Arena (AREN) - 2023 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements This section presents The Arena Group Holdings, Inc's unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022 Condensed Consolidated Balance Sheets | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Total Assets | $204,708 | $203,719 | | Total Liabilities | $244,231 | $242,689 | | Total Mezzanine Equity | $13,176 | $13,176 | | Total Stockholders' Deficiency | $(52,699) | $(52,146) | - The company's total assets slightly increased from $203,719 thousand at December 31, 2022, to $204,708 thousand at March 31, 2023, while stockholders' deficiency deepened from $(52,146) thousand to $(52,699) thousand[9][10][11] Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | |:---|:---|:---| | Revenue | $51,380 | $48,243 | | Gross Profit | $21,345 | $19,746 | | Loss from Operations | $(14,562) | $(15,443) | | Net Loss | $(19,377) | $(18,449) | | Basic and Diluted Net Loss Per Common Share | $(1.04) | $(1.20) | - Revenue increased by $3,137 thousand (6.5%) year-over-year, and despite an improved loss from operations, the net loss widened by $928 thousand, while net loss per common share improved from $(1.20) to $(1.04)[13] Condensed Consolidated Statements of Stockholders' Deficiency | Metric | Balance at Jan 1, 2023 ($ in thousands) | Balance at March 31, 2023 ($ in thousands) | |:---|:---|:---| | Common Stock Par Value | $182 | $217 | | Additional Paid-in Capital | $270,743 | $289,532 | | Accumulated Deficit | $(323,071) | $(342,448) | | Total Stockholders' Deficiency | $(52,146) | $(52,699) | - Total stockholders' deficiency increased from $(52,146) thousand to $(52,699) thousand, primarily due to a net loss of $19,377 thousand, partially offset by proceeds from a stock offering and stock-based compensation[15][16] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | |:---|:---|:---| | Net Cash Used in Operating Activities | $(1,672) | $(13,311) | | Net Cash Used in Investing Activities | $(1,688) | $(1,653) | | Net Cash Provided by Financing Activities | $5,450 | $28,095 | | Net Increase in Cash, Cash Equivalents, and Restricted Cash | $2,090 | $13,131 | | Cash, Cash Equivalents, and Restricted Cash – End of Period | $16,463 | $22,982 | - Net cash used in operating activities significantly decreased from $(13,311) thousand in Q1 2022 to $(1,672) thousand in Q1 2023, while net cash from financing activities decreased substantially from $28,095 thousand to $5,450 thousand[21] Notes to Condensed Consolidated Financial Statements 1. Summary of Significant Accounting Policies - The unaudited financial statements assume the Company will continue as a going concern, though management has identified substantial doubt about this ability without debt refinancing[26][27][32][33] - The Company operates in one reportable segment and is subject to macroeconomic risks including inflation, rising interest rates, and global banking instability[28][29] Anti-Dilutive Securities Excluded from EPS Calculation | Security Type | March 31, 2023 | March 31, 2022 | |:---|:---|:---| | Series G convertible preferred stock | 8,582 | 8,582 | | Series H convertible preferred stock | 1,981,128 | 2,004,971 | | Common stock options | 6,183,262 | 5,541,818 | | Total Anti-Dilutive Securities | 10,282,706 | 10,107,917 | 2. Acquisitions - On January 11, 2023, the Company acquired Fexy Studios for a total purchase price of $3,307 thousand[41][43] Fexy Studios Acquisition Purchase Consideration | Component | Amount ($ in thousands) | |:---|:---| | Cash | $500 | | Common stock | $2,000 | | Contingent consideration | $561 | | Deferred cash payments, as discounted | $246 | | Total Purchase Consideration | $3,307 | Fexy Studios Preliminary Purchase Price Allocation | Asset Acquired | Amount ($ in thousands) | |:---|:---| | Advertiser relationships | $663 | | Brand names | $659 | | Goodwill | $1,985 | | Net Assets Acquired | $3,307 | 3. Balance Sheet Components Allowance for Doubtful Accounts Activity | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Beginning Balance | $2,236 | $1,578 | | Additions | $64 | $980 | | Deductions – write-offs | $(28) | $(322) | | Ending Balance | $2,272 | $2,236 | - Subscription acquisition costs' current portion increased to $31,908 thousand and the noncurrent portion decreased to $12,460 thousand as of March 31, 2023[51] Prepayments and Other Current Assets | Component | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Prepaid expenses | $3,840 | $2,321 | | Employee retention credits | $6,868 | $0 | | Total | $12,037 | $4,441 | Net Intangible Assets | Intangible Asset Type | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Developed technology | $1,654 | $2,450 | | Brand name | $11,500 | $11,207 | | Subscriber relationships | $22,690 | $26,313 | | Advertiser relationships | $14,189 | $13,934 | | Total Intangible Assets, Net | $54,844 | $58,970 | 4. Leases - Operating lease costs increased to $240 thousand for Q1 2023 from $179 thousand in the prior year, with a weighted-average remaining lease term of 1.51 years[63] - The Company expects to receive $414 thousand in sublease income through September 2024[67] 5. Goodwill Goodwill Carrying Value | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Carrying value at beginning of year | $39,344 | $19,619 | | Goodwill acquired in acquisition of Fexy Studios | $1,985 | $0 | | Carrying value at end of period | $41,329 | $39,344 | - Goodwill increased by $1,985 thousand due to the acquisition of Fexy Studios in Q1 2023, reaching a total of $41,329 thousand[69] 6. Line of Credit - The SLR Credit Facility's maximum advances increased to $40,000 thousand with an interest rate of prime plus 4.0% (12.0%), and maturity was extended to December 31, 2024[70] Line of Credit Outstanding Balance | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Balance Outstanding | $9,559 | $14,092 | 7. Restricted Stock Liabilities - The Company repurchased 8,064 shares of restricted common stock for $710 thousand during Q1 2022, with the remaining 18,134 shares repurchased for $1,597 thousand in April 2022[73] 8. Liquidated Damages Payable Liquidated Damages Payable | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Short-term | $5,970 | $5,843 | | Long-term | $124 | $494 | | Total | $6,094 | $6,337 | - The Company settled $494 thousand in liquidated damages by issuing 47,252 shares of common stock, resulting in a $46 thousand gain on settlement[79] 9. Fair Value Liabilities Measured at Fair Value (March 31, 2023) | Liability | Fair Value (Level 3 Inputs) ($ in thousands) | |:---|:---| | Contingent consideration | $1,060 | - The contingent consideration from the Fexy Studios acquisition is valued at $1,060 thousand, with a $499 thousand change in fair value recognized as other expenses in Q1 2023[83][84] 10. Bridge Notes - The Company issued $36,000 thousand in senior secured Bridge Notes with an initial interest rate of 12% per annum, maturing on December 31, 2023[86] Bridge Notes Outstanding Balance | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Balance Outstanding | $35,433 | $34,805 | | Effective Interest Rate | 19.0% | N/A | 11. Term Debt - The Senior Secured Notes and Delayed Draw Term Notes, totaling $66,691 thousand in principal, mature on December 31, 2023, and carry an interest rate of 10.0% per annum[88][89][90][91] Term Debt Carrying Value | Debt Type | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Senior Secured Notes | $62,010 | $61,787 | | Delayed Draw Term Notes | $3,922 | $3,897 | | Total Term Debt Carrying Value | $65,932 | $65,684 | Total Interest Expense | Component | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | |:---|:---|:---| | Amortization of debt costs | $930 | $660 | | Cash paid interest | $3,252 | $2,160 | | Total Interest Expense | $4,182 | $2,820 | 12. Preferred Stock - As of March 31, 2023, the Company had 168 shares of Series G and 14,356 shares of Series H Convertible Preferred Stock outstanding[94] 13. Stockholders' Equity - On March 31, 2023, the Company completed a registered direct offering, issuing 2,963,918 shares of common stock and generating net proceeds of $11,211 thousand[95] - In Q1 2022, the Company raised $32,058 thousand net proceeds from a public offering of 4,181,603 common shares[96] 14. Compensation Plans Total Stock-Based Compensation Expense | Metric | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | |:---|:---|:---| | Total costs charged to operations | $6,427 | $7,367 | | Capitalized platform development | $307 | $687 | | Total Stock-Based Compensation | $6,734 | $8,054 | - Unrecognized compensation expense for stock-based awards totaled $25,492 thousand as of March 31, 2023, with a weighted-average recognition period of 1.42 years[101] - In February 2023, the Company modified certain equity awards for a resigning senior executive, resulting in a $68 thousand incremental cost[101] 15. Revenue Recognition Revenue by Category | Revenue Category | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | |:---|:---|:---| | Digital advertising | $23,504 | $21,646 | | Digital subscriptions | $3,871 | $6,461 | | Licensing and syndication revenue | $4,622 | $3,101 | | Print advertising | $2,082 | $1,368 | | Print subscriptions | $16,665 | $15,303 | | Total Revenue | $51,380 | $48,243 | - Total revenue increased by 6.5% year-over-year, driven by growth in digital advertising, licensing, print advertising, and print subscriptions, partially offset by a 40.1% decrease in digital subscriptions[105] Unearned Revenue (Contract Liabilities) | Unearned Revenue Type | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Short-term | $60,584 | $58,703 | | Long-term | $21,234 | $19,701 | | Total | $81,818 | $78,404 | 16. Income Taxes - The effective tax rate was 0.04% for Q1 2023 and 0.08% for Q1 2022, with a valuation allowance provided against most deferred tax assets due to historical operating losses[109] 17. Related Party Transactions - The Company paid $2,998 thousand in cash interest and accrued $1,815 thousand in interest on notes to BRF, an affiliate of principal stockholder B. Riley, during Q1 2023[110] - Affiliates of B. Riley purchased 1,009,021 shares of common stock for $790 thousand in the March 2023 registered direct offering[110] 18. Commitments and Contingencies - The Company guaranteed minimum annual royalties of $15,000 thousand to ABG-SI, LLC, with total commitments of $86,250 thousand through December 31, 2029[115][133] 19. Subsequent Events - On April 10, 2023, the Company issued 11,766 common shares to settle $124 thousand in liquidated damages[117] - On April 17, 2023, 207,000 common shares were issued upon conversion of 1,500 Series H convertible preferred stock[118] - From April 1, 2023, through the filing date, the Company granted 10,827 options, restricted stock units, and restricted stock awards[120] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of The Arena Group's business strategy, key operating metrics, liquidity, and a detailed analysis of its financial results for Q1 2023 versus Q1 2022 - The Arena Group is a tech-powered media company focused on building deep content verticals leveraging its platform and iconic brands like Sports Illustrated and TheStreet, Inc[122] - The Company's growth strategy involves expanding by adding new premium publishers as independent Publisher Partners or through acquisitions[124] - Uncertainty in the global economy, including inflation, rising interest rates, and banking instability, presents significant risks to the business[126] Key Operating Metrics - Digital advertising revenue increased by 9% in Q1 2023 compared to Q1 2022[127] Key Operating Metrics | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |:---|:---|:---| | Revenue per page view (RPM) | $16.77 | $15.02 | | Monthly average pageviews | 467,296,344 | 480,352,466 | - RPM increased by 11.65% year-over-year, indicating improved yield and pricing, while monthly average pageviews decreased by 2.72%[130] Liquidity and Capital Resources - As of March 31, 2023, the Company had $15,961 thousand in cash and $30,441 thousand available under its working capital line of credit[132] Working Capital Deficit | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | |:---|:---|:---| | Current assets | $83,969 | $78,695 | | Current liabilities | $(216,845) | $(216,364) | | Working capital deficit | $(132,876) | $(137,669) | - The working capital deficit improved slightly from $(137,669) thousand at year-end 2022 to $(132,876) thousand at March 31, 2023[136] Cash Flow Summary | Cash Flow Activity | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | |:---|:---|:---| | Net cash used in operating activities | $(1,672) | $(13,311) | | Net cash used in investing activities | $(1,688) | $(1,653) | | Net cash provided by financing activities | $5,450 | $28,095 | | Net increase in cash, cash equivalents, and restricted cash | $2,090 | $13,131 | Results of Operations Consolidated Results of Operations | Metric | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Revenue | $51,380 | $48,243 | $3,137 | 6.5% | | Gross profit | $21,345 | $19,746 | $1,599 | 8.1% | | Loss from operations | $(14,562) | $(15,443) | $881 | -5.7% | | Net loss | $(19,377) | $(18,449) | $(928) | 5.0% | - Gross profit percentage improved from 40.9% in Q1 2022 to 41.5% in Q1 2023, driven by more favorable revenue shares on premium digital advertising[145][146] Revenue by Category (YoY Change) | Revenue Category | 2023 ($ in thousands) | 2022 ($ in thousands) | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Digital advertising | $23,504 | $21,646 | $1,858 | 8.6% | | Digital subscriptions | $3,871 | $6,461 | $(2,590) | -40.1% | | Licensing and syndication revenue | $4,622 | $3,101 | $1,521 | 49.0% | | Print advertising | $2,082 | $1,368 | $714 | 52.2% | | Print subscriptions | $16,665 | $15,303 | $1,362 | 8.9% | | Total Revenue | $51,380 | $48,243 | $3,137 | 6.5% | Cost of Revenue by Category (YoY Change) | Cost of Revenue Category | 2023 ($ in thousands) | 2022 ($ in thousands) | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Publisher Partner revenue share payments | $4,247 | $5,042 | $(795) | -15.8% | | Technology, Platform and software licensing fees | $4,237 | $3,174 | $1,063 | 33.5% | | Printing, distribution and fulfillment costs | $3,853 | $2,857 | $996 | 34.9% | | Total Cost of Revenue | $30,035 | $28,497 | $1,538 | 5.4% | Operating Expenses (YoY Change) | Operating Expense Category | 2023 ($ in thousands) | 2022 ($ in thousands) | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Selling and marketing | $17,969 | $17,216 | $753 | 4.4% | | General and administrative | $13,053 | $13,514 | $(461) | -3.4% | | Depreciation and amortization | $4,766 | $4,202 | $564 | 13.4% | | Total Operating Expenses | $35,907 | $35,189 | $718 | 2.0% | Other Expenses (YoY Change) | Other Expense Category | 2023 ($ in thousands) | 2022 ($ in thousands) | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Change in fair value of contingent consideration | $(499) | $0 | $(499) | 100.0% | | Interest expense, net | $(4,182) | $(2,820) | $(1,362) | 48.3% | | Liquidated damages | $(127) | $(172) | $45 | -26.2% | | Total Other Expenses | $(4,808) | $(2,992) | $(1,816) | 60.7% | Use of Non-GAAP Financial Measures - Adjusted EBITDA is presented as a non-GAAP measure to provide insight into underlying operating performance[158] Adjusted EBITDA Reconciliation | Metric | 2023 ($ in thousands) | 2022 ($ in thousands) | |:---|:---|:---| | Net loss | $(19,377) | $(18,449) | | Interest expense, net | $4,182 | $2,820 | | Depreciation and amortization | $7,135 | $6,513 | | Stock-based compensation | $6,427 | $7,367 | | Change in fair value of contingent consideration | $499 | $0 | | Liquidated damages | $127 | $172 | | Loss on impairment of assets | $119 | $257 | | Employee retention credit | $(6,868) | $0 | | Employee restructuring payments | $3,288 | $174 | | Adjusted EBITDA | $(4,461) | $(1,132) | - Adjusted EBITDA worsened from $(1,132) thousand in Q1 2022 to $(4,461) thousand in Q1 2023, primarily due to the employee retention credit and increased employee restructuring payments[161] Critical Accounting Policies and Estimates - No material changes to critical accounting policies and estimates were reported compared to the Annual Report on Form 10-K for the year ended December 31, 2022[165] Recent Accounting Pronouncements - The adoption of ASU 2022-02 on January 1, 2023, did not have a material impact on the Company's condensed consolidated financial statements[35][166] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable as the Company qualifies as a "smaller reporting company" - The Company is a "smaller reporting company" and is not required to provide quantitative and qualitative disclosures about market risk[167] ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, despite ongoing material weaknesses from the prior year - Despite unremediated material weaknesses, management concluded that disclosure controls and procedures were effective as of March 31, 2023, after performing additional analyses[170] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2023[171] - The effectiveness of internal controls is subject to inherent limitations and may deteriorate due to changing conditions[172] PART II - OTHER INFORMATION ITEM 1. Legal Proceedings The Company is not currently involved in any legal proceedings expected to have a material adverse effect on its business - The Company is not currently a party to any legal proceedings expected to have a material adverse effect on its business[174] ITEM 1A. Risk Factors Unfavorable economic conditions, including inflation, rising interest rates, and global banking instability, could adversely affect the Company's business and results - Unfavorable economic conditions, including inflation, rising interest rates, and instability in the global banking system, pose significant risks to the Company's business[176][177] - The Company's cash management strategy includes diversifying deposits, but deposits may exceed insurance limits, and there is no assurance of success in further bank closures[177] - A severe or prolonged economic downturn could weaken demand for products and impair the ability to raise additional capital[177] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report during the period - No unregistered sales of equity securities or use of proceeds were reported[178] ITEM 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[178] ITEM 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[178] ITEM 5. Other Information There is no other information to report under this item - No other information was reported[178] ITEM 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF, 104)[180][181][182][183][184][185][186][187] SIGNATURES - The report was signed on May 10, 2023, by Ross Levinsohn, Chief Executive Officer, and Douglas B. Smith, Chief Financial Officer[189]