Arena (AREN) - 2022 Q4 - Annual Report

Part I This part covers the company's business operations, risk factors, properties, and legal proceedings Business The Arena Group is a tech-powered media company leveraging iconic brands and a digital platform to grow audience and monetization across sports, finance, and lifestyle verticals The Platform The company operates a proprietary digital publishing platform providing content management, distribution, and monetization solutions for its owned brands and Publisher Partners - The company has developed a proprietary online publishing platform that provides content management, video publishing, social distribution, and monetization solutions to its owned media businesses and third-party Publisher Partners[24][25] - Publisher Partners utilize the platform services, incurring their own content creation costs, and share the generated revenue with The Arena Group based on a pre-defined agreement, allowing for content scaling at a variable cost[23][27] Our Brands and Growth Strategy The company's growth strategy centers on a vertical model, expanding major brands and initiatives like content syndication, podcasts, e-commerce, and new acquisitions - The company's business model is centered on a vertical strategy, building around major brands like Sports Illustrated (sports), TheStreet (finance), and Parade/Men's Journal (lifestyle) to create a "halo effect" for other partners in the same vertical[29][30] - Key growth initiatives for 2023 include increasing content syndication, offering podcasts and e-commerce, growing the SI Sportsbook, acquiring or developing new verticals, and adding new Publisher Partners[30] - The company has actively expanded its brand portfolio through licensing and acquisitions, including Sports Illustrated (2019), The Spun (2021), Parade (2022), and Men's Journal (2022), to anchor its key lifestyle and sports verticals[32][36][37][38] Intellectual Property The company protects its technology and content through a combination of patents, copyrights, trademarks, and trade secret laws - The company protects its technology and content through a combination of patents, copyrights, trademarks, and trade secret laws[43] Intellectual Property Holdings as of December 31, 2022 | IP Type | Count | | :--- | :--- | | U.S. Issued Patents | 7 | | U.S. Copyright Registrations | ~1,300 | | Registered Domain Names | >1,600 | | U.S. Trademark Registrations | 165 | | Foreign Trademark Registrations | 88 | Competition The digital media industry is highly competitive and fragmented, with the company competing against a wide range of content players, media companies, and social platforms - The digital media industry is highly competitive and fragmented, with The Arena Group competing with a wide range of companies for user attention and advertising revenue[49][73] - Competitors include niche content players (Vice, Buzzfeed), major media companies (CNN, ESPN), content management software providers (WordPress, Medium), and social platforms (YouTube, Facebook)[50] Government Regulations The company's operations are subject to evolving U.S. and international laws, particularly concerning data privacy, data protection, and content regulation - The company's operations are subject to numerous evolving U.S. and international laws, particularly concerning data privacy, data protection, and content regulation[52] - Key regulations impacting the business include the California Consumer Privacy Act (CCPA) / California Privacy Rights Act (CPRA) and the EU's General Data Protection Regulation (GDPR), which impose significant compliance requirements and penalties for non-compliance[53][56] - The company is also exposed to regulations concerning online behavioral advertising, with potential restrictions on user tracking technologies that could adversely affect a significant revenue source[58] Human Capital Resources The company employs 400 individuals, with a portion of its workforce represented by a union, and is focused on diversity, equity, and inclusion initiatives - As of December 31, 2021, the company had 400 employees, with 391 full-time, and approximately 23% of the workforce (92 employees), primarily Sports Illustrated editorial staff, are represented by The NewsGuild of New York[64] - The company launched its first company-wide Diversity, Equity, and Inclusion (DEI) Council in 2022 to advise senior leadership and plans to conduct its first engagement survey in 2023[66] Risk Factors The company faces significant risks across its business operations, financial condition, and governance, including intense competition, reliance on user engagement, cybersecurity threats, a history of losses, and dependence on key executives Risks Related to Our Business The business is highly dependent on user retention and growth, faces intense competition, relies on third-party content, and is vulnerable to restrictions on tracking technologies - The business is highly dependent on retaining and growing its user base and their level of engagement, with failure to do so seriously harming the business[71] - The digital media market is intensely competitive, with many competitors possessing greater financial and technical resources[73] - The company relies on key third-party content contributors, and the loss of their services could adversely affect the business[76][77] - Increasing restrictions on third-party cookies and other tracking technologies could negatively impact the company's ability to deliver targeted advertising and measure effectiveness, potentially harming financial results[78][80] Economic and Operational Risks The company faces concentration risk from a single customer, vulnerability to technology infrastructure interruptions, cybersecurity threats, and material weaknesses in internal financial controls - A significant portion of revenue (13.9% in fiscal 2022) is derived from a single customer, creating a concentration risk[91] - The business is vulnerable to interruptions or performance problems with its technology and infrastructure, which is hosted on third-party cloud platforms like Amazon Web Services and Google Cloud[92][94] - Cybersecurity incidents, malware, and hacking attacks pose a significant threat, potentially leading to data loss, reputational harm, and litigation[97][108] - The company has identified material weaknesses in its internal control over financial reporting related to IT general controls (segregation of duties) and insufficient validation of third-party impression data[120] Risks Related to Our Indebtedness, Financial Condition, and Internal Control The company has a history of losses, faces uncertainty in securing additional capital, and may have limitations on utilizing its net operating loss carryforwards - The company has a history of losses, with a net loss of approximately $70.9 million in fiscal 2022 and an accumulated deficit of $323.1 million as of December 31, 2022[128] - There is uncertainty regarding the company's ability to secure additional capital, which may be necessary to continue operations and fund growth[125][126] - The company's ability to utilize its significant federal net operating loss carryforwards ($190.1 million as of Dec 31, 2022) may be limited due to ownership changes under Section 382 of the Internal Revenue Code[134] Risks Related to Governance and Investment in Our Securities The company is dependent on key executives, has provisions that may deter takeovers, and its stock price has been volatile with potential for future dilution - The company is dependent on the continued services of its key executive officers and management team[135][136] - Provisions in the company's Certificate of Incorporation, Bylaws, and Delaware law may discourage or make a takeover attempt more difficult[142][143] - The trading price of the company's common stock has been and may continue to be volatile[148] - Future sales or issuances of common stock could cause substantial dilution to existing stockholders and cause the market price to decline[152][153] Properties The Arena Group leases office spaces in New Jersey and California, including occupied, sublet, and unoccupied locations - The company leases office space in Hoboken, NJ (occupied by The Spun), Santa Monica, CA (sublet), and Carlsbad, CA (unoccupied)[156] Legal Proceedings The company is not currently subject to any material legal proceedings expected to adversely affect its business or financial condition - The company states it is not currently subject to any material legal proceedings[157] Part II This part details the company's common stock market, management's discussion and analysis of financial performance, and audited financial statements Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock began trading on NYSE American in February 2022, with approximately 186 record holders, and no cash dividends have been paid or are planned - The company's common stock began trading on the NYSE American under the symbol "AREN" on February 9, 2022[157] - As of March 21, 2023, there were approximately 186 holders of record of the common stock[158] - The company has never paid cash dividends and does not intend to in the foreseeable future[159] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2022, revenue increased to $220.9 million, driven by digital advertising growth, despite a $70.9 million net loss and a $137.7 million working capital deficit, raising going concern doubts due to maturing debt Key Operating Metrics This section presents key digital advertising metrics, including revenue per page view and monthly average pageviews, for fiscal years 2022 and 2021 Key Digital Advertising Metrics (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Revenue per page view (RPM) | $17.24 | $15.24 | | Monthly average pageviews | 516,129,297 | 350,761,233 | Liquidity and Capital Resources The company's liquidity relies on cash and credit facilities, but significant debt maturities and recurring losses raise substantial doubt about its ability to continue as a going concern - As of December 31, 2022, principal sources of liquidity consisted of $13.9 million in cash and $25.9 million available under its working capital line of credit with SLR Digital Finance LLC[171] - Management has concluded there is substantial doubt about the company's ability to continue as a going concern for one year, primarily due to significant debt maturing by December 31, 2023, with plans to refinance or extend this debt[175][176] Working Capital Deficit (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Current assets | $78,695 | $77,671 | | Current liabilities | $(216,364) | $(116,413) | | Working capital deficit | $(137,669) | $(38,742) | Summary of Cash Flows (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(11,304) | $(14,729) | | Net cash used in investing activities | $(38,590) | $(13,146) | | Net cash provided by financing activities | $54,416 | $28,191 | Results of Operations This section provides a comparative analysis of the company's financial performance, including revenue, gross profit, and net loss, with a detailed breakdown by revenue category Comparison of Operations (in thousands) | Metric | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $220,935 | $189,140 | 16.8% | | Gross Profit | $88,012 | $78,610 | 12.0% | | Loss from Operations | $(55,883) | $(84,279) | -33.7% | | Net Loss | $(70,858) | $(89,940) | -21.2% | | Basic & Diluted EPS | $(4.02) | $(7.87) | -48.9% | Revenue Breakdown by Category (in thousands) | Revenue Category | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Digital Revenue | $149,812 | $101,008 | 48.3% | | - Digital Advertising | $109,317 | $62,865 | 73.9% | | - Digital Subscriptions | $21,156 | $29,629 | -28.6% | | - Licensing & Syndication | $18,173 | $8,471 | 114.5% | | Total Print Revenue | $71,123 | $88,132 | -19.3% | | - Print Advertising | $10,214 | $9,051 | 12.8% | | - Print Subscriptions | $60,909 | $79,081 | -23.0% | | Total Revenue | $220,935 | $189,140 | 16.8% | - The 73.9% increase in digital advertising revenue was driven by a 47.1% increase in monthly average pageviews and a 13.1% increase in RPM, while the decrease in print subscription revenue was primarily due to a planned reduction in the Sports Illustrated rate base to focus on more profitable subscriptions[199] Use of Non-GAAP Financial Measures This section provides a reconciliation of the company's net loss to Adjusted EBITDA, a non-GAAP financial measure, for fiscal years 2022 and 2021 Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net loss | $(70,858) | $(89,940) | | Loss from discontinued operations, net of tax | $3,470 | - | | Interest expense, net | $11,428 | $10,449 | | Income tax benefit | $(1,063) | $(1,674) | | Depreciation and amortization | $27,109 | $25,174 | | Stock-based compensation | $31,345 | $30,493 | | Other adjustments | $1,670 | $13,433 | | Adjusted EBITDA | $3,101 | $(12,063) | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and the independent auditor's report, which includes an adverse opinion on internal controls and a going concern emphasis due to material weaknesses and recurring losses Report of Independent Registered Public Accounting Firm The independent auditor issued an adverse opinion on internal control over financial reporting due to material weaknesses and highlighted substantial doubt about the company's ability to continue as a going concern - The auditor, Marcum LLP, issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022, due to identified material weaknesses[288][296] - The auditor's report includes an explanatory paragraph highlighting substantial doubt about the company's ability to continue as a going concern, citing a significant working capital deficiency and recurring losses[289] - Critical audit matters identified were the evaluation of the acquisition-date fair value of intangible assets acquired in the Parade and Men's Journal transactions, which involved subjective judgments on forecasted revenue, EBITDA margins, and discount rates[292][293] Consolidated Financial Statements This section provides the company's consolidated balance sheet and statement of operations data for fiscal years 2022 and 2021, presented in thousands Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $78,695 | $77,671 | | Total Assets | $203,719 | $173,983 | | Total Current Liabilities | $216,364 | $116,413 | | Total Liabilities | $242,689 | $211,774 | | Total Stockholders' Deficiency | $(52,146) | $(51,677) | Consolidated Statement of Operations Data (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Revenue | $220,935 | $189,140 | | Gross Profit | $88,012 | $78,610 | | Loss from Continuing Operations | $(67,388) | $(89,940) | | Net Loss | $(70,858) | $(89,940) | Notes to Consolidated Financial Statements This section provides detailed notes to the consolidated financial statements, covering significant events like stock splits, acquisitions, debt obligations, and net operating loss carryforwards - The company completed a 1-for-22 reverse stock split effective February 8, 2022, and up-listed its common stock to the NYSE American on February 9, 2022[321][324] - In 2022, the company acquired Athlon Holdings, Inc. (Parade) for a purchase price of $15.9 million and the digital assets of Men's Journal for $25.0 million in cash[436][448] - As of Dec 31, 2022, the company had significant debt obligations, including $34.8 million in Bridge Notes, $65.7 million in Senior Secured and Delayed Draw Term Notes, and a $14.1 million balance on its line of credit, with the majority maturing by Dec 31, 2023[489][507][513] - The company has federal net operating loss carryforwards of $190.1 million as of Dec 31, 2022, but their usability is subject to limitations under IRC Section 382 due to past and potential future ownership changes[602][603] Controls and Procedures Management concluded that internal control over financial reporting was ineffective as of December 31, 2022, due to material weaknesses in IT general controls and data validation, despite effective disclosure controls after additional procedures - Management concluded that internal control over financial reporting was not effective as of December 31, 2022[251] - Two material weaknesses were identified: (i) inadequate segregation of duties in IT general controls related to change management, and (ii) insufficient validation of non-Google impression data from certain third-party service providers[252] - Despite the material weaknesses, management concluded that disclosure controls and procedures were effective, as additional post-closing analyses were performed to ensure financial statements were prepared in accordance with GAAP[248] - The effectiveness of internal control over financial reporting as of December 31, 2022, has been audited by Marcum LLP, which issued an adverse opinion[254][288] Part III This part provides information on the company's directors, executive officers, corporate governance, executive compensation, and security ownership Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Annual Meeting of Stockholders proxy statement - This section incorporates information by reference from the forthcoming 2023 Proxy Statement[258] Executive Compensation Information on executive compensation is incorporated by reference from the company's 2023 Annual Meeting of Stockholders proxy statement - This section incorporates information by reference from the forthcoming 2023 Proxy Statement[258] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized for issuance under equity compensation plans, with 7,203,215 securities outstanding and 624,538 available for future issuance as of December 31, 2022 Equity Compensation Plan Information as of December 31, 2022 | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Approved by security holders | 6,060,877 | $9.77 | 504,782 | | Not approved by security holders | 1,142,338 | $11.25 | 119,756 | | Total | 7,203,215 | $10.01 | 624,538 | Part IV This part lists the exhibits and financial statement schedules filed as part of the Annual Report, including the independent auditor's report and various material agreements Exhibits and Financial Statement Schedules This section provides an index to the consolidated financial statements and a comprehensive list of exhibits filed with the Annual Report, including material contracts and corporate documents - This section contains the index to the Consolidated Financial Statements and the Report of Marcum LLP, Independent Registered Public Accounting Firm[269] - A detailed list of exhibits filed with the report is provided, including material contracts, debt agreements, and corporate charters[272][273][274]