Arena (US:AREN)2020-05-18 10:43PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements The unaudited statements reveal significant net losses and a going concern warning amid acquisitions and financing activities Condensed Consolidated Balance Sheets Balance sheets reflect substantial growth in assets and liabilities from acquisitions, shifting stockholders' equity to a deficiency Key Balance Sheet Metrics | Metric | September 30, 2018 (Unaudited) | December 31, 2017 | | :--- | :--- | :--- | | Total Assets | $19,674,651 | $6,568,694 | | Total Liabilities | $6,720,057 | $3,416,444 | | Total Stockholders' (Deficiency) Equity | $(5,259,398) | $2,983,754 | | Cash | $1,862,012 | $619,249 | | Goodwill | $1,857,663 | - | Condensed Consolidated Statements of Operations Operations show significant revenue growth but also substantially increased net losses due to higher operating and interest expenses Key Operational Metrics | Metric | 3 Months Ended Sep 30, 2018 | 3 Months Ended Sep 30, 2017 | 9 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2017 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,157,917 | $6,064 | $1,460,958 | $6,064 | | Net Loss | $(8,629,564) | $(1,778,296) | $(17,418,151) | $(4,371,491) | | Net Loss Attributable to Common Shareholders | $(26,675,060) | $(1,778,296) | $(35,463,647) | $(4,371,491) | | Basic and Diluted Net Loss per Common Share | $(0.96) | $(0.11) | $(1.40) | $(0.33) | | Deemed dividend on Series H convertible preferred stock | $(18,045,496) | - | $(18,045,496) | - | Condensed Consolidated Statement of Stockholders' Equity (Deficiency) Stockholders' equity shifted to a significant deficiency, driven by net losses and a large deemed dividend on preferred stock Stockholders' Equity (Deficiency) Summary | Metric | January 1, 2018 | September 30, 2018 | | :--- | :--- | :--- | | Total Stockholders' Equity (Deficiency) | $2,983,754 | $(5,259,398) | | Accumulated Deficit | $(8,472,071) | $(25,890,222) | | Deemed dividend on Series H convertible preferred stock | - | $(18,045,496) | - The reclassification of investor demand payable contributed $3,000,000 to total stockholders' equity in Q1 20189 Condensed Consolidated Statements of Cash Flows Cash flows show substantial use in operations and investments, offset by significant proceeds from financing activities Cash Flow Summary | Cash Flow Activity | 9 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2017 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(6,288,695) | $(2,654,964) | | Net Cash Used in Investing Activities | $(14,417,240) | $(1,513,813) | | Net Cash Provided by Financing Activities | $18,948,698 | $5,269,544 | | Cash, cash equivalents, and restricted cash — end of period | $1,862,012 | $1,699,061 | - Investing activities in 2018 included $9,032,596 for business acquisitions and $1,660,331 for capitalized platform development11 - Financing activities in 2018 were significantly boosted by $12,474,704 from Series H convertible preferred stock issuance and $4,775,000 from 10% convertible debentures11 Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, acquisitions, financing, and subsequent events, including a going concern warning Note 1. Organization and Basis of Presentation This note outlines the company's digital media platform business model and includes a significant going concern warning - The Company operates a digital, distribution, and monetization platform for a coalition of independent, professionally managed online media publishers ('Mavens')17281 - The growth strategy involves expanding the coalition by adding new Mavens and acquiring entities that enhance the platform18282 - Management has concluded there is substantial doubt about the Company's ability to continue as a going concern due to recurring net losses and negative cash flows2225360 - The COVID-19 pandemic has led to a decline in revenues and earnings since early March 2020, with the full impact remaining uncertain2426279 Note 2. Summary of Significant Accounting Policies This note details key accounting policies for revenue recognition, platform development, intangibles, and derivative instruments - The Company adopted ASC 606, Revenue from Contracts with Customers, effective January 1, 2017, recognizing revenue when control is transferred35 Revenue by Product Line (9 Months Ended September 30, 2018) | Product Line | Amount ($) | | :--- | :--- | | Advertising | 1,414,688 | | Membership Subscriptions | 46,270 | | Total | 1,460,958 | - Platform development costs are capitalized and amortized on a straight-line basis over three years454647 - Derivative financial instruments are recorded at fair value, with changes in fair value recognized in the statement of operations5859 Anti-Dilutive Securities Excluded from EPS Calculation (September 30, 2018) | Security Type | Shares Excluded | | :--- | :--- | | Series G Preferred Stock | 188,791 | | Series H Preferred Stock | 58,785,606 | | Unvested and forfeitable restricted stock awards | 5,340,362 | | Financing Warrants | 3,074,018 | | Channel Partner Warrants | 1,099,008 | | Common stock options | 9,693,831 | | Total | 78,181,616 | Note 3. Acquisition of HubPages, Inc. The company acquired HubPages, Inc. for $10.6 million in cash, recognizing significant intangible assets and goodwill - Acquisition of HubPages, Inc. completed on August 23, 2018, for total cash consideration of $10,569,9049496 - HubPages operates a network of 27 premium content channels, acquired to increase content and enhance user experience94 Purchase Price Allocation (HubPages Acquisition) | Asset/Liability | Fair Value ($) | | :--- | :--- | | Current assets | 1,588,096 | | Accounts receivable and unbilled receivables | 1,033,080 | | Other assets | 25,812 | | Developed technology | 6,740,000 | | Tradename | 268,000 | | Goodwill | 1,857,663 | | Current liabilities | (851,114) | | Deferred tax liability | (91,633) | | Net assets acquired | 10,569,904 | - Goodwill of $1,857,663 was recognized, attributed to the acquired workforce and business synergies98100 Note 4. Promissory Notes Receivable Promissory notes receivable from Say Media totaling $3.7 million were settled as part of a subsequent acquisition - Total promissory notes receivable amounted to $3,695,054 as of September 30, 2018, primarily from Say Media105 - In December 2018, the Company settled these notes by forgiving $1,166,556 and reclassifying the remaining $2,528,498 as an advance for the Say Media acquisition106 Note 5. Property and Equipment Net property and equipment increased slightly, reflecting ongoing capital expenditures and depreciation expense | Metric | September 30, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Net Property and Equipment Costs | $64,588 | $54,670 | - Depreciation expense for the nine months ended September 30, 2018, was $19,341, up from $7,990 in the prior year period107 Note 6. Platform Development Net platform development costs reached $4.5 million, reflecting continued investment in the company's technology | Metric | September 30, 2018 | | :--- | :--- | | Net Platform Development Costs | $4,530,996 | - Amortization expense for platform development costs for the nine months ended September 30, 2018, was $1,271,281, a substantial increase from $226,000 in 2017110 Note 7. Intangible Assets Intangible assets totaled $6.9 million net, primarily from the HubPages acquisition, with amortization scheduled over five years Intangible Assets (September 30, 2018) | Asset Type | Carrying Amount ($) | Accumulated Amortization ($) | Net Carrying Amount ($) | | :--- | :--- | :--- | :--- | | Developed technology | 6,740,000 | (141,323) | 6,598,677 | | Tradename | 268,000 | (5,619) | 262,381 | | Website domain name | 20,000 | - | 20,000 | | Total | 7,028,000 | (146,942) | 6,881,058 | - Amortization expense for intangible assets for the three and nine months ended September 30, 2018, was $146,942111 Estimated Amortization Expense for Intangible Assets | Year | Amount ($) | | :--- | :--- | | 2019 | 1,401,600 | | 2020 | 1,401,600 | | 2021 | 1,401,600 | | 2022 | 1,401,600 | | 2023 | 1,254,658 | | Total | 6,861,058 | Note 8. Goodwill Goodwill of $1.9 million was acquired through the HubPages acquisition, with no impairment reported for the period - Goodwill of $1,857,663 was acquired in the HubPages acquisition and remained unchanged as of September 30, 2018114 - No impairment was recognized for goodwill during the nine months ended September 30, 2018114 Note 9. Accrued Expenses Accrued expenses increased significantly due to higher accrued payroll, publisher expenses, and related taxes Accrued Expenses | Category | September 30, 2018 ($) | December 31, 2017 ($) | | :--- | :--- | :--- | | General accrued expenses | 175,140 | 150,136 | | Accrued payroll and related taxes | 191,425 | - | | Accrued publisher expenses | 609,525 | - | | Other accrued expenses | 52,082 | - | | Total accrued expenses | 1,028,172 | 150,136 | Note 10. Liquidating Damages Payable The company recorded $2.7 million in liquidating damages payable for failing to meet registration requirements - A total of $2,667,798 was recorded as Liquidated Damages Payable as of September 30, 2018116 - These damages arose from the Company's failure to meet timeframes for the registration statement covering Series H Preferred Stock117118 Note 11. Fair Value Measurements Derivative liabilities of $1.3 million, related to warrants and conversion features, were measured at fair value using Level 3 inputs - Derivative liabilities are carried at fair value and classified as Level 3 due to subjective valuation inputs119121 Derivative Liabilities (September 30, 2018) | Derivative Type | Carrying Amount ($) | | :--- | :--- | | L2 Warrants | 545,872 | | Strome Warrants | 767,449 | | Total Derivative Liabilities | 1,313,321 | - The change in valuation of derivative liabilities resulted in a gain of $368,694 for the nine months ended September 30, 2018122 Note 12. Notes Payable This note details various notes payable, including repayments resulting in extinguishment losses and conversions into preferred stock - Officer promissory notes, including accrued interest, totaled $966,389 as of September 30, 2018125 - The 8% Promissory Notes were repaid, resulting in a loss on extinguishment of $722,619126131 - The 10% Convertible Debentures were converted into Series H Preferred Stock, leading to a loss on extinguishment of $249,630132138 - Interest expense for the nine months ended September 30, 2018, was $1,552,006, primarily from debt discount amortization and extinguishment losses393 Note 13. Preferred Stock The issuance of Series H Preferred Stock resulted in a significant deemed dividend due to its beneficial conversion feature - 168.496 shares of Series G Convertible Preferred Stock were outstanding, classified as a mezzanine obligation141142 - 19,399.25 shares of Series H Convertible Preferred Stock were issued for gross proceeds of $19,399,250144 - A beneficial conversion feature of $18,045,496 was recorded as a deemed dividend on Series H Preferred Stock151 - The Company recognized $1,347,254 in liquidated damages for registration rights and $1,305,544 for public information failure related to the Series H Preferred Stock148149 Note 14. Stockholders' Equity This note details changes in common stock, restricted stock awards, and warrants, including private placements and fair value adjustments - The Company issued 1,700,000 shares of common stock for $4,250,000 through private placements in 2018153157 - As of September 30, 2018, 5,340,362 unvested restricted stock awards were outstanding, with $4,101,987 in unrecognized compensation cost165 - L2 Warrants and Strome Warrants had their exercise prices adjusted to $0.50 per share and are classified as derivative liabilities169174 Financing Warrants Activity (9 Months Ended September 30, 2018) | Activity | Number of Shares | | :--- | :--- | | Outstanding at January 1, 2018 | 1,289,172 | | Issued | 1,986,558 | | Exercised | (842,117) | | Issued as result of reset provision | 640,405 | | Outstanding at September 30, 2018 | 3,074,018 | Note 15. Stock Based Compensation This note details stock-based compensation, including an expansion of the incentive plan and significant recognized expense - The 2016 Stock Incentive Plan's authorized shares were increased from 3,000,000 to 10,000,000179 - As of September 30, 2018, 9,693,831 common stock options were outstanding, with $4,950,651 in unrecognized compensation expense183185 - Channel Partner Warrants outstanding totaled 1,099,008 as of September 30, 2018189 Total Stock-Based Compensation (9 Months Ended September 30) | Year | Total Stock-Based Compensation ($) | | :--- | :--- | | 2018 | 4,924,999 | | 2017 | 2,045,812 | Note 16. Related Party Transactions This note discloses transactions with related parties, including investment banking services, consulting fees, and officer loans - MDB and B. Riley FBR, entities with board representation, acted as placement agents for multiple private placements192193194196 - The Company's CEO advanced $966,389 (including interest) through promissory notes to meet operating needs199 - Promissory notes receivable from Say Media were settled by forgiving $1,166,556 and reclassifying $2,528,498 as an acquisition advance201 Note 17. Commitments and Contingencies This note outlines contractual obligations for operating leases and revenue share guarantees, with no material legal proceedings Operating Lease Commitments (Seattle Office) | Year | Amount ($) | | :--- | :--- | | 2018 (Oct – Dec) | 48,000 | | 2019 | 233,000 | | 2020 | 265,000 | | 2021 | 227,000 | | Total | 773,000 | Channel Partner Revenue Guarantees (Aggregate Commitment) | Year | Amount ($) | | :--- | :--- | | 2018 (Oct – Dec) | 12,250 | | 2019 | 11,500 | | Total | 23,750 | - The Company is not currently a party to any pending or threatened legal proceedings expected to have a material adverse effect207 Note 18. Subsequent Events This note details significant events after the reporting period, including major financings, acquisitions, and a key licensing deal - From October 2018 through April 2020, the Company raised approximately $139 million through various debt and preferred stock private placements26209212253258262275276 - Acquired Say Media, Inc. on December 12, 2018, for $9,537,397 cash plus equity223224 - Acquired TheStreet, Inc. on August 7, 2019, for $16,500,000 cash237238 - Entered into an exclusive licensing agreement to operate the Sports Illustrated media business, prepaying $45,000,000 in royalties240242243 - Appointed Douglas Smith as CFO, William Sornsin as COO, and Avi Zimak as CRO231267268 - Entered into a new operating lease for offices in New York, with total minimum lease payments of $38,415,920 through November 2032270 - The COVID-19 pandemic has caused a decline in revenues and earnings since early March 2020279280 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, results of operations, strategic developments, and liquidity challenges Overview The company operates a digital media platform for independent publishers, with a growth strategy focused on acquisitions - The Company operates a digital, monetization, and distribution platform shared by a coalition of independent online media publishers ('Mavens')281 - Mavens leverage a proprietary technology platform to engage niche audiences and benefit from improved advertising and membership systems281 - The growth strategy involves expanding the coalition by adding new Mavens and acquiring crucial content providers282 Recent Developments This section highlights key post-period events, including major financings, acquisitions, and the Sports Illustrated licensing agreement - The Company issued multiple series of convertible debentures, preferred stock, and loans to raise substantial capital283285330334339351353 - Acquired Say Media, Inc., TheStreet, Inc., and the assets of Petametrics Inc. (LiftIgniter)297314350 - Entered into an exclusive licensing agreement to operate the Sports Illustrated media business with a $45,000,000 prepaid royalty317318319 - Key executive appointments include a new CFO, COO, and CRO307344345 - The COVID-19 pandemic has led to a decline in revenues and earnings since early March 2020357358 Results of Operations The company experienced substantial revenue growth, but this was offset by significantly higher costs and expenses, widening net losses Key Operational Metrics | Metric | 3 Months Ended Sep 30, 2018 | 3 Months Ended Sep 30, 2017 | 9 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2017 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,157,917 | $6,064 | $1,460,958 | $6,064 | | Cost of Revenue | $1,784,073 | $449,567 | $3,922,594 | $641,606 | | Gross Loss | $(626,156) | $(443,503) | $(2,461,636) | $(635,542) | | General and Administrative | $2,573,142 | $1,300,767 | $7,998,609 | $3,639,204 | | Net Loss | $(8,629,564) | $(1,778,296) | $(17,418,151) | $(4,371,491) | - General and administrative costs increased by $4,359,405 (119.8%) for the nine months ended September 30, 2018, due to business expansion391 - Interest expense for the nine months ended September 30, 2018, was $1,552,006, mainly from amortization and debt extinguishment losses393 - A deemed dividend of $18,045,496 on Series H convertible preferred stock was recognized due to a beneficial conversion feature399 Liquidity and Capital Resources – September 30, 2018 The company faced a working capital deficiency and relied on external financing, prompting a going concern warning - The Company had a working capital deficiency of $2,890,964 at September 30, 2018404 - Management concluded there is substantial doubt about the Company's ability to continue as a going concern401405 - From October 2018 through April 2020, the Company raised approximately $139 million through various debt and preferred stock private placements407 Principal Cash Operating Obligations and Commitments (September 30, 2018) | Obligation Type | Total ($) | 2018 (Oct-Dec) ($) | 2019 ($) | 2020 ($) | 2021 ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | 804,024 | 58,580 | 253,282 | 265,345 | 226,817 | | Employment contracts | 435,417 | 137,500 | 297,917 | - | - | | Consulting agreements | 566,040 | 93,540 | 465,300 | 7,200 | - | | Total | 1,805,481 | 289,620 | 1,016,499 | 272,545 | 226,817 | Item 3. Quantitative and Qualitative Disclosures About Market Risk No quantitative and qualitative disclosures about market risk are applicable to the company for the reported period Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were not effective due to material weaknesses in internal control - Disclosure controls and procedures were deemed not effective as of September 30, 2018, due to material weaknesses in internal control414 - Identified material weaknesses include lack of a functioning audit committee, inadequate segregation of duties, and insufficient accounting resources416 - A remediation plan was commenced in the second quarter of 2019417 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings - The Company is not currently a party to any pending or threatened legal proceedings that it believes would have a material adverse effect417 Item 1A. Risk Factors This section highlights the adverse impact of the COVID-19 outbreak and refers to the 2017 Form 10-K for other risks - The Company's business has been, and is expected to continue to be, adversely affected by the recent COVID-19 outbreak419420 - Readers should review the Risk Factors outlined in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017418 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the company for the reported period Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reported period Item 4. Mine Safety Disclosures This item is not applicable to the company for the reported period Item 5. Other Information This item is not applicable to the company for the reported period Item 6. Exhibits This section lists the exhibits filed with the report, including officer certifications and XBRL data - Includes Officer's Certification Pursuant to Section 302 (Exhibit 31.1) and Section 906 (Exhibit 32.1) of the Sarbanes-Oxley Act423 - XBRL related information (Exhibit No. 101) is furnished but not filed424 SIGNATURES The report is officially signed by the Chief Executive Officer and Chief Financial Officer - The report is signed by James C. Heckman, Jr., Chief Executive Officer, and Douglas B. Smith, Chief Financial Officer, on May 18, 2020422