Vivid Seats Inc.: Form 10-Q for the period ended Mar 31, 2024

This discussion is intended to help readers understand our financial condition and results of operations and is provided as an addition to, and should be read together with, our condensed consolidated financial statements and accompanying notes included elsewhere in this Report, as well as our audited consolidated financial statements and accompanying notes contained in our 2023 Form 10-K. This discussion contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those contemplated by the forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed in the “Risk Factors” and “Forward-Looking Statements” sections of this Report and our 2023 Form 10-K.

Overview

We are an online ticket marketplace that utilizes our technology platform to connect fans of live events seamlessly with ticket sellers. Our mission is to empower and enable fans to Experience It Live. We believe in the power of shared experiences to connect people with live events delivering some of life’s most exciting moments. We operate a technology platform and marketplace that enables ticket buyers to easily discover and purchase tickets to live events and attractions and book hotel rooms and packages, while enabling ticket sellers and partners to seamlessly manage their operations. We differentiate from competitors by offering an extensive breadth and depth of ticket listings at a competitive value. The following table summarizes our Marketplace Gross Order Value (“Marketplace GOV”), revenues, net income and Adjusted EBITDA for the three months ended March 31, 2024 and 2023 (in thousands):

* See the “Key Business Metrics and Non-GAAP Financial Measure” section below for more information on Marketplace GOV and Adjusted EBITDA, which is a financial measure not defined under accounting principles generally accepted in the United States of America (“GAAP”).

Our Business Model

We operate our business in two segments, Marketplace and Resale.

Marketplace

In our Marketplace segment, we primarily act as an intermediary between ticket buyers, sellers and partners through which we earn revenue processing ticket sales for live events and attractions and from facilitating the booking of hotel rooms and packages from our Owned Properties and from our Private Label Offering. Our Owned Properties consist of our websites and mobile applications, including Vivid Seats, Vegas.com (as defined herein) and Wavedash (as defined herein), and our Private Label Offering consists of numerous distribution partners. The Owned Properties component of our Marketplace segment also includes our Vivid Picks daily fantasy sports offering, where users partake in contests by making picks from a variety of sport and player matchups. Using our online platform, we facilitate customer payments, deposits and withdrawals, coordinate ticket deliveries and provide customer service. We do not hold ticket inventory in our Marketplace segment.

We primarily earn revenue from service and delivery fees charged to ticket buyers. We also earn referral fee revenue by offering event ticket insurance to ticket buyers using a third-party insurance provider. The revenue we earn from our Vivid Picks daily fantasy sports offering is the difference between cash entry fees collected and cash amounts paid out to users for winning picks, less customer promotions and incentives.

We incur costs for developing and maintaining our platform, providing back-office support and customer service, facilitating payments and deposits, and shipping non-electronic tickets. We also incur substantial marketing costs, primarily related to online advertising.

A key component of our platform is Skybox, a proprietary enterprise resource planning (“ERP“) tool used by the majority of ticket sellers. Skybox is a free-to-use system that helps ticket sellers manage ticket inventories, adjust pricing and fulfill orders across multiple ticket resale marketplaces. Professional ticket sellers use an ERP to manage their operations, and Skybox is their most widely adopted ERP.

Resale

In our Resale segment, we primarily acquire tickets to resell on secondary ticketing marketplaces, including our own. Our Resale segment also provides internal research and development support for Skybox and our ongoing efforts to deliver industry-leading seller software and tools.

Key Business Metrics and Non-GAAP Financial Measure

We use the following metrics to evaluate our performance, identify trends, formulate financial projections and make strategic decisions. We believe these metrics provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team.

The following table summarizes our key business metrics and non-GAAP financial measure (in thousands):

(1) Marketplace GOV represents the total transactional amount of Marketplace segment orders placed on our platform in a period, inclusive of fees, exclusive of taxes and net of cancellations that occurred during that period. During the three months ended March 31, 2024, Marketplace GOV was negatively impacted by cancellations in the amount of $18.3 million compared to $12.1 million during the three months ended March 31, 2023.

(2) Total Marketplace orders represents the volume of Marketplace segment orders placed on our platform in a period, net of cancellations that occurred during that period. During the three months ended March 31, 2024, our Marketplace segment experienced 50,049 cancellations compared to 20,480 cancellations during the three months ended March 31, 2023.

(3) Total Resale orders represents the volume of Resale segment orders in a period, net of cancellations that occurred during that period. During the three months ended March 31, 2024, our Resale segment experienced 872 cancellations compared to 685 cancellations during the three months ended March 31, 2023.

(4) Adjusted EBITDA is a non-GAAP financial measure. We believe Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations, as well as provides a useful measure for making period-to-period comparisons of our business performance. See the “Adjusted EBITDA” section below for more information and a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure.

Marketplace GOV

Marketplace GOV is a key driver of our Marketplace segment revenue. Marketplace GOV represents the total transactional amount of Marketplace segment orders placed on our platform in a period, inclusive of fees, exclusive of taxes and net of cancellations that occurred during that period. Marketplace GOV reflects our ability to attract and retain customers, as well as the overall health of the industry.

Marketplace GOV can be impacted by seasonality. Typically, we experience slightly increased activity in the fourth quarter when all major sports leagues are in season and there is an increase in order volume for theater events during the holiday season and concert on-sales for the following year. Quarterly fluctuations in Marketplace GOV can also result from the popularity and demand of performers, tours, teams and events, the length and team composition of sports playoff series and championship games, and the number of cancellations.

Marketplace GOV increased during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily as a result of an increase in the number of orders processed, which for the three months ended March 31, 2024 included orders processed through Vegas.com and Wavedash.

Total Marketplace Orders

Total Marketplace orders represents the volume of Marketplace segment orders placed on our platform in a period, net of cancellations that occurred during that period. An order can include one or more tickets, hotel rooms or parking passes. Total Marketplace orders allows us to monitor order volume and better identify trends within our Marketplace segment. Total Marketplace orders increased during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily as a result of an increase in the number of orders processed, which for the three months ended March 31, 2024 included orders processed through Vegas.com and Wavedash.

Total Resale Orders

Total Resale orders represents the volume of Resale segment orders in a period, net of cancellations that occurred during that period. An order can include one or more tickets or parking passes. Total Resale orders allows us to monitor order volume and better identify trends within our Resale segment. Total Resale orders increased during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily as a result of higher activity in our Resale segment.

Adjusted EBITDA

We present Adjusted EBITDA, which is a non-GAAP financial measure, because it is a measure frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe this measure is helpful in highlighting trends in our operating results because it excludes the impact of items that are outside of our control or not reflective of ongoing performance related directly to the operation of our business.

Adjusted EBITDA is a key measure used by our management internally to make operating decisions, including those related to analyzing operating expenses, evaluating performance and performing strategic planning and annual budgeting. Moreover, we believe Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations, as well as provides a useful measure for making period-to-period comparisons of our business performance and highlighting trends in our operating results.

Adjusted EBITDA is not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP. Adjusted EBITDA does not reflect all amounts associated with our operating results as determined in accordance with GAAP and may exclude recurring costs, such as interest expense – net, equity-based compensation, litigation, settlements and related costs, change in fair value of warrants, change in fair value of derivative assets and foreign currency revaluation (gains)/losses. In addition, other companies may calculate Adjusted EBITDA differently than we do, thereby limiting its usefulness as a comparative tool. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from Adjusted EBITDA.

The following table provides a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, net income (in thousands):

(1) We have historically incurred sales tax expense in jurisdictions where we expected to collect and remit indirect taxes, but were not yet collecting from customers. In the first quarter of 2024, we settled certain liabilities for local admissions taxes for less than our estimated liability recorded as of December 31, 2023.

(2) Consists of legal, accounting, tax and other professional fees; personnel-related costs, which consist of retention bonuses; and integration costs. Transaction costs in both periods were primarily related to our acquisitions and strategic investments.

(3) Relates to profits interests issued prior to our merger transaction with Horizon Acquisition Corporation (the “Merger Transaction”) and equity granted pursuant to our 2021 Incentive Award Plan, as amended (the “2021 Plan”), which are not considered indicative of our core operating performance.

(4) Relates to external legal costs, settlement costs and insurance recoveries that were unrelated to our core business operations.

(5) Relates to the revaluation of warrants to purchase common units (“Intermediate Units”) of Hoya Intermediate, LLC (“Hoya Intermediate”) held by Hoya Topco, LLC (“Hoya Topco”) following the Merger Transaction.

(6) Relates to the revaluation of derivatives recorded at fair value.

(7) Relates to the revaluation of Vivid Picks cash earnouts.

(8) Relates to asset disposals, which are not considered indicative of our core operating performance.

(9) Relates to unrealized foreign currency revaluation loss from the remeasurement of non-operating assets and liabilities denominated in non-functional currencies on the balance sheet date.

Key Factors Affecting our Performance

During the three months ended March 31, 2024, there were no material changes to the “Key Factors Affecting Our Performance” disclosed in our 2023 Form 10-K. Our financial position and results of operations depend to a significant extent on those factors.

Recent Business Acquisitions

Vegas.com Acquisition

On November 3, 2023, we acquired VDC Holdco, LLC, the parent company of Vegas.com, LLC (together, “Vegas.com”), an online ticket marketplace for live event enthusiasts exploring Las Vegas, Nevada. The purchase price was $248.3 million, comprising $152.8 million in cash and approximately 15.6 million shares of our Class A common stock. We financed the cash portion of the purchase price at closing with cash on hand. The acquisition was accounted for as an acquisition of a business in accordance with the acquisition method of accounting.

Wavedash Acquisition

On September 8, 2023, we acquired WD Holdings Co., Ltd., the parent company of Wavedash Co., Ltd. (together, “Wavedash”), an online ticket marketplace headquartered in Tokyo, Japan. The purchase price was JPY 10,946.1 million, or approximately $74.3 million based on the exchange rate in effect on the acquisition date, before considering the net effect of cash acquired. We financed the purchase price at closing with cash on hand. The acquisition was accounted for as an acquisition of a business in accordance with the acquisition method of accounting.

Results of Operations

Comparison of the Three Months Ended March 31, 2024 and 2023

The following table sets forth our results of operations (in thousands, except percentages):

Revenues

The following table presents revenues by segment (in thousands, except percentages):

Total revenues increased $29.8 million, or 18%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase, which occurred in both our Marketplace and Resale segments, resulted primarily from an increase in orders processed.

Marketplace

The following table presents Marketplace revenues by event category (in thousands, except percentages):

Marketplace revenues increased $23.4 million, or 17%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase resulted primarily from an increase in the number of orders processed, particularly for theater events, and that the three months ended March 31, 2024 included orders processed through Vegas.com and Wavedash.

Total Marketplace orders increased 0.6 million, or 26%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Cancellation charges, which are recognized as a reduction to revenues, were $9.2 million and $3.6 million for the three months ended March 31, 2024 and 2023, respectively. The increase was primarily due to lower customer credit breakage, as well as an increase in cancellations due primarily to the three months ended March 31, 2024 including cancellations through Vegas.com and Wavedash.

The following table presents Marketplace revenues by business model (in thousands, except percentages):

The increase in revenue from Owned Properties during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 resulted primarily from an increase in the number of orders processed and that the three months ended March 31, 2024 included orders processed through Vegas.com and Wavedash.

The decrease in revenue from Private Label during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 resulted primarily from the negative impact to revenue of customer credit breakage, which more than offset an increase in revenue from higher order volumes.

In our Marketplace segment, we also earn referral fee revenue by offering event ticket insurance to ticket buyers using a third-party insurance provider. Our referral fee revenue was $6.8 million and $7.2 million during the three months ended March 31, 2024 and 2023, respectively. The decrease was primarily due to a decline in the insurance attachment rate to orders.

Resale

Resale revenues increased $6.4 million, or 26%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase resulted primarily from higher order volume.

Total Resale orders increased less than 0.1 million, or 14%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Cancellation charges, which are classified as a reduction to revenues, negatively impacted Resale revenues by $0.3 million for the three months ended March 31, 2024 compared to $0.5 million for the three months ended March 31, 2023. The decrease resulted primarily from fewer cancellations.

Cost of Revenues (exclusive of Depreciation and Amortization)

The following table presents cost of revenues by segment (in thousands, except percentages):

Total cost of revenues increased $11.8 million, or 31%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase resulted primarily from higher revenues in both our Marketplace and Resale segments.

Marketplace

Marketplace cost of revenues increased $6.1 million, or 30%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was relatively consistent with the 20% increase in Marketplace GOV for the same period.

Resale

Resale cost of revenues increased $5.7 million, or 32%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was relatively consistent with the 26% increase in Resale revenues for the same period.

Marketing and Selling

The following table presents marketing and selling expenses (in thousands, except percentages):

Marketing and selling expenses, which are entirely attributable to our Marketplace segment, increased $13.0 million, or 24%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase primarily resulted from greater spending on online advertising, which increased by $12.8 million, or 26%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase in spending on online advertising was relatively consistent with the 20% increase in Marketplace GOV over the same period as we scaled advertising to higher volumes, including volume associated with Vegas.com and Wavedash.

General and Administrative

The following table presents general and administrative expenses (in thousands, except percentages):

Total general and administrative expenses increased $10.0 million, or 31%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily due to higher personnel expenses from higher employee headcount, including headcount added through our acquisitions of Vegas.com and Wavedash, and from higher equity-based compensation expense. Higher professional fees, including those incurred with our acquisitions of Vegas.com and Wavedash, are reflected in other expenses and also contributed to the increase.

Depreciation and Amortization

Depreciation and amortization expenses increased $7.9 million, or 304%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily due to the intangibles acquired as part of our acquisitions of Vegas.com and Wavedash and, to a lesser extent, an increase in capitalized development activities related to our platform. The magnitude of the increase attributable to the amortization of acquired intangibles had a significant impact on net income for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Other (Income) Expense

Interest Expense – Net

Interest expense increased $1.8 million, or 55%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily due to higher interest rates, partially offset by interest earned on cash balances.

Other (Income) Expense

Other (income) expense increased $2.9 million, or 890%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily due to the fair value remeasurement of warrants, net of foreign currency revaluation losses due to unrealized gains arising from the remeasurement of non-operating assets and liabilities denominated in non-functional currencies on the balance sheet date.

Income Tax Expense (Benefit)

Income tax expense increased $2.0 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily due to our valuation allowance on our U.S. net operating losses, interest limitations and tax credit carryforwards as of March 31, 2023 that resulted in recording minimal income tax expense in the first quarter of 2023. The valuation allowance was subsequently released in the second quarter of 2023.

Liquidity and Capital Resources

We have historically financed our operations primarily through cash generated from operations. Our primary short-term requirements for liquidity and capital are to fund general working capital, capital expenditures and debt service requirements. Our primary long-term liquidity needs are related to debt repayment and potential acquisitions.

Our primary source of funds is cash generated from operations. Our existing cash and cash equivalents are sufficient to fund our liquidity needs for the next 12 months and thereafter for the foreseeable future. As of March 31, 2024, we had $154.0 million of cash and cash equivalents, which consist of interest-bearing deposit accounts, money market accounts managed by financial institutions and highly liquid investments with maturities of three months or less. For the three months ended March 31, 2024, we generated positive cash flows from our operating activities.

Loan Agreements

On June 30, 2017, we entered into a $575.0 million first lien debt facility, which included a $525.0 million term loan (the “June 2017 First Lien Term Loan”). We had an outstanding loan balance of $465.7 million under the June 2017 First Lien Loan as of December 31, 2021. In the first quarter of 2022, we repaid $190.7 million of the outstanding June 2017 First Lien Loan. On February 3, 2022, we entered into an amendment which refinanced the remaining balance of the June 2017 First Lien Loan with a new $275.0 million term loan (the “February 2022 First Lien Loan”), which has a maturity date of February 3, 2029, and added a new $100.0 million revolving credit facility (the “Revolving Facility”) with a maturity date of February 3, 2027. The terms of the February 2022 First Lien Loan specify a secured overnight financing rate (“SOFR”)-based floating interest rate and contain a springing financial covenant that requires compliance with a first lien net leverage ratio when revolver borrowings exceed certain levels. The February 2022 First Lien Loan requires quarterly amortization payments of $0.7 million. The Revolving Facility does not require periodic payments. All obligations under the February 2022 First Lien Loan are secured, subject to permitted liens and other exceptions, by first-priority perfected security interests in substantially all of our assets. The February 2022 First Lien Loan carries an interest rate of SOFR (subject to a 0.5% floor) plus 3.25%.

In connection with our acquisition of Wavedash, we assumed long-term debt owed to Shoko Chukin Bank (the “Shoko Chukin Bank Loan”) of JPY 458.3 million (approximately $3.1 million), which has a maturity date of June 24, 2026 and is subject to a fixed interest rate of 1.27% per annum.

As of March 31, 2024, we have the February 2022 First Lien Loan and the Shoko Chukin Bank Loan outstanding and we had no outstanding borrowings under the Revolving Facility.

Share Repurchase Programs

On February 29, 2024, our Board of Directors (our “Board”) authorized a share repurchase program for up to $100.0 million of our Class A common stock, which program was publicly announced on March 5, 2024 and does not have a fixed expiration date (the “2024 Repurchase Program”). As of March 31, 2024, we have repurchased 0.7 million shares of our Class A Common Stock for $4.1 million under the 2024 Repurchase Program and paid less than $0.1 million in commissions. As of March 31, 2024, approximately $95.9 million remained available for future repurchases under the 2024 Repurchase Program.

On May 25, 2022, our Board authorized a share repurchase program for up to $40.0 million of our Class A common stock, which program was publicly announced on May 26, 2022 (the “2022 Repurchase Program”). The 2022 Repurchase Program’s authorization was fully utilized during 2022 and the three months ended March 31, 2023. Cumulatively under the 2022 Repurchase Program, we repurchased 5.3 million shares of our Class A common stock for $40.0 million and paid $0.1 million in commissions.

Share repurchases are accounted for as Treasury stock in the Condensed Consolidated Balance Sheets.

Distributions to Non-Controlling Interests

Pursuant to its Limited Liability Company Agreement, Hoya Intermediate is required to make pro rata tax distributions to its members, of which $3.7 million is owed to non-controlling interests as of March 31, 2024.

Tax Receivable Agreement

In connection with the Merger Transaction, we entered into a Tax Receivable Agreement (the “TRA”) with the existing Hoya Intermediate shareholders that provides for our payment to such shareholders of 85% of the amount of the tax savings, if any, that we realize (or, under certain circumstances, are deemed to realize) as a result of, or attributable to, (i) increases in the tax basis of assets owned directly or indirectly by Hoya Intermediate or its subsidiaries from, among other things, any redemptions or exchanges of Intermediate Units, (ii) existing tax basis (including depreciation and amortization deductions arising from such tax basis) in long-lived assets owned directly or indirectly by Hoya Intermediate and its subsidiaries and (iii) certain other tax benefits (including deductions in respect of imputed interest) related to us making payments under the TRA.

Amounts payable under the TRA are contingent upon the generation of future taxable income over the term of the TRA and future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we would not be required to make the related payments. As of March 31, 2024, we estimate that the tax savings associated with all tax attributes described above would require us to pay $165.7 million, primarily over the next 15 years. As of March 31, 2024, $5.5 million is due within the next 12 months.

Cash Flows

The following table summarizes our cash flows (in thousands):

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Cash Provided by Operating Activities

Net cash provided by operating activities was $39.2 million for the three months ended March 31, 2024 due to $10.7 million in net income, net non-cash charges of $23.0 million and net cash inflows from a $5.4 million change in net operating assets. The net cash inflows from the change in net operating assets were primarily due to an increase in accounts payable resulting from seasonal fluctuations.

Net cash provided by operating activities was $65.1 million for the three months ended March 31, 2023 due to $30.3 million in net income, net non-cash charges of $8.2 million and net cash inflows from a $26.6 million change in net operating assets. The net cash inflows from the change in net operating assets were primarily due to an increase in accounts payable resulting from seasonal fluctuations.

Cash Used in Investing Activities

Net cash used in investing activities was $5.3 million and $2.6 million for the three months ended March 31, 2024 and 2023, respectively, which was primarily related to capital spending on development activities related to our platform.

Cash Used in Financing Activities

Net cash used in financing activities was $4.6 million for the three months ended March 31, 2024, which was primarily related to the 2024 Repurchase Program.

Net cash used in financing activities for the three months ended March 31, 2023 was $10.8 million, which was primarily related to the 2022 Repurchase Program.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Actual results may differ from these estimates under different assumptions or conditions. The estimates and assumptions associated with revenue recognition, equity-based compensation, warrants and earnouts, recoverability of our goodwill, indefinite-lived intangible assets, definite-lived intangible assets, long-lived assets and valuation allowances have the greatest potential impact on our consolidated financial statements. Accordingly, these are the policies that are the most critical to aid in fully understanding and evaluating our condensed consolidated financial statements. For a description of our critical accounting policies and estimates, see our 2023 Form 10-K. During the three months ended March 31, 2024, there were no material changes to the critical accounting policies disclosed in our 2023 Form 10-K.

Recent Accounting Pronouncements

See Note 2, New Accounting Standards, to our unaudited condensed consolidated financial statements included elsewhere in this Report for a description of recently adopted accounting pronouncements and issued accounting pronouncements not yet adopted.

Market risk is the potential loss from adverse changes in interest rates, foreign exchange rates and market prices. Our primary market risk is interest rate risk associated with our long-term debt. We manage our exposure to this risk through established policies and procedures. Our objective is to mitigate potential income statement, cash flow and market exposures from changes in interest rates.

Interest Rate Risk

Our market risk is affected by changes in interest rates. The February 2022 First Lien Loan bears a floating interest rate based on market rates plus an applicable spread. We will be susceptible to fluctuations in interest rates if we do not hedge the interest rate exposure arising from our floating-rate debt, which may adversely impact our financial results. A hypothetical 1% change in interest rates, assuming rates are above our interest rate floor, would have impacted our interest expense by $0.7 million based on amounts outstanding under the February 2022 First Lien Loan during the three months ended March 31, 2024.

Foreign Currency Exchange Risk

Our reporting currency is the U.S. dollar, while certain of our international subsidiaries’ functional currency is their local currency. Our international revenue, as well as costs and expenses denominated in foreign currencies, expose us to the risk of fluctuations in foreign currency exchange rates against the U.S. dollar. Accordingly, we are subject to foreign currency risk, which may adversely impact our financial results.

We are also exposed to foreign exchange rate fluctuations as we translate the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. We have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.

Due to fluctuations in exchange rates resulting from the current macroeconomic environment, we may experience negative impacts on the translation adjustments resulting from the conversion of the financial statements of our foreign subsidiaries into U.S. dollars, as well as the revaluation adjustments on U.S. dollar denominated intercompany loans. Foreign currency translation adjustment included in the Condensed Consolidated Statements of Comprehensive Income was $(1.9) million during the three months ended March 31, 2024. As of March 31, 2024, a hypothetical 10% change in foreign currency exchange rates applicable to our business would have impacted our foreign currency revaluation gain or loss, which is reflected in the Condensed Consolidated Statements of Operations, by $4.2 million.

Limitations on Effectiveness of Disclosure Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures.

Our management, with the participation of our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on such evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2024 due to the material weakness in our internal control over financial reporting described below.

Material Weakness

In connection with the audit of our consolidated financial statements as of December 31, 2023, 2022 and 2021, we identified a material weakness in our internal control over financial reporting related to the implementation of segregation of duties as part of our control activities, the establishment of clearly defined roles within our finance and accounting functions and the number of personnel in those functions with an appropriate level of technical accounting and SEC reporting experience which, in the aggregate, constitute a material weakness.

Remediation Activities

We continue to strengthen our internal control over financial reporting and are committed to ensuring that such controls are designed and operating effectively. During the three months ended March 31, 2024, we continued to review our internal control procedures, to implement new controls and processes, to hire additional qualified personnel and to establish more robust processes to support our internal control over financial reporting, including by creating clearly defined roles and responsibilities and the appropriate segregation of duties. These actions have begun to be validated through testing and, when fully implemented, we believe they will be effective in remediating the material weakness. However, additional time is required to complete implementing the enhanced procedures and to test and ensure the effectiveness and sustainability of the improved controls. The material weakness will not be considered remediated until the applicable controls have been in place and operating for a sufficient period of time and management has concluded, through testing, that these controls are effective. We continue to devote significant time and attention to these efforts.

Changes in Internal Control over Financial Reporting

Except with respect to the continuing remediation activities described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are continuing to review the internal control structures of Wavedash and Vegas.com and, if necessary, will make appropriate changes as we continue to integrate such businesses into our overall internal control over financial reporting.

In addition to the other information set forth in this Report, you should carefully consider the risks and uncertainties discussed in the “Risk Factors” section of our 2023 Form 10-K. These risks and uncertainties could cause actual results to differ materially from historical results or the results contemplated by the forward-looking statements contained in this Report. During the three months ended March 31, 2024, there were no material changes to the risk factors disclosed in our 2023 Form 10-K.