value is estimated on a Level 2 basis. At December 31, 2021, the June 2017 First Lien Loan had a fair value of $ 465.1 million as compared to the 84 VIVID SEATS INC. NOTES to the Consolidated Financial Statements carrying amount of $ 460.1 million. At December 31, 2020, the June 2017 First Lien Loan had a fair value of $ 583.1 million as compared to the carrying amount of $ 609.1 million. We made a partial principal payment of $ 148.2 million on this loan in connection with, and using the proceeds from, the business combination. Refer to Note 10, Debt , for further information. Our May 2020 First Lien Loan is not traded and is carried at the outstanding principal balance, less debt issuance costs and any unamortized discount or premium. The fair value was estimated by discounting the future cash flows using current interest rates at which similar borrowings with similar maturities would be made to borrowers with similar credit ratings. The fair value was estimated assuming prepayment of the loan upon the loan's third anniversary and is estimated on a Level 3 basis, as provided by ASC Topic 820, Fair Value Measurement . During the year ended December 31, 2021, we repaid this loan in full in connection with, and using the proceeds from, the business combination. Refer to Note 10, Debt , for further information. At December 31, 2020, the May 2020 First Lien Loan had a fair value of $ 319.9 million as compared to the carrying amount of $ 268.2 million. Refer to Note 10, Debt , for key terms of the June 2017 First Lien Loan and the May 2020 First Lien Loan. In Connection with the Merger Transaction, we issued Hoya Intermediate Warrants to Hoya Topco, which are classified as Other Liabilities on the Consolidated Balance Sheets. The Hoya Intermediate Warrants are remeasured to fair value each reporting period using the Black-Scholes valuation model. Significant inputs used in the valuation of the Hoya Intermediate Warrants include the volatility, risk-free interest rate, and dividend yield. Other financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximates their fair value because of the short-term nature of these instruments. Nonrecurring Our non-financial assets, such as goodwill, intangible assets, and long-lived assets are measured at fair value on a nonrecurring basis, utilizing Level 3 inputs. The following table presents quantitative information about the significant unobservable inputs applied to these Level 3 fair value measurements during our assessment for impairment in the second quarter of 2020: Significant Unobservable Inputs Range (Weighted Average) Discount rate 12.5 % - 13.5 % ( 13.0 %) Long-term growth rate 2.5 % - 3.5 % ( 3.0 %) The following table presents the sensitivities to changes in the significant unobservable inputs above (in thousands): Goodwill Trademark 50 basis point increase in discount rate $ ( 37,680 ) $ ( 3,935 ) 50 basis point decrease in long-term growth rate ( 21,344 ) ( 2,298 ) Refer to Note 5, Impairments , for disclosure of our fair value methodologies applied to goodwill, intangible assets, and long-lived assets. 15. Commitments and Contingencies Our future minimum cash obligations as of December 31, 2021, were as follows (in thousands): 2022 2023 2024 2025 2026 Thereafter Total Operating leases $ 3,437 $ 905 $ 2,038 $ 2,458 $ 2,477 $ 14,736 $ 26,051 Purchase obligations 2,195 1,391 — — — — 3,586 Total $ 5,632 $ 2,296 $ 2,038 $ 2,458 $ 2,477 $ 14,736 $ 29,637 85 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Operating Leases —We lease office space under several non-cancelable operating leases expiring at various dates through November 2025. The le ases require monthly rental payments, which escalate over the term of the leases. We are also responsible for our proportionate share of real estate taxes, insurance, and common area maintenance. Rent expense was $ 3.7 million, $ 2.8 million, and $ 2.7 million for the years ended December 31, 2021, 2020, and 2019, respectively, and is included in General and administrative expense in the Consolidated Statements of Operations. During 2021, we early terminated our h eadquarters lease and recorded a $ 1.3 million lease termination expense in General and administrative expense in the Consolidated Statements of Operations. We entered into a new 11 -year lease expiring on December 31, 2034 with an annual payment ranging from $ 1.5 million to $ 1.8 million. Lease expense is recognized on a straight-line basis over the term of the lease. The excess of straight-line expense over cash paid is shown as a deferred rent liability and is recorded in Other liabilities in the Consolidated Balance Sheets. The leases also require security deposits which are recorded as a component of Other non-current assets in the Consolidated Balance Sheets. Purchase Obligations —We enter into non-cancelable arrangements, primarily related to the purchase of marketing services and tickets at an agreed upon price. Litigation —We, from time to time, are involved in various claims and legal actions arising in the ordinary course of business, none of which, in the opinion of management, could have a material effect on our business, financial position or results of operations other than those matters discussed herein. We are a co-defendant in a class action lawsuit in Canada alle ging a failure to disclose service fees prior to checkout. On January 5, 2022, we issued coupons to certain members of the class. Other members will be notified in 2022 that they are eligible to submit a claim for a coupon. As of December 31, 2021 and 2020, a liability of $ 0.9 million and $ 1.1 million, respectively, was recorded in Accrued expenses and other current liabilities in the Consolidated Balance Sheets related to expected credit redemptions as of the measurement date. We received multiple class action lawsuits related to customer compensation for cancellations, primarily as a result of COVID-19 restrictions. A final order approving settlement of one of the lawsuits was entered by the court on November 1, 2021 . As such, after insurance, $ 4.5 million was funded to a claims settlement pool and is included in Prepaid expenses and other current assets in the Consolidated Balance Sheets. As of December 31, 2021 and 2020, we had accrued a liability of $ 1.7 million and $ 2.6 million, respectively, in Accrued expenses and other current liabilities in the Consolidated Balance Sheets related to these matters. We expect to recover some of these costs under our insurance policies and have separately recognized an insurance recovery asset of $ 0.5 million and $ 2.5 million, respectively, within Prepaid expenses and other current assets in the Consolidated Balance Sheets at December 31, 2021 and 2020. Other —In 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair Inc., which overturned previous case law that had precluded states from imposing sales tax collection requirements on retailers without a physical presence in the state. In response, most states have adopted laws that attempt to impose tax collection obligations on out-of-state companies. We have registered, or are in the process of registering, where required by statute. There remains a degree of uncertainty as to our obligations in jurisdictions where our registration is still in progress due to the complex laws that govern secondary ticket sales. Pending discussions, it is more likely than not some jurisdictions could assess taxes and assessed amounts may differ materially from amounts currently accrued. It is also possible that some jurisdictions may provide for a later start date for sales tax collection, which could provide a material reduction in amounts currently accrued. In either case, we will adjust the recorded liability to reflect the new information, with a portion of the adjustment impacting orders placed in prior periods. We have recognized a liability for this potential tax of $ 8.8 million and $ 16.8 million at December 31, 2021 and 2020, respectively. This liability is recorded in Accrued expenses and other current liabilities in the Condensed Consolidated 86 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Balance Sheets. The related sales tax expense was $ 9.0 million, $ 6.8 million, and $ 10.0 million for the years ended December 31, 2021, 2020, and 2019, respectively, which reflects uncollected amounts owed to jurisdictions reduced by abatements received. 16. Segment Reporting Our reportable segments are Marketplace and Resale. Through the Marketplace segment, we act as an intermediary between ticket buyers and sellers within our online secondary ticket marketplace. Through the Resale segment, we acquire tickets from primary sellers, which it then sells through secondary ticket marketplaces. Revenues and contribution margin are used by our Chief Operating Decision Maker (“CODM”) to assess performance of the business. We define contribution margin as revenues less cost of revenues and marketing and selling expenses. We do not report our assets, capital expenditures, or related depreciation and amortization expenses by segment, because our CODM does not use this information to evaluate the performance of our operating segments. The following table represents our segment information for the year ended December 31, 2021 (in thousands): Marketplace Resale Consolidated Revenues $ 389,668 $ 53,370 $ 443,038 Cost of revenues (exclusive of depreciation and amortization shown separately below) 51,702 38,915 90,617 Marketing and selling 181,358 — 181,358 Contribution margin $ 156,608 $ 14,455 171,063 General and administrative 92,170 Depreciation and amortization 2,322 Income from operations 76,571 Interest expense – net 58,179 Loss on extinguishment of debt 35,828 Other expenses 1,389 Loss before income taxes $ ( 18,825 ) The following table represents our segment information for the year ended December 31, 2020 (in thousands): Marketplace Resale Consolidated Revenues $ 23,281 $ 11,796 $ 35,077 Cost of revenues (exclusive of depreciation and amortization shown separately below) 13,741 10,949 24,690 Marketing and selling 38,121 — 38,121 Contribution margin $ ( 28,581 ) $ 847 ( 27,734 ) General and administrative 66,199 Depreciation and amortization 48,247 Impairment charges 573,838 Loss from operations ( 716,018 ) Interest expense – net 57,482 Loss on extinguishment of debt 685 Net loss $ ( 774,185 ) 87 VIVID SEATS INC. NOTES to the Consolidated Financial Statements The following table represents our segment information for the year ended December 31, 2019 (in thousands): Marketplace Resale Consolidated Revenues $ 403,645 $ 65,280 $ 468,925 Cost of revenues (exclusive of depreciation and amortization shown separately below) 52,857 53,146 106,003 Marketing and selling 178,446 — 178,446 Contribution margin $ 172,342 $ 12,134 184,476 General and administrative 101,335 Depreciation and amortization 93,078 Loss from operations ( 9,937 ) Interest expense - net 41,497 Loss on extinguishment of debt 2,414 Net loss $ ( 53,848 ) Substantially all of our sales occur and assets reside in the United States. 17. Equity For periods prior to the Merger Transaction, Hoya Intermediate had Senior Preferred Units, Preferred Units, and Common Units, described below, authorized, issued and outstanding. As described in Note 1, Background, Description of Business and Basis of Presentation , on October 18, 2021, we consummated a series of merger transactions between Horizon, Vivid Seats Inc., and Hoya Intermediate. Subsequent to the Merger Transaction, we have two classes of common stock authorized and issued by Vivid Seats Inc.: Class A common stock and Class B common stock. Hoya Intermediate Senior Preferred Units, Preferred Units, and Common Units Prior to the Merger Transaction, Hoya Intermediate had authorized and issued 100 units of Redeemable Senior Preferred Units, 100 units of Redeemable Preferred Units and 100 common units. The Senior Preferred Units held first and second priority liquidation preference: first for an amount equal to the sum of the amount of the aggregate unpaid yield and aggregate unreturned capital, and second for payment of any reasonable out-of-pocket expenses associated with certain agreements. The Preferred Units had a liquidation preference subsequent to the Senior Preferred Units, but before the Common Units, for an amount equal to the aggregate unreturned capital. Senior Preferred Units compounded semi-annually at a per annum yield rate of 12.5 %. Unit holders were entitled to distributions when declared by our former parent, Hoya Topco, LLC. As of December 31, 2020, no distributions toward unpaid yield or unreturned capital were made. As of December 31, 2020 and up to the Merger Transaction, the Senior Preferred Units and Preferred Units were deemed to be currently redeemable and were measured at the maximum redemption amount, with the offset recorded to Additional paid-in capital on the Consolidated Balance Sheets. Therefore, the Senior Preferred Units were accreted to an amount equal to their liquidation preference plus the applicable premium, and the Preferred Units were carried at an amount equal to their unreturned capital. In connection with the Merger Transaction, the Senior Preferred Units and the Preferred Units were redeemed and no longer remain outstanding. As of December 31, 2021, 197,291,871 Comm on Units of Hoya Intermediate are outstanding. Vivid Seats Inc. holds 40.1 % of the outstanding Common Units in Hoya intermediate as of December 31, 2021, with the remainder held by Hoya Topco. 88 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Vivid Seats Inc. Class A Common Stock In connection with the Merger Transaction, Vi vid Seats Inc. issued 29,431,260 shares of Class A common stock. We issued an additional 2,143,438 shares of Class A common stock as part of the acquisition of Betcha. Holders of Class A common stock are entitled to full economic rights, including the right to receive dividends when and if declared by our Board, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock. Each holder of Class A common stock is entitled to one vote for each share of Class A common stock held. Vivid Seats Inc. Class B Common Stock In connection with the Merger Transaction, Vivid Seats Inc. issued 118,200,000 shares of Class B common stock. Holders of Class B common stock do not have econ omic rights but are entitled to one vote for each share of Class B common stock held. Holders of Class A common stock and Class B common stock vote as a single class on all matters requiring a shareholder vote. Following the Merger Transaction, the quantity of Vivid Seats Inc. Class A common stock and Class B common stock is equal to the quantity of Hoya Intermediate common units outstanding. Warrants In connection with the Merger Transaction, we issued Public Warrants, Private Warrants, and Exercise Warrants (collectively, the “Class A Warrants”), which are recorded as a component of equity. 18. Warrants Class A Warrants —We issued the following Class A Warrants in connection with the Merger Transaction: Public Warrants —We issued Public Warrants to purchase 18,132,776 shares of Class A common stock at an exercise price of $ 11.50 per share to former warrant holders of Horizon, of which 5,166,666 shares were issued to Horizon Sponsor, LLC. We may, in our sole discretion, reduce the exercise price of the Public Warrants to induce early exercise, provided that we provide at least five days advance notice. The exercise price and number of Class A common stock shares issuable upon exercise of the warrants may also be adjusted in certain circumstances including in the event of a share dividend, recapitalization, reorganization, merger or consolidation. In no event are we required to net cash settle the Public Warrants. The Public Warrants became exercisable 30 days following the Merger transaction and expire at the earliest of five years following the Merger Transaction, liquidation of the Company, or the date of redemption elected at our option provided that the value of common stock exceeds $ 18.00 per share. There is an effective registration statement and prospectus relating to the shares issuable upon exercise of the warrants. Under certain circumstances, we may elect to redeem the Public Warrants at a redemption price of $ 0.01 per Public Warrant at any time during the term of the warrant in which our Class A common stock share trading price has been at least $ 18.00 per share for 20 trading days within the 30 trading-day period. If we elect to redeem the warrants, it must notify the Public Warrant holders in advance, who would then have at least 30 days from the date of notification to exercise their respective warrants. If the warrant is not exercised within that 30-day period, it will be redeemed pursuant to this provision. As of December 31, 2021, we had 18,132,776 outstanding public warrants to purchase 18,132,776 shares of our Class A common stock. As part of the Merger Transaction, we modified the terms of the Public Warrants. The modification resulted in a transfer of incremental value of $ 1.3 million to the holders of the Public Warrants, which we recorded as Other expenses in the Consolidated Statements of Operations. 89 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Private Warrants —We issued Private Warrants to purchase 6,519,791 shares of our Class A common stock at an exercise price of $ 11.50 per share to former warrant holders of Horizon. The Private Warrants have similar terms to the Public Warrants, except that the Private Warrants are not redeemable by us. As of December 31, 2021, we had 6,519,791 outstanding private warrants to purchase 6,519,791 shares of our Class A common stock. As part of the Merger Transaction, we modified the terms of the Private Warrants. The modification did not result in a transfer of incremental value to the warrant holders. Exercise Warrants —We issued warrants to purchase 17,000,000 shares of Class A common stock at an exercise price of $ 10.00 per share and warrants to purchase 17,000,000 of Class A common stock at an exercise of $ 15.00 per share. The Exercise Warrants have similar terms to the Public Warrants, except that the Exercise Warrants have different exercise prices, an initial term of 10 years , are not redeemable by us, and are fully transferable. As of December 31, 2021, we had 34,000,000 outstanding Exercise Warrants to purchase 34,000,000 shares of our Class A common stock. As the Class A Warrants are indexed to our equity and meet the equity classification guidance of ASC 815-40, we reflect these warrants as a component of equity within additional paid-in capital. Upon the valid exercise of a Class A Warrant for Class A common shares of Vivid Seats Inc., Hoya Intermediate will issue to Vivid Seats Inc. an equivalent number of Intermediate Common Units. Hoya Intermediate Warrants —Hoya Intermediate issued Hoya Intermediate Warrants to Hoya Topco, which consist of warrants to purchase 3,000,000 Hoya Intermediate common units at an exercise price of $ 10.00 per unit and warrants to purchase 3,000,000 Hoya Intermediate common units at an exercise price of $ 15.00 per unit. A portion of the Hoya Intermediate Warrants, which consists of warrants to purchase 1,000,000 Hoya Intermediate common units at exercise prices of $ 10.00 and $ 15.00 per unit, respectively, were issued in tandem with stock options issued by Vivid Seats, Inc. to members of our management team. The Option Contingent Warrants only become available to exercise by Hoya Topco in the event that a corresponding management option is forfeited. As of December 31, 2021, none of the Option Contingent Warrants are available to exercise by Hoya Topco. Our Hoya Intermediate Warrants are exercisable for Hoya Intermediate common units, which allow for a potential cash redemption at the discretion of the unit holder. Hence, the Hoya Intermediate Warrants are classified as a liability in Other liabilities on our Consolidated Balance Sheets. Upon consummation of the Merger Transaction, we recorded a warrant liability of $ 20.4 million, reflecting the fair value of the Hoya Intermediate Warrants determined using the Black Scholes model. The fair value of the Hoya Intermediate Warrants includes Option Contingent Warrants of $ 1.6 million. The estimated fair value of the Option Contingent Warrants is adjusted to reflects the probability of forfeiture of the corresponding stock options based on historical forfeiture rates for Hoya Topco profits interests. The following assumptions were used to calculate the fair value of the Hoya Intermediate and Option Contingent Warrants at December 31, 2021 and upon consummation of the Merger Transaction: 12/31/2021 10/18/2021 Estimated volatility 36.0 % 28.0 % Expected term (years) 9.8 10.0 Risk-free rate 1.5 % 1.6 % Expected dividend yield 0.0 % 0.0 % For the period from October 18, 2021 until December 31, 2021, we recognized a charge to Other expenses on the Consolidated Statements of Operations resulting from an increase in the fair value of the warrant s of $ 0.1 million. Upon the valid exercise of a Hoya Intermediate Warrant for Common Units in Hoya Intermediate, Vivid Seats Inc. will issue an equivalent amount of Vivid Seats Inc. Class B common shares to Hoya Topco. 90 VIVID SEATS INC. NOTES to the Consolidated Financial Statements 19. Redeemable noncontrolling Interests As of December 31, 2021, Hoya Topc o owns 59.9 % of the Common Units of Hoya Intermediate and 40.1 % of the voting power. Hoya Topco has the right to exchange its common units in Hoya Intermediate for shares of Vivid Seats Class A common stock on a one-to-one basis or cash proceeds for an equivalent amount. The option to redeem Hoya Intermediate common units for cash proceeds must be approved by the Board of Vivid Seats Inc., which as of December 31, 2021, is controlled by investors in Hoya Topco. The ability to put common units is solely within the control of the holder of the redeemable noncontrolling interests. If Hoya Topco elects the redemption to be settled in cash, the cash used to settle the redemption must be funded through a private or public offering of Class A Common Stock and subject to our Board's approval. The financial results of Hoya Intermediate and its subsidiaries are consolidated with Vivid Seats Inc., with the redeemable noncontrolling interests' share of our net loss separately allocated. 20. Equity-Based Compensation The 2021 Incentive Award Plan ("2021 Plan") was approved and adopted in order to facilitate the grant of equity incentive awards to our employees and directors. The 2021 Plan became effective on October 18, 2021 upon closing of the Merger Transaction. RSUs On October 19, 2021, we granted 1,408,773 RSUs to directors and certain employees. RSUs granted to directors vest on an annual basis over a five-year period, subject to the directors' continued service on the Board. RSUs granted to employees vest on a quarterly basis over a four-year period, subject to the employee’s continued employment through the applicable vesting date. We account for forfeitures of outstanding, but unvested grants, in the period they occur. A summary of activity for RSUs for the year ended December 31, 2021 is as follows (in thousands): Shares Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2020 — $ — Granted 1,408,773 12.86 Forfeited ( 30,662 ) 12.86 Vested — — Unvested at December 31, 2021 1,378,111 $ 12.86 Unrecognized compensation expense relating to unvested RSUs as of December 31, 2021, wa s $ 16.9 million, which is expected to be recognized over a weighted average period of approximately four years . Stock options On October 19, 2021, we granted 3,061,486 stock options at an exercise price of $ 13.09 and 1,000,000 stock options at an exercise price of $ 15.00 to certain employees. Stock options provide for the purchase of shares of Vivid Seats Class A common stock in the future at an exercise price set on the grant date. These stock options vest on a quarterly basis over a four-year period and expire ten years from the date of the grant, subject to the employee’s continued employment through the applicable vesting date. Unrecognized compensation expense relating to unvested stock options as of December 31, 2021, was $ 14.5 million, w hich is expected to be recognized over a weighted average period of approximately four years . No stock options were exercised or forfeited during the year ended December 31, 2021. 91 VIVID SEATS INC. NOTES to the Consolidated Financial Statements The fair value of stock options granted is estimated on the grant date using the Hull-White model. This valuation model requires us to make assumptions and judgments about the variables used in the calculation, including the sub-optimal exercise factor (“SOEF”), the volatility of our common stock, risk-free interest rate, and expected dividends. We use the Hull-White model under the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, as the options were effectively out of the money on the date of grant as we had announced, but not issued, a one-time dividend. Changes in assumptions made on the risk-free rate of interest, and expected volatility can materially impact the estimate of fair value and ultimately how much share-based compensation expense is recognized. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and corresponds to the full term of the options. The expected volatility is estimated on the date of grant based on the statistics of historical stock return volatility of comparable publicly-traded companies as well as the implied volatility of our publicly traded warrants. The following assumptions were used to calculate the fair value of our stock awards on the date of grant for the year ended December 31, 2021: 2021 Estimated volatility 28.0 % Expected term (years) 10.0 Risk-free rate 1.7 % Expected dividend yield 0.0 % Profits interest and Phantom Units Prior to the Merger Transaction, certain members of management received equity-based compensation awards for profits interest in Hoya Topco, LLC in the form of Incentive Units, Phantom Units, Class D Units, and Class E Units. Each incentive unit vests ratably over five years and accelerates upon a change in control of Hoya Topco, LLC. We do not expect any future profits interest to be granted after the Merger Transaction. The fair value of the incentive units granted is estimated using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires certain subjective inputs and assumptions, including the fair value Hoya Topco's equity, the expected term, risk-free interest rates, and expected equity volatility. The fair value of incentive units is recognized as equity-based compensation expense on a straight-line basis over the requisite service period. We account for forfeitures as they occur. Changes in assumptions made on expected term, the risk-free rate of interest, and expected volatility can materially impact the estimate of fair value and ultimately how much share-based compensation expense is recognized. The expected term is estimated based on the timing and probabilities until a major liquidity event. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and corresponds to the expected term. The expected volatility is estimated on the date of grant based on the average historical stock price volatility of comparable publicly-traded companies. 92 VIVID SEATS INC. NOTES to the Consolidated Financial Statements The following table summarizes the Hoya Topco, LLC Incentive Units, Class D Units, and Class E Units for the years ended December 31, 2021, 2020, and 2019: Class B-1 Units Class D Units Class E Units Number of Incentive Units Weighted Average Grant Date Fair Value Number of Incentive Units Weighted Average Grant Date Fair Value Number of Incentive Units Weighted Average Grant Date Fair Value Balances at January 1, 2019 — $ — 666,150 $ 15.65 500,765 $ 25.46 Units Granted — — 218,000 15.50 — — Units Repurchased — — ( 6,000 ) 15.28 — — Units Forfeited — — ( 45,640 ) 15.42 — — Balances at December 31, 2019 — — 832,510 $ 15.63 500,765 $ 25.46 Units granted 905,000 2.32 1,755,000 0.89 — — Units repurchased — — ( 97,604 ) 15.95 — — Units forfeited ( 50,000 ) 2.32 ( 441,666 ) 7.81 — — Balances at December 31, 2020 855,000 $ 2.32 2,048,240 $ 4.67 500,765 $ 25.46 Units granted — — — — — — Units repurchased — — — — — — Units forfeited ( 10,000 ) 2.32 ( 60,400 ) 7.01 — — Balances at December 31, 2021 845,000 $ 2.32 1,987,840 $ 4.60 500,765 $ 25.46 Unrecognized compensation expense as of December 31, 2021 related to these incentive units was $ 9.1 million, which is expected to be recognized over a weighted average period of approximately three years . The following assumptions were used to calculate the fair value of our unit awards on the date of grant for the years ended December 31, 2020 and 2019: 2020 2019 Estimated volatility 47.0 % - 102.0 % 44.0 % - 47.0 % Expected term (years) 1.8 - 2.8 2.8 - 3.3 Risk-free rate 0.1 % - 1.6 % 1.6 % - 2.2 % Expected dividend yield 0.0 % 0.0 % Compensation expense For the years ended December 31, 2021, 2020 and 2019, equity-based compensation expense related to RSUs, stock options and profits interest was $ 6.0 million, $ 4.3 million and $ 5.2 million, respectively. Our Board declared a special dividend of $ 0.23 per share to holders of Class A Common Stock on October 18, 2021, which we paid on November 2, 2021 . On November 2, 2021, the exercise price was modified and reduced by the same $ 0.23 per share. The amount recognized in the compensation expense relating to stock option modifications for the year ended December 31, 2021 is immaterial. 21. Loss Per Share We calculate basic and diluted net loss per share of Class A common stock in accordance with ASC 260, Earnings per Share. Class B common stock does not have economic rights in the Company and as a result, is not considered a participating security for basic and diluted loss per share. As such, basic and diluted loss per share of Class B common stock has not been presented. Net loss per Class A common stock–basic is calculated by dividing net income attributable to Class A Common Stockholders by the weighted-average shares of Class A common stock outstanding. 93 VIVID SEATS INC. NOTES to the Consolidated Financial Statements Net loss per Class A common stock–diluted is based on the average number of shares of Class A common stock used for the basic earnings per share calculation, adjusted for the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method and if-converted method, as applicable. Net loss attributable to Class A Common Stockholders–diluted is adjusted for our share of Hoya Intermediate’s consolidated net loss after giving effect to Common Units of Hoya Intermediate that convert into potential shares of Class A common stock, to the extent it is dilutive. In addition, Net loss attributable to Class A Common Stockholders–diluted is adjusted for the impact of changes in the fair value of Hoya Intermediate Warrants, to the extent they are dilutive. We analyzed the calculation of loss per share for periods prior to the Merger Transaction and determined that it resulted in values that would not be meaningful to the users of the consolidated financial statements. Therefore, loss per share information has not been presented for periods prior to the Merger Transaction. The following table sets forth the computation of basic and diluted net loss per share of Class A common stock and represents the period from October 18, 2021 to December 31, 2021, the period where the Company had Class A and Class B common stock outstanding (in thousands, except share and per share data): October 18, 2021 through December 31, 2021 Numerator—basic: Net loss $ ( 6,293 ) Less: Loss attributable to redeemable noncontrolling interests 3,010 Net loss attributable to Class A Common Stockholders—basic ( 3,283 ) Denominator—basic: Weighted average Class A common stock outstanding—basic 77,498,775 Net loss per Class A common stock—basic $ ( 0.04 ) Numerator—diluted: Net loss attributable to Class A Common Stockholders—basic $ ( 3,283 ) Net loss effect of dilutive securities: Effect of dilutive Hoya Intermediate Warrants ( 123 ) Net loss attributable to Class A Common Stockholders—diluted ( 3,406 ) Denominator—diluted: Weighted average Class A common stock outstanding—basic 77,498,775 Weighted average effect of dilutive securities: Effect of dilutive Hoya Intermediate Warrants — Weighted average Class A common stock outstanding—diluted 77,498,775 Net loss per Class A common stock—diluted $ ( 0.04 ) Potential shares of common stock are excluded from the computation of diluted net loss per share if their effect would have been anti-dilutive for the period presented or if the issuance of shares is contingent upon events that did not occur by the end of the period. 94 VIVID SEATS INC. NOTES to the Consolidated Financial Statements The following table presents potentially dilutive securities excluded from the computation of diluted net loss per share for the period presented: For the Year Ended December 31, 2021 RSUs 1,378,111 Stock options 4,061,486 Class A Warrants 24,652,569 Exercise Warrants 34,000,000 Hoya Intermediate Warrants 4,000,000 Shares of Class B common stock 118,200,000 22. Related-Party Transactions In December 2020, Vivid Cheers Inc. (“Vivid Cheers”) was incorporated as a non-profit organization within the meaning of Section 501(c)(3) of the Internal Revenue Code. Vivid Cheers’ mission is to support causes and organizations dedicated to healthcare, education, and support of workers in the live events industry during times of need. We have the right to elect the Board of Directors of Vivid Cheers, which currently comprises our executives. We do not have a controlling financial interest in Vivid Cheers, and accordingly, do not consolidate Vivid Cheers’ statement of activities with its financial results. We made charitable contributions of $ 2.4 million and $ 0.5 million for the years ended December 31, 2021 and 2020, respectively to Vivid Cheers. We had accrued charitable contributions payable of $ 1.3 million and $ 0.5 million as of December 31, 2021 and 2020, respectively, and is included in Accrued expenses and other current liabilities in the Consolidated Balance Sheet. 23. Subsequent events On February 3, 2022, we repaid $ 190.7 million of outstanding June 2017 First Lien Loan. We entered into an amendment which refinances the remaining existing term loan with a new $ 275.0 million term loan with a maturity date of February 3, 2029, adds a new revolving credit facility in an aggregate principal amount of $ 100.0 million with a maturity date of February 3, 2027 , replaces the LIBOR based floating interest rate with a term SOFR based floating interest rate and revises the springing financial covenant to require compliance with a first lien net leverage ratio. 95 Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclos ure None.