Arena (US:AREN)2025-04-15 21:30Part I: Business and Risk Factors This section details the company's business model, strategic verticals, intellectual property, and critical risk factors including legal proceedings and cybersecurity Business Overview The company operates as a technology-driven media entity managing content verticals in sports, lifestyle, and finance through its proprietary digital platform and partner network - The company operates as a media company using a proprietary technology platform to manage content verticals in sports, lifestyle, and finance18 - Core owned and operated brands include Athlon Sports, TheStreet, The Spun, Parade, Men's Journal, and Autoblog1833 - The company's platform supports over 150 independent Publisher Partners who create content and share in the generated revenue, benefiting from Arena's technology, scale, and monetization expertise1920 - The business experiences significant seasonality, with the fourth quarter being the most profitable due to holiday advertising and major sports seasons, while the first quarter is the most challenging49 Business Strategy and Verticals The company's strategy focuses on audience expansion, publisher acquisition, and partner growth across its Sports & Leisure, Finance, Lifestyle, and Platform verticals - Growth initiatives include expanding audience reach, improving revenue yield through technology and syndication, acquiring strong brands, and partnering with entrepreneurial publishers24 - The Sports & Leisure vertical includes brands like Athlon Sports and The Spun26 - The Finance vertical is anchored by TheStreet and the recently acquired Autoblog (September 2024)3133 - The Lifestyle vertical features major brands such as Parade and Men's Journal3435 Intellectual Property and Human Capital As of December 31, 2024, the company holds various intellectual properties including patents, copyrights, and trademarks, and employs 198 people Intellectual Property Holdings (as of Dec 31, 2024) | IP Type | Count | | :--- | :--- | | U.S. Issued Patents | 7 | | U.S. Copyright Registrations | ~1,300 | | Registered Domain Names | >1,200 | | U.S. Trademark Registrations | ~118 | | Foreign Trademark Registrations | 90 | - As of December 31, 2024, the company had a total of 198 employees, with 190 full-time and 8 part-time46 Risk Factors The company faces critical risks including the Sports Illustrated license termination, going concern doubts, internal control weaknesses, and NYSE delisting threats - Sports Illustrated License Termination: The license to operate the Sports Illustrated media business was terminated by ABG, who is now seeking $48.8 million in damages, including a $45.0 million termination fee, and this loss is expected to materially harm the business707172 - Going Concern Risk: The company's financial condition, including recurring net losses ($100.7 million in FY2024) and a working capital deficit, raises substantial doubt about its ability to continue as a going concern119120 - Internal Control Weaknesses: Management identified material weaknesses in internal control over financial reporting, specifically related to undocumented accounting policies and insufficient validation of third-party data111245 - NYSE Delisting Risk: The company is not in compliance with NYSE American's minimum stockholders' equity requirements, and failure to regain compliance by April 2026 could result in the delisting of its common stock144145 - The company faces risks from recent advances in Generative AI, which could reduce online traffic, enable unauthorized use of content, and harm revenue streams74 Cybersecurity The company manages cybersecurity risks through a program overseen by the Audit Committee, involving regular assessments and incident response planning - The Audit Committee of the Board of Directors oversees the company's cybersecurity risk management processes152 - The company engages third parties for risk assessments, penetration testing, and evaluations of security controls to identify and mitigate cyber risks153154 - To date, no known cybersecurity threats or prior incidents have materially affected or are reasonably likely to materially affect the company's operations, business strategy, or financial condition156 Legal Proceedings The company is involved in significant legal disputes, including a $48.8 million lawsuit from ABG and a $20 million claim from its former CEO - ABG Group filed a lawsuit seeking $48.8 million in damages for breach of contract related to the termination of the Sports Illustrated license162 - The former CEO and Chairman filed a lawsuit seeking $20 million for claims including retaliation, breach of contract, and wrongful termination160 - A lawsuit filed by the former President, Media was resolved through a confidential settlement agreement on November 15, 2024159 Part II: Financial Information This section provides management's discussion and analysis of financial condition, results of operations, and internal controls, along with key financial metrics and liquidity information Management's Discussion and Analysis (MD&A) MD&A details a 12.3% revenue decline, improved gross margin, reduced operating expenses, and a $100.7 million total net loss, raising going concern doubts Key Operating Metrics Key operating metrics for FY2024 show a 9% increase in RPM to $23.31 but a 16% decrease in monthly average pageviews to 332.9 million Key Operating Metrics (2024 vs. 2023) | Metric | FY 2024 | FY 2023 | Change | | :--- | :--- | :--- | :--- | | Revenue per page view (RPM) | $23.31 | $21.35 | +9% | | Monthly Average Pageviews (millions) | 332.9 | 394.4 | -16% | - The increase in RPM was driven by a higher percentage of digital video advertising, which commands higher prices than display ads177 - The decrease in monthly average pageviews was primarily caused by the shutdown of FanNation sites early in 2024177 Liquidity and Capital Resources The company faces significant liquidity challenges with a $82.0 million working capital deficit and $121.3 million in debt, raising going concern doubts - Going Concern Warning: Management has determined that substantial doubt exists about the company's ability to continue as a going concern for the next year due to recurring net losses from continuing operations and a significant working capital deficit181326 Financial Position (as of Dec 31, 2024) | Metric | Amount (in thousands) | | :--- | :--- | | Cash and cash equivalents | $4,362 | | Working capital deficit | ($82,022) | | Total debt obligations, gross | $121,342 | Cash Flow Summary (FY 2024) | Cash Flow Activity | Amount (in thousands) | | :--- | :--- | | Net cash used in operating activities | ($16,076) | | Net cash used in investing activities | ($5,175) | | Net cash provided by financing activities | $16,329 | Results of Operations (FY2024 vs FY2023) FY2024 saw a 12.3% revenue decline to $125.9 million, but improved gross profit and operating income due to expense reductions, despite segment shifts Consolidated Results of Operations (Continuing Ops, in thousands) | Metric | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $125,907 | $143,630 | -12.3% | | Gross Profit | $55,718 | $55,273 | +0.8% | | Income (Loss) from Operations | $7,869 | ($17,460) | -145.1% | | Net Loss from Continuing Ops | ($7,667) | ($37,215) | -79.4% | | Net Loss from Discontinued Ops | ($93,043) | ($18,367) | +406.6% | | Total Net Loss | ($100,710) | ($55,582) | +81.2% | Revenue from Continuing Operations by Category (in thousands) | Category | 2024 | 2023 | | :--- | :--- | :--- | | Digital advertising | $93,008 | $106,282 | | Digital subscriptions | $7,800 | $11,956 | | Performance Marketing | $10,927 | $3,449 | | Print revenue | $1,073 | $9,507 | Segment Revenue (in thousands) | Segment | 2024 | 2023 | | :--- | :--- | :--- | | Sports & Leisure | $42,449 | $65,984 | | Finance | $27,734 | $29,638 | | Lifestyle | $39,865 | $36,836 | | Platform | $15,859 | $11,172 | - The decrease in Sports & Leisure revenue was driven by the cessation of publishing FanNation sites and the shutdown of Athlon Outdoor print operations203 Non-GAAP Measures: Adjusted EBITDA Adjusted EBITDA more than doubled to $27.0 million in FY2024, driven by significant reductions in operating expenses Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Line Item | 2024 | 2023 | | :--- | :--- | :--- | | Net loss | ($100,710) | ($55,582) | | Loss from discontinued operations, net of tax | $93,043 | $18,367 | | Loss from continuing operations | ($7,667) | ($37,215) | | Plus Adjustments... | | | | Adjusted EBITDA | $26,960 | $13,175 | - Adjusted EBITDA is calculated by adjusting net loss for items such as interest, taxes, depreciation, amortization, stock-based compensation, and other non-recurring or non-cash items215 Controls and Procedures Management concluded internal controls over financial reporting were ineffective due to undocumented policies and insufficient third-party data validation, with remediation plans underway - Management concluded that internal control over financial reporting was not effective as of December 31, 2024244111 - Material Weakness 1: Finance and accounting policies, including those for revenue recognition and expense recognition, have not been fully documented245 - Material Weakness 2: The company did not maintain a sufficient system of internal controls to validate data provided by certain third-party service providers for print subscription management, advertising, and ad serving251 - Remediation plans include hiring resources to document policies, obtaining and reviewing SOC 1 reports from third-party providers, and implementing additional controls for reviewing third-party agreements246251 Consolidated Financial Statements and Notes This section presents the independent auditor's report, summary financial statements, and detailed notes on discontinued operations, debt, related party transactions, and segment performance Independent Auditor's Report Auditors issued a going concern warning and identified critical audit matters regarding goodwill valuation and programmatic advertising revenue - The auditor's report includes a "Going Concern" paragraph, citing recurring net losses and a working capital deficit that raise substantial doubt about the company's ability to continue283298 - A critical audit matter was the valuation of the company's $42.6 million in goodwill, which required subjective judgment in evaluating assumptions for revenue growth, operating margins, and discount rates289290 - Another critical audit matter was the sufficiency of audit evidence for programmatic advertising and publisher revenue, due to the high volume of transactions dependent on third-party service providers292293 Financial Statements Summary The company's financial position deteriorated in 2024 with decreased assets, increased stockholders' deficiency, and a $100.7 million net loss Consolidated Balance Sheet Data (in thousands) | Metric | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | $116,352 | $188,878 | | Total Liabilities | $246,512 | $247,705 | | Total Stockholders' Deficiency | ($130,328) | ($58,995) | Consolidated Statement of Operations Data (in thousands) | Metric | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Revenue | $125,907 | $143,630 | | Loss from Continuing Operations | ($7,667) | ($37,215) | | Loss from Discontinued Operations | ($93,043) | ($18,367) | | Net Loss | ($100,710) | ($55,582) | Note 3: Discontinued Operations This note details the $93.0 million loss from discontinued Sports Illustrated operations, including a disputed $45.0 million termination fee - The company discontinued the Sports Illustrated media business after the licensor, ABG, terminated the agreement on January 18, 2024416 Loss from Discontinued Operations (FY 2024, in thousands) | Item | Amount | | :--- | :--- | | Revenue | $22,159 | | Total operating expenses | $100,057 | | Including General & administrative | $45,907 | | Including Loss on impairment of assets | $39,391 | | Net loss from discontinued operations | ($93,043) | - Current liabilities from discontinued operations as of Dec 31, 2024, include a disputed royalty fee liability of $3.75 million and a disputed termination fee liability of $45.0 million419420 Notes 17 & 18: Debt (Simplify Loan & Term Debt) The company holds significant debt, including $110.4 million in Term Debt and a $10.7 million Simplify Loan, with a recent debt-to-equity conversion Term Debt Summary (as of Dec 31, 2024, in thousands) | Debt Instrument | Principal Balance | Carrying Value | | :--- | :--- | :--- | | Senior Secured Notes | $62,691 | $62,510 | | Delayed Draw Term Notes | $4,000 | $3,979 | | 2022 Bridge Notes | $36,000 | $35,947 | | 2023 Notes | $8,000 | $8,000 | | Total Term Debt | $110,691 | $110,436 | - The company has a working capital loan agreement with its principal stockholder, Simplify, for up to $50 million, with $10.7 million outstanding as of year-end469 - In August 2024, $15 million of debt owed to Simplify was exchanged for 17,797,817 shares of common stock469484 - The company defaulted on a Term Debt interest payment in December 2023 but subsequently entered into a forbearance agreement and cured the default by year-end 2024476 Note 24: Related Party Transactions The company has critical related party transactions with its principal stockholder, Simplify, including significant financing and revenue contributions - Simplify became the majority stockholder (owning 71.4%) following a $12 million private placement and a $15 million debt-for-equity swap in 2024484485544 - The company recognized $5.1 million in digital advertising revenue from Living Essentials, LLC, an affiliate of Simplify543 - In December 2023, Renew Group Private Limited, an affiliate of Simplify, purchased all notes and common stock held by the former principal stockholder, B. Riley, and assumed the role of agent for the company's Term Debt546 Note 26: Segment Reporting The company reports across four segments: Sports & Leisure, Finance, Lifestyle, and Platform, with varying revenue and gross profit performance in FY2024 Segment Performance (FY 2024, in thousands) | Segment | Total Revenue | Segment Gross Profit | | :--- | :--- | :--- | | Sports & Leisure | $42,449 | $20,089 | | Finance | $27,734 | $18,348 | | Lifestyle | $39,865 | $24,656 | | Platform | $15,859 | $6,390 | | Total | $125,907 | $69,483 | - The company changed its reportable segments in 2024 to align with how the new CEO evaluates performance, focusing on segment gross profit by vertical, and prior period data has been re-cast557