The Arena Group Holdings, Inc. (AREN) Earnings Call Transcript & Summary

Welcome to The Arena's Group shareholder update conference call. Before we begin, I'd like to note that some of the comments made during this presentation may include forward-looking statements. All statements, other than statements of historical fact are statements that could be deemed forward-looking statements. The company cautions investors that any forward-looking statements are based on the beliefs of assumptions made by and information currently available to the company. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risk, trends, uncertainties and factors that are beyond the company's control or ability to predict. Investors should use caution in relying on forward-looking statements, which are based only on known result and trends at the time that are made to anticipate future results or trends. Certain risks are discussed in the company's filings with the SEC. The company disclaims any intention or obligation except as required by law to update or revise any financial projections, all forward-looking statements, whether because of new information, future events or otherwise. With that, I would like to turn the call over to Manoj Bhargava. Manoj, the call is yours.

Thank you. My name is Manoj Bhargava. And since this is my first call in The Arena, I'm going to take you through a little bit of history so that you have some context as to the events and certainly more information as an investor that's needed by investors. So back in August, we signed an agreement of -- a business combination agreement with Arena and subsequently, what happened is when the largest shareholder, Arena, which was Riley called and said, "Would you like to buy our -- my stake in it?" so we said -- I said sure. Basically -- and then we arrived at a price and we bought their equity in Arena. At that point, which -- at that point, I think we ended up with something like 44% of the company. And -- after that, we obviously got deeper in it from August and this was late last year. And when we got there, then I asked the first thing, of course, we wanted to know is what's the cash position, which is the first thing somebody wants to know in a company is that if you got adequate cash. So they came up with a cash flow statement, and it turned out that in less than 45 days, we were not going to make payroll, so the company was basically insolvent, which was a little bit of a shocker to us because we were told and certainly pre-August before we made the statements, the company was basically at least cash flow breakeven, so it wasn't leading at that time. So obviously, at that point, we looked at it and say, okay, what do we do? We can't make payroll. So the only things that were -- that we could not pay were 2 things. One was the loan, the interest payments on the loan and the second one was the ABG contract. If we made either of them, the company wasn't going to make payroll and payroll obviously is number one. So we said, okay, what do we do? So we did not pay. In fact, I went down to -- I went to see the folks at ABG and informed them, in fact, gave them our cash flow projection and said, look, this is what's happening, guys. And I said, we don't have the capital. And immediately, I can't put it in because it's a public company, you have to go through all kinds of paperwork and approvals and to make that happen. So that's why we [reached] at that point, we couldn't pay. And then obviously, at that point, we said, okay, we've got to fix this thing. We can't just keep bleeding otherwise, it will just shut down. So those are our options. So the option, obviously, option funds that we can't make -- we can't make those payments. And then so at that point, we looked at every people, processes, license everything and said, okay, how does this company survive? And we start looking at all the things that weren't going to have enough revenue or were creating expenses where the revenue wasn't matching. Sort of obvious things that you would do if you were going to turn around the company. And we cut a lot of stuff. There's no doubt about it. And that's what -- so we had a lot of visits with the fellows at ABG. We're negotiating in good faith with them. And then we obviously -- everybody has seen in the news, what happened. I won't go too deep in it because court cases and so on. As you know, the -- there's been a lot of stories in the media, no. We're in the entertainment business. So we kind of understand, the stories have been pretty entertaining. Not -- not very useful, but really very entertaining. But this is temporary. This will come and this will go. It's irrelevant. Because we have been sued by bad guys before. So it's not -- I'm not worried about it. And our response instead of in the media, is going to be in the court. And that's why we -- that's where these funds belongs. The other things that are there that we put money in. I mean there have been some questions as to is the company going to stay solvent? Is it going to go through Chapter 11 or whatever? To put that to bed, we did a couple of things. One, we put money into the company as equity. So we're not equal to all the investors. So if we want to -- if there was any intent to take this into Chapter 11, we wouldn't certainly not put equity in it because we get wiped out, that equity would be wiped out. So we are doing our best to make sure that the investors are taken care of as best as we can, considering the circumstance where Arena is. Now the other part that we've done is we're doing going forward with is the business combination agreement which values Arena at $5 a share, where right now it's under $0.90. But I didn't want -- we made a decision that we are not going to renegotiate that because in -- it's just too much work, and it's too much and it also makes us look like, okay, we did something to renegotiate, which we didn't. So in order to have really good faith, we said, look, it costs us extra. Obviously, it's not the same company that we signed up for. However, we decided that no, we're going to stay with this BCA business combination agreement. Now saying that, it has been submitted to the SEC. And so it's not completely in our hands. But so far, it's looking fairly positive that the SEC will pass this. So -- that's -- so the Chapter 11 side is not an intent at all. And we're backing it up with money into the company, two times already, and this will be the third time. There's a -- the one thing that I can say is that if we hadn't been here as an investor and having put the capital in, both the SI magazine as well as on Arena would be shut down. Because once you don't make payroll, nobody sticks around. So we made sure as best as we could, that Arena would survive and that SI, the magazine would also survive. And we put the money in to make sure we made payroll. Folks may complain, but in the end, payroll is going to be the most important thing that we did. So that's sort of the past and what's happening so far. As far as the future goes, obviously, not having SI, we had done a few things to make SI better. So SI is definitely -- there's no doubt, it's a loss that it would have been great if we had been able to negotiate with them and get something good. However, we found out that as the agreement was with ABG, it was total loss. And couldn't go -- and I explained to ABG that, look, guys, we can't go on this way. There's no way. It's just going to sink one day. Maybe it won't be now, it will be next month. So we said, okay, if we have something good, good agreement then we would be happy to do it. And if not, it's better to say, okay, well, let's do something that we own. So it turns out, we own really great products. TheStreet, Parade, Men's Journal, Surfer, all of those have really strong futures. And we own them. I have to run the permission for every time I turnaround to somebody else. We get to -- these are great brands, and they've been neglected because SI was the high-profile brand. And so all of these were neglected. They were always orphans. It turns out the orphans were making money all the time. Meanwhile, Arena has been losing money forever for 4 or 5 years, it's lost way over $200 million. So the profitable stuff, we still have that. So I think in our future, I mean, I think our future is really quite good. We've been looking at the other brands that we have. And if we didn't think those had a future, then obviously, we would say, okay, we're not investing anymore in it. So I think we have a very great future. And so we're putting more money in. Now so far, we're changing some of the models. For example, it's been static media, [indiscernible] articles instead of that, there'll be a lot more video and a lot more of the other social presence, influencer capabilities, newsletters, all of those things will be -- those are opportunities for us that we really didn't pay much attention to. And so that's -- so I think that the future is really good, and that's why we're putting more money in. As far as all the noise. Yes, there's always noise, who cares. With that, I will turn it over to the other fellows that are going to give you some more information. And if you want financial information, that's already on the 10-K. If you want detailed stuff, that's in the 10-K, now we won't waste our time going through the 10-K.

Thank you, Manoj. I'm Jay Frankl, Co-President and Chief Business Transformation Officer of the Arena Group. We're laser-focused on making Arena Group cash flow positive in 2024, not just EBITDA positive. On the restructuring side, thus far, we've identified over $40 million in net annual cost savings. We expect that this number will increase during Q2 of 2024. Most, if not all, of these cost savings we fully implemented during this year with a significant portion to be realized during the first half of this year. These savings come in 3 primary areas: people, process and Sports Illustrated. With January termination of the Sports Illustrated license with ABG, without that license and the SI print and digital businesses, Arena will realize significant cost savings even after revenue losses. The company will also realize interest savings associated with the financial support that Manoj had discussed from Simplify. In fact, Arena didn't pay any transaction fees this year associated with the capital that was infused into the company and the credit that has also been made available to The Arena Group. With that, I'll turn it over to our Chairman and CEO, Cavitt Randall.

Hello. Just a little color on the framework for the business going forward. We're focused on a couple of things. We're going to look at customers really 2 ways as 2 separate sets of customers. One is the customer that consumes the web pages and things that we develop. But the other customer is the advertiser that pays us to reach that audience of consumers. So we're going to treat both of those as customers. We're looking at platform publishing partners as actual partners in our business. And we're doing a number of things to help them better monetize the content they produce. Our monetization machine is, frankly, second to none. The vertical strategy is anchored by key brands that we own, as Manoj indicated. We have some really great brands in Parade, Men's Journal, TheStreet, Athlon Sports, Surfer, Powder, a bunch of others. And we're going to build an environment where those brands are the focus and around those brands, these publisher partners but the business itself, that is Arena, really exists to support those individual brands and verticals. So arena isn't the star, those verticals and those brands, the star going forward. From a monetization perspective, some of the changes the team has already made in ad tech. In Q1, we see a 40% increase in programmatic ad revenue on owned properties, similar benefits to programmatic partners as well. So in these improvements that have been made, there are others that are still being implemented where we're further increasing the monetization. We're enhancing the value of each customer interaction by integrating things like video that Manoj touched on, where we can -- where every page view, we get more time on page and we can increase the revenue and profitability of each user visit. Just a brief update on where we are in the business combination agreement that's been spoken about already with Bridge Media. The first step was we had to publish our 10-K that we released last week. That then will feed into the revision to the S-4. We have comments from the SEC that we need to update the S-4, including updated financials to be consistent with the 10-K released last week. Once that S-4 is declared effective by the SEC, we'll then proceed with the shareholder vote requesting approval for the -- formal approval for the merger. Based on the information we have and the fact that not everything is within our control, our best estimate is a close in Q2 or Q3 of '24. With that, we will open the line to questions.

[Operator Instructions] One moment for our first question and it's coming from Mark Argento with Lake Street Capital Markets.

I was just wondering, can you give us a little bit of a color of what the entity looks like, both now without Sports Illustrated and then with these additional assets as you bring those assets in when you close the business combination. I think there's a little confusion out there. What's the revenue run rate kind of profitability, kind of what assets are owned now by the combined business?

Okay. So good question. The structure is not really any different. It was -- as far as the pass goes, the SI brand and the magazines that are related to it were under Arena, which at this point, that's not the change. I mean under Arena also is Parade and TheStreet and the other magazines. So that part isn't really a change. There will be a structural change because of all kinds of laws and lawyers, is when the business combination agreement happens, then it will change slightly, but it literally -- in the end, the holding company will still be -- the shareholders today will be the same as it will be in the holding company. As far as color going forward on specifics. First of all, you have to realize this SI thing has happened as a surprise in the last just few weeks. So we're still going through quite a few changes. And because SI was such a large portion, it affects everything within the company in terms of costs because you have more lawyers, you have more accounting, you have more overhead of all kinds. So all of that has changed. And so we're just going through it. And we really won't have any answer for you. Probably, I'd say that will settle probably in third quarter. That's my best guess. It's not a promise right now until we figure out where everything is. But fundamentally, it looks really good.

At a high level, obviously, legacy Arena Group, minus Sports Illustrated, but maybe you could just touch on some of the assets that you're -- kind of the assets you already own that you're bringing in any kind of -- what specifically are they? It sounds like maybe there's some channels or stations or other brands. Maybe if you could just even at a high level, just outline that for us, that would be great.

Sure. The part of it -- I mean part of it, of course, we're bringing cash. So the business combination agreement we put in -- well, different parties, but it will put in about $50 million. So that will help a lot because today, it's way over, the leverage is pretty high. As far as the assets we're bringing in from the merger would be 2 television networks. One is sports, one is news. And it currently is in 150 markets. And so it's -- that together with our sports property, which is Athlon right now, that together with Athlon as far as sports goes. So that will have a big impact on it. And then we have the new side, which -- we will -- the future portion of that is sort of in change right now because with Parade and all the products we have currently in Arena, that will affect some of the content in those 2 national broadcast networks. But that gives us a huge -- video is where everything is at this point. So it will give us a huge content machine with a lot of video content.

All right. And Manoj, to date, how much capital have you invested in [ debt ] and equity into the company at this point?

Well, different companies altogether. Good question. That's not an Arena question really. It's in Arena, 12 plus.

I mean I guess I'll get -- you own over 50% of the company now, right? And then all the primary debt, right? So you control the company.

Okay. Just a slight correction there. We do own 55% of the company today, so that is true. And the debt is with somebody affiliated, but we arranged that debt. And so the debt is separated, but the equity portion, we own 55% at this point.

Got it. All right. And then just last one for me and then I'll hop back in the queue. What has to happen now -- like is SI that fully separated at this point? Is there a shared services agreement like how does kind of the divorce so to speak, kind of transpire?

That's a good question. I think we were a bit of a surprised because we were negotiating in good faith and one day, morning when they were supposed to show up. They said, divorce final, you're done. So it is final. There is no agreement whatsoever, except obviously the court case. That's our relationship now.

[Operator Instructions] All right, ladies and gentlemen, thank you. This will conclude our Q&A session and conference call for today. We thank you all for participating, and you may now disconnect.