Business Context and Reporting Period
Company: TheMaven, Inc. (Note: Metadata referenced "Arena Group Holdings," but the filing text identifies the registrant as TheMaven, Inc., a digital media network operator).
Reporting Period: Quarterly report (Form 10-Q) for the period ended June 30, 2018.
Business Overview: The Company operates an exclusive network of professionally managed online media channels using a proprietary technology platform. It generates revenue through advertising and membership subscriptions. The Company is classified as a "smaller reporting company" and a "non-accelerated filer."
Accounting Status: The financial statements for the three and six months ended June 30, 2018, are not reviewed by a registered public accounting firm due to the resignation of BDO USA, LLP. The Company plans to engage a new firm to review these statements.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Revenue | $303,041 | $0 |
| Cost of Revenue | $2,120,030 | $192,039 |
| Gross Loss | $(1,816,989) | $(192,039) |
| Operating Expenses | $5,352,597 | $2,401,506 |
| Net Loss | $(7,033,547) | $(2,593,195) |
| Cash and Restricted Cash (End of Period) | $116,187 | $1,448,474 |
| Total Current Liabilities | $6,211,724 | $416,444 |
| Working Capital | $(5,582,946) | $3,444,523 |
Debt and Liquidity: As of June 30, 2018, the Company held significant current liabilities including $1.84 million in 10% convertible notes, $316,755 in 8% convertible notes, and $734,536 in shareholder notes. Cash flow from operations was negative $4.1 million for the six-month period.
Material Changes vs. Prior Period
- Revenue Generation: The Company began generating revenue in 2018 ($303k for six months) compared to zero in the prior year, driven by advertising and membership sales.
- Expense Surge: Operating expenses more than doubled to $5.35 million, primarily due to a $998,000 non-cash stock-based compensation charge resulting from the modification of restricted stock awards in March 2018, and increased headcount.
- Cost of Revenue: Cost of revenue increased significantly to $2.12 million, largely driven by channel partner guarantees ($803k) and amortization of website development costs ($783k), resulting in a gross loss.
- Liquidity Deterioration: Working capital shifted from a positive $3.4 million in December 2017 to a deficit of approximately $5.6 million by June 2018. Cash on hand dropped from $3.6 million to $116,187.
- Debt Financing: The Company executed three separate financing transactions in June 2018, raising approximately $6.5 million in gross proceeds through convertible notes and shareholder loans, significantly increasing current liabilities.
Guidance, Outlook, Risks, and Unusual Items
Going Concern
Management has concluded there is substantial doubt about the Company's ability to continue as a going concern. The Company has incurred operating losses and negative cash flows and anticipates needing additional debt or equity capital to fund operations for the next year.
Acquisitions and Subsequent Events
- HubPages, Inc.: The Company consummated the merger with HubPages on August 23, 2018, paying approximately $10.6 million in cash consideration.
- Say Media, Inc.: The Company is negotiating a merger (originally an asset purchase) with Say Media. As of the filing date, the Company had advanced over $3.6 million to Say Media and its creditors. Completion requires additional financing.
- Series H Financing: In August 2018, the Company raised $13 million via a private placement of Series H Convertible Preferred Stock. Proceeds were used to fund the HubPages acquisition and working capital.
Risks and Contingencies
- Unreviewed Financials: The interim financial statements were not reviewed by an auditor, creating a risk of material misstatement.
- Internal Controls: The Company identified material weaknesses in internal controls, including a lack of a functioning audit committee, inadequate segregation of duties, and insufficient accounting resources for complex transactions.
- Capital Requirements: There is no assurance the Company can secure the necessary funds to complete pending acquisitions or meet debt obligations.
Investor Verification Checklist
- Auditor Status: Verify the engagement of a new registered public accounting firm and the timeline for the review of the unaudited Q2 2018 financial statements.
- Acquisition Funding: Confirm the status of financing required to complete the Say Media merger and the repayment of the $7.4 million promissory note due December 2018.
- Debt Obligations: Review the terms of the 10% convertible debentures and 8% convertible notes, including conversion prices and maturity dates, to assess dilution and liquidity risks.
- Stock-Based Compensation: Analyze the impact of the $2.8 million incremental compensation cost recognized due to the waiver of the buy-back right on restricted stock awards.
- Cash Runway: Assess the sufficiency of the $13 million raised in August 2018 against the Company's stated operating burn rate and acquisition costs.