MARKETWISE, INC.
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | | | 2022 | | 2021 | | 2022 | | 2021 |
Net revenue | | | | | | | $ | 119,297 | | | $ | 140,422 | | | $ | 383,383 | | | $ | 401,647 | |
Related party revenue | | | | | | | 637 | | | 245 | | | 1,363 | | | 864 | |
Total net revenue | | | | | | | 119,934 | | | 140,667 | | | 384,746 | | | 402,511 | |
Operating expenses: | | | | | | | | | | | | | |
Cost of revenue (1) (2) | | | | | | | 14,482 | | | 62,024 | | | 48,328 | | | 221,662 | |
Sales and marketing (1) (2) | | | | | | | 51,635 | | | 82,558 | | | 184,922 | | | 231,269 | |
General and administrative (1) (2) | | | | | | | 28,986 | | | 356,286 | | | 79,895 | | | 928,376 | |
Research and development (2) | | | | | | | 2,173 | | | 2,137 | | | 6,740 | | | 5,842 | |
Depreciation and amortization | | | | | | | 836 | | | 629 | | | 2,053 | | | 2,076 | |
Related party expense | | | | | | | 96 | | | 10,097 | | | 290 | | | 10,144 | |
Total operating expenses | | | | | | | 98,208 | | | 513,731 | | | 322,228 | | | 1,399,369 | |
Income (loss) from operations | | | | | | | 21,726 | | | (373,064) | | | 62,518 | | | (996,858) | |
Other (expense) income, net | | | | | | | (3,651) | | | 9,859 | | | 15,568 | | | 10,162 | |
Interest (expense) income, net | | | | | | | (183) | | | 5 | | | (572) | | | 17 | |
Income (loss) before income taxes | | | | | | | 17,892 | | | (363,200) | | | 77,514 | | | (986,679) | |
Income tax expense | | | | | | | 1,383 | | | 3,085 | | | 3,945 | | | 3,085 | |
| | | | | | | | | | | | | |
Net income (loss) | | | | | | | 16,509 | | | (366,285) | | | 73,569 | | | (989,764) | |
Net income attributable to noncontrolling interests | | | | | | | 20,521 | | | 33,248 | | | 59,875 | | | 32,117 | |
Net (loss) income attributable to MarketWise, Inc. | | | | | | | $ | (4,012) | | | $ | (399,533) | | | $ | 13,694 | | | $ | (1,021,881) | |
| | | | | | | | | | | | | |
Earnings per share: |
| | | | | | | | | | | | | |
| | | | | | | | | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 | | Period from July 22, 2021 through September 30, 2021 |
Net income per Class A common share - basic and diluted | | $ | (0.17) | | $ | 0.59 | | | $ | 0.39 | |
| | | | | | | | | | | | | |
Weighted average shares outstanding, basic (in thousands) | | 23,533 | | 23,233 | | | 24,963 | |
| | | | | | | | | | | | | |
Weighted average shares outstanding, diluted (in thousands) | | 23,566 | | 23,267 | | | 24,963 | |
| | | | | | | | | | | | | |
As a result of the Transactions, the capital structure has changed and earnings per share information is only presented for the period after the date of the Transactions. See Note 11 – Earnings Per Share. |
| | | | | | | | | | | | | |
(1) Included within cost of revenue, sales and marketing, and general and administrative expenses are stock-based compensation expenses as follows (see Note 10 – Stock-Based Compensation): |
| | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | | | 2022 | | 2021 | | 2022 | | 2021 |
Cost of revenue | | | | | | | 438 | | | 46,396 | | | 1,496 | | | 171,312 | |
Sales and marketing | | | | | | | 514 | | | 32,606 | | | 1,655 | | | 47,516 | |
General and administrative | | | | | | | 1,201 | | | 333,563 | | | 4,039 | | | 842,257 | |
Total stock based-compensation expense | | | | | | | 2,153 | | | 412,565 | | | 7,190 | | | 1,061,085 | |
| | | | | | | | | | | | | |
(2) Cost of revenue, sales and marketing, general and administrative, and research and development expenses are exclusive of depreciation and amortization shown as a separate line item |
MARKETWISE, INC.
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
The accompanying notes are an integral part of these condensed consolidated financial statements.
MARKETWISE, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | | | | | | $ | 16,509 | | | $ | (366,285) | | | $ | 73,569 | | | $ | (989,764) | |
Other comprehensive income (loss): | | | | | | | | | | | | |
Cumulative translation adjustment | | | | | | 6 | | | (40) | | | (100) | | | (141) | |
Total comprehensive income (loss) | | | | | | $ | 16,515 | | | $ | (366,325) | | | $ | 73,469 | | | $ | (989,905) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MARKETWISE, INC.
Condensed Consolidated Statement of Stockholders’ Deficit / Members’ Deficit (Unaudited)
(In thousands, except share, unit, per share, and per unit data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Members’ units | | Common Stock - Class A | | Common Stock - Class B | | Preferred Stock | | Additional paid-in capital | | Accumulated deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Deficit / Members’ Deficit Attributable to MarketWise, Inc. | | Noncontrolling Interest | | Total Stockholders’ Deficit / Members’ Deficit |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | |
Balance at January 1, 2021 | 547,466 | | | $ | (914,728) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (17) | | | $ | (914,745) | | | $ | (5,865) | | | $ | (920,610) | |
Class A units transferred to Class B | (18,947) | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Acquisition of Chaikin | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 810 | | | 810 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (101) | | | (101) | | | — | | | (101) | |
Distributions | — | | | (15,098) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (15,098) | | | (831) | | | (15,929) | |
Net loss | — | | | (622,348) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (622,348) | | | (1,131) | | | (623,479) | |
Balance at June 30, 2021 | 528,519 | | | (1,552,174) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (118) | | | (1,552,292) | | | (7,017) | | | (1,559,309) | |
Activity prior to the Transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distributions related to the recapitalization | — | | | (120,353) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (120,353) | | | — | | | (120,353) | |
Net loss, January 1, 2021 through July 21, 2021 | — | | | (409,213) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (409,213) | | | 81 | | | (409,132) | |
Effects of the Transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net proceeds | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 113,291 | | | — | | | — | | | 113,291 | | | — | | | 113,291 | |
Reclassification of Class B Units from liability to equity on July 21, 2021 (date of the Transactions) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,528,228 | | | — | | | — | | | 1,528,228 | | | — | | | 1,528,228 | |
Reverse capitalization on July 21, 2021 | (528,519) | | | 2,081,740 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (164,367) | | | — | | | 1,917,373 | | | (1,917,373) | | | — | |
Issuance of common stock - Class A and Class B | — | | | — | | | 24,952,096 | | | 2 | | | 291,092,303 | | | 29 | | | — | | | — | | | (31) | | | — | | | — | | | — | | | — | | | — | |
Establishment of warrant liabilities | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (45,021) | | | — | | | — | | | (45,021) | | | — | | | (45,021) | |
Establishment of deferred taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 10,056 | | | — | | | — | | | 10,056 | | | — | | | 10,056 | |
Establishment of noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,511,911) | | | — | | | 109 | | | (1,511,802) | | | 1,511,802 | | | — | |
Activity subsequent to the Transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity-based compensation | — | | | — | | | 200,373 | | | — | | | — | | | — | | | — | | | — | | | 1,732 | | | — | | | — | | | 1,732 | | | — | | | 1,732 | |
MARKETWISE, INC.
Condensed Consolidated Statement of Stockholders’ Deficit / Members’ Deficit (Unaudited)
(In thousands, except share, unit, per share, and per unit data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,226) | | | (4,226) | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (40) | | | (40) | | | — | | | (40) | |
Net income, July 22, 2021 through September 30, 2021 (see note below) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,680 | | | — | | | 9,680 | | | 33,167 | | | 42,847 | |
Balance at September 30, 2021 | — | | | $ | — | | | 25,152,469 | | | $ | 2 | | | 291,092,303 | | | $ | 29 | | | — | | | $ | — | | | $ | 96,344 | | | $ | (154,687) | | | $ | (49) | | | $ | (58,361) | | | $ | (383,566) | | | $ | (441,927) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock - Class A | | Common Stock - Class B | | Preferred Stock | | Additional paid-in capital | | Accumulated deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Deficit Attributable to MarketWise, Inc. | | Noncontrolling Interest | | Total Stockholders’ Deficit |
| | | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | |
Balance at July 1, 2022 | | | | | 22,505,103 | | | $ | 2 | | | 291,092,303 | | | $ | 29 | | | — | | | $ | — | | | $ | 90,048 | | | $ | (128,409) | | | $ | (115) | | | $ | (38,445) | | | $ | (321,162) | | | $ | (359,607) | |
Equity-based compensation | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,153 | | | — | | | — | | | 2,153 | | | — | | | 2,153 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock - warrant exchanges | | | | | 5,939,739 | | | 1 | | | — | | | — | | | — | | | — | | | 14,400 | | | — | | | — | | | 14,401 | | | — | | | 14,401 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Vesting of restricted stock units | | | | | 377,660 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Restricted stock units withheld to pay taxes | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (511) | | | — | | | — | | | (511) | | | — | | | (511) | |
Acquisition of noncontrolling interest - Chaikin | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,257) | | | — | | | — | | | (1,257) | | | 960 | | | (297) | |
Distributions | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (677) | | | (677) | |
Foreign currency translation adjustments | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 6 | | | — | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (see note below) | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,012) | | | — | | | (4,012) | | | 20,521 | | | 16,509 | |
Balance at September 30, 2022 | | | | | 28,822,502 | | | $ | 3 | | | 291,092,303 | | | $ | 29 | | | — | | | $ | — | | | $ | 104,833 | | | $ | (132,421) | | | $ | (109) | | | $ | (27,665) | | | $ | (300,358) | | | $ | (328,023) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
MARKETWISE, INC.
Condensed Consolidated Statement of Stockholders’ Deficit / Members’ Deficit (Unaudited)
(In thousands, except share, unit, per share, and per unit data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock - Class A | | Common Stock - Class B | | Preferred Stock | | Additional paid-in capital | | Accumulated deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Deficit Attributable to MarketWise, Inc. | | Noncontrolling Interest | | Total Stockholders’ Deficit |
| | | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | |
Balance at January 1, 2022 | | | | | 24,718,402 | | | $ | 2 | | | 291,092,303 | | | $ | 29 | | | — | | | $ | — | | | $ | 97,548 | | | $ | (146,115) | | | $ | (9) | | | $ | (48,545) | | | $ | (356,717) | | | $ | (405,262) | |
Equity-based compensation | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,190 | | | — | | | — | | | 7,190 | | | — | | | 7,190 | |
Proceeds from issuance of common stock | | | | | 161,178 | | | — | | | — | | | — | | | — | | | — | | | 517 | | | — | | | — | | | 517 | | | — | | | 517 | |
Issuance of common stock - warrant exchanges | | | | | 5,939,739 | | | 1 | | | — | | | — | | | — | | | — | | | 14,400 | | | — | | | — | | | 14,401 | | | — | | | 14,401 | |
Repurchases of stock | | | | | (2,484,717) | | | — | | | — | | | — | | | — | | | — | | | (13,054) | | | — | | | — | | | (13,054) | | | — | | | (13,054) | |
Vesting of restricted stock units | | | | | 487,900 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Restricted stock units withheld to pay taxes | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (511) | | | — | | | — | | | (511) | | | — | | | (511) | |
Acquisition of noncontrolling interest - Chaikin | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,257) | | | — | | | — | | | (1,257) | | | 960 | | | (297) | |
Distributions | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,476) | | | (4,476) | |
Foreign currency translation adjustments | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (100) | | | (100) | | | — | | | (100) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (see note below) | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 13,694 | | | — | | | 13,694 | | | 59,875 | | | 73,569 | |
Balance at September 30, 2022 | | | | | 28,822,502 | | | $ | 3 | | | 291,092,303 | | | $ | 29 | | | — | | | $ | — | | | $ | 104,833 | | | $ | (132,421) | | | $ | (109) | | | $ | (27,665) | | | $ | (300,358) | | | $ | (328,023) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
MARKETWISE, INC.
Condensed Consolidated Statement of Stockholders’ Deficit / Members’ Deficit (Unaudited)
(In thousands, except share, unit, per share, and per unit data)
| | | | | | | | | | | | | | | | | |
Note: The Transactions occurred on July 21, 2021. As a result, net loss for the three and nine months ended September 30, 2021 was attributed to the pre-Transactions period from January 1, 2021 through July 1, 2021 and from July 1, 2021 through July 21, 2021, and to the post-Transactions period from July 22, 2021 through September 30, 2021. Net income for the three and nine months ended September 30, 2022 was attributed to the post-Transactions period. During the pre-Transactions period, net loss was attributable to consolidated MarketWise, LLC and its respective noncontrolling interests. During the post-Transactions period, net income was attributable to consolidated MarketWise, Inc. and its respective noncontrolling interests. As of September 30, 2022, MarketWise, Inc.’s controlling interest in MarketWise, LLC was 9.0% and the noncontrolling interest was 91.0%. For the three months ended September 30, 2022, net income attributable to controlling interests included a $3.9 million loss on warrant liabilities and a $1.4 million tax provision, both of which are 100% attributable to the controlling interest. For the nine months ended September 30, 2022, net income attributable to controlling interests included a $14.9 million gain on warrant liabilities and a $3.9 million tax provision, both of which are 100% attributable to the controlling interest. |
| Controlling interests | | Noncontrolling interests | | Total |
Net income (loss) of MarketWise, LLC attributed to the pre-Transactions period from July 1, 2021 through July 21, 2021 | $ | (409,213) | | | $ | 81 | | | $ | (409,132) | |
Net income of MarketWise, Inc. attributed to the post-Transactions period from July 22, 2021 through September 30, 2021 | 9,680 | | | 33,167 | | | 42,847 | |
Net income (loss) for the three months ended September 30, 2021 | $ | (399,533) | | | $ | 33,248 | | | $ | (366,285) | |
| | | | | |
Net income of MarketWise, Inc. attributed to the post-Transaction period from July 1, 2022 through September 30, 2022 | $ | (4,012) | | | $ | 20,521 | | | $ | 16,509 | |
| | | | | |
Net income (loss) of MarketWise, LLC attributed to the pre-Transactions period from January 1, 2021 through July 21, 2021 | $ | (1,031,561) | | | $ | (1,050) | | | $ | (1,032,611) | |
Net income of MarketWise, Inc. attributed to the post-Transactions period from July 22, 2021 through September 30, 2021 | 9,680 | | | 33,167 | | | 42,847 | |
Net income (loss) for the nine months ended September 30, 2021 | $ | (1,021,881) | | | $ | 32,117 | | | $ | (989,764) | |
| | | | | |
Net income of MarketWise, Inc. attributed to the post-Transaction period from January 1, 2022 through September 30, 2022 | $ | 13,694 | | | $ | 59,875 | | | $ | 73,569 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MARKETWISE, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 73,569 | | | $ | (989,764) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 2,053 | | | 2,076 | |
| | | |
Impairment of right-of-use assets | 287 | | | — | |
Stock-based compensation | 7,190 | | | 208,646 | |
Change in fair value of derivative liabilities – Class B Units | — | | | 728,079 | |
Change in fair value of warrant liabilities and other derivative liabilities | (15,626) | | | (11,543) | |
Deferred taxes | 3,649 | | | 3,085 | |
Unrealized gains on foreign currency | (91) | | | (62) | |
Noncash lease expense | 1,616 | | | 1,375 | |
Gain on sale of cryptocurrencies | — | | | (105) | |
| | | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 3,241 | | | 5,581 | |
Related party receivables and payables, net | (1,140) | | | (906) | |
Prepaid expenses | 2,371 | | | (4,396) | |
Other current assets and other assets | (774) | | | 26 | |
Cryptocurrency intangible assets | — | | | 109 | |
Deferred contract acquisition costs | 486 | | | (82,050) | |
Trade and other payables | (1,516) | | | (7,667) | |
Accrued expenses | (7,151) | | | 31,005 | |
Deferred revenue | (24,759) | | | 170,239 | |
| | | |
| | | |
Operating lease liabilities | (1,486) | | | (859) | |
Other current and long-term liabilities | (4,156) | | | 5,751 | |
Net cash provided by operating activities | 37,763 | | | 58,620 | |
Cash flows from investing activities: | | | |
Cash paid for acquisitions, net of cash acquired | (12,770) | | | (7,139) | |
| | | |
Acquisition of noncontrolling interests, including transaction costs | (297) | | | — | |
Purchases of property and equipment | (35) | | | (73) | |
Purchases of intangible assets | — | | | (890) | |
Capitalized software development costs | (136) | | | (100) | |
Net cash used in investing activities | (13,238) | | | (8,202) | |
Cash flows from financing activities: | | | |
| | | |
Net proceeds from the Transactions | — | | | 113,291 | |
| | | |
Issuance of related party notes receivable | — | | | (8) | |
Proceeds from related party notes receivable, net | 737 | | | — | |
Proceeds from issuance of common stock | 517 | | | — | |
Repurchases of stock | (13,054) | | | — | |
Restricted stock units withheld to pay taxes | (511) | | | — | |
Distributions to members | — | | | (135,451) | |
Distributions to noncontrolling interests | (4,476) | | | (5,057) | |
Net cash used in financing activities | (16,787) | | | (27,225) | |
Effect of exchange rate changes on cash | (100) | | | (32) | |
Net increase in cash, cash equivalents and restricted cash | 7,638 | | | 23,161 | |
Cash, cash equivalents and restricted cash — beginning of period | 139,578 | | | 114,927 | |
Cash, cash equivalents and restricted cash — end of period | $ | 147,216 | | | $ | 138,088 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
1. Organization
Description of Business and Basis of Presentation
MarketWise, Inc. (“MarketWise,” “the Company,” “we,” “us,” or “our”) is a holding company that has no material assets other than its ownership in MarketWise, LLC (formerly Beacon Street Group, LLC), and operates and controls all of the businesses and operations of MarketWise, LLC and its subsidiaries. The Company provides independent investment research for investors around the world. We believe we are a leading content and technology multi-brand platform for self-directed investors. We offer a comprehensive portfolio of high-quality, independent investment research, as well as several software and analytical tools, on a subscription basis.
While our headquarters are in Baltimore, Maryland, we operate multiple subsidiaries in the United States.
Reverse Recapitalization with Ascendant Digital Acquisition Corp.
On July 21, 2021, as contemplated by the Business Combination Agreement, dated as of March 1, 2021, by and among Ascendant Digital Acquisition Corp. (“ADAC”), MarketWise, LLC, all of the members of MarketWise, LLC (the “MarketWise Members”), and Shareholder Representative Services LLC, (as amended, the “Transaction Agreement”), ADAC was domesticated and continues as a Delaware corporation, changing its name to “MarketWise, Inc.”
As a result of, and upon the effective time thereof, among other things, (1) each of the then issued and outstanding Class A ordinary shares, par value $0.0001 per share, of ADAC (the “ADAC Class A ordinary shares”) automatically converted, on a one-for-one basis, into a share of Class A common stock, par value $0.0001 per share, of MarketWise, Inc. (the “Class A common stock”); (2) each of the then issued and outstanding redeemable warrants of ADAC automatically converted into a redeemable warrant to acquire one share of Class A common stock (the “warrants”); and (3) each of the then issued and outstanding units of ADAC that had not been previously separated into the underlying ADAC Class A ordinary shares and underlying warrants upon the request of the holder thereof were cancelled and entitled the holder thereof to one share of Class A common stock and one-half of one warrant. No fractional warrants were issued upon such separation.
On July 21, 2021, as contemplated by the Transaction Agreement, MarketWise, Inc. and MarketWise, LLC consummated the business combination contemplated by the Transaction Agreement whereby (i) MarketWise, LLC restructured its capitalization, appointed MarketWise, Inc. as its managing member, and issued to MarketWise, Inc. 28,003,096 common units of MarketWise, LLC (the “MarketWise Units”), and 30,979,993 warrants to purchase MarketWise Units and (ii) MarketWise, Inc. issued 291,092,303 shares of Class B common stock, par value $0.0001 per share, of MarketWise, Inc. (the “Class B common stock” and, together with the Class A common stock, the “common stock”) to the MarketWise Members.
As previously announced, on March 1, 2021, concurrently with the execution of the Transaction Agreement, ADAC entered into subscription agreements (the “Subscription Agreements”) with certain investors (collectively, the “PIPE Investors”) who subscribed for 15,000,000 shares of Class A common stock at $10.00 per share for an aggregate commitment amount of $150 million (the “PIPE Investment” and, together with the other transactions described above and all transactions contemplated by or pursuant to the Transaction Agreement, the “Transactions”). The PIPE Investment was consummated on July 21, 2021 substantially concurrently with the closing of the other Transactions.
Immediately after giving effect to the Transactions, there were 28,003,096 shares of Class A common stock (including 3,051,000 Sponsor Earn Out Shares (as defined and discussed in our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on July 28, 2021) the “Original Report”), 291,092,303 shares of Class B common stock, and 30,979,993 warrants outstanding (including 10,280,000 Private Placement Warrants (as defined in the Original Report)). Upon the consummation of the Transactions, ADAC’s ordinary shares, warrants, and units ceased trading on The New York Stock Exchange, and MarketWise, Inc.’s Class A common stock and warrants began trading on the Nasdaq under the symbols “MKTW” and “MKTW W,” respectively.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
Immediately after giving effect to the Transactions, (1) ADAC’s public shareholders owned approximately 0.1% of the outstanding MarketWise, Inc. common stock, (2) the MarketWise Members owned approximately 91.2% of the outstanding MarketWise, Inc. common stock, (3) Ascendant Sponsor LP, a Cayman Islands exempted limited partnership and related parties (the “Sponsor”) collectively owned approximately 3.2% of the outstanding MarketWise, Inc. common stock (including 3,051,000 Sponsor Earn Out Shares), and (4) the PIPE Investors owned approximately 4.7% of the outstanding MarketWise, Inc. common stock.
The Transaction was accounted for as a reverse recapitalization in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Under the guidance in Accounting Standards Codifications (“ASC”) Topic 805, MarketWise, LLC is treated as the “acquirer” for financial reporting purposes. As such, MarketWise, LLC is deemed the accounting predecessor of the combined business and MarketWise, Inc. the successor registrant for SEC purposes, meaning that MarketWise, LLC’s financial statements for previous periods will be disclosed in the registrant’s future periodic reports filed with the SEC. The reverse recapitalization was treated as the equivalent of MarketWise, LLC issuing stock for the net assets of ADAC, accompanied by a recapitalization.
As part of the recapitalization Transactions, we recorded net cash proceeds from the Transactions of $113.6 million in equity. This cash amount includes: (1) the reclassification of ADAC’s Trust Account of $414.6 million to cash and cash equivalents that became available at the time of the Transactions; (2) proceeds of $150.0 million from the issuance and sale of MarketWise Class A common stock in the PIPE investment; (3) payment of $48.8 million in non-recurring transaction costs; (4) settlement of $14.5 million in deferred underwriters’ discount; and (5) the payment of $387.7 million to redeeming shareholders of ADAC. We also recorded (1) $45.0 million in equity related to the establishment of the initial value of the warrants; and (2) $10.1 million in equity related to the establishment of the initial value of deferred taxes.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying condensed consolidated financial statements include the accounts of MarketWise, Inc. and its subsidiary, MarketWise, LLC, a variable interest entity (“VIE”) for which MarketWise, Inc. is deemed to be the primary beneficiary.
MarketWise, Inc. is a holding company that owns a minority economic interest in MarketWise, LLC but, through its role as the managing member of MarketWise, LLC, controls all of the business and operations of MarketWise, LLC. Therefore, MarketWise, LLC and its subsidiaries are included in the Company’s consolidated financial statements. As of September 30, 2022, MarketWise, Inc. had a 9.0% ownership interest in MarketWise, LLC.
The Company determined that MarketWise, LLC is the primary beneficiary of a VIE, Stansberry Pacific Research, and therefore, the assets, liabilities, and results of operations of that VIE are included in the Company’s consolidated financial statements. For more information on Stansberry Pacific Research, see Note 14 – Variable Interest Entities.
The condensed consolidated financial statements have been prepared in accordance with GAAP. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying statements of operations include expenses for certain functions historically performed by a related party, including general corporate services, such as legal, accounting, treasury, information technology, human resources and administration. These expenses are based primarily on direct usage when identifiable, direct capital expenditures or other relevant allocations during the respective periods. We believe the assumptions underlying the accompanying condensed consolidated financial statements, including the assumptions regarding these expenses from this related party, are reasonable. Actual results may differ from these expenses, assumptions and estimates. The amounts recorded in the accompanying condensed consolidated financial statements are not
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
necessarily indicative of the actual amount of such indirect expenses that would have been recorded had we been a separate independent entity.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements and the related footnote disclosures have been prepared by us in accordance with GAAP for interim financial reporting and as required by Rule 10-01 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The year-end December 31, 2021 condensed consolidated balance sheet data included herein was derived from audited financial statements but does not include all disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of items of a normal and recurring nature, necessary to present fairly our financial position as of September 30, 2022, the results of operations, comprehensive income (loss), stockholders’ deficit / members’ deficit, and cash flows for the three and nine months ended September 30, 2022 and 2021. The results of operations for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of the results to be expected for the full year. The information contained herein should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. Management considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made in the accompanying financial statements include, but are not limited to, the fair value of common units, derivatives, warrants, valuation of assets acquired and liabilities assumed in business combinations, useful lives of intangible assets with definite lives, benefit period of deferred contract acquisition costs, determination of standalone selling prices, estimated life of membership customers, recoverability of goodwill and long-lived assets, valuation allowances on deferred tax assets, the incremental borrowing rates to calculate lease liabilities and right-of-use (“ROU”) assets and certain accruals. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.
Emerging Growth Company
We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our unaudited condensed financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Segment Information
Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by our chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. Our Chief Executive Officer serves as the CODM.
Based on the financial information presented to and reviewed by our CODM in assessing our performance and for the purposes of allocating resources, we have determined our operating subsidiaries represent individual operating segments with similar economic characteristics that meet the criteria for aggregation into a single reporting segment for financial statement purposes. Accordingly, we have a single reportable segment.
Long-lived assets outside the United States were immaterial as of September 30, 2022 and December 31, 2021.
Stock-Based Compensation
Stock-based compensation expenses are included in cost of revenue, sales and marketing, and general and administrative expenses in a manner consistent with the employee’s salary and benefits in the condensed consolidated statements of operations.
2021 Incentive Award Plan
On July 21, 2021, the MarketWise, Inc. 2021 Incentive Award Plan (the “2021 Incentive Award Plan”) became effective. As of September 30, 2022, MarketWise has reserved a total of 32,938,082 shares of MarketWise Class A common stock for issuance pursuant to the 2021 Incentive Award Plan and the maximum number of shares that may be issued pursuant to the exercise of incentive stock options granted under the 2021 Incentive Award Plan is 32,045,000, in each case, subject to certain adjustments set forth therein. See also Note 10 – Stock-Based Compensation.
The 2021 Incentive Award Plan provides for the grant of stock options, including incentive stock options, or ISOs, and nonqualified stock options, or NSOs; restricted stock; restricted stock units, or RSUs; stock appreciation rights, or SARs; and other stock or cash-based awards.
Equity-based compensation with service conditions made to employees is measured based on the grant date fair value of the awards and recognized as compensation expense over the period during which the recipient is required to perform services in exchange for the award (the requisite service period). We have elected to use a straight-line attribution method for recognizing compensation costs relating to awards that have service conditions only. Forfeitures are recorded as they occur.
2021 ESPP
As a result of the Transactions, we adopted the 2021 Employee Stock Purchase Plan (“ESPP”) effective on January 1, 2022. Under the ESPP, the Company authorizes the grant of the right to purchase shares of Class A common stock by employees who qualify under the ESPP. As of September 30, 2022, The Company has reserved for issuance a total of 6,557,847 shares of Class A common stock for the ESPP. The current offering period began on July 1, 2022 and ends on December 31, 2022.
The ESPP is implemented through a series of offerings under which eligible employees are granted purchase rights to purchase shares of the Company’s Class A common stock on specified dates during such offerings. Under the ESPP, the Company has determined the offering period to occur in six month intervals, with the purchase occurring as of the last trading day of each offering period. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s Class A
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
common stock on the first trading day of the offering period, or (2) the fair market value of the Company’s Class A common stock on the purchase date, as defined in the ESPP. The fair value of the ESPP is determined using the Monte Carlo model as of the beginning of each offering period and is expensed ratably over the six month offering period.
Class B Units
As more fully described above, we completed our Transactions in July 2021, and all Class B Units fully vested as of the transaction date, and the original operating agreement was terminated and replaced by a new operating agreement consistent with the Company’s Up-C structure. This new operating agreement does not contain the put and call options that existed under the previous operating agreement, and the Common Units are treated as common equity under the new operating agreement and do not generate stock-based compensation expense.
Prior to the Transactions, under the old operating agreement, and as part of our compensation and retention strategy, we granted incentive compensation units (“Class B Units”) to certain key employees, which are profit interests for United States federal income tax purposes. The Class B Units were accounted for as a substantive class of equity and allowed the recipient to realize value only to the extent that the value of the award appreciated.
The Class B Units contained service-based vesting conditions and had different vesting terms depending upon the employee which ranged from vesting immediately to eight years; vesting was accelerated upon the completion of the Transactions. Compensation cost was recognized on a straight-line basis over the requisite service period until vesting for the entire award, but at least equaled the number of vested units determined by the underlying vesting schedule. Forfeitures were accounted for in the period in which they occurred.
The Class B Units were subject to a put and call option whereby we could elect to redeem or be required to redeem these units at a value determined by a predefined formula based on a multiplier of our net income as defined by management. Employees may not exercise the put option until 25 months have elapsed from the issuance date. Since the redemption price is not representative of fair value, the employees are not considered to be subject to the risks and rewards of share ownership, and the Class B Units were classified as liabilities in the accompanying condensed consolidated balance sheet. Prior to the completion of the Transactions, the liability for Class B units was remeasured to fair value at the end of each reporting period.
Since Class B Units were classified as liabilities, all cash distributions made to the unitholders of the Class B Units pursuant to our operating agreement were considered to be stock-based compensation expenses. Upon consummation of the Transactions, the old operating agreement was terminated and a new operating agreement was adopted.
Noncontrolling Interest
Noncontrolling interest represents the Company’s noncontrolling interest in consolidated subsidiaries which are not attributable, directly or indirectly, to the controlling Class A common stock ownership of the Company.
The Transactions occurred on July 21, 2021. As a result, net income (loss) for the year ended December 31, 2021 was attributed to the pre-Transactions period from January 1, 2021 through July 21, 2021 and to the post-Transactions period from July 22, 2021 through December 31, 2021. Net income (loss) in the pre-Transactions period was attributable to consolidated MarketWise, LLC and its respective noncontrolling interests and in the post-Transactions period was attributable to consolidated MarketWise, Inc. and its respective noncontrolling interests.
Net income for the three and nine months ended September 30, 2022 was fully in the post-Transactions period and therefore attributable to consolidated MarketWise, Inc. and its respective noncontrolling interests. As of September 30, 2022, MarketWise, Inc.’s controlling interest in MarketWise, LLC was 9.0% and the noncontrolling interest was 91.0%. For the three months ended September 30, 2022 net income attributable to controlling interests included a $3,868 loss on warrant liabilities and a $1,383 tax provision, and for the nine months ended September 30, 2022 net income attributable to controlling interests included a $14,931 gain on warrant liabilities and a $3,945 tax provision, both of which are 100% attributable to the controlling interest.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
Net loss for three and nine months ended September 30, 2021 was attributed to the pre-Transactions period from January 1, 2021 through July 1, 2021 and from July 1, 2021 through July 21, 2021 and to the post-Transactions period from July 22, 2021 through September 30, 2021.
Earnings Per Share
Basic net income per share is based on the weighted average number of shares of Class A common stock issued and outstanding during the period. Diluted net income per share is based on the weighted average number of shares of Class A common stock issued and outstanding and the effect of all dilutive common stock equivalents and potentially dilutive share based compensation awards outstanding during the period.
Recently Issued and Adopted Accounting Pronouncements
In October 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-08: Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this ASU adds contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations. As a result, acquiring entities are required to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, instead of fair value. We have early adopted and applied this ASU to the Winans Media transaction (as defined herein). See Note 4 – Acquisitions for additional disclosure on the Winans Media transaction.
3. Revenue Recognition
Disaggregation of revenues
The following table depicts the disaggregation of revenue according to customer type and is consistent with how we evaluate our financial performance. We believe this depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Subscriptions | | Advertising | | Revenue Share (Related Party) | | Revenue Share (Third-party) | | Total |
Timing of transfer: | |
Transferred over time | $ | 118,990 | | | $ | — | | | $ | — | | | $ | — | | | $ | 118,990 | |
Transferred at a point in time | — | | | 169 | | | 637 | | | 138 | | | 944 | |
Total | $ | 118,990 | | | $ | 169 | | | $ | 637 | | | $ | 138 | | | $ | 119,934 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| Subscriptions | | Advertising | | Revenue Share (Related Party) | | Revenue Share (Third-party) | | Total |
Timing of transfer: | |
Transferred over time | $ | 139,831 | | | $ | — | | | $ | — | | | $ | — | | | $ | 139,831 | |
Transferred at a point in time | — | | | 423 | | | 245 | | | 168 | | | 836 | |
Total | $ | 139,831 | | | $ | 423 | | | $ | 245 | | | $ | 168 | | | $ | 140,667 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Subscriptions | | Advertising | | Revenue Share (Related Party) | | Revenue Share (Third-party) | | Total |
Timing of transfer: | |
Transferred over time | $ | 382,321 | | | $ | — | | | $ | — | | | $ | — | | | $ | 382,321 | |
Transferred at a point in time | — | | | 606 | | | 1,363 | | | 456 | | | 2,425 | |
Total | $ | 382,321 | | | $ | 606 | | | $ | 1,363 | | | $ | 456 | | | $ | 384,746 | |
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Subscriptions | | Advertising | | Revenue Share (Related Party) | | Revenue Share (Third-party) | | Total |
Timing of transfer: | |
Transferred over time | $ | 398,362 | | | $ | — | | | $ | — | | | $ | — | | | $ | 398,362 | |
Transferred at a point in time | — | | | 1,968 | | | 864 | | | 1,317 | | | 4,149 | |
Total | $ | 398,362 | | | $ | 1,968 | | | $ | 864 | | | $ | 1,317 | | | $ | 402,511 | |
Revenue recognition by subscription type was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | | 2022 | | 2021 | | 2022 | | 2021 |
Membership subscriptions | | | | | | $ | 46,915 | | | $ | 50,862 | | | $ | 148,219 | | | $ | 140,893 | |
Term subscriptions | | | | | | 72,075 | | | 88,970 | | | 234,102 | | | 257,470 | |
Non-subscription revenue | | | | | | 944 | | | 835 | | | 2,425 | | | 4,148 | |
Total | | | | | | $ | 119,934 | | | $ | 140,667 | | | $ | 384,746 | | | $ | 402,511 | |
Revenue for the Membership and Term subscription types are determined based on the terms of the subscription agreements. Non-subscription revenue consists of revenue from advertising and other revenue from revenue share arrangements and the sale of print products and events, such as webinars and conferences.
Net revenue by principal geographic areas was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | | 2022 | | 2021 | | 2022 | | 2021 |
United States | | | | | | $ | 119,707 | | | $ | 139,998 | | | $ | 384,419 | | | $ | 400,871 | |
International | | | | | | 227 | | | 669 | | | 327 | | | 1,640 | |
Total | | | | | | $ | 119,934 | | | $ | 140,667 | | | $ | 384,746 | | | $ | 402,511 | |
Revenue by location is determined by the billing entity for the customer.
Contract Balances
The timing of revenue recognition, Billings, cash collections and refunds affects the recognition of accounts receivable, contract assets and deferred revenue. Our current deferred revenue balance in the condensed consolidated balance sheets includes an obligation for refunds for contracts where the provision for refund has not lapsed. Accounts receivable, deferred revenue and obligation for refunds are as follows:
| | | | | | | | | | | | | | | |
| As of | | | | |
| September 30, 2022 | | December 31, 2021 | | | | |
Contract balances | | | | | | | |
Accounts receivable | $ | 4,564 | | | $ | 7,805 | | | | | |
Obligations for refunds | $ | 4,998 | | | $ | 5,590 | | | | | |
Deferred revenue – current | $ | 313,806 | | | $ | 311,543 | | | | | |
Deferred revenue – non-current | $ | 371,921 | | | $ | 393,043 | | | | | |
We recognized $72,852 and $63,960 of revenue during the three months ended September 30, 2022 and 2021, and $266,246 and $240,638 during the nine months ended September 30, 2022 and 2021, respectively, that was included within the beginning contract liability balance of the respective periods. The Company has collected all amounts included in deferred revenue other than $4,564 and $7,805 as of September 30, 2022 and December 31, 2021, respectively, related to the timing of cash settlement with our credit card processors.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
Assets Recognized from Costs to Obtain a Contract with a Customer
The following table presents the opening and closing balances of our capitalized costs associated with contracts with customers:
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| |
| |
| |
| |
| |
| |
| |
| |
| |
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Balance at January 1, 2022 | $ | 203,071 | |
Royalties and sales commissions – additions | 27,758 | |
Revenue share and cost per acquisition fees – additions | 43,326 | |
Amortization of capitalized costs | (71,570) | |
Balance at September 30, 2022 | $ | 202,585 | |
We did not recognize any impairment on capitalized costs associated with contracts with customers for the three and nine months ended September 30, 2022 and 2021.
Remaining Performance Obligations
As of September 30, 2022, the Company had $690,725 of remaining performance obligations presented as deferred revenue in the condensed consolidated balance sheets. We expect to recognize approximately 46% of that amount as revenues over the next twelve months, with the remainder recognized thereafter.
4. Acquisitions
Winans Media
During third quarter 2022, we acquired 100% ownership of certain assets and liabilities from Crowdability, Inc. (“Winans Media transaction”), a provider of financial newsletters, for cash of $12,770. The Winans Media transaction expands our product offerings and our customer base and adds to our talented group of professionals. The Winans Media transaction was accounted for using the acquisition method of accounting for business combinations. The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
Right of use asset | $ | 50 | |
Goodwill | 8,019 | |
Tradenames | 709 | |
Customer relationships | 9,350 | |
Total assets acquired | 18,128 | |
| |
Deferred revenue, current | (2,648) | |
Operating lease liabilities, current | (22) | |
Operating lease liabilities, noncurrent | (28) | |
Deferred revenue, noncurrent | (2,660) | |
| |
Liabilities assumed | (5,358) | |
| |
Net assets acquired | $ | 12,770 | |
The excess purchase consideration over the fair values of assets acquired and liabilities assumed was recorded as goodwill. The goodwill arising from the acquisition is largely attributable to expanding our copy and editorial talent base and synergies which we expect to achieve from cross-marketing and providing complementary products to our existing and acquired customers and is fully expected to be deductible for tax purposes. The acquired intangible assets related to the Winans Media transaction are amortized over their estimated useful lives.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
Accordingly, the tradenames will be amortized over 9.0 years and customer relationships will be amortized over 6.5 years. Amortization for the acquired intangible assets was $217 for the quarter ended September 30, 2022.
Chaikin
On January 21, 2021, we acquired 90% ownership of Chaikin Holdings LLC (“Chaikin”) a provider of analytical tools and software for investors, for cash of $7,139, net of cash acquired. We acquired Chaikin to expand our product offerings and our customer base. The Chaikin acquisition was accounted for using the acquisition method of accounting for business combinations. The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
Cash | $ | 151 | |
Other current assets | 138 | |
Customer relationships | 3,664 | |
Tradenames | 657 | |
Software | 247 | |
Goodwill | 5,187 | |
Other noncurrent assets | 443 | |
Total assets acquired | 10,487 | |
Liabilities assumed | (2,387) | |
Net assets acquired | $ | 8,100 | |
| |
Cash consideration | $ | 7,290 | |
Noncontrolling interest | 810 | |
Total consideration | $ | 8,100 | |
The excess purchase consideration over the fair values of assets acquired and liabilities assumed was recorded as goodwill. The goodwill arising from the acquisition is largely attributable to synergies which we expect to achieve from cross-marketing and providing complementary products to our existing and acquired customers, and is expected to be fully deductible for tax purposes. The acquired intangible assets of Chaikin are amortized over their estimated useful lives. Accordingly, the tradenames will be amortized over 8.5 years and customer relationships will be amortized over 6 years. Amortization for the acquired intangible assets was $174 and $115 for the three months ended September 30, 2022 and 2021, and $515 and $477 for the nine months ended September 30, 2022 and 2021, respectively.
During third quarter 2022, we acquired additional noncontrolling interests totaling 3.7% in Chaikin, to obtain 93.7% ownership for $297.
5. Goodwill and Intangible Assets, Net
Goodwill
The carrying amounts of goodwill are as follows:
| | | | | |
| |
| |
| |
Balance at December 31, 2021 | $ | 23,288 | |
Acquisition – Winans Media transaction | 8,019 | |
Balance at September 30, 2022 | $ | 31,307 | |
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
Intangible assets, net
Intangible assets, net consisted of the following as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Cost | | Accumulated Amortization | | Net Book Value | | Weighted-Average Remaining Useful Life (in years) |
Finite-lived intangible assets: | | | | | | | |
Customer relationships | $ | 21,718 | | | $ | (9,223) | | | $ | 12,495 | | | 6.5 |
Tradenames | 4,287 | | | (2,145) | | | 2,142 | | | 6.3 |
Capitalized software development costs | 3,002 | | | (1,712) | | | 1,290 | | | 2.2 |
Finite-lived intangible assets, net | 29,007 | | | (13,080) | | | 15,927 | | | |
| | | | | | | |
Indefinite-lived intangible assets: | | | | | | | |
| | | | | | | |
Internet domain names | 1,087 | | | — | | | 1,087 | | | |
Indefinite-lived intangible assets, net | 1,087 | | | — | | | 1,087 | | | |
Intangible assets, net | $ | 30,094 | | | $ | (13,080) | | | $ | 17,014 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Cost | | Accumulated Amortization | | Net Book Value | | Weighted-Average Remaining Useful Life (in years) |
Finite-lived intangible assets: | | | | | | | |
Customer relationships | $ | 12,368 | | | $ | (8,105) | | | $ | 4,263 | | | 4.4 |
Tradenames | 3,578 | | | (1,838) | | | 1,740 | | | 5.3 |
Capitalized software development costs | 2,866 | | | (1,344) | | | 1,522 | | | 3.1 |
Finite-lived intangible assets, net | 18,812 | | | (11,287) | | | 7,525 | | | |
| | | | | | | |
Indefinite-lived intangible assets: | | | | | | | |
| | | | | | | |
Internet domain names | 1,087 | | | — | | | 1,087 | | | |
Indefinite-lived intangible assets, net | 1,087 | | | — | | | 1,087 | | | |
Intangible assets, net | $ | 19,899 | | | $ | (11,287) | | | $ | 8,612 | | | |
We recorded amortization expense related to finite-lived intangible assets of $760 and $513 for the three months ended September 30, 2022 and 2021, and $1,793 and $1,736 for the nine months ended September 30, 2022 and 2021, respectively, within depreciation and amortization in the accompanying condensed consolidated statement of operations. These amounts include amortization of capitalized software development costs of $133 and $103 for the three months ended September 30, 2022 and 2021, and $368 and $306 for the nine months ended September 30, 2022 and 2021, respectively.
We recorded additions to capitalized software development costs of $55 and $136 for the three and nine months ended September 30, 2022, respectively. We recorded additions to capitalized software development costs of $347 for the nine months ended September 30, 2021, which includes acquired software of $247.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
As of September 30, 2022, the total expected future amortization expense for finite-lived intangible assets is as follows:
| | | | | |
Remainder of 2022 | $ | 891 | |
2023 | 3,330 | |
2024 | 2,843 | |
2025 | 2,327 | |
2026 | 2,066 | |
Thereafter | 4,470 | |
Finite-lived intangible assets, net | $ | 15,927 | |
6. Fair Value Measurements
The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Aggregate Fair Value |
Assets: | |
Money market funds | $ | 38,049 | | | $ | — | | | $ | — | | | $ | 38,049 | |
Total assets | 38,049 | | | — | | | — | | | 38,049 | |
Liabilities: | |
| | | | | | | |
Derivative liabilities, noncurrent | — | | | — | | | 1,320 | | | 1,320 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total liabilities | $ | — | | | $ | — | | | $ | 1,320 | | | $ | 1,320 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Aggregate Fair Value |
Assets: | |
Money market funds | $ | 25,001 | | | $ | — | | | $ | — | | | $ | 25,001 | |
Total assets | 25,001 | | | — | | | — | | | 25,001 | |
Liabilities: | |
Derivative liabilities, noncurrent | — | | | — | | | 2,015 | | | 2,015 | |
Warrant Liabilities - Public Warrants | 19,599 | | | — | | | — | | | 19,599 | |
Warrant Liabilities - Private Placement Warrants | — | | | — | | | 9,733 | | | 9,733 | |
Total liabilities | $ | 19,599 | | | $ | — | | | $ | 11,748 | | | $ | 31,347 | |
The level 3 liabilities related to our warrants, our Class B Units, and certain employee and non-employee contracts contain embedded derivatives, see Note 8 – Derivative Financial Instruments and Note 10 – Stock-Based Compensation.
The fair value of the Public Warrants was measured based on the listed market price of such warrants at the end of the reporting period. The fair value of the Private Placement Warrants was estimated using a Monte Carlo simulation model at the end of the reporting period. The Company estimates the fair value of the warrants at each reporting period, with changes in fair value recognized in the condensed consolidated statements of operations.
The estimated fair value of the warrant liabilities – Public Warrants is determined using Level 1 inputs. The estimated fair value of the warrant liabilities – Private Placement Warrants is determined using Level 3 inputs. Inherent in a Monte Carlo simulation are assumptions related to expected stock-price volatility, expected life and
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
risk-free interest rate. The Company estimates the volatility of its ordinary shares based on historical volatility of select peer companies that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term.
The following table provides quantitative information regarding Level 3 fair value measurements inputs at their measurement dates: | | | | | | | | |
| As of | | | |
| September 30, 2022 | | | |
Volatility | 36.80 | % | | | |
Discount rate | 21.00 | % | | | |
Credit spread | 0.10 | % | | | |
Risk-free rate | 3.50 | % | | | |
The following table summarizes the change in fair value of the liabilities during the nine months ended September 30, 2022 and 2021:
| | | | | |
Balance at January 1, 2022 | $ | 31,347 | |
Change in fair value of derivative instruments | (15,626) | |
Warrants exchanged for Class A common stock (see Note 17 – Warrant Exchange) | (14,401) | |
| |
Balance at September 30, 2022 | $ | 1,320 | |
| |
Balance at January 1, 2021 | $ | 597,578 | |
Incremental Class B Units | 206,914 | |
Establishment of derivative warrant liabilities on July 21, 2021 (date of the Transactions) | 45,021 | |
Change in fair value of derivative instruments | (11,543) | |
Change in fair value of Class B Units | 728,079 | |
Reclassification of Class B Units from liability to equity on July 21, 2021 (date of the Transactions) | $ | (1,528,228) | |
Balance at September 30, 2021 | $ | 37,821 | |
The following table summarizes the change in fair value of the Class B Units by income statement line item during the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | | |
Cost of revenue | $ | — | | | $ | 24,028 | | | $ | — | | | $ | 136,417 | | | | | | |
Sales and marketing | — | | | 2,607 | | | — | | | 10,870 | | | | | | |
General and administrative | — | | | 102,911 | | | — | | | 580,792 | | | | | | |
Total change in fair value of Class B Units | $ | — | | | $ | 129,546 | | | $ | — | | | $ | 728,079 | | | | | | |
To derive the fair value of the Class B Units, we estimated the fair value of Class B Units using a valuation technique. For more information regarding the valuation of the Class B Units, see Note 10 – Stock-Based Compensation.
As more fully described in Note 1, we completed our Transactions in July 2021, and all Class B Units fully vested as of the transaction date, and the original operating agreement was terminated and replaced by a new operating agreement consistent with the Company’s Up-C structure. This new operating agreement does not contain the put and call options that existed under the previous operating agreement, and the Common Units under the new operating agreement are treated as common equity and do not generate stock-based compensation expense. The Class B Units liability was reclassified to equity as of the transaction date.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
7. Balance Sheet Components
Capitalized Implementation Costs
We capitalized cloud computing implementation costs for customer-relationship management, revenue management, and enterprise resource planning systems of $360 and $21 for the three months ended September 30, 2022 and 2021, and $1,392 and $114 for the nine months ended September 30, 2022 and 2021, respectively. The capitalized implementation costs are capitalized within other current assets and other assets on the condensed consolidated balance sheets. Amortization expense related to capitalized cloud computing implementation costs was $133 and $145, for the three and nine months ended September 30, 2022, respectively.
Property and Equipment, Net
Property and equipment, net consists of the following:
| | | | | | | | | | | | | | | | | | | |
| | | As of | | |
| Estimated Useful Lives | | September 30, 2022 | | December 31, 2021 | | |
Furniture and fixtures | 5 years | | $ | 960 | | | $ | 960 | | | |
Computers, software and equipment | 3 years | | 1,458 | | | 1,423 | | | |
Leasehold improvements | Shorter of estimated useful life or remaining term of lease | | 1,278 | | | 1,278 | | | |
| | | 3,696 | | | 3,661 | | | |
Less: Accumulated depreciation and amortization | | | (2,733) | | | (2,473) | | | |
Total property and equipment, net | | | $ | 963 | | | $ | 1,188 | | | |
Depreciation and amortization expense for property and equipment was $76 and $116 for the three months ended September 30, 2022 and 2021, and $260 and $340 for the nine months ended September 30, 2022 and 2021, respectively.
Accrued Expenses
Accrued expenses consist of the following:
| | | | | | | | | | | | |
| As of | |
| September 30, 2022 | | December 31, 2021 | |
Commission and variable compensation | $ | 19,637 | | | $ | 22,155 | | |
Payroll and benefits | 3,677 | | | 5,164 | | |
| | | | |
Other accrued expenses | 15,988 | | | 19,134 | | |
Total accrued expenses | $ | 39,302 | | | $ | 46,453 | | |
8. Derivative Financial Instruments
Prior to the closing of the Transactions, as part of our compensation and employee retention strategy, we entered into contracts with key employees and independent contractors which contain embedded derivatives. These contracts are intended to compensate the employees or independent contractors for services provided and retain their future services. These embedded derivative instruments are issued in the form of phantom interests in Net Income, as defined by our board of directors, that grant the holder value equal to a percentage of Net Income multiplied by a price multiple, or contain an option that granted appreciation rights upon exercise, and which become exercisable upon occurrence of an initial public offering. All derivative instruments are recorded at fair value as derivative liabilities on our condensed consolidated balance sheets.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
As of September 30, 2022, there are embedded derivative instruments outstanding. The following table presents information on the location and amounts of derivative instruments gains and losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | 2022 | | 2021 | | 2022 | | 2021 |
Derivatives Not Designated as Hedging Instruments | | Location of Gain (Loss) Recognized in Income Statement | | | | | | | | |
Warrants | | Other income, net | | $ | (3,868) | | | $ | 9,952 | | | $ | 14,931 | | | $ | 9,952 | |
| | | | | | | | | | |
Phantom Interests in Net Income | | General and administrative | | (160) | | | (250) | | | 695 | | | 2,138 | |
Option | | General and administrative | | — | | | 115 | | | — | | | (547) | |
Total | | | | $ | (4,028) | | | $ | 9,817 | | | $ | 15,626 | | | $ | 11,543 | |
See Note 6 – Fair Value Measurements for more information regarding the valuation of our derivative instruments. As more fully described in Note 17 – Warrant Exchange the Private Placement Warrants and Public Warrants were exchanged for Class A common stock of MarketWise, Inc. in September 2022.
9. Debt
On October 29, 2021, MarketWise, LLC, entered into a loan and security agreement (the “Loan and Security Agreement”) providing for up to $150 million of commitments under a revolving credit facility (the “Credit Facility”), including a $5 million letter of credit sublimit, and allows for revolving commitments under the Credit Facility to be increased or new term commitments to be established by up to $65 million. The existing lenders under the Credit Facility are entitled, but not obligated, to provide such incremental commitments. The Credit Facility has a term of three years, maturing on October 29, 2024.
The Credit Facility is guaranteed by MarketWise, LLC’s direct and indirect material U.S. subsidiaries, subject to customary exceptions (the “Guarantors”), pursuant to a guaranty by the Guarantors in favor of HSBC Bank USA, National Association, as agent (the “Guaranty”). Borrowings under the Credit Facility are secured by a first-priority lien on substantially all of the assets of MarketWise, LLC and the Guarantors, subject to customary exceptions.
Borrowings will bear interest at a floating rate depending on MarketWise, LLC’s Net Leverage Ratio (as defined in the Loan and Security Agreement). As of September 30, 2022, there were no outstanding advances under the Credit Facility.
The Loan and Security Agreement contains customary affirmative and negative covenants for transactions of this type, and contains financial maintenance covenants that require MarketWise, LLC to maintain an Interest Coverage Ratio and Net Leverage Ratio (both as defined in the Loan and Security Agreement), and provides for a number of customary events of default, which could result in the acceleration of obligations and the termination of lending commitments under the Loan and Security Agreement. As of September 30, 2022, we were in compliance with these covenants.
10. Stock-Based Compensation
During the three and nine months ended September 30, 2022 we recorded stock-based compensation related to our 2021 Incentive Award Plan and our ESPP, and during the three and nine months ended September 30, 2021, we recorded stock-based compensation related to our Class B Units and our 2021 Incentive Award Plan. As more fully described in Note 1, we completed our Transactions in July 2021, and all Class B Units fully vested as of the transaction date, and the original operating agreement was terminated and replaced by a new operating agreement consistent with the Company’s Up-C structure. This new operating agreement does not contain the put and call
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
options that existed under the previous operating agreement, and the Common Units are treated as common equity under the new operating agreement and do not generate stock-based compensation expense.
Included within cost of revenue, sales and marketing, and general and administrative expenses are total stock-based compensation expenses as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | | |
Cost of revenue | $ | 438 | | | $ | 46,396 | | | $ | 1,496 | | | $ | 171,312 | | | | | | |
Sales and marketing | 514 | | | 32,606 | | | 1,655 | | | 47,516 | | | | | | |
General and administrative | 1,201 | | | 333,563 | | | 4,039 | | | 842,257 | | | | | | |
Total stock based-compensation expense | $ | 2,153 | | | $ | 412,565 | | | $ | 7,190 | | | $ | 1,061,085 | | | | | | |
Total stock-based compensation expense for the three and nine months ended September 30, 2022 includes expenses related to our 2021 Incentive Award Plan and our ESPP, while the total stock-based compensation expense for the three and nine months ended September 30, 2021 includes the vesting of Class B units, the change in fair value of Class B liability awards, profits distributions to Class B unitholders and our 2021 Incentive Award Plan as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
2021 Incentive Award Plan | $ | 2,086 | | | $ | 2,643 | | | $ | 6,828 | | | $ | 2,643 | |
Employee Stock Purchase Plan | 67 | | | — | | | 362 | | | — | |
Vested Class B units and change in fair value of Class B liability awards | — | | | 292,580 | | | — | | | 934,993 | |
Profits distributions to Class B unitholders | — | | | 117,342 | | | — | | | 123,449 | |
Total stock-based compensation expense | $ | 2,153 | | | $ | 412,565 | | | $ | 7,190 | | | $ | 1,061,085 | |
2021 Incentive Award Plan
On May 16, 2022, we granted a service provider 373,134 restricted stock units (“RSUs”), and on June 2, 2022, we granted our board members 289,555 RSUs in aggregate, both under our 2021 Incentive Award Plan.
On September 27, 2021, we granted certain employees and board members RSUs and stock appreciation rights (“SARs”) under our 2021 Incentive Award Plan.
For employees and service providers, both RSUs and SARs are primarily time based and typically vest ratably over four years, as specified in the individual grant notices. The RSUs granted in September 2021 entitle the recipients to dividend equivalents which are subject to (the same vesting terms and accumulate during the vesting period. Upon vesting, the RSU holder will be issued the Company’s Class A common stock. The SARs will be settled in the Company’s Class A common stock upon exercise. The shares to be issued upon exercise will have a total market value equal to the SAR value calculated as (x) number of shares underlying SAR, multiplied by (y) any excess of the Company’s share value on the date of exercise over the exercise price set in each individual grant notice.
The fair value of RSUs is the same as the Company’s share price on the date of grant. The fair value of the SARs was determined using a Black-Scholes model.
The activities of the RSUs and SARs and the related weighted average grant-date fair value of the respective share classes, including granted, exercised and forfeited, from January 1, 2022 to September 30, 2022 are summarized as follows:
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | RSUs | | SARs |
| | | Units | | Weighted-Average Grant Date Fair Value | | Units | | Weighted-Average Grant Date Fair Value |
Outstanding at January 1, 2022 | | | 2,334,490 | | | $ | 8.30 | | | 1,935,131 | | | $ | 4.05 | |
Granted | | | 662,689 | | | 2.89 | | | — | | | — | |
Exercised or vested | | | (660,363) | | | 8.17 | | | — | | | — | |
Forfeited | | | (102,188) | | | 5.91 | | | (103,120) | | | 4.05 | |
| | | | | | | | | |
Outstanding at September 30, 2022 | | | 2,234,628 | | | $ | 6.69 | | | 1,832,011 | | | $ | 4.05 | |
The stock compensation expense related to the RSU and SAR grants was $2,086 and $6,828 for the three and nine months ended September 30, 2022, respectively. As of September 30, 2022, none of the SARs were exercisable and they have a remaining contractual term of 8.75 years.
Employee Stock Purchase Plan
As a result of the Transactions, the Company adopted the ESPP. Under the ESPP, the Company authorizes the grant of the right to purchase shares of Class A common stock by employees who qualify under the ESPP. The Company has reserved for issuance a total of 6,557,847 shares of Class A common stock. The ESPP became effective on January 1, 2022, and the current offering period began on July 1, 2022 and ends on December 31, 2022.
The ESPP is implemented through a series of offerings under which eligible employees are granted purchase rights to purchase shares of the Company’s Class A common stock on specified dates during such offerings. Under the ESPP, the Company has determined the offering period to occur in six month intervals, with the purchase occurring as of the last trading day of each offering period. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s Class A common stock on the first trading day of the offering period, or (2) the fair market value of the Company’s Class A common stock on the purchase date, as defined in the ESPP. The fair value of the ESPP is determined using the Monte Carlo model as of the beginning of each offering period and is expensed ratably over the six month offering period.
The Company recognized $67 and $362 of stock-based compensation expense related to the ESPP during the three and nine months ended September 30, 2022, respectively. As of September 30, 2022, $224 has been withheld on behalf of employees for the December 31, 2022 purchase date.
Class B Units
For the three and nine months ended September 30, 2021, we recognized stock-based compensation expenses related to the Class B units of $409,922 and $1,058,442, respectively. These amounts include profits distributions to Class B unitholders of $117,342 and $123,449 for the three and nine months ended September 30, 2021, respectively. The amount of stock-based compensation expense related to the Class B Units included in each of the line items in the accompanying condensed consolidated statement of operations is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | | |
Cost of revenue | $ | — | | | $ | 45,618 | | | $ | — | | | $ | 170,536 | | | | | | |
Sales and marketing | — | | | 31,507 | | | — | | | 46,417 | | | | | | |
General and administrative | — | | | 332,797 | | | — | | | 841,489 | | | | | | |
Total stock based-compensation expense | $ | — | | | $ | 409,922 | | | $ | — | | | $ | 1,058,442 | | | | | | |
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
The weighted-average grant-date fair value of Class B Units granted was $2,195.16 per unit during the three and nine months ended September 30, 2021.
Because the Class B Units were not publicly traded, we estimated the fair value of its Class B Units in each reporting period. The fair values of Class B Units were estimated by the board of managers based on our equity value. The board of managers considered, among other things, contemporaneous valuations of our equity value prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
For the three and six months ended June 30, 2021, the fair value of the Class B Units was estimated using a probability-weighted expected return method. This method considered two scenarios: one based on a market approach according to a proposed acquisition of the Company and allocated through a liquidation waterfall, and the other based on the Company continuing as a private entity according to a discounted cash flow analysis, and allocated using an option pricing model. The results of these two methods were weighted to derive the fair value of the Class B Units as of June 30, 2021.
The discounted cash flow method estimates the equity value of the Company by projecting the Company’s net cash flows into the future and discounting these net cash flows to present value by applying a discount rate. Key inputs for this valuation include the Company’s projected cash flows and discount rate. Changes to these inputs could have a material impact on the accompanying condensed consolidated financial statements.
The option pricing model allocates the equity value to each class of common units by preparing a breakpoint analysis to determine which securities would receive value at each threshold of a hypothetical liquidation. Then applying a Black-Scholes option pricing analysis to determine the incremental value of each respective breakpoint and allocating that value to each participating security based on its pro-rata ownership in the breakpoint. Key inputs for this valuation include the equity value of the Company, risk-free rate, allocation thresholds, and stock volatility.
The Company considered several objective and subjective factors to determine the best estimate of the fair value of the Class B Units, including:
▪the Company’s historical and expected operating and financial performance;
▪current business conditions;
▪indications of value from external investors and their proposed value for the business;
▪the Company’s stage of development and business strategy;
▪macroeconomic conditions;
▪the Company’s weighted average cost of capital;
▪risk-free rates of return;
▪the volatility of comparable publicly traded peer companies; and
▪the lack of an active public market for the Company’s equity units.
See also Note 2 – Summary of Significant Accounting Policies – Stock Based Compensation.
11. Earnings Per Share
On July 21, 2021, we completed the Transactions pursuant to the Transaction Agreement which materially impacted the number of shares outstanding. We analyzed the calculation of earnings per share for periods prior to the Transactions, and determined that it resulted in values that would not be meaningful to the users of the
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
condensed consolidated financial statements, as our capital structure completely changed as a result of the Transactions. Therefore, earnings per share information has not been presented for periods prior to the Transactions.
Weighted average shares outstanding in the table below have not been retroactively restated to give effect to the reverse recapitalization for periods prior to the date of the Transactions. See Note 1 – Organization – Description of Organization and Reverse Recapitalization with Ascendant Digital Acquisition Corp. for more information regarding the Transactions.
The following tables set forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2022 and for the period from July 22, 2021 through September 30, 2021:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 | | Period from July 22, 2021 through September 30, 2021 |
Basic earnings per share: | | | | | |
Numerator: | | | | | |
Net income | $ | 16,509 | | | $ | 73,569 | | | $ | 42,847 | |
Less: Net income attributable to noncontrolling interests | 20,521 | | | 59,875 | | | 33,167 | |
Net income attributable to Class A common shareholders | $ | (4,012) | | | $ | 13,694 | | | $ | 9,680 | |
| | | | | |
Denominator: | | | | | |
Weighted average shares outstanding (in thousands) | 23,533 | | | 23,233 | | | 24,963 | |
| | | | | |
Basic earnings per share | $ | (0.17) | | | $ | 0.59 | | | $ | 0.39 | |
| | | | | |
Diluted earnings per share: | | | | | |
Numerator: | | | | | |
Net income | $ | 16,509 | | | $ | 73,569 | | | $ | 42,847 | |
Less: Net income attributable to noncontrolling interests | 20,521 | | | 59,875 | | | 33,167 | |
Net income attributable to Class A common shareholders | $ | (4,012) | | | $ | 13,694 | | | $ | 9,680 | |
| | | | | |
Denominator: | | | | | |
Weighted average shares outstanding (in thousands) | 23,566 | | | 23,267 | | | 24,963 | |
| | | | | |
Diluted earnings per share | $ | (0.17) | | | $ | 0.59 | | | $ | 0.39 | |
The Company’s potentially dilutive securities and their impact on the computation of diluted earnings per share is as follows:
▪Public and Private Placement Warrants: the public and Private Placement Warrants were "out of the money" for the period from July 21, 2021 through September 30, 2021, therefore, net income per share excludes any impact of the 20,699,993 public warrants and 10,280,000 Private Placement Warrants. The warrants were out of the money during the portion of the three and nine month periods ending September 30, 2022 prior to the warrant exchange transaction in September 2022. There are no warrants outstanding as of September 30, 2022. For more details on the warrant exchange, see Note 17 – Warrant Exchange.
▪Sponsor and MarketWise Management Member Earnout shares: the 3,051,000 Sponsor Earn Out shares and the 2,000,000 MarketWise Management Member Earn Out shares (as defined and discussed in the
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
Original Report) held in escrow are excluded from the earnings per share computation since the earnout contingency has not been met.
▪Restricted stock units: The basic earnings per share calculation includes the impact of vested RSUs as of September 30, 2022. The diluted earnings per share calculation includes the impact of dilutive RSUs, excludes the impact of antidilutive RSUs, and excludes certain RSUs with performance conditions, since the performance conditions have not been met as of September 30, 2022.
▪Stock appreciation rights: The diluted earnings per share calculation excludes the impact of SARs since the effect was antidilutive.
▪ESPP: The basic earnings per share calculation includes the impact of the shares that were issued under the ESPP as of June 30, 2022. The diluted earnings per share calculation includes the impact of dilutive shares and excludes the impact of antidilutive shares under the ESPP as of September 30, 2022.
12. Income Taxes
We are subject to U.S. federal and state taxes with respect to our allocable share of any taxable income or loss of MarketWise, LLC, as well as any stand-alone income or loss we generate. MarketWise, LLC is treated as a partnership for U.S. income tax purposes and for most applicable state and local income tax purposes and generally does not pay income taxes in most jurisdictions. Instead, MarketWise, LLC’s taxable income or loss is passed through to its members, including us.
The effective income tax rates for the three and nine months ended September 30, 2022 were 7.7% and 5.1%, respectively The effective income tax rates for the three and nine months ended September 30, 2021 were (0.8)% and (0.3)%, respectively. The main driver of the rates in 2021 was stock compensation expense as a result of the Transactions. The main drivers of the increase in the effective tax rate from the second quarter 2022 are the increase in the Company’s ownership of MarketWise, LLC and the discrete impacts of the shortfall related to stock compensation as well as provision to return entries. Our effective tax rate in 2022 differs from the U.S. federal statutory rate primarily because we generally do not record income taxes for the noncontrolling portion of pre-tax income.
As a result of the reverse capitalization in 2021, we recorded a deferred tax asset resulting from the outside basis difference in our interest in MarketWise, LLC. The Company considers both positive and negative evidence when measuring the need for a valuation allowance. A valuation allowance is not required to the extent that, in management’s judgment, positive evidence exists with a magnitude and duration sufficient to result in a conclusion that it is more likely than not (a likelihood of more than 50%) that the Company’s deferred tax assets will be realized.
In evaluating the need for a valuation allowance on the deferred tax asset, the company considered positive evidence related to its historic earnings, forecasted income and reversal of temporary differences. Therefore, the Company recorded a valuation allowance in the amount of $28,981 for certain deferred tax assets that are not more likely than not to be realized.
As part of the Transactions, we entered into Tax Receivable Agreements (“TRAs”) with certain shareholders that will represent approximately 85% of the calculated tax savings based on the portion of basis adjustments on future exchanges of MarketWise, LLC units and other carryforward attributes assumed that we anticipate to be able to utilize in future years. There was no exchange of MarketWise, LLC units as part of the Transactions and there has been no exchange since the closing; therefore, we have not recorded a liability under the TRAs as of September 30, 2022.
As of September 30, 2022, we had no unrecognized tax positions and believe there will be no changes to uncertain tax positions within the next 12 months.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
13. Related Party Transactions
We have certain revenue share agreements with related parties. Accordingly, we recognized revenue from related parties of $637 and $245 for the three months ended September 30, 2022 and 2021, and $1,363 and $864 for the nine months ended September 30, 2022 and 2021, respectively.
We incurred costs related to revenue share agreements with related parties which are capitalized within deferred contract acquisition costs. We capitalized $397 and $1,337 for the three months ended September 30, 2022 and 2021, and $2,167 and $8,921 for the nine months ended September 30, 2022 and 2021, respectively.
Additionally, a related party provided call center support and other services to the Company for which we recorded an expense within cost of revenue of $186 and $347 for the three months ended September 30, 2022 and 2021, and $680 and $960 for the nine months ended September 30, 2022 and 2021, respectively.
We recorded fees paid to members of our Board of Directors of $74 and $226 during the three and nine months ended September 30, 2022, respectively, and $76 for the three and nine months ended September 30, 2021 within related party expense in the accompanying condensed consolidated statement of operations.
A related party also provided certain corporate functions to MarketWise and the costs of these services are charged to MarketWise. We recorded $21 and $21 for the three months ended September 30, 2022 and 2021, and $64 and $67 for the nine months ended September 30, 2022 and 2021, respectively, within related party expense in the accompanying condensed consolidated statement of operations. We held balances of $425 and $1,037 as of September 30, 2022 and December 31, 2021, respectively, of related party payables related to revenue share expenses, call center support, and the services noted above. The balances with our related party are presented net and are included in related party payables, net in the condensed consolidated balance sheet.
We earned fees and provided certain accounting and marketing services to companies owned by certain of MarketWise’s Class B unitholders. As a result, we recognized $225 and $93 in other income, net for the three months ended September 30, 2022 and 2021, and $478 and $235 for the nine months ended September 30, 2022 and 2021, respectively. Related party receivables related to these services were $478 and $358 as of September 30, 2022 and December 31, 2021, respectively.
We lease offices from related parties. Lease payments made to related parties were $418 and $383 for the three months ended September 30, 2022 and 2021, and $1,337 and $1,150 for the nine months ended September 30, 2022 and 2021, respectively, and rent expense of $588 and $556 were recognized in general and administrative expenses for the three months ended September 30, 2022 and 2021, and $1,729 and $1,668 for the nine months ended September 30, 2022 and 2021, respectively, related to leases with related parties. At September 30, 2022 and December 31, 2021, ROU assets of $9,626 and $10,323 and lease liabilities of $7,295 and $7,545 are associated with leases with related parties.
In April 2020 we provided a loan to a related party and recognized a related party note receivable from the unitholder of $1,148. We recognized $6 and $2 in interest income for the three months ended September 30, 2022 and 2021, and $16 and $7 for the nine months ended September 30, 2022 and 2021, respectively. The related party note receivable balance was $421 and $1,158 as of September 30, 2022 and December 31, 2021, respectively. The interest rate on the loan is variable and was 2.93% as of September 30, 2022. During October 2022, the loan was repaid in full.
In July 2021, the Company’s board approved and made a discretionary, one-time, lifetime-award, non-employee bonus payment of $10,000 to the Company’s founder, who is a Class B common stockholder, which was recorded within related party expense in the condensed consolidated statement of operations.
14. Variable Interest Entities
We consolidated a VIE based on our ability to exercise power and being the primary beneficiary of the entity including directing the operations and marketing campaigns and sharing customer lists and publications, as of
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
September 30, 2022 and December 31, 2021. There have been no reconsideration events during these periods. The assets of consolidated variable interest entities may only be used to settle obligations of these entities. In addition, there is no recourse to MarketWise for the consolidated VIE’s liabilities. The following represents financial information for the consolidated VIE included in the condensed consolidated balance sheets:
| | | | | | | | | | | | | |
| As of | | |
| September 30, 2022 | | December 31, 2021 | | |
Current assets | $ | 3,497 | | | $ | 3,901 | | | |
Noncurrent assets | 230 | | | 2 | | | |
Total assets | $ | 3,727 | | | $ | 3,903 | | | |
| | | | | |
Current liabilities | $ | — | | | $ | 274 | | | |
| | | | | |
Total liabilities | $ | — | | | $ | 274 | | | |
15. Supplemental Cash Flow Information
Supplemental cash flow disclosures are as follows:
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | |
| | | | | | 2022 | | 2021 | |
Supplemental Disclosures of Cash Flow Information: | | | | | | | | | |
Cash paid for interest | | | | | | $ | 589 | | | $ | — | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | |
Operating cash flows from operating leases | | | | | | (1,731) | | | (1,317) | | |
Operating lease right-of-use assets obtained in exchange for lease obligations | | | | | | (795) | | | — | | |
Operating lease right-of-use assets obtained in exchange for lease obligations from acquisitions | | | | | | (50) | | | (398) | | |
| | | | | | | | | |
Supplemental Disclosures of Non-Cash Investing and Financing Activities: | | | | | | | | | |
| | | | | | | | | |
Capitalized software included in accounts payable | | | | | | 120 | | | — | | |
| | | | | | | | | |
| | | | | | As of September 30, | |
| | | | | | 2022 | | 2021 | |
Reconciliation of Cash and Cash Equivalents and Restricted Cash: | | | | | | | | | |
Cash and cash equivalents | | | | | | $ | 147,216 | | | $ | 137,588 | | |
Restricted cash | | | | | | — | | | 500 | | |
Total | | | | | | $ | 147,216 | | | $ | 138,088 | | |
16. Shareholders' Equity
The Company’s capital stock consists of (i) issued and outstanding Class A common stock with a par value of $0.0001 per share, and (ii) issued and outstanding Class B common stock with a par value of $0.0001 per share.
The table set forth below reflects information about the Company’s equity, as of September 30, 2022. The 3,051,000 Sponsor Earn Out shares held in escrow and the 2,000,000 Management Earn Out shares are considered contingently issuable shares and therefore excluded from the number of Class A common stock issued and outstanding in the table below.
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
| | | | | | | | | | | | | | | | | |
| Authorized | | Issued | | Outstanding |
Common stock - Class A | 950,000,000 | | | 28,822,502 | | | 28,822,502 | |
Common stock - Class B | 300,000,000 | | | 291,092,303 | | | 291,092,303 | |
Preferred stock | 100,000,000 | | | — | | | — | |
Total | 1,350,000,000 | | | 319,914,805 | | | 319,914,805 | |
Each share of Class A and Class B common stock entitles the holder one vote per share. Only holders of Class A common stock have the right to receive dividend distributions. In the event of liquidation, dissolution or winding up of the affairs of the Company, only holders of Class A common stock have the right to receive liquidation proceeds, while the holders of Class B common stock are entitled to only the par value of their shares. Class B common stock can be issued only to MarketWise Members, their respective successors and permitted transferees. Under the terms of the MarketWise Operating Agreement, and subject to certain restrictions set forth therein, the MarketWise Members are entitled to have their MarketWise Units redeemed or exchanged for shares of our Class A common stock, at our option. If redeemed for cash at the Company’s option, such cash would have to be generated through an offering of shares to the market such that there would not be any situation where there would be a net cash obligation to the Company for such redemption. Shares of our Class B common stock held by any such redeeming or exchanging MarketWise Member will be canceled for no additional consideration on a one-for-one basis with the redeemed or exchanged MarketWise Units whenever the MarketWise Members’ MarketWise Units are so redeemed or exchanged. The MarketWise Members may exercise such redemption rights for as long as their MarketWise Units remain outstanding. For more information, see also Item 13: Certain Relationships and Related Transactions, and Director Independence — MarketWise Unit Redemption Right included in our Annual Report. Our board of directors has discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
On November 4, 2021, our Board of Directors authorized the repurchase of up to $35.0 million in aggregate of shares of the Company’s Class A common stock, with the authorization to expire on November 3, 2023. We did not repurchase any shares during the three months ended September 30, 2022 and we repurchased 2,484,717 shares totaling $13,054 in aggregate, including fees and commissions of $25 for the nine months ended September 30, 2022. Since the inception of the program we have repurchased 2,984,987 total shares. The maximum dollar value of shares that may yet to be purchased under the plan was $18.6 million as of September 30, 2022
For each share of Class A common stock the Company repurchases under the share repurchase program, MarketWise, LLC, the Company’s direct subsidiary, will redeem one common unit of MarketWise, LLC held by the Company, decreasing the percentage ownership of MarketWise, LLC by the Company and relatively increasing the ownership by the other unitholders.
As more fully described in Note 17 – Warrant Exchange below, during September 2022 we issued Class A common stock totaling 5,939,739 in connection with our warrant exchange transaction.
17. Warrant Exchange
On August 17, 2022, we commenced an exchange offer (the “Offer”) and consent solicitation (the “Consent Solicitation”) relating to our outstanding Public Warrants and Private Placement Warrants to purchase shares of Class A common stock at $11.50 per share. Each holder was offered the opportunity to receive 0.1925 shares of Class A common stock in exchange for each outstanding warrant tendered by the holder and exchanged pursuant to the Offer. Concurrently with the Offer, we solicited consents from holders of the warrants to amend the warrant agreement that governs all of the warrants (the “Warrant Agreement”) to permit us to require that each warrant outstanding upon the closing of the Offer be exchanged for 0.17325 shares of Class A common stock, which is a ratio 10% less than the exchange ratio applicable to the Offer (such amendment, the “Warrant Amendment”).
On September 14, 2022, we concluded the Offer and Consent Solicitation with approximately 96% of the outstanding warrants validly tendered and not withdrawn prior to the expiration of the Offer and Consent
MARKETWISE, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share, unit, per share, and per unit data)
Solicitation. Accordingly, on September 19, 2022, we issued 5,725,681 shares of Class A common stock in exchange for the 29,743,932 warrants tendered in the Offer.
Additionally, we received the requisite approval of warrant holders to enter into the Warrant Amendment. Accordingly, we and Continental Stock Transfer & Trust Company entered into the Warrant Amendment, dated September 15, 2022, and we exercised our right, in accordance with the terms of the Warrant Amendment, to exchange each warrant that was outstanding upon the closing of the Offer for 0.17325 shares of Class A common stock per warrant. On September 30, 2022, we issued 214,058 shares of Class A common stock in exchange for the 1,236,061 outstanding warrants after closing of the Offering. As a result, there are no outstanding warrants as of September 30, 2022, and the warrants were delisted from trading on the Nasdaq. In connection with the warrant exchange, we paid out a de minimis amount of cash in lieu of fractional shares.
We incurred $2.1 million of costs directly related to the warrant exchange, consisting primarily of dealer manager fees and professional, legal, printing, filing, regulatory, and other costs. These costs were recorded in general and administrative expenses on the condensed consolidated statements of operations as the transactions did not generate any proceeds to us and therefore the costs did not qualify to be deferred or charged to additional paid-in-capital under ASC 340-10-S99-1.
18. Subsequent Events
Subsequent events have been evaluated through November 3, 2022, which is the date that the financial statements were issued.