PART I
FORWARD LOOKING STATEMENTS
Item 1. Business
Statements contained in this Report include "forward‑looking statements" within
Preamble
Following the meaningrecent acquisition of such term in Section 27AConverge Direct, LLC and its affiliates ("Converge" and “Converge Acquisition”) on March 22, 2022, Troika Media Group, Inc. (“Company,” inclusive of Converge) has experienced a fundamental restructuring of its management, business strategy, solutions, and operations. The Converge Acquisition has significantly altered the strategic course of the Securities ActCompany to be better positioned to deliver scalable revenue on sustainable growth and efficient operations.
The Company has undergone the following transformative events since March 2022:
•Revenue Growth Capabilities: The addition of 1933,Converge’s revenue capabilities as amended (the "Securities Act")evidenced by its audited revenues of approximately $294.0 million and Section 21Eincome from operations of approximately $21.0 million for the year ended December 31, 2021, relative to the Company’s revenues of approximately $16.2 million and losses of approximately $16.7 million for fiscal year ended June 30, 2021.
•Executive Management and Leadership: The appointment of Sadiq (Sid) Toama as President on March 21, 2022, and subsequent appointment as Chief Executive Officer on May 19, 2022 (formerly, Converge’s Chief Operating Officer since 2016). The appointment of Erica Naidrich as Chief Financial Officer on May 23, 2022. The appointment of Converge’s former leadership team to critical growth positions across the Company including Business Development, Media, Analytics, and Technology. The departures of the Securities Exchange ActCompany’s former Chief Executive Officer, President, Chief Operating Officer, and Chief Financial Officer.
•Governance: The restructuring of 1934,the Company’s Board of Directors including the appointment of Randall Miles as amended (the "Exchange Act"). Forward‑looking statements involve knownDirector and unknown risks, uncertaintiesChairman of the Board.
•Integrated Business Strategy: The creation of an integrated consulting and solutions business designed to power consumer engagement, and customer acquisition as the Company’s core capability. Redefinition and integration of the Company’s legacy creative services (brand and creative consulting, design, PR, events, and NFTs) into a unified Brand Building and Activation solution group to build on Converge’s customer acquisition and enterprise technology offerings.
•Business Unit Restructuring: The Company has divested, discontinued, and downsized non-profitable and non-essential business units including its: London-based press relations and communications business (Mission Media Limited), peer-to-peer digital asset marketplace (Troika IO), digital creative operations (Troika Labs), and the Company’s sports and entertainment rebranding business, Troika Design Group, Inc.
•Business Operations: The Company has restructured its business operations to a matrixed services structure to streamline finance, facilities, people operations, technology, analytics, strategy, sales, and marketing.
•New Revenue Strategy: Focusing revenue strategy and operations that boost revenue growth and are accretive to earnings: pivoting the business strategy to Converge’s proven track record of customer engagement and acquisition across the Company’s new core sectors.
•Sector and Revenue Streams: Recalibrating the Company’s sector mix to match its new solutions capabilities to power scalable revenue opportunities. Introduction of Converge’s Performance Solutions revenue stream to attract new clients.
Company Overview
The Company is a professional services company that architects and builds enterprise value in consumer facing brands to generate scalable performance driven revenue growth. The Company delivers three solutions pillars that: CREATE brands and experiences and CONNECT consumers through emerging technology products and ecosystems to deliver PERFORMANCE based measurable business outcomes.
Business Solutions Pillars
The Company now provides the three brand and customer acquisition solutions through one unified organization that has three core “Business Solutions Pillars”:
•Brand Building and Activation
•Marketing Innovations and Enterprise Technology
•Performance and Customer Acquisition
The Company’s Business Solutions are designed to be executed as standalone or integrated activations with an unified go-to-market approach.
The Company generates revenue principally from two material revenue streams: Managed Services and Performance Solutions.
The Company’s Managed Services are typically orientated around the management of a customer’s marketing, data, and/or creative program. The Company’s deliverables relate to the planning, designing, and activating of a solution program or set of work products. The Company executes this revenue stream by leveraging internal and external creative, technical or media-based resources, third party advertising technology ("AdTech") solutions, proprietary business intelligence systems, data delivery systems, and other factorskey services required under the terms of a scope of work with a client.
The Company’s Performance Solutions are typically orientated around the delivery of a predetermined event or outcome to a client. Typically, the revenue associated with the event (as agreed upon in a scope of work) is based on a click, lead, call, appointment, qualified event, case, sale, or other defined business metric. The Company engages in a myriad of consumer engagement tactics, digital and offline ecosystems, and customer acquisition methods to generate a consumer’s interest in a particular service or product.
Enterprise Organization
The Company is structured as a matrixed organization with four operational and business quadrants:
•Enterprise Planning and Operations
•Knowledge and Technical Services
•Client Acquisition and Thought Leadership
•Business Consulting Solutions
This matrix structure is capable of delivering a financially efficient organization that democratizes technical and planning resources.
Scale
We excel at generating highly scalable customer acquisition and retention programs in high value products and services across several strategic sectors. The Company generates resilient enterprise brand value and revenues for its clients, having orchestrated thousands of mass scale campaigns and sales programs for some of the leading companies in the United States.
Sector Expertise
The Company provides its turnkey solutions in the following sectors:
•Consumer Products and Services
•Entertainment and Media
•Sports and Betting
•Financial and Professional Services
•Education
•eSports and Gaming
The Company’s Business Solutions are architected to service other sectors that have a B2C focus with a need for high lifetime value customers.
Headquarters
The Company is headquartered in New York, New York with satellite offices in Los Angeles, California and Westchester County, New York.
Converge Acquisition
In March 2022, the Company acquired Converge Direct, LLC and its affiliates for a purchase price of $125.0 million. Converge was founded in 2006 and became a leading customer acquisition and business measurement partner for large brands in the entertainment, financial and professional services, education, leisure, and home services verticals. The Converge Acquisition enables the Company to provide performance-based customer generation capabilities powered by Converge’s business intelligence know-how, data, and technology capabilities.
The Converge Acquisition has proven to be the catalyst for the Company’s transformation into an integrated consulting and solutions business which could cause actualis now built upon Converge’s proven growth, operational model, and tenured team members. The Converge Acquisition has created a platform, powered by a new executive and management team (and recomposed Board of Directors), to establish an intelligently connected solutions organization that can build upon Converge’s revenues of $294.0 million and Income from Operations of $21.0 million for the year ended December 31, 2021 (pursuant to Converge’s audited financial statement).
Converge’s resilient growth since 2017 (and during COVID-19) was based on demand for its performance-based customer acquisition and business intelligence programs across its digital and offline mediums, first party data, and digital brand products. Most notably, Converge’s revenue growth in the home services and professional services sectors during COVID-19 continues to power the Company’s growth potential and scalability which can be easily translated across various new business sectors.
Converge grew to an eighty (80) person operation, at the time of the Acquisition, with offices in New York City, NY, Westchester County, NY, and San Diego, CA. Converge’s co-founder, Tom Marianacci, is now the Head of Acquisitions and Performance, former Member Mike Carrano holds the position of Executive Director of Acquisition and Performance, and Sadiq (Sid) Toama is the Company’s Chief Executive Officer and Board Director.
Company Strategy
Business Strategy
Our business strategy is to build upon Converge’s success and revenues by continuing its unwavering focus on performance driven business outcomes and delivering hyper measurable outcomes that is underwritten by our enterprise technology and analytics expertise. The Company is now able to complement the core capabilities of the Converge Acquisition to deliver the other key attributes of a successful customer engagement business.
Our business purpose, as an organization, and our value to shareholders is to continue to build and grow the business to:
•Deliver measurable enterprise value to our clients through deployment of innovative and future proof Brand Strategy, Enterprise Technology and Performance Marketing;
•Architect, deploy and manage measurement ecosystems for our clients to measure our impact and the impacts of other headwinds and tailwinds in their business;
•Deliver high intent and high lifetime customers;
•Generate sustainable and cost-effective customers whilst mitigating market volatility acting as our clients’ customer acquisition insurance partner;
•Offer flexible and risk mitigating business models that are innovative and reward us for our investment in our clients’ businesses;
•Activate a disciplined focus on Sector expertise to help clients intelligently scale their businesses and be able to focus on what they do best;
•Introduce best technical and strategic practices across our Sectors for our clients and for ourselves as thought leaders and activation engineers;
•Develop full, vertically integrated brands that create rich first party data that can be monetized through intelligent lead and data distribution to the most valuable buyers;
•Build and deploy licensable brands and digital products for clients who wish to manage their own lead formula on a self-serve basis;
•Expand our core solutions into complementary sub-verticals; and
•Focus on engagements and cross-brand partnerships that produce outcomes: if our clients win, we win.
Our integrated Performance Solutions enable us to put our own skills and expertise in play and to be compensated when our clients win. Our solutions become incremental to current client activity and soon become part of a core growth strategy that clients find difficult to replace. We do this across all facets of our business solutions and our Knowledge Services capabilities.
The new organizational mantra is “to do for ourselves what we do for our clients”; ultimately, we believe there is no better way to build a robust internal value system than to replicate the way in which we help our clients for our own continued growth.
Knowing Our Clients
Our focus is always on knowing (and continuing to better understand) our clients and what keeps them up at night. Our dedication to a disciplined order, method, and routine when it comes to discovery allows us to get the most crucial insights into our clients’ businesses. We also know that our clients consist of an array of functions which allows us to deploy our mix of multi-functional experts to complement external stakeholders.
We focus on practical and scalable technology and data activations to leverage decision sciences to transform our business and those of our clients. Our clients' businesses are in constant flux which increases the need for perpetual discovery. We closely partner with our clients to analyze multi-touch data across their business data mesh to report, diagnose, prescribe, and activate optimization strategies to maximize investments in creative, media, and customer offerings to drive sales growth.
Agnostic Approach
Our technology and marketing channel agnostic philosophy allows us to deploy diversified solutions for our clients that consider macro- and microeconomic and technical headwinds and opportunities to generate strong return on investment and protect downside risk.
We can build custom programs and measurement strategies to help clients whether they are in growth or operating results, performances or achievements expressed or impliedrisk management stages in their lifecycle by offering performance solutions. We do this to help minimize their exposure to media, client CRM
inconsistencies, and other customer acquisition unknowns such as call centers, supply chain, and business model hazards. We are not a lead generation marketplace as we continue to act as consultants to our clients in providing thought leadership and solutions capabilities to solve our clients’ custom challenges.
Human Capital Resources
As a company that is made up of technical functions and talent, our processes and our people are our standout superpowers. We are committed to a culture of shared success, investing in our people to provide them with opportunities across our organization and help them achieve their personal objectives. No different to our business value to our clients, we continuously seek to bring our analytics focus to measure, diagnose, and prescribe the forward‑looking statements notbest paths forward for our people. Our matrixed organization, where our people report to occur or be realized. Statements regarding future events, developments,their function and to the project, enables our teams to get a broad reach into multiple functions and insights across the Company to increase the lifetime value for both parties. This approach enables the Company to provide long-standing and stable services powered by people who really do know their clients through shared processes.
The Company has attracted, and continues to attract, talented and diverse team members during the recent transformation of the business. The Company’s focus has been to introduce talent from all sectors (finance, sports, banking, and technology sectors) to build upon its creative, media, and analytics talent pool. Due in part to these efforts, the Company's futureworkforce has grown from 96 employees in July 2021 to approximately 208 employees as of June 30, 2022. As of September 12, 2022, the Company employs 134 individuals across the globe.
The Company continues to work with its newly structured Board of Directors to architect attractive compensation strategies for its new look organization.
Revenue Generation
We generate revenue by merging our brand architectural teams, our technology powered consumer engagement capabilities, and media reach to deliver our clients' commercial objectives such as customer acquisition, consumer engagement, or profit driven outcomes. We do this using insights from internal and external data markers that we manage through Helix, our Business Intelligence platform. Helix allows us, our partners, and clients to make diagnostic and prescriptive business decisions efficiently and measure business and operational impacts to continually optimize our performance.
In doing so, we are able to provide different revenue generating programs. We are typically compensated on a negotiated “per lead,” “per call,” or other “per business action” basis that ultimately is architected by us with due regard for supply and demand factors and subject to there being a viable and scalable engagement opportunity for all parties concerned. Our higher margin business engagements are powered by executing customer acquisition and engagement programs across a range of channels and mediums whereby we take on the cost of paying digital search companies, third-party media sources, affiliate marketing platforms, content aggregators, data providers, and other strategic partners to generate consumer engagement both on digital devices and in the physical home or property.
We can unify our creative, technology, and performance acquisition capabilities to power all our different revenue streams. As a long-standing customer acquisition partner for large advertisers, we can leverage our media and technology economies of scale to power our more lucrative revenue streams. The symbiosis of our revenue streams combine to create the best of both worlds for us to continue to grow in the media, creative, and technology verticals. Ultimately, this is our competitive advantage and as well as management's expectations, beliefs, intentions, plans, estimates or projections relatingwe continue to build on the long-standing partnerships, we are best suited to take advantage of our unified Create, Connect, and Perform strategy.
The Company generates revenue by providing consulting and solutions for its clients that include:
•Design, build and execution of brand building;
•Activation of brand strategy and amplification across multiple consumer engagement channels and mediums;
•Extending brand engagement into emerging technologies and ecosystems (Web3, metaverse, augmented reality, and virtual reality);
•Generation of incremental client revenue and awareness through brand licensing, partnerships, and audience extensions;
•Implementation of enterprise technology to measure the impact of the Company’s Business Solutions Pillars;
•Architecting and delivering analytics solutions to help brands through descriptive, diagnostic, predictive, and prescriptive analytics;
•Delivering data aggregation and visualization solutions through its proprietary Helix Business Intelligence platform;
•Generating consumer opt-in to receive product and services offers from brands;
•Monetization of first party data and consumer traffic;
•Building and executing omnichannel and multi-medium customer acquisition and retention programs on a performance basis;
•Monetization of consumer leads generated through our own brands and digital ecosystems; and
•Implementation of customer acquisition and retention technologies and operational enhancements for clients.
Consumer Acquisition and Engagement
Having acquired Converge, our now integrated strategy supports our agile competitive standing in the marketplace. Our media buying power, proprietary technologies, consumer data aggregation, and business intelligence solutions create further opportunities to scale the Company's revenue in the sectors we serve. We are able to deploy our turnkey solutions to further grow revenue due to the futurefollowing attributes:
•Our deep data capabilities and operational business experience in our client sectors;
•Our years of media and customer acquisition know-how across multiple channels; and
•Our ability and agility at orchestrating hundreds of simultaneous programs, campaigns, and engagement tactics allow us to optimize our test and learn strategy to take advantage of lucrative opportunities.
Because of our deep expertise in online and offline mediums, we can effectively trade the market for consumer traffic and data source, partners of whom generate high-intent and unbranded media.
Our consumer engagement programs garner consumer data points and traffic in several ways:
•Email campaigns;
•SMS campaigns;
•Internal Brand and Client Brand in organic or search engine optimization (“SEO”) websites;
•Targeted search engine marketing (“SEM”);
•Pay-per-click (“PPC”) campaigns;
•Pay-per-call (“PPCL”) campaigns;
•Social and web3 community ecosystems;
•Prospect, internal, and third-party email programs;
•Call center operations; and
•Online and offline media partnerships.
Our reach continues to be an attractive commercial and risk mitigation proposition for our clients. We add value due to our diverse and flexible multi-channel capabilities that help our programs to minimize market fluctuations and take advantage of optimization opportunities. Clients pay us for the actual opt-in actions by visitors or customers that result from our marketing activities on their behalf, versus traditional impression-based advertising and marketing models in which an advertiser pays for a broad audience’s exposure to an advertisement.
We continue to build on our long-standing client partnerships in the cost or impression marketing models in which our clients are forward-looking statements withinresponsible for the meaningcosts of these laws.media impressions to a wide scale audience across online and offline mediums. The Company is strategically positioned to marshal clients from traditional account-based media engagements and into outcome-based performance solutions and vice versa dependent on market conditions and business needs for all parties.
Transparency
Due to our agnostic approach to AdTech, marketing technology ("MarTech"), and customer acquisition ecosystems, we can provide clients transparency into the decisions and recommendations that we make. We develop forward-looking statements by combining currently available informationhave prioritized the “why we do things” above “how we do things” to ensure that clients and partners are not limited in the spectrum of solutions that we offer due to exclusivity of services and financial arrangements with our beliefspartners and assumptions. These statements relateecosystems.
The Company executes its customer acquisition solutions across multiple scalable channels and mediums such as email, SMS, display, video, audio streaming, digital Out of Home, Search Engine Marketing, Social, Affiliate, Direct Mail, Linear TV, Linear Radio, and Print Inserts. The Company’s enterprise technology expertise spans all major AdTech and MarTech ecosystems, including Google (Elite Marketing Partner), Bing, The Trade Desk, LiveRamp, Facebook, TikTok, and other
leading digital service providers. The Company’s technology footprint spans NetSuite, Oracle, Salesforce, AWS, and Adobe.
Industry Overview, Market Opportunities and Competitive Landscape
Industry Overview
The Company's consulting and solutions services are designed to future events, includingfulfill three key client outcomes: (1) build enterprise value in brands, (2) generate resilient, scalable, and performance-driven revenue growth, and (3) retain customers and maximize their value. The Company powers these outcomes through a myriad of services that span:
(i) Brand Building and Activation;
(ii) Marketing Innovation and Enterprise Technology; and
(iii) Performance and Customer Acquisition.
The Company’s channel agnostic capabilities in the engagement and acquisition of consumers by offering a dual solutions stream, enables it to expand its total addressable market. The Company operates in diverse sectors that are complementary across consumer audiences. The sectors are curated to mitigate the macro- and microeconomic but also to leverage the relative scale of those sectors and market geographies.
Market Opportunities
The restructuring of the Company and its new focus positions the business into a strong standing to take advantage of the following market opportunities:
•The need for our future performance,clients to shift from a traditional marketing focus;
•A desire for clients to measure the impact of their tangible and management's expectations, beliefs, intentions, plansintangible sales and marketing investments;
•A need for enhanced operational capabilities for clients maximizes their customer acquisition systems and strategies;
•Rethinking the role of our client’s marketing functions;
•A desire to deploy enterprise technology across our clients’ businesses;
•Providing incremental customer sales activity and expertise to clients without disturbing their operations;
•The need for a unified business intelligence ecosystem that enables all stakeholders to make decisions based on prescriptive and predictive analytics; and
•Support investments in brands by private equity to rapidly deliver sales growth and leverage scalable business models such as franchise or projections relatingdealer-based businesses.
While the digital consumer engagement space is ever expanding, the Company’s ability to activate its customer acquisition programs across both digital and offline mediums, at scale, continues to be a market opportunity for the futureCompany. Clients are continually looking to explore greenfield opportunities to find new customers, utilize rich first party data to target consumers who extend their audience cohorts, and to have a trading partner who can leverage marketing opportunities where costs fluctuate.
The increasing complexities and challenges in the labor market focus our clients on their core product or service development and activation; this shift provides opportunities for the Company to grow our Create, Connect, and Perform capabilities.
The Company’s opportunity to pivot its core competency to customer retention and reengagement results creates a scalable market opportunity for us to expand our impact to our clients. The Company expects retention and reengagement solutions to be an incremental revenue opportunity as clients work to maximize their customer acquisition investments.
Competitive Landscape
The Company Business Solutions Pillars, Revenue Segmentation, and solutions mix are most comparable with AdTech and MarTech businesses such as EverQuote, Inc. (NASDAQ: EVER), SelectQuote, Inc. (NYSE: SLQT), LendingTree, Inc. (NASDAQ: TREE), QuinStreet, Inc. (NASDAQ: QNST), Digital Media Solutions, Inc (NASDAQ: DMS), and Fluent, Inc (NASDAQ: FLNT) but with lesser risk exposure to a single industry and Business Solutions Pillars than some of these statementscomparable businesses.
Who We Compete With
Our primary competitors are traditional advertising and creative agencies and digital customer acquisition marketing and media entities. Our competition with our peers is orientated around the value we get for our marketing investment (or our clients’), cost of marketing, cost of technology, addressable media, targeting data costs, scalable media, and consumer engagement and consumer acquisition provenance and compliance. Our competitors can also be identified by the useour clients who wish to utilize our know how, consumer data, or customer leads for their own monetization. Similarly, our competitors may also be a source of forward-looking terminology such as "believes," "expects," "anticipates," "estimates," "projects," "intends," "seeks," "future," "continue," "contemplate," "would," "will," "may," "should," and the negative or other variations of those terms or comparable terminology or by discussion of strategy, plans, opportunities or intentions. As a result, actual results, performance or achievements may vary materially from those anticipated by the forward-looking statements. These statements include, among others:consumer traffic to our customer acquisition programs.
· | statements concerning the benefits that we expect will result from our business activities and results of operation that we contemplate or have completed, such as increased revenues; and |
Technology· | statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. |
Among the factors that could cause actual results, performance or achievements to differ materially from those indicated by such forward-looking statements are:
· | our ability to continue to raise funds until such time, if ever, we generate profits; |
· | our ability to implement our business strategies and future plans of operations; |
· | expectations regarding the size of our market; |
· | our expectation regarding the future market demand for our services; |
· | our ability to achieve sustained profitability; |
· | any future claims made by or against Robert DePalo, one of our principal shareholders or his affiliates, that concern the Company; |
· | the establishment, development and maintenance of relationships with telecommunications carriers, vendors and customers; |
· | compliance with applicable laws and regulatory changes; |
· | our ability to identify, attract and retain qualified personnel and the loss of key personnel; |
· | general economic conditions in the United States, as well as the economic conditions affecting the industry in which we operate; |
· | maintaining our intellectual property rights and litigation involving intellectual property rights; |
· | our ability to anticipate and adapt to a developing market(s) and to technological changes; acceptance by customers of any new products; |
· | a competitive environment characterized by numerous, well-established and well-capitalized competitors; |
· | the ability to develop and upgrade our technology and information systems; and |
· | our ability to provide superior customer service. |
· | consequences from the sale of substantially all of the assets of Signal Share Infrastructure, Inc. (the former operations of M2 nGage Group, Inc. (formerly Roomlinx, Inc.)) in a foreclosure sale: |
Because forward-looking statements are subject to assumptions and uncertainties, actual results, performance or achievements may differ materially from those expressed or implied by such forward-looking statements. Stockholders are cautioned not to place undue reliance on such statements, which speak only as of the date such statements are made. Except to the extent required by applicable law or regulation, M2 nGage, Inc. undertakes no obligation to revise or update any forward-looking statement, or to make any other forward-looking statements, whetherThe Company has, as a result of the Converge Acquisition, acquired and continues to design and develop its technology capabilities and products. We build and provide technology, data, and analytics as part of our overall solutions offerings for current and new information, future events or otherwise.clients.
ITEM 1. DESCRIPTION OF BUSINESS
BackgroundOur continued focus on technology, including our proprietary business intelligence platform Helix, allows us to deploy surveillance systems across our consumer engagement programs to better manage and optimize decisions to enhance cost efficiencies.
M2 nGage Group, Inc. (formerly Roomlinx, Inc.) (the "Company", "Roomlinx" or "M2 Group") was formed in 1998 under the laws of the State of Nevada. On March 27, 2015, the
The Company entered intodeploys internally developed data and completed (the "Closing") a Subsidiary Merger Agreement (the "SMA") by and among the Company, Signal Point Holdings Corp. ("SPHC"), SignalShare Infrastructure, Inc. ("SSI") and RMLX Merger Corp. Upon the terms and conditions of the SMA, the Company's wholly-owned subsidiary RMLX Merger Corp., a Delaware corporation, was merged with and into SPHC, with SPHC and its operating subsidiaries surviving as a wholly-owned subsidiary of the Company (the "Subsidiary Merger"). The existing business of Roomlinx was transferred into a newly-formed, wholly-owned subsidiary named SignalShare Infrastructure Inc. In connection with the Subsidiary Merger, the Company's President and Chief Executive Officer, Michael S. Wasik, resigned from all positions with the parent Company and was named President and Chief Executive Officer of SSI. As a result of the Subsidiary Merger, the shareholders of SPHC, a privately-owned Delaware corporation, received an aggregate of approximately 85% of the Fully Diluted (as defined therein) common stock of the Company. The merger consideration was determined by the Company, after a thorough review of prospective acquisitions, the benefits of the proposed transaction, including access to capital, increased market opportunities and reach, perceived synergies, efficiencies and other financial considerations,software systems as well as third party leading enterprise systems for internal and external projects. The Company utilizes customized and integrated technologies for a strategic growth plan contemplated by managementvariety of workstreams including:
•Consumer engagement management;
•Performance Management;
•Web and mobile ecosystems;
• Media planning and strategy;
•Program optimization; and
•Data aggregation.
The Company continues to build upon its long-standing enterprise data know-how to design and deploy technology systems for itself and its clients to leverage optimization levers to make better business decisions more quickly and to measure the impact of the combined entity.same.
On May 11, 2016, SSI,
The Company’s focus continues to make data accessible to key stakeholders and to have a wholly-owned subsidiarysolid descriptive and diagnostic analytics foundation to execute predictive and prescriptive business optimizations across all revenue generating programs.
Regulatory
Federal, state, and industry-based regulations impact the businesses of our customers and our partners and, in turn, impact our revenues. Increased regulations can cause customers to reduce their expenditures and thus, their advertising budgets, which can potentially lower our revenues. Changes in consumer privacy laws and the impact of those changes in the digital world can have impacts on the Company completed the Foreclosure Sale of substantially all assets of SSI (other than certain excluded agreements) pursuant to Article 9 of the Uniform Commercial Code. SSI, which held the operations of the Company prior to the Subsidiary Merger, terminated all of its employees and ceased operations.
On October 1, 2010, the Company acquired 100% of the membership interests of Canadian Communications, LLC and its wholly owned subsidiaries, Cardinal Connect, LLC, a non-operating entity, Cardinal Broadband, LLC,ability to engage with consumers. The Company’s ability to utilize consumer data and Cardinal Hospitality, Ltd, entity. The acquisition of Canadian Communications, LLC also included a 50% joint venture interest in Arista Communications, LLC. transmit consumer preferences to clients and partners are paramount to its success.
Cardinal Broadband, LLC was formed in 2005 as a Colorado Limited Liability Company. PursuantGiven that we interact with consumers across online and offline mediums, we, along with our partners, clients, and service providers, are subject to the acquisition of Canadian Communications, LLCmany federal and state laws and regulations, including restrictions on October 1, 2010, the Company became the 100% member of Cardinal Broadband, LLC. Subsequent to the acquisition, Cardinal Broadband became a division of the Company.
SPHC and Subsidiary Business
SPHC is a digital technology, media, communications holding company that, through its various subsidiaries, provides integrated solutions including high density Wi-Fi for sports stadiums, concert and festival venues and convention centers. These integrated solutions not only provide the full design and installation of the Wi-Fi networks, but also through the use of software, works withunsolicited commercial email, such as the venuesCAN-SPAM Act and state email marketing laws, and restrictions on selling advertisingthe use of marketing activities conducted by telephone, including the Telemarketing Sales Rule and sponsorship opportunities on those networks. SPHC through its subsidiaries also provides broadband (wireless and wired) and Voice over Internet Protocol (VoIP) services to corporate customers primarily in the New York tri-state area.Telephone Consumer Protection Act.
SPHC was formed on October 3, 2012, pursuant to a reorganization when it acquired 100% of the issued and outstanding common stock and became the parent company of Signal Point Corp., a New York corporation ("SP Corp.") and M2 nGage Communications, Inc. (formerly Signal Point Telecommunications Corp.), a New York corporation ("SPTC" or "M2 Communications")). On September 27, 2012, SP Corp. acquired the assets and assumed certain liabilities of Wave2Wave Communications, Inc. and its subsidiaries ("W2W") in a Section 363 Asset Sale under the Bankruptcy Code. The portion of these assets that were associated with the W2W entity were transferred to SPTC by SP Corp., while those that were associated with other business lines remained with SP Corp. and subsequently the stock of SPTC and SP Corp. was acquired by SPHC in a corporate restructuring. SP Corp. expanded certain assets acquired in the W2W Acquisition while either reducing or eliminating other unprofitable assets. SP Corp. is no longer an operating subsidiary. M2 Communications is the subsidiary that provides broadband, VoIP services and Wi-Fi to corporate customers and all references to these services refer to M2 Communications.
In January 2013, SPHC acquired SignalShare LLC ("SSLLC"), a Delaware limited liability company and diversified its products and services. SignalShare provides high density Wi-Fi solutions for sports stadiums, concert and festival venues and convention centers.
On December 9, 2014, SPHC and its wholly-owned subsidiary, M2 nGage, Inc. (formerly SignalShare Software Development Corp.) ("SSSD" or M2 nGage") and Incubite, Inc. ("Incubite") and its members entered into an Agreement and Plan of Reorganization whereby Incubite exchanged the assets of Incubite for interest in SPHC that were distributed to the Incubite Members. M2 nGage is a software development company and provides Wi-Fi related services as part of its media offering to its customers provides data analytics for the networks they monitor allowing advertisers to better target their advertisement placements and providing additional revenue opportunities for M2 nGage.
The M2 Communications and M2 nGage subsidiaries of SPHC were transferred to a new holding company, Digital Media Acquisition Group Corp. (DMAG), and that entity now the 100% shareholder of both subsidiaries. The Company is the sole owner of DMAG.
Rebranding
On July 28, 2016, we changed the name of the Company to M2 nGage Group, Inc. Moreover, the names of the operating subsidiaries were changed to reflect the new branding of the Company. We believe that this streamlined branding will allow for better name recognition, as well as helping cross-sell our various services. As part of the rebranding process, services that where formerly offered by M2 Communications (e.g., Wi-Fi services) will be transitioned to M2 nGage.
M2 nGage Group, Inc., has the following two operating divisions:
· | M2 nGage Communications, Inc. (formerly known as Signal Point Telecommunications Corp.), is our Broadband Voice & Data division, and |
· | M2 nGage, Inc. (formerly known as SignalShare Software Development Corp and Signal Point Media Corp.), is our Wi-Fi networking division. |
Through its subsidiaries, M2 Group, provides the following services:
· | Wi-Fi for events, parks and venues |
· | Wi-Fi network engineering |
· | Wi-Fi temporary and permanent installations |
· | Wi-Fi for concerts and corporate events |
· | Wi-Fi offloading for cellular carriers |
· | Wi-Fi for hotels and convention centers |
· | Voice and Data services for small to mid-sized businesses in the Northeast and Midwest United States; |
· | Wireless Point-to-Point and Multi Point connections |
· | Professional IT services |
· | Backhaul aggregation services |
· | Mobile & WiFi applications for guest and fan engagement experiences |
· | Marketing Data Analytics & Reporting |
· | Media Content for events and hospitality customers |
· | Sponsorship partnerships and advertising opportunities. |
Business Strategy
We continue to execute on all aspects of our business, including our Wi-Fi networking, digital technology and media business serving the sports, entertainment and convention center market and our business where we provide broadband, VoIP services, and value added hospitality services to the commercial market. We have found that truly successful businesses find ways of taking fixed assets and generating multiple revenue opportunities over those fixed, preferably on a contractual monthly recurring revenue model, thereby improving profitability.
Our communications business stems from the assets we purchased in 2012. Our goal is also subject to provide our business customers with their basic broadbandfederal and VoIP services,state laws and then as a trusted vendor to these customers, to provide them with additional value added services. Since we are paying for the infrastructure required to provide these services with the revenues generated from these customers, each additional valued added service we provide allows us to generate an increased profit marginregulations regarding user privacy, search engines, Internet tracking technologies, direct marketing, data security, data privacy, pricing, sweepstakes, promotions, intellectual property ownership and maximizing the infrastructure already in place.infringement, trade secrets, export of encryption technology, acceptable content and quality of goods, and taxation, among others.
In the same fashion of generating additional revenue from our customers utilizing the common infrastructure we already have in place to provide our basic services,Further, we also utilizeoperate in certain sectors that same infrastructure to provide services for third parties. As an example, AT&T provides many of the Parks in the New York Cityhave their own compliance and surrounding boroughs with free Wi-Fi service. M2 Communications is the company that set up the Wi-Fi in the parks for AT&T and is providing the broadband for these parks, utilizing antennas on the roofs of nearby buildings where we are already providing services to the business tenants of those buildings. Here again, we are generating additional revenue utilizing a fixed asset we already have in place, intended to increase our profit margin.
We consider our digital technology, media and Wi-Fi business to be our high growth business. The business started as a provider of High Density Wi-Fi networks for large audiences. Without disclosing proprietary technology we deploy, what we have figured out is a way to provide a high quality of service in extremely densely populated stadiums, arenas and convention centers.
We have taken steps over the past year to take this business and transform it into not only an installation revenue business, but a business that generates monthly recurring revenues. The way we have done this is two-fold:
First, is by adding a maintenance component to our service offerings so not only do we get installation revenue but the venues will pay us on a monthly basis for a maintenance fee for the network;
Second, and more importantly, we have taken advantage of access to the wireless network by collecting all of the data analytics of what happens on the network and utilizing these analytics to sell advertising sponsorship opportunities through our Fan/Guest nGage media products. M2 nGage is the branding we use for our data analytics and sponsorship software platform. We have tested both the technology and our ability to sell these sponsorship opportunities and we were extremely pleased with the results. This has given us the confidence to now go to existing customers, as well as all of the new stadiums and venues we are working with, and offer our advertising sponsorship services whereby we jointly sell with the venue and we have a revenue sharing agreement alongside our network installation agreement. In theory, we are acting as a partner to the teams, providing the teams and venues with a vehicle for a Return on Investment (ROI) to pay for their capital expense building their WiFi networks. Our software platform also serves as a Fan Engagement portal that allows the team to connect with the fans before, during and after the game, and we are working on plans to expand those fan engagement opportunities to the many fans not attending the games in-stadium, which is something teams have told us they are looking for but have not found the way to do.
The value of these networks really starts to shine when you look at how many potential eyeballs or users we have for the networks we install.
Through this unique approach of combining network infrastructure installation with media sales, we have started to gain momentum in the market and are building brand awareness.
We continue to aggressively push new sales and installation opportunities, and are in discussions with NHL teams, NBA teams, NFL teams, and several NCAA teams and convention centers. No assurance can be given, however, that we will conclude any of these potential contracts.
Another area we continue to focus on is our music festival and corporate events business. This utilizes the same technology we use in the large stadiums and arenas, but whereas those are permanent installations, theses music and corporate events are installed as temporary installations. What we do is build the temporary Wi-Fi networks capable of handling high density performance, and then again plan to sell sponsorship and advertising packages in conjunction with the event owners based on the data analytics that we collect.
Business Segments
DMAG operating subsidiaries are organized into three primary business units: (1) Wi-Fi; (2) enterprise broadband services, including voice, data and wireless / IT support; and (3) media content/data analytics and advertising, all of which together provides a comprehensive solution for business and media partners.
Wi-Fi Networking
DMAG's subsidiaries provide a wide variety of wireless offerings catering to specific vertical markets. The various Wi-Fi services provided include the following:
Wi-Fi for Stadiums – We have installed Wi-Fi networks in major stadiums and arenas where high-density connectivity for massive audiences has been an issue. We are one of the few companies to have solved that problem. Once the networks are installed, we will have long-term contracts for maintenance of the network; data analytics of transactions processed on the networks and offers various media content services which will be described below.
Wi-Fi Network Engineering – We provide installation services for enterprise corporate clients through M2 Communications. One such example is the rollout for AT&T of Wi-Fi networks in the New York City Public Parks, for which AT&T paid M2 Communications an initial fee and is continuing to pay a monthly recurring fee for the broadband connectivity. Existing and previous customers also include IBM, Google, NBC and Viacom.
Wi-Fi for Events - We offer Wi-Fi based services for special events,regulatory frameworks such as concerts, music festivals, corporate gatheringsinsurance and sporting events. The Company is paid by the organizers for the installationlegal. In our financial services client vertical, our websites and maintenance of the network before and during the event, and for an additional fee provides analytical data to the customers, showing consumer trends. Our executive and sales team members have previously serviced and generated sales from customers including Austin City Limits, Live Nation, AEG, and iHeart Radio.
Wi-Fi Offloading - M2 Communications leverages the wireless tower rights it currently has on the roofs of buildings in New York City in order to start building out our Wi-Fi Network. M2 Communications currently has many rooftop rights on buildings in New York and as funding and opportunity allows, has plans to acquire more. The concept is not to offer Wi-Fi services under M2 Communications' brand, but to offer access to the network to the major wireless cellular carriers. This access will allow the carriers to have their customers offload the data traffic onto M2 Communications' network, which in turn frees up the carriers network for more voice calls. With access to the rooftop locations on these buildings pursuant to various building services Agreements ("BSA"), the Company provides transmitters, wireless equipment and telecommunications transmission facilities necessary to service customers and providers. Our transmitters are programmed with the ability to accept transmissions from carrier networks, like AT&T, and those carrier customers are allowed access to our network. These transmissions are then carried on dedicated high capacity telecommunications circuits to the desired destinations. M2 Communications has successfully completed a pilot with AT&T in New York City for this service and has signed a definitive Wi-Fi roaming agreement, as well as other services. M2 Communications believes that it is the first and only company to have a signed carrier offloading agreement with AT&T.
M2 Communications intends to carry forward preliminary discussions with other major U.S. based cellular carriers to run similar trials in others cities as well. The potential revenue for this business is difficult to project as it is relying on the millions of customers the carriers have in any one market at any given time.
Enterprise Broadband
Enterprise Voice and Data - We offer Enterprise Corporate customers a complete package of integrated products that includes wired and wireless broadband Internet access services, VoIP telephone services, data and email hosting, point-to point connections, collocation services, VPNs, and web hosting. Existing customers include Rolex, Versace, Christian Louboutin, New Jersey Sports and Exposition Authority (NJSEA), amongst many others.
Media Content / Analytics
Data Analytics - through the millions of potential users on our various networks, we accumulate consumer data analytics which can be monetized with owners, sponsors and major consumer brands. Based on existing events, DMAG has access to certain user data from over 30 million potential visitors over our networks.
Media Content - DMAG, through its subsidiaries is able to provide improved and cutting edge fan engagement for all of its venues, as well as VIP hospitality guests, which will create marketing opportunities. This includes working with venues and owners on advertising sponsorship opportunities, as well as providing specific target market media content. In 2016 M2 nGage has started to roll this out and revenues are minimal at this time.
Market Opportunity
We seek to capitalize on the convergence of wireless, broadband, and content-based service models. Growth in new applications in wireless voice and multimedia services, increasing demand for high quality mobile voice and high definition video entertainment services, and the desire of cellular carriers to efficiently manage valuable spectrum, drive the underlying demand for our wireless broadband products and systems. It is widely accepted that existing networks and technologies cannot fulfill this demand.
DMAG Historical Business
The various businesses that DMAG acquired have provided communication services to small to mid-sized businesses in the Northeast and Midwest United States with a complete package of integrated products that includes wired and wireless broadband Internet access services, Voice over Internet Protocol, or VoIP, data, email hosting, point-to point connections, managed network services, collocation, virtual private networks, or VPNs, web hosting, Wi-Fi and wireless internet. These subsidiaries have successfully implemented and sold fixed wireless broadband solutions in the Northeast United States since our inception. Following SPHC's acquisition of the assets of Wave2Wave through the Section 363 auction, M2 Communications is selling services to businesses primarily through a direct sales force, channel partners and telemarketing. While M2 Communications markets these services to many customer segments, it focuses on selling to customers in multi-tenant office buildings (in-building) and to remote locations (stand-alone buildings). It currently has active Building Service Agreements, or BSAs, with building owners throughout New York, New Jersey, Connecticut, and Chicago. Under these BSAs, it either pays the building owners monthly rent or a revenue share to allow it to sell throughout their buildings. The term of these BSAs are typically multi-year in length, with automatic renewals. M2 Communications has found that revenue share agreements give the building owners an incentive to promote our services to new tenants, and will help it increase penetration rates in terms of the number of tenants per building. It also helps with the securing of roof top rights for our Wi-Fi network. This legacy now helps M2 Communications differentiates itself from its competition and creates a mutually beneficial relationship between it, the building owners and tenants.
M2 Communications leverages the wireless towers it currently has on the roofs of buildings in New York City in order to start building out our Wi-Fi network. M2 Communications plans to acquire more rights to use buildings roofs providing that the funds and opportunity is available and prudent. The concept is not to offer Wi-Fi services under M2 Communications' brand, but to offer access to the network to the major wireless cellular carriers. This access will allow the carriers to have their customers offload the data traffic onto M2 Communications' network, which in turn frees up the carriers network for more voice calls. M2 Communications has successfully completed a pilot with AT&T in New York City for this service and has signed a definitive Wi-Fi roaming agreement, as well as other services.
M2 Communications is also doing Wi-Fi rollouts and maintenance for third parties through its IT services business. One such example is the build out in 2012/2013 for AT&T of Wi-Fi networks in various New York public parks. It was paid for the rollout by AT&T, and is paid a monthly recurring fee from them for the broadband connectivity. The M2 Communications and M2 nGage subsidiaries of SPHC were transferred to a new holding company, Digital Media Acquisition Group Corp. (DMAG), and DMAG is the 100% shareholder of both subsidiaries. The Company is the sole owner of DMAG.
SignalShare Operations
SignalShare was created to meet the demand for mobile Wi-Fi access as users increase their integration of digital technology into their daily lives. The proliferation of Wi-Fi enabled mobile devices has dramatically grown and will continue to expand. Signal Share offered new products and services designed to provide permanent and temporary Wi-Fi and data collection and analysis for live sporting and entertainment events. Signal Share provided all of the technology, infrastructure and resources necessary to construct a broadband wireless network for an event. Regardless of the location, event type or duration, Signal Share connected fans in a whole new way.
On July 5, 2016, SignalShare, LLC filed for bankruptcy voluntarily pursuant to Chapter 7 of the Bankruptcy Code. The case was filed in the U.S. Bankruptcy Court, District of New Jersey and is captioned case no. 16-23003.
Arista Communications, LLC
Arista Communications, LLC is a joint venture between Cardinal Broadband and Wiens Real Estate Ventures, LLC, with each entity having a 50% membership interest. Wiens is the developer of the Arista residential/retail/office development in Broomfield, Colorado. The joint venture was formed to provide telecommunication services to the Arista community. Arista Communications provides telephone, television, and internet connectivity to the residents and businesses of the Arista development, including the 1st Bank Center, an 8,000-seat music and sports venue. The Company owned a 50% membership interest in Arista Communications through its Cardinal Broadband division. Cardinal Broadband manages the operations of Arista Communications. The financial statements of Arista Communications, LLC are consolidated with the Company in accordance with ASC Topic 810, Consolidation. The Company's interest in Arista Communications, LLC were sold as part of the Cardinal Broadband sale agreement effective May 1, 2016.
SignalShare Infrastructure
SignalShare Infrastructure ("SSI") conducted the existing business operations of Roomlinx following the merger with SPHC. On May 11, 2016, SSI completed the Foreclosure Sale of substantially all assets of SSI (other than certain excluded agreements) pursuant to Article 9 of the Uniform Commercial Code. SSI terminated all of its employees and ceased operations. The Foreclosure Sale resulted from SSI's inability to pay $3,622,275 of indebtedness to SSI's senior lender, Cenfin, LLC. The winning bid was made by Single Digits, Inc., an unaffiliated New Hampshire corporation and accepted by Cenfin. There was no relationship between SSI or its affiliates and Single Digits prior to the transaction. The consideration was $700,000 plus SSI's cash on hand at Closing less $207,106.72, such amount representing 75% of deposits received by SSI prior to closing for future installations for which work had not been substantially completed for Hyatt (see below). The amount of accounts receivables included in the transferred assets was approximately $440,000 as of May 9, 2016.
The primary business of SSI focused on providing in-room media, entertainment, and HD television programming solutions along with wired networking solutions and Wireless Fidelity networking solutions, also known as Wi-Fi, for high speed Internet access to hotels, resorts, and time share properties. The Company also provided both wired and wireless Internet access, HD satellite television service, and telephone service both Plain Old Telephone Service ("POTS") and Voice over Internet Protocol ("VOIP"), to residential and business customers.
On May 3, 2016 at 10:00 A.M. (Local Time) Cenfin, the senior secured lender of SSI, sold all right, title and interest in substantially all personal property of SSI to the highest qualified bidder at a public auction pursuant to Article 9 of the Uniform Commercial Code. The auction took place at the offices of DLA Piper LLP, 203 N. LaSalle Street, Chicago, Illinois 60601. There was one bidder and the transaction closed on May 11, 2016 and all employees of SSI were terminated and the operations of SSI ceased
Hyatt Master Services Agreement
On March 12, 2012, the Company and Hyatt Corporation ("Hyatt") entered into a Master Services and Equipment Purchase Agreement (the "MSA") pursuant to which SSI agreed to provide in-room media and entertainment solutions, including its proprietary Interactive TV (or iTV) platform, high speed internet, free-to-guest, on-demand programming and related support services, to Hyatt-owned, managed or franchised hotels that are located in the United States, Canada and the Caribbean. Under the MSA, Hyatt will use its commercially reasonable efforts to cause its managed hotels to order the installation of the Company's iTV product in a minimum number of rooms in Hyatt hotels within certain time frames.
On November 16, 2015, SSI entered into a Settlement, Mutual Release, and Indemnification Agreement (the "Settlement Agreement") with Hyatt which had claimed that the Company had breached the MSA and various Hotel Services and Equipment Purchase Agreements (the "HSAs"). Pursuant to the terms of the Settlement Agreement, the parties terminated various HSAs and SSI agreed to sell and assign iTV services for the remainder of the amended HSAs to third party providers and to provide Transition Services (as defined) for up to ninety (90) days after an HSA is terminated. All of such administrative costs for such services are capped at $250,000 and shall be deducted from the deposits currently on hand with SSI, for which Hyatt had demanded repayment.
The parties agreed to extend the terms of the amended HSAs for an additional thirty-six (36) months from the date of expiration to provide High Speed Internet Access ("HSIA"), subject to approval of the owners of hotel properties. After payment of the above-described administrative costs not to exceed $250,000, the remainder of the $966,036 of deposits owed by SSI shall be applied toward a 15% credit for any hotel HSIA installations after November 16, 2015 until the deposits re exhausted. SSI was granted the right to bid upon any new WiFi installations and upgrades of any hotel convention center business, subject to Hyatt's right to accept or reject SSI's bid at Hyatt's sole discretion. Pursuant to the above described foreclosure sale, of SSI's operations, including the MSA, were sold to a non-affiliated third party.
Residential Media and Communications
We provide residential and business customers telecommunication services including telephone, satellite television, and wired and wireless internet access. Telephone service is provided through traditional, analog "twisted pair" lines, as well as digital "VoIP". Analog phone service is typically provided via an interconnection agreement with CenturyLink, Inc., which allows the Company to resell CenturyLink service through their wholesale and retail accounts with CenturyLink. VoIP service is provided at properties where the Company maintains a broadband internet service to the end customer, allowing the Company to provide digital phone service (VoIP) over the same lines as their internet service.
Television service is typically provided via the Company's agreements with DISH Network and DirecTV. Most television service is provided via a head-end distribution system, or an L-Band digital distribution system. Television service is offered in high definition whenever possible.
Internet service is provided via both wired and wireless network design. The Company provisions and manages broadband access to the residential customers through both wholesale and resale methods. Wholesale methods exist when the Company owns and controls the internet circuit and resale methods exist when the Company uses an affiliated third party to provide the internet circuit.
We generate revenue through:
● Network design and installation services
● Delivery of telephone service (billed monthly)
● Delivery of Internet service (billed monthly)
● Delivery of television service (billed by the satellite provider with monthly commissions paid to the Company)
Many of our existing and potential competitors may have greater financial, technical, marketing and distribution resources than we do. Additionally, many of these companies may have greater name recognition and more established relationships with our target customers.
Product Development
We seek to continually enhance the features and performance of our existing products and services. In addition, we are continuing to evaluate new products to meet our customers' expectations of ongoing innovation and enhancements.
Our ability to meet our customers' expectations depends on a number of factors, including our ability to identify and respond to emerging technological trends in our target markets, develop and maintain competitive products, enhance our existing products by adding features and functionality that differentiate them from those of our competitors and offering products on a timely basis and at competitive prices. Consequently, we have made, and we intend to continue to make, investments in product development.
Patents and Trademarks
We own the registered trademarks of "SuiteSpeed®," "SmartRoom®," and "Roomlinx®." We also have proprietary processes and other trade secrets that we utilize in our business.
Customer Support Systems
We provide live support from our call centers 24 hours a day, seven days per week, and 365 days a year. Support representatives are specifically trained to enable them to offer customers customized support depending on the product or service at issue. We utilize industry standard coaching and employee development and training programs to help achieve high quality customer interactions. As such, most callers will reach a live representative in less than one minute and, when they do; trained agents work to address any concerns or issues on that very first call into the support system. Customer care operations strive to ensure first call resolutions are over 80% for customer issues and those issues escalated to a higher level are handled quickly by senior engineers. Customer care centers cater to the diverse needs and preferences of its customers.
Network Architecture and Deployment
We offer an integrated voice and data network as an advanced and secure network, sophisticated voice and data applications, as well as outstanding, reliability, redundancy, and security. The diversity and resiliency of our network are designed to insulate customers from network failures by providing diverse network access points in each market and multiple private peering arrangements. All of this is supported by power backup and a self-healing high capacity fiber optic backbone. We are able to manage and control the entire network: equipment, points of presence, and fiber optic backbone—providing customers with reliability, high availability service, and security. We believe that such network deployment strategies will allow it to enter new markets rapidly and to offer customers flexible technological solutions tailored to their specific needs.
Our network was built from the ground up by professionals with many years of combined engineering and design experience in voice and data technologies. This network infrastructure and operations support systems enable it to control the types of services that it offers, how these services are packaged and how they are integrated to serve customers. Through the installation of IP routers at its switch sites, we deploy packet-based technology to augment its traditional circuit-switching technology. Its customer-specific voice and data solutions are driven by customer preferences and priorities, as it strives to provide industry-leading packet delivery, latency, and backbone availability over its core IP network, enabling rapid, secure, and accurate transmissions. By providing the latest in IP technologies, we seek to maintain an advanced architecture that supports converged technologies. This allows it to deliver cutting-edge products, features and services to customers efficiently over a single, next-generation network—including unified messaging, IP video and trunking, presence management, and online feature management—allowing customers to combine voice and data services to increase efficiency and reduce costs.
We rely on various equipment vendors and integration partners to provide us with equipment and services to offer our services. We anticipate that these vendors have adequate supply and technology to meet our deployment and institutional needs. Moreover, SignalShare Software Development Corp. has its own development team associated with its products.
Network Operations Command Center (NOCC).
We provide pro-active, real-time monitoring to protect customer services. Our Network Operations Command Center (NOCC) in Hackensack, New Jersey provides 24/7/365 surveillance of its network elements to support our customers' services. The NOCC is equipped with proactive monitoring tools to ensure quick identification and resolution of network issues. In addition to this constant surveillance of individual network elements, we will perform routine equipment audits to ensure reliability. The network is highly sectionalized, with remote access to all devices that allows us to communicate with devices such as modems and routers to speed detection and repair. We employ the latest telecommunications standards to ensure that we maintain the low mean-time-to-repair performance. In addition, it adheres to stringent "maintenance window" schedules, where repairs are done overnight to minimize or eliminate any impact on its customers. The NOCC provides advanced, "always-on" monitoring for latency, jitter, utilization and packet loss in real time. Customer Premise Equipment, local loops and backbone elements are constantly under surveillance with proactive monitoring systems for fast failure detection and recovery. Because of these capabilities, many problems are identified and rectified before customers are even aware there is an issue. Our highly trained staff is provided with the right tools, training and state-of-the-art equipment to maintain network reliability and keep the network and its customers up and running.
Stringent Security Regulations.
We meet the most demanding security standards and regulations to safeguard customers' critical data and processes against disruption, and provide privacy protection. For example, M2 Communications complies with the FCC's stringent Customer Network Proprietary Information, or CPNI, standards that safeguard customer proprietary information and prevent "data mining."
Competition
The primary competitors in the marketplace include hardware manufacturers of access points and switches, Incumbent Local Exchange Carriers, or ILECs, such as Verizon and AT&T, and other national and international providers such as Level 3 Communications, LLC, XO Communications and Cogent Communications, Inc. Additionally; regional and local providers such as Broadview Networks, Inc. and Paetec/Windstream, GuestTek and Sonifi also compete in some of our market offerings. Although many are much larger organizations, they may be less apt to handle the small to mid-size market that is SPHC's focus. The Company believes that it is able to compete effectively in the marketplace by solution oriented sales, personal and prompt client support and services, and competitive pricing. It further believes that its technology and offerings are well positioned to compete in this marketplace, provide a superior experience for end users, and provide for the most efficient use of network resources. While there are other companies offering such services, M2 Communications is one of a limited number of companies that has the ability to offer combined Wi-Fi services, broadband service and Media & Content services to major corporations, consumer brands and sporting owners.
Regulatory Obligations
As a telecommunications carrier and under the FCC's recently adopted broadband rules, SPHC and its affiliates offering regulated services are subject to a varietyvarious federal, state, and
local laws, including state licensing laws, federal and state laws prohibiting unfair acts and practices, and federal and state advertising laws. The costs of compliance with these regulations and new laws may increase in the future and any failure on our part to comply with such laws may subject us to significant liabilities.
Macroeconomic Conditions
During 2020, the U.S. economy increasingly suffered the adverse effects of the COVID-19 economic and health crisis. Macroeconomic factors, such as the level that canof interest rates, credit availability, and the level of unemployment, including during economic downturns and global pandemics, could all have cost or operational implications. The regulations, for instance, require the filing of periodic revenue and service quality reports, the provisionan adverse impact on our customers’ costs of services and their demand for our services and our revenues. Any difficulties faced by our customers due to customers with hearing or speech disabilities and associated funding of telecommunications relay services, protection of Customer Proprietary Network Information (CPNI),hardships in the capabilityeconomy could cause a reduction in their advertising budgets as they seek to associate a physical address with a calling party's telephone number (E-911) and cooperation with law enforcement officials engagedmanage expenses in lawful investigations. The FCC's stringent CPNI, standards safeguard customer proprietary information, including the services selected and call records, and prevent "data mining" by requiring customer authentication before disclosing CPNI which significantly curtails "data mining." Moreover, the CPNI rules require yearly certifications of compliance and immediate reportsgeneral. Conversely, to the FCC and the Federal Bureau of Investigation in situations where CPNI is disclosed in violation of the rules. SPHC is required to file quarterly and yearly reports with the Universal Service Administration Company ("USAC") disclosing its telecommunications revenues. These filings are used for certain public interest assessments, e.g., USF and TRS, which support universal service and programs for persons with certain disabilities. The FCC has jurisdiction over the management and licensing of the electromagnetic spectrum for all commercial users. The FCC routinely reviews its spectrum policies and may change its position on spectrum use and allocations from time to time. Wean extent, we believe that the FCCdigital media advertising industry is committedalso counter-cyclical to allocating spectrummacroeconomic conditions since some customers increase their advertising and promotion efforts in times where consumers are more difficult to support wireless broadband deployment throughoutacquire. This enables us to ease the United Statesdownward impact on our revenues during a downturn in the economy.
We also believe that we are well suited to take advantage of an economic downturn due to (a) our business being focused on measurable business outcomes versus brand awareness, (b) our trading capabilities across multiple channels and will continuetactics to modify its regulationstake advantage of easing media costs, and (c) our ability to foster such deployment, which will help us implementleverage sectors that promote financial benefits and costs savings to consumers. We saw growth in the Converge business during the COVID-19 pandemic of approximately $238.0 million for year ended December 31, 2020, and $294.0 million for year ended December 31, 2021, due to the Performance revenue stream promoting clients to test our existing and future business plans. SPHC primarily uses unlicensed spectrum in orderservices due to provide its Wi-Fithe financial risk mitigation that this solution offers (pay lead or appointment etc). In addition, we have also been able to take advantage of consumers being at home who are engaging with our home services and the Company must comply with equipment and transmission standards associated with use of the spectrum in order to avoid interference. Noncompliance with these and other provisions can result in administrative fines and penalties.home improvements client offerings.
In 2015, the FCC reversed its previous rulings that Internet services are interstate information services that are not subject to regulation as a telecommunications service under federal law or to state or local utility regulation. The FCC determined that broadband providers are common carriers subject to FCC regulation similar to telephone providers, but decided to forbear much of the more onerous regulations applicable to telephone providers. Accordingly, our broadband Internet services are, therefore, not subject to many of the regulatory requirements imposed on wireless and wireline telecommunications service providers. For example, we are not currently required to contribute a percentage of gross revenues from our Internet access services to the universal service funds used to support local telephone service and advanced telecommunications services for schools, libraries and rural health care facilities. Our wireless broadband Internet services are, however, subject to a number of federal regulatory requirements, including the Communications Assistance for Law Enforcement Act ("CALEA") requirement that high-speed Internet service providers implement certain network capabilities to assist law enforcement in conducting surveillance of persons suspected of criminal activity and the FCC's CPNI rules.
With respect to services based on customer analytics raises privacy concerns that can impact state and federal law pertaining to personal information and data protection depending on if the data is personally identifiable or non-personally identifiable. Monitoring of programs to insure that personally identifiable information is not disclosed will be necessary to insure the company does not violate state and federal law. Moreover, data collection associated with minors may impose differing and more stringent obligations on our use of such data. Our terms of service with customers and users will require proper disclosure of our uses of the information in order to obtain proper consent from users and customers in order to avoid privacy concerns and potential consumer protection law violations.
Intellectual Property
The Company has registered trademarks on the following names: Fundamentals, The Power of Fandom, Entertain Change, and several pending marks. To protect its proprietary rights, we relythe Company relies on a combination of trademark, copyright, patent, trade secret, and other intellectual property laws, employment, confidentiality, and invention assignment agreements with its employees and contractors, and confidentiality agreements and protective contractual provisions with our partners, licensees, and other third parties. The Company owns several hundred brands and URLs that it utilizes to power its core revenue generation activities.
Trademarks. AsAvailable Information
Our website is www.troikamedia.com. Interested readers can access, free of December 31, 2015, SPHC maintainedcharge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the following trademarks: "SignalPoint Communications"Securities Act, through the SEC website at www.sec.gov and "SignalPoint". Roomlinx, Inc. maintains the following trademarks: "Roomlinx" and "SmartRoom."
Copyrights. SPHC has not registered any copyrights. All works of original authorship fixed in a tangible form that may exist are unregistered.
Patents. We maintain one patent for "Communications System and Call Forwarding Management" Patent No. US 8,036,362 B1. The Company's M2 nGage subsidiary has filed one provisional patent for "A One-Tap Operation on Mobile Device Touchscreens to Instantly Send a New Text Message Chosen From a User-Customizable Set of Phrases Displayed in a Keyboard-like Grid."
Other Materials. From time to time, employees will report on potential intellectual property opportunities for the company. These opportunities may include new product and service offerings, and potential proprietary information association with such services which may warrant application for formal IP protection. Regarding potential patentable material, personnel will conduct interviews with the inventors, may perform initial prior art searches, and if a determination is made that the proprietary material is valuable enough to the company to warrant patent protection, such applications will be made with the assistance of third-party patent counsel with support of our own in-house counsel. In addition, the company will also seek to maintain certain intellectual property and proprietary know-how as trade secrets, and generally require our partners to execute non-disclosure agreements prior to any substantive discussions or disclosures of our technology.
We rely and expect to continue to rely on a combination of confidentiality and license agreementssearching with our employees, consultants, and third parties with whomticker symbol “TRKA.” Such reports are generally available the day they are filed. Upon request, we have relationships, as well as trademark, copyright, patent, trade secret, and domain name protection laws, as applicable, to protect our intellectual proprietary rights. We have filed various applications for protectionwill furnish interested readers a paper copy of certain aspectssuch reports free of our intellectual property, and we currently hold a numbercharge by contacting Investor Relations at 25 West 39th Street, 6th Floor, New York, New York 10018 or call (212) 213-0111or by email investorrelations@troikamedia.com.
Employees
As of August 25, 2016, we had approximately 33 employees companywide; however, the number of employees may increase or decrease as we deem fit. None of our employees is subject to a collective bargaining agreement or an employment agreement.
Item 1A. Risk Factors
An investment in our Company is very speculative and involves a very high degree of risk. Accordingly, investors should carefully consider the following risk factors, as well as other information set forth in this report, in making an investment decision with respect to our securities. We have sought to identify what we believe to be all material risks and uncertainties to our business and ownership of our common stock, but we cannot predict whether, or to what extent, any of such risks or uncertainties may be realized nor can we guarantee that we have identified all possible risks and uncertainties that might arise. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial may also harm our business operations. If any of these risks or uncertainties occurs, it could have a material adverse effect on our business.business, financial condition, results of operations, and prospects.
Risks Relating to Our Business and Industry
We are undergoing a transformational reorganization of strategy, governance, and management following the Converge Acquisition.
Since the Converge Acquisition, we have undergone a transformational restructuring of its strategy, governance, and management which require time and pose implementation risks and costs. This transformative event may be impacted by risks associates with the merger of cultures, delay in adoption of new processes, changes in systems and standard operating procedures, and the like. There are risks associated with legacy clients understanding the new strategy and how they will be serviced on a go forward basis. The restructuring poses cost consequences of personnel, office, and systems changes. All these risks may impact our financial performance and may lead to an increase in costs. Management’s time and focus in executing the restructuring can lead to a loss of focus on revenues and growth.
We rely on a rapidly changing industry and new business model which makes it challenging to assess our business and our prospects of success.
A significant majority of our revenue is derived from solutions that leverage online, digital and offline industries. These industries are constantly evolving especially as they relate to customer acquisition which is the core of our business. The digital media industry has undergone rapid and dramatic changes in its relatively short history of losses from operations which may continue,include evolution in internet media, advertising technologies, privacy and which may harm our ability to obtain financingdata standards, regulation, and continue our operations.
The Company's financial statements reflect that it has incurred significant losses since inception, including net losses of $81,479,644changing consumer visitor and $11,996,546 for the years ended December 31, 2015,client demands. Our performance solutions model and 2014, respectively. The Company expects toproduct offerings have also changed as we continue to have lossesadapt to market needs and negative cash flow forheadwinds. The evolution of our business model, including our products and solutions are also at the foreseeable futureearly stages in their development and it is possible we may never reach profitability. Therefore, there is a significant risk that public investors may lose all or some of their investment.
activation.Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
The audit report ofindustry that we are in does possess risks which can impact our independent auditors dated August 29, 2016 on our consolidated financial statements forperformance. These include, but are not limited to, the year ended December 31, 2015 included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Our auditors' doubts are based on our recurring net loss of $81.5 million, and negative cash generated from operating activities of $4.6 million for the year ended December 31, 2015 and our negative working capital of $30.0 million as of December 31, 2015. following:
•Our ability to continue asattract and retain client advertisers, and to generate revenue from them, depends on a going concern will be determined bynumber of factors, including the ability of our clients to earn an attractive return on investment from their investment with us.
•Our ability to improvecompete effectively with others for media and consumer engagement.
•Our ability to keep pace with changes in AdTech, MarTech, and general technology capabilities of our competitors.
•Changes in general economic conditions and market dynamics in the United States or in the specific Sectors that we operate in and that we may expand into outside of the United States.
•The impact of COVID-19 pandemic and its aftermath on us and our third-party partners, clients, and the economy cannot be predicted.
•Changes in the regulatory enforcement or legislative environment surrounding digital, online, offline, and technology services.
•Our reliance upon the supply of media and consumer response and in particular, the availability of media, affordability, performance, efficiency, consumer response rates, and the general services that we rely on from our third-party partners.
•We rely on online and internet companies to attract consumers.
•Our ability to accurately forecast results of operations and appropriately plan our expenses across our Revenue Streams and in particular Performance Solutions.
•Our ability to manage cyber security risks and costs associated with maintaining robust security infrastructure.
•Our ability to continually optimize our websites, digital ecosystems, and offline programs to increase consumer response rates and quality of customers for our clients.
•Our ability to develop new solutions, enhancements, and features to meet new demands from our clients and for our internal performance.
•Our ability to implement enhanced products across our business profitability, ourand achieve client adoptions of such products.
•Our ability to generate sufficient cash flow fromsuccessfully challenge regulatory audits, investigations, or allegations of noncompliance with media, privacy, and other laws that govern our operationsindustry, Sectors, and our abilitysolutions.
If we are unable to obtain additional funding in the short term to meet our operating needs and the current portion of our required obligation payments for the next twelve months from the date of this report. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our Subsidiary Merger with Signal Point caused some disruption of our business, has diluted our stockholders and may harmaddress these risks, our business, financial condition or operating results.performance, overall results of operations, and business prospects could suffer.
Our March 2015 subsidiary merger with SPHC (the "Subsidiary Merger") has and could subject usWe rely on clients to a number of risks,make investments in “Core Functions” including, but not limited to:to, media, marketing, technology, analytics, creative, and operations.
We rely on our clients investing in Core Functions for our two revenue streams. We expect to derive the considerationvast majority of our revenue in delivering Managed Service and Performance Solutions that generate qualified consumer inquiries such as clicks, leads, calls, applications, retainers, cases, customers, and sales. Our clients will reduce or end their investment if they do not generate the desired business results. The failure of our solutions (including our strategies, technologies, and campaign management) to effectively match our clients’ products and services with our digital and offline audiences in a manner that results in increased revenue for our clients could have an adverse impact on our ability to maintain or increase our revenue from investments.
Even if our solutions are effectively executed, our current (and future) clients may not continue to make investments due to competition, disintermediation, and other industry risks. For example, macroeconomic conditions such as an economic downturn or public health crises (such as the Subsidiary MergerCOVID-19 pandemic and share issuancethe Russia-Ukraine military conflict) may impact our client Investments in the short-term and potentially in the long-term. If any of our clients decided not to continue to make investments with us and utilize our solutions due to changes in the industry and competitive landscape, the Company could experience a rapid decline in its revenue over a relatively short period of time.
A reduction in the efficiency of the Company’s solutions across all Revenue Categories may negatively impact the Company’s investment in its Performance Solution. An increase in media or activation costs, a reduction in campaign performance, a fall in consumer response rates, reduction in the value of those consumers to our secured lender resulted in substantial dilution to our existing stockholders;clients will decrease revenues and impact the acquired company or technologies has not improved market position as planned; and personnelfinancial performance of the acquired company, asCompany.
If we lose major clients, our revenue will decrease, and our business may be harmed.
We expect that a limited number of clients will continue to account for a significant percentage of our revenue, and the combined operationsloss of any one of these clients, or a material reduction in their investment with the Company, could decrease our revenue and harm our business.
We do not have placed significant demandslong term agreements with our clients.
Because the majority of our contracts with our clients do not have fixed commitments, these clients have the ability to unilaterally terminate their agreements with us, pause their campaigns, or materially reduce the amount of business they conduct with us at any time, with little or no prior notice. There is no guarantee that we will be able to retain or renew existing agreements with any of our clients on acceptable terms, or at all. Moreover, some of our clients seek specific sub-sets of consumers and, despite the return they are able to achieve on the Company's management, technical, financialleads we provide, may not renew their agreements with us because we are unable to provide significant additional user profiles that meet their criteria.
Additionally, because of the nature of our Performance Solutions engagements, we typically bear the costs of purchasing media, data, and applications without the assurance of any revenue by any particular client. We must be able to generate more revenue from consumers than our cost of goods and services used to acquire such consumers in order to be profitable. Our ability to do so is dependent on many factors, including having the right media strategy, sources to drive consumers who engage with our sites and call center partners, providing content and experiences that retain consumer attention, and displaying relevant advertisements and other resources; key personnel and customers of the acquired company may terminate their relationships with the acquired company as a result of the acquisition; we may experience additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting; we may assume or be held liable for risks and liabilities as a result of our acquisition,content to consumers. Other factors, some of which are outside of our control, such as competition, changing consumer tastes, and general economic conditions, may inhibit our ability to operate our business profitably, which could adversely affect our results of operations.
Our clients don’t work exclusively with us and are open to working with competitors.
In most cases, our clients are able to work with our competitors as we maydo not have been ableexclusivity where they deem it to discover duringbe viable based on the particular solution that we are providing.
We rely on our due diligencemanagement team and other key employees, and the loss of one or adequately adjust formore key employees could harm our business.
Our success and future growth depend upon the continued services of our management team, and other key employees in all areas of our organization. From time to time, there may be changes in our acquisition arrangements;key employees resulting from the hiring or departure of executives and employees, which could disrupt our ongoingbusiness. We have, in the past, experienced declines in our business and management's attentiona depressed stock price, making our equity and cash incentive compensation programs less attractive to current and potential key employees. If we lose the services of key employees or if we are unable to attract and retain additional qualified employees, our business and growth could suffer.
Litigation could distract management, increase our expenses, or subject us to material money damages and other remedies.
We may be disruptedinvolved from time to time in various additional legal proceedings, including, but not limited to, actions relating to breach of contract, breach of federal and state privacy laws, and intellectual property infringement that might necessitate changes to our business or diverted by transitionoperations.
Regardless of whether any claims against us have merit, or integration issues and the complexity of managing geographicallywhether we are ultimately held liable or culturally diverse enterprises; we may incur one-time write-offs or restructuring charges in connection with the acquisition; and we may acquire goodwill and other intangible assets that are subject to amortization or impairment tests, which couldpayment of damages, claims may be expensive to defend and may divert management’s time away from our operations. If any legal proceedings were to result in future charges to earnings.
We cannot assure you that we will successfully integrate all of our business. In addition, we cannot assure you that, our continued business will achieve sales levels, profitability, efficiencies or synergies that justify acquisition or that the acquisition will result in increased earnings for us in any future period. These factorsan unfavorable outcome, it could have a material adverse effect on our business, financial condition, prospectsposition, and operating results.
We Have Only a Limited Operating History, Which Makes It Difficult to Evaluate an Investment in Our Common Stock.
We have only a limited operating history upon which our business, financial condition and operating results of operations. Any adverse publicity resulting from actual or potential litigation may be evaluated. We face a number of risks encountered by early stage technology companies that participate in new technology markets, including our ability to:
| ● | Maintain our engineering and support organizations, as well as our distribution channels; |
| ● | Negotiate and maintain favorable rates with our vendors; |
| ● | Retain and expand our customer base at profitable rates; |
| ● | Recoup our expenses associated with the wireless devices we resell to subscribers; |
| ● | Manage expanding operations, including our ability to expand our systems if our subscriber base grows substantially; |
| ● | Attract and retain management and technical personnel; |
| ● | Find adequate sources of financing; and |
| ● | Anticipate and respond to market competition and changes in technologies as they develop and become available. |
We may not be successful in addressing or mitigating these risks and uncertainties, and if we are not successful our business could be significantlyalso materially and adversely affected.
Bothaffect our management and our independent registered public accounting firm have identified material weaknesses in our internal control over financial reporting. If we are unable to correct these weaknesses, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and the market price of our shares may be adversely impacted.
The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company's internal control over financial reporting in its annual report, which contains management's assessment of the effectiveness of the company's internal control over financial reporting. In addition, if in future years, we were to meet certain market capitalization and other benchmarks, our independent registered public accounting firm would also report on the effectiveness of our internal control over financial reporting. As of December 31, 2015, our management concluded that our internal control over our financial reporting was not as effective as they can be.
In connection with their audit of our consolidated financial statements for the year ended December 31, 2015, our management and our independent registered public accounting firm identified and communicated to us material weaknesses in our internal control over financial reporting as defined in the standards established by the U.S. Public Company Accounting Oversight Board ("PCAOB") that there is reasonable possibility that a material misstatement in our annual or interim consolidated financial statements would not be prevented or detected on a timely basis by our internal controls. The material weaknesses identified by our independent auditors include lack of adequate resources and experience within the accounting and finance department to ensure timely identification, resolution and recording of accounting matters.
Although we have adopted a remediation plan to improve our internal control over financial reporting, the plan may not be sufficient to overcome these material weaknesses. We will continue to implement measures to remedy these material weaknesses as well as other deficiencies identified by our independent auditors and us in order to meet the deadline and requirements imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements,reputation, which in turn could harmadversely affect our results.
Our client investment and business needs are often subject to seasonality and may fluctuate significantly during the course of the year.
Our financial results are also subject to fluctuation as a result of seasonality and cyclicality in our client businesses. Some of our clients have lower investment budgets during the first and second calendar year quarters. The costs to acquire media from media or data service providers is also subject to seasonal variability with costs typically increasing in the fourth quarter. Our results of operations have in the past been adversely affected when we were unable to mitigate fluctuations in the price and availability of media, data, and consumers, and similar effects may occur in the future.
Certain clients have investment budgets that are not consistent during any given period. On occasion, we must react to client shortfalls in areas such as performance, inventory, and business targets. As a result, we are, from time to time, required to respond to investment increases at the end of a month, quarter, or year. Beyond these budgetary constraints and investment patterns of our clients, other factors affecting our business may include macroeconomic conditions affecting the digital and negatively impactoffline media industry and the various market price of our shares.
Risks Related to DMAG, SPHC and their Affiliates Business and Industry
Our market is extremely competitive and we face intense competition from other providers of communications services that have significantly greater resources.
The market for broadband and VoIP related services is highly competitive and we compete with several companies within each of our markets. We face competition from several different sources including wireless carriers, incumbent local exchange carriers, cable operators and Internet service providers. Many of these operators have substantially greater resources and greater brand recognition than we have. Further, there is no guarantee that they will not enter the wireless Internet connectivity market and compete directly with us for our subscriber base, which could have a material adverse effect on our future operations.
Our current or future competitors may provide services comparable or superior to those provided by us, or at lower prices, or adapt more quickly to evolving industry trends or changing market requirements.
Many providers of communications services have competitive advantages over our operations, including substantially greater financial, personnel and other resources, better access to capital, brand name recognition and long-standing relationships with customers. These resources place us at a competitive disadvantage in our markets and may limit our ability to expand into new markets. Because of their greater financial resources, some of our competitors can also better afford to reduce prices for their services and engage in aggressive promotional activities. Such tactics could have a negative impact on our business. For example, some of our competitors have adopted pricing plans such that the rates that they charge are not always substantially higher, and in some cases are lower, than the ratesSectors that we will charge for similar services. Due to theseserve. Poor macroeconomic conditions could decrease our clients’ investments and, other competitive pricing pressures, we currently expect average monthly revenue per customer location to remain relatively flat or decline in the foreseeable future. Any of the foregoing factors could require us to reduce our prices to remain competitive or cause us to lose customers, resulting in a decrease in its revenue.
We rely on third-party equipment vendors and integration partners. If we are unable to enter into agreements or arrangements with such equipment vendors or integration partners or if the equipment provided or services performed by such equipment vendors or integration partners do not perform as expected, this could impair our ability to offload our Wi- Fi network.
We rely on various equipment vendors and integration partners to provide us with equipment and services. M2 Communications entered into a Unilateral Wi-Fi Roaming Agreement with AT&T in New York City to offer AT&T access to M2 Communications' network to have AT&T customers offload the data traffic to M2 Communications' network. This, in turn, frees up the carrier network for more voice calls. We cannot be certain that we will be able to rollout our Wi-Fi network in this manner or that it will be attractive to other carriers. The failure to do so maythereby, have a material adverse effect on our business and operating results. Thisresults of operations.
Our failure to compete effectively against other digital and offline marketing alternatives or meet performance metrics required by our clients could negativelyadversely impact our business strategy.
The "Wholesale or "Neutral Host" model may require capital expenditures without having agreements from customers.
Our ability to profitably capture mobile wireless data users in each building is predicated on being able to secure sufficient "wholesale" revenue from wireless carriers who wish to off-load bandwidth from their "out-of-building" networks. We will have to scout locations and enter into wholesale agreements with significant wireless carriers in addition to AT&T to make the wholesale model work. It is likely that we will have to expend substantial capital to deploy our in-building wireless networks before we have additional commitments from wireless carriers to purchase its wholesale services.
The long distance telecommunications industry is highly competitive which may adversely affect our performance.
The long distance telecommunications industry, including VoIP, is intensely competitive and is significantly influenced by the marketing and pricing decisions of the larger industry participants. With recent developments in technology, the industry has relatively limited barriers to entry with numerous entities competing for the same customers. Customers frequently change long distance providers in response to the offering of lower rates or promotional incentives by competitors. Generally, our customers will be able to switch carriers at any time to other VoIP providers or traditional long distance telephone companies. We believe that competition in all of our markets is likely to increase. In each of our targeted regions, we will compete primarily on the basis of price (particularly with respect to our sales to other carriers), and also on the basis of customer service and our ability to provide a variety of telecommunications products and services. There can be no assurance that we will be able to compete successfully in the future.
Many of our competitors are significantly larger, have substantially greater financial, technical and marketing resources and larger networks than us and a broader portfolio of services, control transmission lines and have strong name recognition and loyalty, long-standing relationships with our target customers, and economies of scale which can result in a lower cost structure for transmission and related costs. These competitors include, among others, AT&T, Verizon Business, Sprint and Verizon. We will also compete with numerous other long distance providers, some of which focus their efforts on the same customers targeted by us. Increased competition in the United States as a result of the foregoing, and other competitive developments could have an adverse effect on our future business, results of operations, prospects and financial condition.
Our relationships with vendors, suppliers and customers are material to our operations and many of our contracts with such entities are out of term and in renewal terms.
We contract with many vendors, suppliers and customers that account for significant portions of our revenues or infrastructure. Many of the contracts we acquired upon our acquisition in bankruptcy of Wave2Wave Communications ("W2W") were "out of term" (i.e., the original term of the contract had expired) when we assumed them and are in renewal terms (i.e., the contract is extended for some period of time depending on its terms) or "evergreen" (i.e., the terms of the former agreement continue while the parties renegotiate the agreement) while the parties negotiate replacement terms. Termination or renegotiation requests associated with these agreements may come at any time and negotiations, especially in the case of complex agreements, such as telecommunications interconnection agreements, can be extended. Any disruptions experienced by these vendors, suppliers and customers as a result of these negotiations or the sudden termination of an agreement may affect our ability to deliver products or services and impact our revenues and could have an adverse effect on our business.
If third-party vendors fail to deliver equipment or deploy our in-building network, we may be unable to execute our business strategy.
Our success will depend on third parties that we do not control to deliver equipment and deploy our in-building network. We rely on other companies to lease or sell to us telecommunications equipment, computer hardware and software, networking equipment and related services that are critical to the maintenance and operation of our network. We cannot be certain that third parties will be successful in their development and deployment efforts. Even if these parties are successful, the delivery and deployment process could be lengthy and subject to delays. If these delays occur, we will be unable to deploy our network for carrier offloading in a timely manner, negatively impacting our business plan and our prospects and results could be harmed.
We do not carry substantial inventories of our products and cannot be assured that we will be able to lease the products and services that we need on a timely basis, or in sufficient quantities. If we are unable to obtain critical services and products in the quantities required by us and on a timely basis, our business, financial condition and results of operations may be materially adversely affected.harmed.
We depend on third-party providers whom we do not control to install our integrated access devices at customer locations. We must maintain relationships with efficient installation service providers in current cities and identify similar providers as we will enter new markets in order to maintain quality in our operations.
The installationmarket for digital and offline marketing is intensely competitive, and we expect this competition to continue and to even increase in the future, both from existing and new competitors. We compete for clients against other digital and offline marketing companies on the basis of integrated access devices at customer locations is an essential step that will enable our customers to obtain our services. We outsource the installation of integrated access devices to a number of different installation vendors in each market. We must insure that these vendors adhere to the timelines and quality that we require to provide our customers with a positive installation experience. In addition, we must obtain these installation services at reasonable prices. If we are unable to continue maintaining a sufficient numberfactors, including return on advertising spend ("ROAS") or Cost of installation vendors in our markets who provide high quality service at reasonable prices to us, we may have to use our own employees to perform installations of integrated access devices. We may not be able to manage such installations effectively using our own employees with the quality we desire and at reasonable costs.
We depend on local telephone companies for the installation and maintenanceMarketing (“COM”) of our customers' access lines and other network elements and facilities.
Our customers' access lines are sometimes installed and maintained by local telephone companies in each of our markets. If the local telephone company does not perform the installation properly or in a timely manner, our customers could experience disruption inclient’s investments, price, client service, and delayssector standing. When our clients experience a reduction in obtaining our services. We expect to experience routine delays in the installation of access lines by the local telephone companies to our customers in each of our markets, although these delays are not expected to result in any material impact to our ability to compete and add customers in our markets. Any work stoppage action by employees of a local telephone company that provides our services in one of our markets could result in substantial delays in activating new customers' lines and could materially harm our future operations. Furthermore, we are also dependent on traditional local telephone companies for access to their collocation facilities and we utilize certain of their network elements. Failure of these elements or damage to a local telephone company's collocation facility would cause disruptions in our service.
System disruptions could cause delays or interruptions of our service, which could cause us to lose customers or incur additional expenses.
Our success depends on our ability to provide reliable service. Although our network service is designed to minimize the possibility of service disruptions or other outages, our service may be disrupted by problems on its system,investment budgets, newer media sources such as malfunctions in its software or other facilities, overloading of its network and problems withthose we offer can often be the systems of competitors with which we interconnect, such as physical damagefirst expenditures to telephone lines and power surges and outages. Any significant disruption in its network could cause it to lose customers and incur additional expenses.
We depend on key personnel and our ability to hire and retain sufficient numbers of qualified personnel.
We rely heavily on the expertise, experience and continued services of Aaron Dobrinsky, our Chairman of the Board, Christopher Broderick, our Chief Operating Officer, Andrew Bressman, Managing Director and Head of Corporate Development,be cut, as well as other key employees. Although Messrs. Broderickcreative and Bressman are employed under employment contracts,event services. Our clients have expectations as to the loss of anyROAS and COM of their media spend, as well as the quality and conversion rates of the consumers that we generate, and they choose to do business with us based on these metrics. Our value is that we measure our performance which provides our clients multi-touch performance analysis of our solutions throughout the consumer journey and sales funnel.
The expectations of our clients may change over time, and the ROAS or COM or consumer leads that we supply to our clients may not always meet these expectations. Conversion rates for consumer leads can be impacted by factors other than the lead quality, many of which are outside our control, such as the competition in our clients’ industries, our clients’ sales
practices, availability of our clients’ services and the inabilityproducts, our clients’ ability to replace any of them and/or attract or retain other key individuals,contact consumers, and value propositions. Lower consumer conversion rates could materially adversely affect us. If any of the three persons or other key executive employees were to leave,be even more likely as we could face substantial difficulty in hiring a qualified successorexpand our services and could experience a loss in productivity while any success obtains the necessary training and experience. We do not have key man life insurance policies on our management.
Our resources may not be sufficient to manage our intended growth; failure to properly manage potential growth would be detrimental to our business.
We may fail to adequately manage our intended future growth. Our initial administrative, financial and operational functions come from existing operations. Any growth in our operations will place a significant strain on our resources, and increase demands on our management and on our operational and administrative systems, controls and other resources. We cannot assure you that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistentrelationships with our growth strategy. As part of this growth, we may haveclients by moving our performance metrics further down our clients’ sales funnels all the way to implement new operational and financial systems, procedures and controls to expand, train and manage our employee base, and maintain close coordination among our staff. We cannot guarantee that we will be able to do so.a customer sale.
In addition to our merger with SPHC, toIf the extent we acquire any business entity, we will also need to integrate and assimilate new operations, technologies and personnel. If we are unable to manage growth effectively, such as if our sales and marketing efforts exceed our capacity to install, maintain and service our products or if new employees are unable to achieve performance levels, our business, operating results and financial condition could be materially adversely affected. As with all expanding businesses, the potential exists that growth will occur rapidly. If we are unable to effectively manage this growth, our business and operating results could suffer. Anticipated growth in future operations may place a significant strain on management systems and resources. In addition, the integration of new personnel will continue to result in some disruption to ongoing operations. The ability to effectively manage growth in a rapidly evolving market requires effective planning and management processes. We will needfor offline customer acquisition services fails to continue to improve operational, financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and managedevelop, our work force.
We must keep up with rapid technology change and evolving industry standards in order to be successful. Our competitorssuccess may be better positioned than we are to adapt to rapid changes in technology, and we could lose customers.
The markets for our services are characterized by rapidly changing technology and evolving industry standards. Any products or processes that we develop may become obsolete or uneconomical before we recover any expenses incurred in connection with their development. Our future success will depend, in part, on our ability to effectively identify and implement leading technologies, develop technical expertise and influence and respond to emerging industry standards and other technology changes.
All this must be accomplished in a timely and cost-effective manner. We may not be successful in effectively identifying or implementing new technologies, developing new services or enhancing our existing services in a timely fashion. Some of our competitors, including the local telephone companies, have a much longer operating history, more experience in making upgrades to their networks and greater financial resources than we will have. We cannot assure you that we will obtain access to new technologies as quickly or on the same terms as our competitors, or that we will be able to apply new technologies to our existing networks without incurring significant costs or at all. In addition, responding to demand for new technologies would require us to increase our capital expenditures, which may require additional financing in order to fund. Further, our competitors, in particular the larger incumbent providers, enjoy greater economies of scale in regard to equipment acquisition and vendor relationships. As a result of those factors, we could lose customers and our financial results could be harmed. If we fail to identify and implement new technologies or services, our business, financial condition and results of operations could be materially adversely affected.
Difficult conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations, and we do not expect these conditions to improve in the near future.
Our results of operations can be materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and elsewhere around the world. Stresses experienced by global capital markets over the last few years have resulted in continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market, uncertain real estate markets, increased volatility and diminished expectations for the economy. These factors, combined with volatile oil prices, high unemployment levels and any decline in business and consumer confidence may have an adverse effect on our business.
We must maintain adequate processes and systems for collecting our accounts receivable, or if we are otherwise unable to collect material amounts of our accounts receivables our cash flow and profitability will be negatively affected.
The communications industry has experienced difficulties in the recent past in collecting accounts receivable from telecommunications providers due to the complexity involved in billing and the uncertainty with regard to certain regulatory matters. If we do not maintain adequate processes and systems for collecting our accounts receivable, our cash flow and profitability will be negatively affected.
We face considerable uncertainty in the estimation of revenues, related costs of services and their subsequent settlement.
Our revenues and the related cost of sales will often be earned and incurred with the same group of carriers who can be our vendors, suppliers and customers simultaneously. These revenues and their related costs may be based on estimated amounts accrued for pending disputes with other carriers, the contractual rates charged by our service providers, as well as sometimes contentious interpretations of existing tariffs and regulations. Subsequent adjustments to these estimates may occur after the bills are received/tendered for the actual costs incurred and revenues earned, and these adjustments can often be material to our future operating results. Industry practice is to routinely dispute charges that a company such as ours believes have been billed in error or incorrectly; these disputed balances are recorded in accounts payable in its consolidated balance sheets. Some of these disputed amounts are normally granted by providers in the form of credits subsequent to the periods in which they were incurred. In some cases we expect to enter into settlements with customers and issue credits against outstanding amounts owed in return for long-term agreements. These credits can be material to our results and will be charged directly against revenues in periods subsequent to where the revenues/costs of services were initially measured. Judgment is required in estimating the ultimate outcome of the dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations. Actual results can differ from estimates, and such differences could be material.
Intellectual property infringement claims are common in the industry and, should such claims be made against us, and if we do not prevail, our business, financial condition and operating results could be harmed.
Patent positions in the telecommunications industry are uncertain and involve complex legal, scientific and factual questions and often conflicting claims. The industry has in the past been characterized by a substantial amount of litigation and related administrative proceedings regarding patents and intellectual property rights. In addition, established companies have used litigation against emerging growth companies and new technologies as a means of gaining a competitive advantage. Third parties may claim we are infringing their patents, copyrights, trademarks or other intellectual property and may go to court to attempt to stop us from engaging in our ongoing operations and activities. These lawsuits can be expensive to defend and conduct and may divert the time and attention of management.
If a third-party successfully asserts an infringement claim against us, a court could order us to cease the infringing activity.
The court could also order us to pay damages for the infringement, which could be substantial. Any order or damage award could harm our business, financial condition and operating results.
In addition, we may be required to participate in interference proceedings in the United States Patent and Trademark Office to determine the relative priorities of our inventions and third parties' inventions. An adverse outcome in an interference proceeding could require us to cease using the technology or to license rights from prevailing third parties.
If we were unable to obtain any necessary license following an adverse determination in litigation or in interference or other administrative proceedings, we would have to redesign our products to avoid infringing a third-party's patent and could temporarily or permanently have to discontinue manufacturing and selling the infringing products. If this were to occur, it would negatively impact future saleslimited, and could harm our business, financial condition, and operating results.results of operations.
Our business activities require additional financing that might not be obtainable on acceptable terms, if at all, which could have a material adverse effect on our financial condition, liquidity and our ability to operate going forward.
We needrely heavily on offline marketing service providers, programs, and vehicles. Our financial performance is dependent on the positive evolution of the offline marketing industry and the cost of media, paper, printing, and production continuing to raise additional capital from equity or debt sources in orderbe favorable. We rely on consumers to meet our working capitalrespond to offline media campaigns across TV, print, and capital expenditure requirements, as well as other potential cash needs to finance future growth, includingoffline engagement channels.
Publicity issues and the deploymentperception of our network for Wi-Fi offloading by carriers and the expansion of service within existing markets and to new markets,industry may damage our reputation, which can be capital intensive. As a result of the deterioration of the equity markets, in general, and the decline in our stock price, we have had difficulty in raising money during 2015 and into 2016.
The actual amount of capital required to fund our operations and development may vary materially from our estimates. In order to obtain additional funding in the future, we may have to sell assets, seek debt financing, or obtain additional equity capital. In addition, any indebtedness we incur in the future could subject us to restrictive covenants limiting our flexibility in planning for, or reacting to changes in, our business as described above. If we raise funds by selling more stock, your ownership in us will be diluted, and we may grant future investors preferred rights superior to those of the Common Stock that you own. If we are unable to obtain additional capital when needed, we will have to delay, modify or abandon some of our expansion plans, including, but not limited to, the deployment of our network for Wi-Fi offloading by carriers. This could slow our growth, negatively affect our ability to compete in our industry and adversely affect our financial condition.
Our operational support systems and business processes may not be adequate to effectively manage our growth.
Our continued success depends on the scalability of our systems and processes. We cannot be certain that our systems and processes are adequate to support ongoing growth in customers. Failure to manage our future growth effectively could harm our quality of service and customer relationships, which could increase our customer churn, result in higher operating costs, write-offs or other accounting charges, and otherwise materially harm ourbusiness, financial condition, and results of operations.
WeWith the growth of online advertising, there is increasing awareness and concern among the general public, privacy advocates, mainstream media, governmental bodies, and others regarding online marketing, advertising, telecommunications, and privacy matters, particularly as they relate to individual privacy interests. Certain other companies within our industry may not be able to continue to grow our customer base at prior rates, which would resultengage in a decrease in the rate of revenue growth.
Future growth in our existing marketsactivities that others may be more difficult than prior growth, due to increasedview as unlawful or more effective competition in the future, difficulties in scaling our business systems and processes, or difficulty in maintaining sufficient numbers of qualified market management personnel, sales personnel and qualified integrated access device installation service providers to obtain and support additional customers. Failure to continue to grow our customer base at prior rates would result in a corresponding decrease in the rate of its revenue growth.
Our systems may experience security breaches which could negatively impact our business.
Despite the implementation of network security including firewalls, encryption for the radio frequency signal and user authentication measures, the core of our infrastructure is vulnerable to computer viruses, break-ins and similar disruptive problems. Computer viruses or other problems causedinappropriate. These activities by third parties, could lead to significant interruptionsincluding our competitors, or delayseven companies in service to customers. Weother data-focused industries, may face liability associated with such breaches andbe seen as indicative of the behavior of our industry as a whole, which may lose potential customers. While we will attempt to reducethereby harm the riskreputation of such losses through warranty disclaimers and liability limitation clausesall participants in our license agreementsindustry, including us. Additionally, smaller competitors frequently design their websites to look like they are owned and operated by maintaining product liability insurance, thereus. If these competitors engage in noncompliant activities, it can be no assurances that such measures will be effective in limitinghave a particularly damaging impact on our liability for such damages or avoiding government sanctions.
The wireless portion of our Wi-Fi network operates in the unlicensed frequency band, which means other operators can operate in the same frequency and there is a risk of interferencerelationships with our wireless signal.users and/or clients.
Because we operate our in-building Wi-Fi network in unlicensed spectrum, other devices are allowed to operate in the same frequency band in the same geographic areas in which we operate. Users of unlicensed spectrum are not entitled to protectionIn addition, from other users of that spectrum. Therefore, use of unlicensed spectrum is inherently subject to interference from third parties. While several precautions have been taken to avoid interference, there is no guarantee that we will not experience interference on the wireless portion of our network. If we experience interference, it could cause customers to be dissatisfied with our wireless services, resulting in customers cancelling this portion of services or cancelling all of our services. This could greatly impair our ability to retain and or generate new customers in any building that has interference issues.
As a result of the Wave2Wave Acquisition, we have substantial senior indebtedness which may require us to seek additional financing, minimize capital expenditures, or seek to refinance some or all of our debt.
As a result of the Wave2Wave acquisition, the principal amount of SPHC's indebtedness to the senior lenders thereunder totaled approximately $15,328,397 at the end of 2012. (Both Senior Lenders are affiliates of Robert DePalo, currently the Company's principal stockholder.) In a 2012 exchange and redemption offering to Brookville and Veritas holders by SPHC, such holders accepted 6,156,213 shares of Common Stock, at a then valuation of $1.20 per share, in exchange for a portion of their respective Brookville and Veritas debt holdings. In 2014, the Company issued an additional 2,581,657 shares of Common Stock in exchange for the cancellation of $3,872,489 of debt held by Brookville and Veritas. The 2012 exchange and redemption transaction resulted in a reduction of approximately $7,388,603 in the total amount of principal and accrued interest on SPHC indebtedness to the Senior Lenders, and the shares of Common Stock issued to the exchanging holders of the Senior Lenders were contributed to SPHC's treasury by Mr. DePalo from his personal holdings.
Despite such reduction, SPHC's outstanding senior indebtedness, which carries a weighted annual interest rate of 14%, was approximately $2,488,000 plus interest as of December 31, 2015, of which no additional principal indebtedness had been paid as of August 11, 2016. Such indebtedness, which is substantial in relation to our size, has adversely affected the Company's financial position, and limit our available cash and the Company's access to additional capital. As a result of the Subsidiary Merger, the Company currently needs to obtain additional financing to repay this and other outstanding indebtedness. From time to time, we have been unable to obtain additional financing, and have been declared in defaultmay in the repaymentfuture be subject to investigations, inquiries, or litigation by various regulators and claimants, which may harm our reputation, regardless of the outcome of any such debt, which has had a material adverse effect onaction. Any damage to our reputation, including from publicity from legal proceedings against us or companies that work within our industry, governmental proceedings, class action litigation, or the disclosure of information security breaches or private information misuse, may adversely affect our business, financial position,condition, and results of operations
We rely on third-party digital and related cash flows.
The level of SPHC's indebtedness has had important consequences, including:
●offline media sources, including strategic partners, for a substantialsignificant portion of our cash flowrevenue. Any decline in the supply of media, clicks, leads, and other consumer touchpoints available through these third-party websites could cause our revenue to decline or our cost to reach visitors to increase.
A significant portion of our revenue is attributable to consumer traffic or calls originating from operations has been dedicatedthird-party partners across the online and offline mediums. In many instances, third-party partners can change the media inventory they make available to debtus at any time in ways that could impact our campaign performance and revenue. Our third-party partners are exclusive to us. In addition, third-party partners may place significant restrictions on our offerings generally or have conflicts with other clients. These restrictions may prohibit advertisements from specific clients or specific industries or restrict the use of certain creative content or formats. If a third-party partner decides not to make its channel or inventory available to us, demands a higher cost, or places significant restrictions on the use of such inventory, we may not be able to find media inventory from other sources to satisfy our requirements in a timely and cost-effective manner.
The consolidation of Internet advertising networks and third-party media service and has not beenproviders could eventually lead to a concentration of desirable inventory on websites or networks owned by a small number of individuals or entities, which could limit the supply or impact the pricing of inventory available for other purposes;
● limitingto us. In the past, we have experienced declines in our flexibility in planning for,home services Sector primarily due to volume declines caused by losses of available media from third-party service providers acquired or reacting to,retained by our competitors, changes in our businesssearch engine algorithms which reduced or eliminated traffic from some third-party service providers, and the industry in which we operate;
● limiting our ability to obtain financingincreased competition for working capital, capital expenditures and general corporate purposes, including acquisitions, and may impede our ability to secure favorable terms;
● making us more vulnerable to economic and industry downturns which may limit our ability to withstand competitive pressures;
● placing us at a competitive disadvantage to our competitors with less indebtedness;
● limiting our ability to fund working capital, capital expenditures, and other general corporate purposes; and
● reducing our flexibility in responding to changing business and economic conditions.
The terms of our Senior Lenders' credit facilities contain restrictions and limitations that have significantly impacted our ability to operate our business.
SPHC is required to maintain compliance with certain financial covenants and our credit facilities contain certain restrictions and limitations that have significantly limited our ability to operate our business. In the absence of any required waiver or consent, these restrictions may limit its ability to:
● incur or guarantee additional indebtedness;
● create liens on our assets;
● make investments;
● engage in mergers and acquisitions;
● redeem capital stock
● make capital expenditures;
● sell any of our assets;
● �� maintain certain leverage ratios on a quarterly basis; and
● declare any dividends.
Therefore, we have needed to seek permission from our Senior Lenders in order to engage in some corporate and commercial actions that we believe were in the best interest of our business, and a denial of permission has made it difficult for us to successfully execute our business strategy and effectively compete with companies that are not similarly restricted. Our Senior Lenders' interests have been different, at times, from our interests or our stockholders' interests, and wequality media. We cannot guaranteeassure you that we will be able to obtainacquire media inventory that meets our Senior Lenders' permission when needed.clients’ performance, price, and quality requirements, in which case our revenue could decline, or our operating costs could increase, and is financially viable.
Our ability to complyRisks associated with the covenantsdigital algorithms and restrictions contained in our credit facilities may be affected by economic, financial and industry conditions and other factors beyond our control. Any default under our credit facilities, which is not waived by the required lenders could substantially decrease the value of your investment. If we are unable to repay indebtedness, our Senior Lenders and any new facilities could proceed against the collateral securing that indebtedness. This couldconsumer engagement ecosystems have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or need to scale back our operations. Our ability to comply with these covenants in future periods will also depend substantiallypreviously posed a negative impact on the value of our assets, our success at keeping our costs low and our ability to successfully implement our overall business strategy.
We are highly leveraged and may incur substantial additional debt, which could adversely affect our financial health and our ability to obtain financing in the future, react to changes in our business and make debt service payments. Ifthe industry that we increaseare in. These risks may arise again which can have a negative impact on the amountconsumers that we are able to reach, their engagement with our brands or offers, their ability to visit our digital ecosystems, and the increased costs of our indebtedness in the future, our high level of indebtedness could have important consequences to stockholders.and occasioned by these issues.
Highly leveraged companies are significantly more vulnerable to unanticipated downturns and setbacks, whether directly related to their business or flowing from a general economic or industry condition, and therefore are more vulnerable to a business failure or bankruptcy.
We May Incur Additional Liabilities as a Result of the Foreclosure Sale of our SSI Operations.
On May 11, 2016, SSI completed the foreclosure sale under Article 9 of the UCC of substantially all of its assets, which consisted of the operations of Roomlinx prior to the Subsidiary Merger.
The sale resulted from SSI's inability to pay approximately $3.6 million of indebtedness to SSI's senior lender. While the Company intends to have SSI liquidated under Chapter 7 of the Bankruptcy Code, there can be no assurance SSI and/or the Company will not incur additional liabilities.
We May Acquire or Make Investments in Companies or Technologies That Could Cause Loss of Value to Our Stockholders and Disruption of Our Business.
Subject to our capital constraints, we intend to continue to explore opportunities to acquire companies or technologies in the future. Entering into an acquisition entails many risks, any of which could adversely affect our business, including:
| ● | Failure to integrate the acquired assets and/or companies with our current business; |
| ● | The price we pay may exceed the value we eventually realize; |
| ● | Loss of share value to our existing stockholders as a result of issuing equity securities as part or all of the purchase price; |
| ● | Potential loss of key employees from either our current business or the acquired business; |
| ● | Entering into markets in which we have little or no prior experience; |
| ● | Diversion of management's attention from other business concerns; |
| ● | Assumption of unanticipated liabilities related to the acquired assets; and |
| ● | The business or technologies we acquire or in which we invest may have limited operating histories, may require substantial working capital, and may be subject to many of the same risks we are. |
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We Have Limited ResourcesSearch engines, social media platforms, and We May be Unable to Effectively Support Our Operations.
We must continue to developother online sources often revise their algorithms and expand our systems and operations in order to remain competitive. We expect this to place strain on our managerial, operational and financial resources. We may be unable to develop and expand our systems and operations forintroduce new advertising products. If one or more of the following reasons:search engines or other online sources on which we rely for website traffic were to modify its general methodology for how it displays our advertisements, resulting in fewer consumers clicking through to our websites, our business could suffer. In addition, if our online display advertisements are no longer effective or are not able to reach certain consumers due to consumers’ use of ad-blocking software, our business could suffer.
| ● | We may not be able to retain at reasonable compensation rates qualified engineers and other employees necessary to expand our capacity on a timely basis; |
| ● | We may not be able to dedicate the capital necessary to effectively develop and expand our systems and operations; and |
| ● | We may not be able to expand our customer service, billing and other related support systems. |
If one or more of the search engines or other online sources on which we cannot managerely for purchased listings modifies or terminates its relationship with us, our operations effectively,expenses could rise, we could lose consumer traffic to our businesswebsites, and operating results will suffer. Moreover, even if we are successfula decrease in obtaining new customersconsumer traffic to our websites, for our products and services, we may encounter difficulty in, or be unable to, obtaining adequate resources, including financial and human, to roll-out our products and services to such customers.
Our Business Could be Harmed if we are Unable to Protect our Proprietary Technology.
We rely primarily on a combination of trade secrets, copyright and trademark laws and confidentiality procedures to protect our technology. Despite these precautions, unauthorized third parties may infringe, copy, or reverse engineer portions of our technology. In the absence of significant patent protection, we may be vulnerable to competitors who attempt to copy our products, processes or technology, which could harm our business.
Our Business Prospects Depend in Part on Our Ability to Maintain and Improve Our Services as Well as to Develop New Services.
We believe that our business prospects depend in part on our ability to maintain and improve our current services and to develop new services. Our services will have to achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements. Additionally, our new services and service enhancements may not achieve market acceptance.
Our Management and Operational Systems Might Be Inadequate to Handle Our Potential Growth.
We may experience growth that could place a significant strain upon our management and operational systems and resources. Failure to manage our growth effectively could have a material adverse effect upon our business, results of operations and financial condition. Our ability to compete effectively and to manage future growth will require us to continue to improve our operational systems, organization and financial and management controls, reporting systems and procedures. We may fail to make these improvements effectively. Additionally, our efforts to make these improvements may divert the focus of our personnel. We must integrate our key executives into a cohesive management team to expand our business. If new hires perform poorly, or if we are unsuccessful in hiring, training and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the growth we will need to increase our operational and financial systems, procedures and controls. Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. We may not be able to effectively manage such growth, and failure to do soany reason, could have a material adverse effect on our business, financial condition, and results of operations. Consumer traffic to our websites and the volume of sales generated by consumer traffic varies and can decline from to time. Additionally, even if we are successful in generating traffic to our websites, we may not be able to convert these visits into consumer sales.
We currently compete with numerous other online marketing companies, and we expect that competition will intensify. Some of these existing competitors may have more capital or complementary products or services than we do, and they may leverage their greater capital or diversification in a manner that adversely affects our competitive position. In addition, other newcomers, including major search engines and content aggregators, may be able to leverage their existing products and services to our disadvantage. We may be forced to expend significant resources to remain competitive with current and potential competitors. If any of our competitors are more successful than we are at attracting and retaining consumers, or if we are unable to effectively convert visits into consumer sales, our business, financial condition, and results of operations could be materially adversely affected.
Any legal liability for the information we communicate to consumers could harm our business and operating results.
Consumers may rely upon information we communicate regarding our client products and services, including information relating to insurance, coverage, benefits, exclusions, limitations, availability, consumer legal cases, liability events, legislation, and the like. If we provide inaccurate information or information that could be construed as misleading, we could be found liable for related damages and our relationships with our clients could suffer.
We Do Not Respond Effectivelycould lose revenue and clients if we fail to adequately detect click-through or other fraud on advertisements.
We are exposed to the risk of fraudulent consumer clicks or actions on our websites or our third-party partner websites, which could lead our clients to become dissatisfied with our campaigns and, in turn, lead to a loss of clients and related revenue. Our clients may also receive consumer leads that are spam or fraudulent that can have financial implications. Additionally, we have terminated and may, in the future, terminate our relationships with third party partners who we believe to have engaged in fraud or suspicious activities. We may not be able to replace the terminated partners with new partners which could result in a reduction in traffic to our sites and registrations.
We are exposed to online data privacy and security risks particularly given that we gather, transmit, and store personally identifiable information ("PII"). A Timely Basisfailure to Rapid Technological Change, Our Business Could Suffer.maintain adequate reasonable safeguards to protect the security, confidentiality, and integrity of PII including failure to develop, implement, and support our technology infrastructure and assessment processes, we may be in breach of our commitments to our clients and consumers. Unauthorized access to or accidental disclosure of confidential or proprietary data in our network systems, including via ransomware attacks, may cause us to incur significant expenses and may negatively affect our reputation and business.
Our industryMost of our services are web-based and online performance marketing relies on structured and unstructured consumer data. As a result, the amount of data stored on our servers has been increasing. We gather, transmit, and store information about our users and marketing and media partners, including PII. This information may include financial, health, and other behavioral information, some of which is characterizedheld or managed by rapidly changing technologies, industry standards, customer needs and competition,our third-party vendors. As a result, we are subject to certain contractual terms, including third-party security reviews, as well as by frequent new productfederal, state, and service introductions. Our services are integratedforeign laws and regulations designed to protect PII. Complying with the computer systems ofthese contractual terms and various laws could cause us to incur substantial costs or require us to change our customers. We must respondbusiness practices in a manner adverse to technological changes affecting both our customers and suppliers. Webusiness.
In addition, our existing security measures may not be successful in developingpreventing security breaches. As we grow our business, we expect to continue to invest in technology services, hardware, and software. Creating the appropriate security support for our technology platforms is expensive and complex, and our execution could result in inefficiencies or operational failures and increased vulnerability to cyber-attacks.
We may also make commitments to our clients regarding our security practices in connection with clients’ due diligence. If we do not adequately implement and enforce these security policies to the satisfaction of our clients, we could be in violation of our commitments to our clients and this could result in a loss of client confidence, damage to our reputation, and loss of business. Despite our implementation of security measures and controls, our information technology and infrastructure are susceptible to circumvention by an internal party or third-party, such that electronic or physical computer break-ins, cyber-attacks, malware, ransomware, viruses, social engineering (including phishing attacks), fraud, employee error, and other disruptions and security breaches that could result in third-parties gaining unauthorized access to our systems and data.
We may be unable to anticipate all our vulnerabilities and implement adequate preventative measures and, in some cases, we may not be able to immediately detect a security incident. In the past, we have experienced security incidents involving access to our databases.
Although to our knowledge no sensitive financial or personal information has been compromised and no statutory breach notification has been required, any future security incidents could result in the compromise of such data and subject us to liability or remediation expense or result in cancellation of client contracts. Any security incident may also result in a misappropriation of our proprietary information or that of our users, clients, and third-party service providers, which could result in legal and financial liability, as well as harm to our reputation. Any compromise of our security could limit the adoption of our products and services and have an adverse effect on our business.
Other risks include:
•Any publicized security problems could negatively affect consumers’ willingness to provide private information on the Internet generally, including through our services.
•A security breach at any such third-party could be perceived by consumers as a security breach of our systems and in any event could result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability, and subject us to regulatory penalties and sanctions. In addition, such third parties may not comply with applicable disclosure or contractual requirements, which could expose us to liability.
•We could incur significant costs for which our insurance policies may not adequately cover us and expend significant resources in protecting against security breaches and complying with the multitude of state, federal, and foreign laws regarding data privacy and data breach notification obligations.
•We may need to increase our security-related expenditures to maintain or increase our systems’ security or to address problems caused and liabilities incurred by security breaches.
We have long sales cycles, which can result in significant time between initial contact with a prospect and execution of a client agreement, making it difficult to project when, if at all, we will obtain new clients and when we will generate revenue.
Our sales cycle, from initial contact to contract execution and implementation can take significant time. Some of our clients undertake an evaluation process that frequently involves analysis of our competitors. As a result, it is difficult to predict when we will obtain new clients and begin generating revenue. We also rely on creating new programs that require architecture and investment before we can attract new clients. In addition, to increase revenue in our Performance Solutions, we take time to analyze and assess new opportunities and enter engagements on testing basis that can take up to twelve (12) months before we are able to generate revenue. As a result, we may not be able to add clients, or generate revenue, as quickly as we may expect, which could harm our revenue growth rates.
Customer concentration creates risks for our business.
Over 65% of our revenues each year comes from five large customers. To the extent that any large customer fails to meet its purchase commitments, changes its ordering patterns or business strategy, or otherwise reduces its purchases or stops purchasing our products or services, or if we experience difficulty in meeting the demand by these customers for our products or services, our revenues and results of operations could be adversely affected.
Our past growth or the past growth in our sectors or by our competitors may not be indicative of future growth, and our revenue growth rate may decline in the future.
Our past growth may not be indicative of our future growth, and our revenue growth rate may decline in the future. This growth may not be indicative of our future growth, if any, and we will not be able to grow as expected, or at all, if we do not accomplish the following:
•Increase the number of consumers using our solutions;
•Maintain and expand the number of clients using our solutions;
•Further improve the quality of our products and solutions and introduce high-quality new products;
•Increase the number of visitors to our digital ecosystems;
•Timely adjust marketing onexpenditures in relation to changes in demand for the underlying products and services offered by our advertisers;
•Maintain brand recognition and effectively leverage our brand;
•Attract and retain management and other skilled personnel for our business. Our revenue growth rates may also be limited if we are unable to achieve high;
•Market penetration rates as we experience increased competition. If our revenue or revenue growth rates decline, investors’ perceptions of our business may be adversely affected, and the market price of our common stock could decline; and
•Our ability to reorganize the business operations and deploy our new strategy since the Converge Acquisition.
If our emails are not delivered and accepted or are routed by email providers less favorably than other emails, or if our sites are not accessible or treated disadvantageously by internet service providers, our business may be substantially harmed.
If email providers or internet service providers ("ISPs") implement new or more restrictive email or content delivery or accessibility policies, including with respect to net neutrality, it may become more difficult to deliver emails to consumers or for consumers to access our websites and services. For example, certain email providers, including Google, may categorize our emails as “promotional,” and these emails may be directed to an alternate, and less readily accessible, section of a timely and cost-effective basis, new services that respondconsumer’s inbox.
If email providers materially limit or halt the delivery of our emails, or if we fail to technological changes, evolving industry standardsdeliver emails to consumers in a manner compatible with email providers’ email handling or changing customer requirements. Our success will depend, in part, onauthentication technologies, our ability to accomplish allcontact consumers through email could be significantly restricted. In addition, if we are placed on “spam” lists or lists of entities that have been involved in sending unwanted, unsolicited emails, our operating results and financial condition could be substantially harmed. Further, if ISPs prioritize or provide superior access to our competitors’ content, our business and results of operations may be adversely affected.
If we are unable to develop new offerings, achieve increased consumer adoption of those offerings, or penetrate new vertical markets, our business and financial results could be adversely affected.
Our success depends on our continued innovation to provide products and solutions that increase our consumer engagement, increase first party data, and build enterprise value in our brands. These new offerings must be widely adopted by consumers for us to continue to attract clients. Accordingly, we must continually invest resources in product, technology, and business development in order to improve the following incomprehensiveness and effectiveness of our solutions.
Entry into new sectors may have specific risks associated with them and a timelylearning curve that will cost money and cost-effective manner:focus. If we fail to penetrate new sectors successfully, our revenue may grow at a slower rate than we anticipate, and our financial condition could suffer.
| ● | Effectively using and integrating new technologies; |
| ● | Continuing to develop our technical expertise; |
| ● | Enhancing our engineering and system design services; |
| ● | Developing services that meet changing customer needs; |
| ● | Advertising and marketing our services; and |
| ● | Influencing and responding to emerging industry standards and other changes. |
We Dependare a holding company and our only material assets are in our subsidiaries and the revenue and income that they generate.
Our material assets are contained within our subsidiaries that generate the revenues for the Company. Our assets are encumbered by our Senior Secured Lender.
Risk Related to our Intellectual Property
If we do not adequately protect our intellectual property rights, our competitive position in the marketplace and business may suffer.
Our business depends on Retaining Key Personnel. The Lossour intellectual property, the protection of Our Key Employees Could Materially Adversely Affect Our Business.
Duewhich is crucial to the technical naturesuccess of our servicesbusiness. We rely on a combination of trademark, trade secret, and the dynamic market in whichcopyright law and contractual restrictions to protect our intellectual property. We attempt to protect our intellectual property, technology, and confidential information by requiring our employees and consultants to enter into confidentiality and assignment of inventions agreements and third parties to enter into non-disclosure agreements as we compete,deem appropriate.
Despite our performance depends in part onefforts to protect our retaining key employees. Competitors and othersproprietary rights, unauthorized parties may attempt to recruit our employees. A major partcopy aspects of our compensationdigital ecosystems, product features, software, and functionality or obtain and use information that we consider proprietary. We may not be able to discover or determine the extent of any unauthorized use or infringement or violation of our intellectual property or proprietary rights. Third parties also may take actions that diminish the value of our proprietary rights or our reputation in the way that they use our brands. The protection of our intellectual property may require the expenditure of significant financial and managerial resources.
Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could be costly, time-consuming, and distracting to management, resulting in a diversion of resources, the impairment or loss of portions of our intellectual property, and could materially adversely affect our business, financial condition, and operating results. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. These steps may be inadequate to protect our intellectual property. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to use information that we regard as proprietary to create product offerings that compete with ours.
We currently own and maintain a large amount of domain names. The regulation of domain names in the United States is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars, or modify the requirements for holding domain names. In addition, there is an active market in desirable domain names and our ability to purchase such domains would be subject to market conditions. As a result, we may not be able to acquire or maintain all domain names that use the name of our brands.
The Company may face litigation and liability due to claims of infringement of third party-intellectual property rights.
From time to time, third parties may allege that we have infringed the trademarks, copyrights, patents, and other intellectual property rights, including from our competitors or non-practicing entities. Such claims, regardless of their merit, could result in litigation or other proceedings and could require us to expend significant financial resources and attention by our management and other personnel that otherwise would be focused on our business operations, result in injunctions against us that prevent us from using material intellectual property rights, or require us to pay damages to third parties. Intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may result in significant settlement costs or require us to stop offering some features, or purchase licenses or modify our products and features while we develop non-infringing substitutes, but such licenses may not be available on terms acceptable to us or at all, which would require us to develop alternative intellectual property.
As a distributor of digital media content, we face liability and expenses for legal claims based on the nature and content of the materials that we create or distribute, including materials provided by third parties. If we are required to pay damages or expenses in connection with these legal claims, our business and results of operations may be harmed.
We display original content and third-party content on our websites and in our marketing messages. As a result, we have faced and will continue to face potential liability based on a variety of theories, including deceptive advertising and copyright or trademark infringement. We generally rely on the “fair use” exception for our use of third-party brand names and marks, but these third parties may disagree, and the laws governing the fair use of these third-party materials are imprecise and adjudicated on a case-by-case basis. We also create content we believe to be original for our websites. While we do not believe that this content infringes on any third-party copyrights or other intellectual property rights, owners of competitive websites that present similar content have taken and may take the position that our content infringes on their intellectual property rights.
We are also exposed to risk that content provided by third parties is inaccurate or misleading, and for material posted to our key employeeswebsites by users and other third parties. These claims could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. The general liability and
cyber/technology errors and omissions insurance we maintain may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is in the formnot covered by insurance, or is more than insurance coverage, could materially adversely affect our business, financial condition, and results of stock option grants. A prolonged depression in our stock price could make it difficult for usoperations.
Risk Related to retain our employeesLegal and recruit additional qualified personnel.Regulatory Matters
Our Data Systems Could Failability to collect information from consumers may be limited due to technology and data changes from digital companies due to privacy or Their Security Could Be Compromised, and We Will Increasingly Be Handling Personal Data Requiring Our Compliance With a Variety of Regulations.other operational shifts in strategy.
Our business operations dependrelies on the reliabilitycollection of sophisticatedconsumer information and tracking web activity of those visitors in our digital ecosystems as well as data systems. Any failure of these systems, or any breachderived by other service providers relating to consumers. If regulation prohibits us from collecting rich first party data, our ability to execute our solutions may be compromised and our revenues may be adversely impacted. Fundamental changes in technology and regulation that impacts our information collection processes will also impact the efficiency of our systems' security measures,consumer acquisition campaigns and our ability to cross sell products and services to our consumers.
Federal and state laws regulating telephone, email, and messaging marketing practices impose certain obligations on advertisers, which could adversely affectreduce our operations, at least untilability to expand our data can be restored and/orbusiness.
Our industry and sectors are heavily regulated. We are, and may in the breaches remediated. We have,future become, subject to a limited extent, begun to serve as a conduit for personal information to third-party credit processors, service partners and others, and it is likely we will do so more regularly. The handling of such personal information requires we comply with a variety of federal, state, and industry requirements governinglocal laws, many of which are unsettled and still developing, and which could subject us to claims or otherwise harm our business.
Our activities are subject to extensive regulation under the uselaws of the United States and protectionits various states and the other jurisdictions in which we operate. We are currently subject to a variety of, such information,and may in the future become subject to additional, federal, state, and local laws that are continuously evolving and developing, including but not limited to, FCC consumer proprietary network information regulations, FTClaws regarding internet-based businesses and other businesses that rely on advertising, as well as privacy and consumer protection laws, including the TCPA, the Telemarketing Sales Rule, the CAN-SPAM Act, the Fair Credit Reporting Act, the Federal Trade Commission Act, and employment laws, including those governing wage and hour requirements. In addition, there is increasing attention by state and other jurisdictions to regulation in this area. These laws are complex and can be costly to comply with, require significant management time and effort, and could subject us to claims, government enforcement actions, civil and criminal liability, or other remedies, including suspension of business operations. These laws may conflict with each other, further complicating compliance efforts.
If we are alleged not to comply with these laws or regulations, we may be required to modify affected products and Payment Card Industry ("PCI") data security standardsservices, which could require a substantial investment and loss of revenue or cease providing the affected product or service altogether. If we are found to have violated laws or regulations, we may be subject to significant fines, penalties, and other losses.
We could be required to fundamentally change our business activities and practices or modify our products and solutions, which could have an adverse effect on our business. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to develop new products and features could be limited. All of this could impair our or our clients’ ability to collect, use, or disclose information relating to consumers, which could decrease demand for the Healthcare division, the requirementsour platforms, increase our costs, and impair our ability to maintain and grow our client base and increase our revenue.
Risks Related to Liquidity and Capital Resources
Covenants in our Credit Facility impose restrictions that may limit our operating and financial flexibility. The Financing Agreement contains many significant restrictions, negative and affirmative covenants that may limit our operating and financial flexibility. The Financing Agreement presents a risk of the Health Insurance Portabilitydefault.
The Company entered a Credit Facility on March 21, 2022, concerning a first lien term loan of $76.5 million with a senior secured lender. The Financing Agreement contains negative covenants that, among other things, limit our ability to:
•Incur indebtedness;
•Grant liens on its assets;
•Make certain investments;
•Incur certain expenses and Accountability Act ("HIPAA")limits;
•Engage in mergers or acquisitions;
•Dispose of assets;
•Enter certain transactions; and regulations thereunder. While we believe we have taken the steps necessary
•Make certain restricted payments.
The Financing Agreement contains certain affirmative covenants and customary events of default provisions, including, subject to assure compliance with all applicable regulationsthresholds and have made necessary changes to our data systems, any failuregrace periods, among others, payment default, covenant default, and judgment default. Each of these systems or any breach oflimitations are subject to various conditions.
In addition, the security of these systemsFinancing Agreement contains financial covenants, which require us to maintain minimum total leverage ratios and fixed charge coverage ratios. The applicable interest rate on the facility may increase which would result in our interest expenses going up.
These covenants could materially adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand and exposepursue our business strategies and otherwise conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot provide any assurance that we will be able to comply with such covenants. These restrictions also limit our ability to obtain future financings or to withstand a future downturn in our business or the economy in general. In addition, complying with these covenants may also cause us to increased cost, liability for lost personal information and increased regulatory obligations.
An Interruption in the Supply of Products and Services That We Obtain From Third Parties Could Cause a Decline in Sales of Our Services.
In designing, developing and supporting our services, we rely on many third party providers. These supplierstake actions that may experience difficulty in supplying us products or services sufficient to meet our needs or they may terminate or fail to renew contracts for supplying us these products or services on terms we find acceptable. If our liquidity deteriorates, our vendors may tighten our credit, makingmake it more difficult for us to obtain supplierssuccessfully execute our business strategy and compete against companies that are not subject to such restrictions.
A breach of any covenant in the Financing Agreement or the agreements governing any other indebtedness that we may have outstanding from time to time would result in a default under that agreement after any applicable grace periods. A default, if not waived in full or limited basis, could result in an acceleration of the debt outstanding under the Financing Agreement and in a default with respect to, and an acceleration of, the debt outstanding under other debt agreements. If that occurs, we may not be able to make all the required interest and capital payments or borrow sufficient funds to refinance such debt. Even if new financing were available at such time, it may not be on terms satisfactorythat are acceptable to us. Any significant interruptionus or terms as favorable as our current agreements. If our debt is in default for any reason, our business, financial condition, and results of operations could be materially and adversely affected.
The exercise of our outstanding Convertible Series E Preferred stock and warrants will depress our stock price and dramatically dilute shareholders. Delay and failure of the Company to register up to 400,000,000 million common shares pursuant to the Convertible Series E Preferred will incur financial penalties.
As previously disclosed, on March 22, 2022, the Company issued and sold 500,000 shares of Series E Convertible Preferred Stock, $0.01 par value, with a stated value of $100 per share or an aggregate of $50.0 million pursuant to the terms of a Securities Purchase Agreement, dated March 16, 2022 (the “Purchase Agreement”), by and among the Company and certain institutional investors (the “Purchasers”). The Series E Preferred Stock were originally convertible into Common Stock at $1.50 per share, subject to adjustment. The Company issued accompanying Common Stock Purchase Warrants (the “Warrants”) originally exercisable for five (5) years at $2.00 per share, subject to adjustment as described in the supplyPurchase Agreement, to purchase an aggregate of 33,333,333 shares of Common Stock.
The shares of Series E Preferred Stock and Warrants and the shares of Common Stock issuable upon conversion of the Series E Preferred Stock and the exercise of the Warrants (collectively, the “Securities”) were not initially registered under the Securities Act of 1933, as amended. Pursuant to a Registration Rights Agreement with the Purchasers dated March 16, 2022 (the “Registration Rights Agreement”), the Company committed to file with the Securities and Exchange Commission (the “SEC”) an initial Registration Statement concerning the Securities within ten (10) business days of the March 21, 2022, closing date, which initial Registration Statement is required to be declared effective within forty-five (45) days of the filing date or ninety (90) days if there is a “full review by the SEC”.
While the Company has filed with the SEC a Registration Statement on Form S-1 (the “Form S-1”) concerning the Securities to satisfy the requirements of the Registration Rights Agreement, the Form S-1 has not been declared effective by the SEC as of September 28, 2022, and within the period required under the terms of the Registration Rights Agreement. As a result, the Company is required under the terms of the Registration Rights Agreement to pay to the Purchasers a partial liquidated damages penalty for failure to meeting the effectiveness date requirement, which is determined to be the product of 2.0% multiplied by the aggregate subscription amount paid by each Purchaser under the
terms of the Purchase Agreement, with the partial liquidated damages to be capped at 14% of the subscription amount. Such partial liquidated damages are owed to the investors within seven (7) days of the failure to meet the requirements for effectiveness, and will be owed monthly to the Purchasers until the Form S-1 is declared effective by the SEC. This will result in a payment by the Company of approximately $1.0 million per month (with prorated payments for partial months) to the Purchasers until the Form S-1 is declared effective by the SEC, resulting in up to a maximum of $7.0 million in payments.
On September 26, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with the Purchasers, pursuant to which (i) each Purchaser exchanged its Warrants for new warrants to purchase our common stock (the “New Warrants”) and (ii) each Purchaser consented to an amendment and restatement of the terms of our Series E convertible preferred stock, par value $0.01 per share (the “Series E Preferred Stock”) as well as other changes in the terms of the private placement effected by the Company on March 16, 2022 (collectively, the “New PIPE Terms”).
We then filed an amended and restated certificate of designation for the Series E Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Nevada to effect certain changes contemplated by the Exchange Agreement.
The New PIPE Terms effect the following changes, among others, to the rights of the Series E Holders:
New Warrant Exercise Price: The New Warrant exercise price per share of common stock is $0.55, provided that if all shares of Series E Preferred Stock are not repurchased by the Company on or prior to November 26, 2022, on such date, the exercise price per share of the New Warrants will adjust to $2.00, subject to further adjustment as set forth in the New Warrant.
Series E Conversion Price: The conversion price for the Series E Preferred Stock shall initially equal $0.40 per share, and so long as the arithmetic average of the daily volume-weighted average prices of the Common Stock for the calendar week prior to each of the following respective dates is lower than the conversion price at that time, the conversion price shall be downwardly adjusted by $0.01 on each of October 24, 2022, October 31, 2022, November 7, 2022, November 14, 2022 and November 21, 2022.
Standstill Period: The Purchasers agreed to a 60-day standstill period ending on November 26, 2022 (the “Standstill Period”), during which each Series E Holder may convert not more than 50% of the Series E Preferred Stock held by such holder at the beginning of the Standstill Period.
Series E Buyout. During the Standstill Period the Company will use commercially reasonable efforts to raise funds to repurchase all outstanding shares of Series E Preferred Stock held by the Purchasers at a purchase price of $100 per share, subject to the provisions of the Certificate of Designation (the “Series E Buyout”).
Limitation on Sales: During the Standstill Period, the Purchasers agreed not to sell shares of the Company’s common stock for a price less than $0.30 per share.
Liquidated Damages: The Company agreed to pay to the Purchasers all liquidated damages owed through September 21, 2022 (including any pro-rated amounts).
There is no guarantee that we will be able to raise funds, on commercially reasonable terms or at all, to effect the Series E Buyout.
The Company is in negotiations with its Senior Secured Lender to revise the terms of its Financing Agreement relating to the Credit Facility.
The Company’s shareholders are subject to dilution of their common stock given the prospect of the Series E Preferred with the possibility of the registration of 400,000,000 shares. The Company’s shares outstanding as of September 23, 2022, is 64,209,616and shareholders face the risk of substantial dilution. The costs of and occasioned by the delay in the effectiveness of the registration statement will impact the Company’s financial performance and creates substantial financial risk.
We do not intend and may be unable to pay cash dividends for the foreseeable future.
We have never declared or paid cash dividends on our common stock and we do not expect to declare or pay any cash dividends in the foreseeable future. Additionally, our Financing Agreement prohibits us from paying cash dividends on our common stock and contains limitations on our ability to redeem or repurchase shares of our common stock. As a result, you may only receive a return on your investment in our common stock if the trading price of your shares increases.
If we are not able to continue to meet the Nasdaq Capital Market rules for continued listing, our common stock or warrants could be delisted.
Our common stock is listed on the Nasdaq Capital Markets. In order to maintain compliance with Nasdaq Listing Rules, we must satisfy minimum financial and other reporting, governance requirements, failure of which could result in a delisting of our common stock, which could adversely affect the market liquidity of our common stock, our ability to obtain financing to repay debt and fund our operations.
•On May 20, 2022, the Company received notice from Nasdaq that it had failed to maintain a minimum bid price of $1 per share based on the closing bid price for the thirty (30) consecutive business days preceding May 20, 2022, and thus it has failed to meet a Nasdaq Listing Rules. The Company has until November 16, 2022, to remedy the failure.
•On July 1, 2022, the Company received notice from Nasdaq that it had not held an annual meeting of shareholders within twelve (12) months of the Company’s 2021 fiscal year end. The Company must conduct an annual meeting of shareholders by no later than December 27, 2022, to meet Nasdaq Listing Rules and remedy the failure.
Volatility in the trading price on Nasdaq of our common stock and warrants.
Our stock price has been volatile and may be volatile in the future. We may incur rapid and substantial increases or decreases in our stock price in the foreseeable future attributable to various factors including those discussed in these products“Risk Factors” and may be unrelated to our operating performance or servicesprospects and some of which are beyond our control. As a result of this volatility, investors may experience losses on their investment in our common stock. The market price for our common stock may be influenced by many factors that are both in and out of our control including economic, market, industry, governance, management, operations, etc.
Broad factors may seriously harm or harm the market price of our common stock, regardless of our operating performance. Further, increases or decreases may be inconsistent with any improvements in actual or expected operating performance, financial condition, or other indicators of value. Since the stock price of our common stock has been volatile and may be volatile in the future, investors in our common stock could cause a declineincur substantial losses. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations, and growth prospects. There can be no guarantee that our stock price will remain at current prices or that future sales of our services, unlesscommon stock will not be at prices lower than those sold to investors.
We may require additional capital in the future to pursue our business objectives and untilrespond to business opportunities, challenges, or unforeseen circumstances.
While we anticipate that our existing cash and cash equivalents should be sufficient to fund our operations for at least the next twelve (12) months, we may need to raise additional capital, including debt capital, to fund operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet various objectives, including developing future products, increasing working capital, acquiring businesses, and responding to competitive pressures, capital may not be available on favorable terms or may not be available at all. Lack of sufficient capital resources could significantly limit our ability to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional funds are ablenot available, we may be required to replacedelay, reduce the functionality provided by these productsscope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies.
Risks Related to Financial Reporting
If we fail to maintain proper and services. We also depend on third partieseffective internal controls, our ability to deliver and support reliable products, enhance their current products, develop new productsproduce accurate financial statements on a timely basis or effectively prevent fraud could be impaired, which would adversely affect our ability to operate our business.
In order to comply with the Sarbanes-Oxley Act of 2002 (“SOX Act”), our management is responsible for establishing and cost-effectivemaintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. We may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal control over financial reporting will not prevent or detect all error and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. All control systems have inherent limitations, and, accordingly, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate financial statements on a timely basis, which could adversely affect our ability to operate our business and respondcould result in regulatory action.
If we identify material weaknesses in our internal control over financial reporting or otherwise fail to emerging industry standardsmaintain an effective system of internal control over financial reporting, the accuracy and other technological changes.timeliness of our financial reporting may be adversely affected.
We Operatemust maintain effective internal control over financial reporting to accurately and timely report our results of operations and financial condition. In addition, the SOX Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting as of the end of our fiscal year, and the effectiveness of our disclosure controls and procedures quarterly. If we are not able to comply with the requirements of the SOX Act in a Very Competitive Industry, Which May Negatively Impact timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities, which would diminish investor confidence in our financial reporting and require additional financial and management resources, each of which may adversely affect our business and operating results.
We may be required to record a significant charge to earnings if our goodwill or intangible assets become impaired.
We have a substantial amount of goodwill and purchased intangible assets on our consolidated balance sheet because of acquisitions. Events and conditions that could result in impairment of our goodwill and intangible assets include adverse changes in the regulatory environment, a reduced market capitalization, or other factors leading to reduction in expected long-term growth or profitability.
General Risk Factors
We face risks and uncertainties related to the COVID-19 pandemic and its aftermath, which could significantly disrupt our operations, and which could have a material adverse impact on our business, financial condition, operating results, and cash flows. These risks and uncertainties could pertain to other viruses, pandemics, or other such unforeseen and broad-based public health crises.
Our Pricesbusiness has been and may continue to be adversely impacted by the effects of COVID-19 and its aftermath. In addition to negative macroeconomic effects on our business, decreased consumer demand for Our Servicesproducts offered by our clients, and reduced client budgets, the COVID-19 pandemic and any other related adverse public health developments have caused and may further cause declines in revenue and margin, and disruption to our business may continue or Cause Usworsen over a prolonged period. The businesses of our clients and third-party media service providers (including strategic partners) have also been negatively affected and may continue to Lose Business Opportunities.
Thebe disrupted by reduced demand, consumer creditworthiness, delinquencies, absenteeism, quarantines, economic responses our government is taking to limit the human and economic impact of the COVID-19 pandemic (e.g., stimulus payments), and restrictions on employees’ ability to work, office closures, and travel or health-related restrictions. In addition, in the aftermath of the pandemic, it may be the case that consumers spend less time researching and comparing online, which could represent decreased demand for the online products and services that we market for our services is becoming increasingly competitive. Our competitorsclients. Depending on the magnitude and duration of such disruptions and their effect on client spending and/or the availability of quality media from third-party service providers including strategic partners, our business, financial condition, operating results, and cash flows could be adversely affected.
In addition, COVID-19 or other disease outbreaks have in the short-run, and may useover the samelonger term, adversely affect the economies and financial markets within many countries, including in the United States, resulting in economic or financial
market instability and could continue to negatively affect marketing and advertising spend in products offered by our clients or on media availability or performance. For example, certain companies that operate in the credit-driven markets such as credit cards and servicespersonal loans have seen and may continue to see reductions in competition with us. With time and capital, it would be possiblenear-term demand for competitors to replicate our services due to weakened, or additional weakening of, economic and offer similar services at a lower price. We expect that we will compete primarily onemployment conditions, and the basisuncertainty over the length of the functionality, breadth, qualityeconomic downturn. Such continuing effects of COVID-19, and price of our services. Our currentother similar effects, have resulted and potential competitors include:
| ● | Other wireless high speed internet access providers, such as SDSN, Guest-Tek Wayport, Greentree, Core Communications and Stay Online; |
| ● | Other viable network carriers, such as SBC, Comcast, Sprint and COX Communications; and |
| ● | Other internal information technology departments of large companies. |
Many of our existing and potential competitors have substantially greater financial, technical,may continue to result in reduced marketing and distribution resources than we do. Additionally, many of these companies have greater name recognition and more established relationships with our target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can. In addition, we have established strategic relationships with many of our potential competitors. In the event such companies decide to compete directly with us, such relationships would likely be terminated,advertising spend or drops in media availability or performance, which could have a material adverse effect on our business, financial condition, operating results, and reducecash flows. There can be no assurance that any decrease in revenue or margin resulting from COVID-19 will be offset by increased revenue or margin in subsequent periods or that our market share business, financial condition, operating results, and cash flows will remain consistent with pre-pandemic expectations and/or force us to lower prices to unprofitable levels.performances.
We May be Sued by Third Parties For Infringement of Their Proprietary Rights and We May Incur Substantial Defense Costs and Possibly Substantial Royalty Obligations or Lose The Right to Use Technology Important To Our Business.
Any intellectual property claims, with or without merit, could be time consuming and expensive to litigate or settle and could divert management attention from administering our business. A third party asserting infringement claims against us or our customers with respectFurthermore, we may experience disruptions to our currentbusiness operations resulting from quarantines, self-isolations, or future products may materially adversely affect us by, for example, causing us to enter into costly royalty arrangements or forcing us to incur settlement or litigation costs.
We may be subject to claims that DMAG, SPHCother movement and its employees orrestrictions on the ability of our employees to perform their jobs that may have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of former employers or competitors. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costsimpact our sales and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or preventmarketing activities and our ability to commercialize certain products, which could severely harm our business.
Our Quarterly Operating Results are Subject to Significant Fluctuations and, As A Result, Period-To-Period Comparisons of Our Results of Operations are Not Necessarily Meaningful.
| ● | The success of our brand building and marketing campaigns; |
| ● | Price competition from potential competitors; |
| ● | The amount and timing of operating costs and capital expenditures relating to establishing the Company's business operations; |
| ● | The demand for and market acceptance ofdesign, develop, or deliver our products and services; |
| ● | Changes in the mix of services sold by our competitors; |
| ● | Technical difficulties or network downtime affecting communications generally; |
| ● | The ability to meet any increased technological demands of our customers; and |
| ● | Economic conditions specific to our industry. |
Therefore, our operating results for any particular quarter may differ materially from our expectations or those of security analysts and securities traders and may not be indicative of future operating results. The failure to meet expectations may cause the price of our common stock to decline. Since we are susceptible to these fluctuations, the market price of our common stock may be volatile, which can result in significant losses for investors who purchase our common stock prior to a significant decline in our stock price.
Covenants under our Credit Facilities may restrict our future operations and adverse consequences could result in the event of non-compliance
Our credit facilities, including those of SPHC also contain other customary covenants, including covenants that require us to meet specified financial ratios and financial tests. We may not be able to comply with these covenants in the future. Our failure to comply with these covenants may result in the declaration of an event of default and cause us to be unable to borrow under our credit facilities and debt instruments. In addition to preventing additional borrowings under these agreements, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under these agreements, which would require us to pay all amounts outstanding. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us or at all.
Many of our Key Functions Are Concentrated in a Single Location, and a Natural Disaster or Act of Terrorism Could Seriously Impact Our Ability to Operate.
Our IT systems, production, inventory control systems, executive offices and finance/accounting functions, among others, are primarily centralized in our Broomfield, Colorado facility. A natural disaster, such as a tornado, could seriously disrupt our ability to continue or resume normal operations for some period of time. Similarly, an act of terrorism could disrupt our facility. While we have certain business continuity plans in place, no assurances can be given as to how quickly we would be able to resume operations and how long it may take to return to normal operations. We may experience business interruptions and could incur substantial losses beyond what may be covered by applicable insurance policies, and may experience a loss of customers, vendors and employees during the recovery period.
We rely on third-party vendors for information systems. If these vendors discontinue support for our systems or fail to maintain quality in future software releases, we could sustain a negative impact on the quality of our services to customers, the development of new services and features, and the quality of information needed to manage our business.
We have agreements with vendors that provide for the development and operation of back office systems such as ordering, provisioning and billing systems. We also rely on vendors to provide the systems for monitoring the performance and condition of our network. The failure of those vendors to perform their services in a timely and effective manner at acceptable costs could materially harm our growth and our ability to monitor costs, bill customers, and provisionor meet customer orders, maintain the network and achieve operating efficiencies. Such a failure could also negatively impact our ability to retain existing customers or to attract new customers.
Regulatory Risks
We are subject to complex and sometimes unpredictable government regulations. Changes to such regulationscommitments, which could have a material adverse impact on our business, operations or, iffinancial condition, operating results, and cash flows. In addition, we failpreviously announced that we paused our financial advisor-led process to comply with these regulations, we could incur significant fines and penalties.review strategic alternatives in large part due to market uncertainties resulting from the COVID-19 pandemic.
There are now in effect, or pending, at the federal and state levels of government, numerous regulatory programs and proposals of general applicationMoreover, to the industry, Internet providersextent the COVID-19 pandemic or any worsening of the global business and competitive carriers,economic environment as a result thereof adversely affects our business, financial condition, operating results, and cash flows, it may also have the effect of heightening or exacerbating many of which havethe other risks described in these risk factors, such as those relating to a reduction in online marketing spend by our clients, a loss of clients or may have important effectslower advertising yields, our dependence on third-party service providers including strategic partners, risks with respect to counterparties, annual and quarterly fluctuations in our results of operations, the operationsimpact of the Company and/or its affiliates in many areas, including licensing, tax, regulatory compliance, fees, charges and interconnection rights and obligations. The number and scope of such programs and proposals are significant. Some examples of these matters include state investigation of access charges, the FCC's review of intercarrier compensation charges, special access charges and Universal Service Fund assessments.
Our broadband Internet access services are subject to various attempts to impose so-called "net neutrality" rules, some of which were affirmed and others vacatedinterest rate volatility on appeal by the U.S. District Court for the District of Columbia in early 2014. Proponents of these rules want to limit the ways that a broadband Internet access service provider can structure business arrangements and manage its network. Some of these parties have urged the FCC to "reclassify" broadband Internet access service as a "telecommunications service" under Title II of the Communications Act, thus subjecting these services to traditional utility-style regulation which the FCC did on February 26, 2015, releasing the order on March 12, 2015 (See Report and Order on Remand, Declaratory Ruling, and Order, Protecting and Promoting the Open Internet, GN Docket No. 14-28, FCC 15-24 (rel. Mar. 12, 2015). The order classifies broadband internet as a "telecommunications" service subject to common carrier regulation under Title II of the Communications Act of 1934, as amended.
The scope of the rules and potential litigation is uncertain and implementing rules are being appealed in the courts (See United States Telecom Association, No. 15-1063 (D.C. Cir.). The further regulation of broadband, wireless, and our other activities and any related court decisions could restrictvisitor traffic, internal control over financial reporting, seasonal fluctuations, our ability to compete in the marketplacecollect our receivables from our clients, and limit the return we can expectrisks relating to achieve on past and future investments in our networks. The FCC's net neutrality rules could limit our flexibility in managing our broadband networks and delivering broadband services, and could have an adverse effect on certain of our business operations and restrict our ability to compete inraise additional capital when and as needed.
Given that the marketplace. The new rules would also require enhanced disclosure in our termsmagnitude and conditions to the extent such new disclosures are required. Finally, end users may bring action at the FCC if they feel a provider has breached the rules or the FCC may institute an enforcement action upon its own motion.
We are unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future regardingduration of COVID-19’s impact on our business orand operations remain uncertain, the telecommunications industry in general. Federal or state governments may impose additionalcontinued spread of COVID-19 (including the emergence and persistence of variants relating thereto) and the imposition of related public health containment measures and travel and business restrictions or adopt interpretations of existing laws that could have a material adverse effectimpact on us. our business, financial condition, operating results, and cash flows.
Any negative changes in the economy and broader economic conditions have had material impacts to our business in the past and are likely to cause a material and adverse impact on our revenues and profitability.
If we failthe Company were to comply with any existing or future regulations, restrictions or interpretations, we could incur significant fines and penalties, including, but not limited to, loss of license or suspension of operating authority.
Regulatory decisions could materially increase our costs of leasing last-mile facilities.
In order to reach our end user customers, we will often lease lines from incumbent carriers, who will also be our competitors. The extent to whichdissolve, the incumbent carrier must provide these facilities to us at low rates is dependent on federal and state regulatory actions. To date, we are still able to lease these facilities at low rates in mostholders of our intended markets.securities may lose all or substantial amounts of their investments.
Incumbent carriers are, however, allowedIf the Company were to escape this requirement in discrete geographic areas, typically in major urban centers, where there is substantial competitive deploymentdissolve as a corporation, as part of facilities by other carriers. Additionally, incumbent carriers have been employing a statutorily authorized process called regulatory forbearance in an effortceasing to lift these requirements over much larger areas. To the extent that the incumbents are successful in these actions in markets wheredo business or otherwise, we will operate, our costs of obtaining these facilities could materially increase, adversely affecting our profit margins.
The FCC is reexamining its policies towards VoIP and telecommunications in general and changes in regulation could subject us to additional fees or increase the competition it faces.
Voice over Internet Protocol, or VoIP, can be used to carry user-to-user voice communications over dial-up or broadband service. The FCC has ruled that some VoIP arrangements are not regulated as telecommunications services, but that a conventional telephone service that uses Internet protocol in its backbone is a telecommunications service. The FCC has initiated a proceeding to review the regulatory status of VoIP services and the possible application of various regulatory requirements, including the payment of access charges, which are not required at the present time. Expanded use of VoIP technology could reduce the access revenues received by local exchange carriers like us, while carriers dispute its charges during the FCC's review of the issue. We cannot predict whether or when VoIP providers may be required to pay all amounts owed to any creditors and/or be entitled to receive access charges, or the extent to which users will substitute VoIP calls for traditional wireline communications. Furthermore, if, as planned in our business strategy, we carry wireless carrier originated voice traffic over the Wi-Fi network, this traffic may be considered interconnected VoIP traffic under the FCC's rules and may be subject to separate regulatory requirements for us and the wireless carriers.
Judicial review and FCC decisions pursuantpreferred stockholders before distributing any assets to the Federal Telecommunications Act of 1996 may adversely affect our business.
The Telecommunications Act of 1996 provides for significant changes and increased competition in the telecommunications industry. This federal statute and its related regulations remain subject to judicial review and additional rulemakings of the FCC, thus making it difficult to predict what effect the legislation will have on us, our operations and our competitors. In addition to reviewing intercarrier compensation and access to last mile facilities, the FCCinvestors and/or preferred stockholders. There is also reviewing applying more common carrier regulation to internet services. Depending on the classifications and reach of such regulations, if implemented, it may create burdens to competition or increase compliance costs.
Risks Relating to Our Common Stock
All of the shares to be issued and outstanding after the consummation of the Subsidiary Merger are restricted and not freely transferrable.
Upon completion of the Subsidiary Merger, only a very small portion of the shares of Common Stock issued and outstanding following the Reverse Split have the same status of registered and publicly tradable securities. In addition, all of the restricted Dividend Shares (9.4% of the fully diluted shares) Cenfin shares (5.2% of fully diluted shares) and the shares issued to SPHC shareholders (85.4% of fully diluted shares) were subject to a nine (9) month lock-up, which expired at December 31, 2015. The holders of such shares continue to be subject to restrictions and limitations on transfer, and will be required to comply with the provisions of the Securities Act and SEC rules concerning registration requirements and/or exemptions from such requirements prior to seeking to dispose of such shares.
Even if an active public market for our securities develops, it is not possible to predict the extent, liquidity and duration of any public trading market for our shares.
The size and nature of the trading market for our securities post-merger has been sporadic and subject to fluctuations. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of the Company's Common Stock. There can be no assurance that a more active market for the Company's Common Stock will develop, or if one should develop, there is no assurance that it will be sustained. This severely limits the liquidity of our Common Stock, and has had a material adverse effect on the market price of the Company's Common Stock and on our ability to raise additional capital.
The ability of any such market to provide liquidity for the holders of such shares and to establish a reasonable and rational pricing mechanism, will likely depend on many variables. These may include general economic conditions, public evaluation of the business model being utilized by such successor entity, the revenues, earnings and growth potential of such entity, the reputation of its management, the general state of the U.S. telecommunications industry, the impact of competition and regulation, and the like.
Limitation of Liability and Indemnification of Officers and Directors
Our officers and directors are required to exercise good faith and high integrity in the management of our affairs. Our Articles of Incorporation provides, however, that our officers and directors shall have no personal liability to us or our stockholders for damages for any breach of duty owed to us or our stockholders, unless they breached their duty of loyalty, did not act in good faith, knowingly violated a law, or received an improper personal benefit. Our Articles of Incorporation and By-Laws also provide for the indemnification by us of our officers and directors against any losses or liabilities they may incur by reason of their serving in such capacities, provided that they do not breach their duty of loyalty, act in good faith, do not knowingly violate a law, and do not received an improper personal benefit. Additionally, we have entered into individual Indemnification Agreements with each of our directors and officers to implement with more specificity the indemnification provisions provided by the Company's By-Laws and provide, among other things, that to the fullest extent permitted by applicable law, the Company will indemnify such director or officer against any and all losses, expenses and liabilities arising out of such director's or officer's service as a director or officer of the Company, as the case may be. The Indemnification Agreements also contain detailed provisions concerning expense advancement and reimbursement.
In addition, pursuant to the terms of the Subsidiary Merger, the Company assumed the Consulting Agreements of Robert DePalo and SAB Management LLC (the "Consultants"). Their consulting agreements each providerisk that in the event of such a dissolution, there will be insufficient funds to repay amounts owed to holders of any litigation, investigation orof our indebtedness and insufficient assets to distribute to our other matter naming Robert DePalo, SAB Management LLC or Andrew Bressman (Managing Memberinvestors, in which case investors could lose their entire investment.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.Properties
Our principal executive office is located in a leased facility in New York, New York, consisting of SAB Management),approximately 13,116 square feet of office space under a lease with an expiration date in October 2029. This facility accommodates our principal operations, finance, and administrative activities. We also lease additional facilities to accommodate operations throughout the Company will pay 100% of legal fees to lawyers of their choice. Moreover,United States and in the settlement agreement between Brookville, Veritas, Allied and certain SPHC Subsidiaries provides for indemnification of Mr. DePalo. See United Kingdom.
Item 3. "LegalLegal Proceedings
There is hereby incorporated by reference the information disclosed in Note 11 - Recent Events Concerning Our Principal Shareholder, Robert DePalo."Legal Contingencies to the Consolidated Financial Statements, Part II, Item 8 of this Form 10-K.
Insofar as indemnification
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us under the above provisions, we have been informed that, in the opinionRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.Equity Securities.
Resale of Shares Could Adversely Affect the Market Price of Our Common Stock and Our Ability to Raise Additional Equity Capital
If our stockholders sell substantial amounts of our common stock in the public market, including shares issuable upon the effectiveness of a registration statement, upon the expiration of any statutory holding period under Rule 144, any lock-up agreement or shares issued upon the exercise of outstanding options, warrants or restricted stock awards, it could create a circumstance commonly referred to as an "overhang" and, in anticipation of which, the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred orWarrants are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
In general, a non-affiliated person who has held restricted shares for a period of six months, under Rule 144, may sell into the market our common stock all of their shares, subject to the Company being current in its periodic reports filed with the SEC. An affiliate may sell an amount equal to the greater of 1% of the outstanding shares 136,019,348 as of August 11, 2016 or the average weekly number of shares sold in the last four weeks prior to such sale. Such sales may be repeated once every three months, and any of the restricted shares may be sold by a non-affiliate without any restriction after they have been held one year.
Further Issuances of Equity Securities May Be Dilutive to Current Stockholders.
We are required to seek additional capital. This capital funding could involve one or more types of equity securities, including convertible debt, common or convertible preferred stock and warrants to acquire common or preferred stock. We are currently seeking funds via convertible preferred stock and warrants. Such equity securities could be issued at or below the then-prevailing market price for our common stock. We may also issue additional shares of our Common Stock or other securities that are convertible into or exercisable for our Common Stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of Common Stock may create downward pressuretraded on the trading priceNasdaq Capital Market under the symbols “TRKA” and “TRKAW,” respectively.
As of our Common Stock. Any issuance of additional shares of our common stock will be dilutive to existing stockholders and could adversely affect the market price of our common stock.
Articles of Incorporation Grants the Board of Directors the Power to Designate and Issue Additional Shares of Preferred Stock.
Our Articles of Incorporation grants our Board of Directors authority to, without any action by our stockholders, designate and issue, from our authorized capital, shares in such classes or series as it deems appropriate and establish the rights, preferences, and privileges of such shares, including dividends, liquidation and voting rights. The rights of holders of classes or series of preferred stock that may be issued could be superior to the rights of the common stock offered hereby. Our board of directors' ability to designate and issue shares could impede or deter an unsolicited tender offer or takeover proposal. Further, the issuance of additional shares having preferential rights could adversely affect other rights appurtenant to theSeptember 23, 2022, 64,209,616 shares of common stock offered hereby. Any such issuances will dilute the percentage of ownership interest of our stockholders and may dilute our book value.
Limited Market Due To Penny Stock Related to SPHC Capital Structure. See "Risks" below.
Our stock differs from many stocks, in that it is considered a penny stock. The SEC has adopted a number of rules to regulate penny stocks. These rules include, but are not limited to, Rules 3a5l-l, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Exchange Act. Because our securities probably constitute penny stock within the meaning of the rules, the rules would apply to our securities and us. The rules may further affect the ability of owners of our stock to sell their securities in any market that may develop for them. There may be a limited market for penny stocks, due to the regulatory burdens on broker-dealers. The market among dealers may not be active. Investors in penny stock often are unable to sell stock back to the dealer that sold them the stock. The mark-ups or commissions charged by the broker-dealers may be greater than any profit a seller may make. Because of large dealer spreads, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold the stock to the investor. In some cases, the stock may fall quickly in value. Investors may be unable to reap any profit from any sale of the stock, if they can sell it at all.
Stockholders should be aware that, according to the Securities and Exchange Commission Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. These patterns include: control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; "boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
Furthermore, the penny stock designation may adversely affect the development of any public market for our shares of common stock or, if such a market develops, its continuation. Broker-dealers are required to personally determine whether an investment in penny stock is suitable for customers. Penny stocks are securities (i) with a price of less than five dollars ($5.00) per share; (ii) that are not traded on a "recognized" national exchange; and (iii) of an issuer with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average annual revenues of less than $6,000,000 for the last three years. Section 15(g) of the Exchange Act and Rule 15g-2 of the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be penny stock. Rule 15g-9 of the SEC requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.
This procedure requires the broker-dealer to (i) obtain from the investor information concerning his financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for the Company's stockholders to resell their shares to third parties or to otherwise dispose of them.
We do not anticipate paying cash dividends on our Common Stock, and accordingly, shareholders must rely on stock appreciation for any return on their investment.
We have not declared or paid any cash dividend on our Common Stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our Common Stock will depend upon any future appreciation in their value. There is no guarantee that shares of our Common Stock will appreciate in value or even maintain the price at which our shareholders have purchased their shares.
Sarbanes-Oxley and Federal Securities Laws Reporting Requirements Can Be Expensive
As a public reporting company, we are subject to the Sarbanes-Oxley Act of 2002, as well as the information and reporting requirements of the Exchange Act and other federal securities laws. The costs of compliance with the Sarbanes-Oxley Act and of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC, and furnishing audited reports to stockholders, are significant and may increase in the future. See Risk Factors - "Both our Management and our independent registered public accounting firm have identified material weaknesses in our internal control over financial reporting. If we are unable to correct these weaknesses, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and the market price of our shares may be adversely impacted."
The trading price of the Common Stock may become volatile, which could lead to losses by investors and costly securities litigation.
The trading price of the Common Stock is likely to be highly volatile and could fluctuate in response to factors such as:
● actual or anticipated variations in our operating results;
● announcements of developments by us or our competitors;
● regulatory actions regarding our products;
● announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
● adoption of new accounting standards affecting our industry;
● additions or departures of key personnel;
● introduction of new products by us or our competitors;
● sales of our Common Stock or other securities in the open market; and
● other events or factors, many of which are beyond our control.
The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been initiated against such a company.
Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management's attention and resources, which could harm our business and financial condition.
Insiders will continue to have substantial control over the Company, which could delay or prevent a change in corporate control or result in the entrenchment of management or our board of directors.
As of August 24, 2016 Robert DePalo, together with any affiliates and related persons, beneficially owns, in the aggregate, approximately 43,260,969 (32%) shares of our 136,019,348 outstanding shares of common stock. As a result, Mr. DePalo may have the ability to influence the outcome of matters submitted to our shareholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. Mr. DePalo may have the ability to influence the management and affairs of the Company in the foreseeable future. The foregoing could have the effect of:
● delaying, deferring or preventing a change in control;
● entrenching or changing our management or our Board of Directors;
● impeding a merger, consolidation, takeover or other potential transaction affecting our business or the control of our Company.
In October 2015 and April 2016, the Company entered into various Debt and Preferred Stock Restructuring Documents with Robert Depalo and affiliated entities as set forth in Item 13. "Certain Relationships and Related Transaction and Director Independence." Pursuant to these agreements, the Company agreed (subject to shareholder approval not yet obtained) to amend its charter and other relevant documents to provide for certain restrictions which would provide Mr. DePalo with further control over various matters.
Risks Related to Capital Structure
Because the Subsidiary Merger may be characterized as a "reverse merger," we may not be able to attract the attention of brokerage firms.
The Subsidiary Merger may be characterized as a "reverse merger." Accordingly, additional risks may exist as a result of such characterization. For example, securities analysts of brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our Common Stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on our behalf in the future.
We cannot provide assurance that we will be able to maintain the status of a public reporting company.
While M2 Group is currently a public reporting company, the continuation of such status will depend on various factors such as continuous and timely filing of audited consolidated financial statements and other required periodic reports with the SEC, satisfying the internal control and assessment requirements of the Sarbanes-Oxley Act of 2002, and instituting and monitoring procedures to control the unauthorized use of company information and prevent inside trading violations.
Applicable regulatory requirements may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management of its business and its ability to obtain or retain listing of our Common Stock.
We may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for effective management because of the rules and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive officers. The enactment of the Sarbanes-Oxley Act has resulted in the issuance of a series of related rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of new and more stringent rules by the stock exchanges. The perceived increased personal risk associated with these changes may deter qualified individuals from accepting roles as directors and executive officers.
Further, some of these changes heighten the requirements for board or committee membership, particularly with respect to an individual's independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of our business and our ability to obtain or retain listing of our shares of Common Stock on any stock exchange (assuming we elect to seek and are successful in obtaining such listing) could be adversely affected.
We have been assessing our internal controls and believe that they require improvements. If we fail to implement changes to our internal controls or any others that we identify as necessary to maintain an effective system of internal controls, it could harm our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the trading price of our stock.
Provisions of our charter, bylaws, and Nevada law may make an acquisition of us or a change in our management more difficult.
Certain provisions of our certificate of incorporation and Bylaws that are in effect could discourage, delay or prevent a merger, acquisition or other change in control that shareholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock. Shareholders who wish to participate in these transactions may not have the opportunity to do so.
Furthermore, these provisions could prevent or frustrate attempts by our shareholders to replace or remove our management. These provisions:
● allow the authorized number of directors to be changed only by resolution of our board of directors;
● authorize our board of directors to issue without shareholder approval blank check preferred stock that, if issued, could operate as a "poison pill" to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;
● establish advance notice requirements for shareholder nominations to our board of directors or for shareholder proposals that can be acted on at shareholder meetings;
● authorize the Board of Directors to amend the By-laws;
● limit who may call shareholder meetings; and
● require the approval of the holders of a majority of the outstanding shares of our capital stock entitled to vote in order to amend certain provisions of our certificate of incorporation.
Section 78.438 of the NRS prohibits a publicly held Nevada corporation from engaging in a business combination with an interested stockholder, generally a person that together with its affiliates owns or within the last two years has owned 10% of voting stock, for a period of two years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner, or falls within certain exemptions under the NRS. As a result of these provisions in our charter documents under Nevada law, the price investors may be willing to pay in the future for shares of our common stock may be limited.
In addition, because SPHC is incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a prescribed period of time.
We do not anticipate paying cash dividends on our Common Stock, and accordingly, shareholders must rely on stock appreciation for any return on their investment.
We have not declared or paid any cash dividend on our Common Stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our Common Stock will depend upon any future appreciation in their value. There is no guarantee that shares of our Common Stock will appreciate in value or even maintain the price at which our shareholders have purchased their shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
The Company leases approximately 10,885 square-feet of office space at 433 Hackensack Avenue Hackensack, New Jersey 07601; and a small meeting office in New York. The Company does not own any real estate and believes its existing facilities are suitable and adequate for the business conducted therein, appropriately used and have sufficient capacity for their intended purpose.
Co-Location Space
In addition to the Hackensack office described above, M2 Group leases several co-location sites throughout the region. These sites are leased to provide secure locations for mission-critical equipment within its network. These sites allow it to locate network switching, server and storage equipment in secure, geographically diverse sites, and interconnect to a variety of telecommunications and other network service provider(s) with a minimum of cost and complexity. These sites include: 111 8th Avenue in NYC, 21 Harborview, Stamford, CT, 111 Pavonia, Jersey City, NJ and 111 North Canal, Chicago, ILL. These serve as primary POPs, "point of presence," and are the anchor locations for the geographically redundant network architecture. All of these locations are equipped with high levels of physical security including 24 hours per day, seven days per week, guard services. These locations are also equipped with redundant power facilities including generators and/or back up battery power systems to guard against any type of power related outages. The cooling systems in these facilities are continuously maintained to avoid any type of heat related issues with network switching equipment. Signal Point provides most of the technical and facilities support to co-locations at these building by dispatching technicians when necessary. However, in certain key locations, Signal Point will also deploy "remote hands", or contract services to other telecommunications technicians to provide emergency technical or facilities related support.
ITEM 3. LEGAL PROCEEDINGSThe Company is subject to the various legal proceedings and claims discussed below as well as certain other non-material legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business.
El Dorado Offices 2, LP
The Company received notice that El Dorado Offices 2, LP ("Landlord") had filed suit against the Company and SignalShare Infrastructure, Inc. associated with amounts due under a terminated office space lease and an associated promissory note. The Landlord seeks approximately $326,000, plus costs, associated with the failure to repay the promissory note. The Company was served with the complaint on November 24, 2015 and answered the Complaint.
On June 1, 2016, the Company settled this matter for a total payment of $125,000, payable in installments ending in October of 2016. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
CLC Networks and Skada
The Company is in receipt of a District Court Civil Summons, dated May 29, 2012, in the matter of "CLC Networks, Inc. and Skada Capital, LLC v. Roomlinx, Inc.", commenced in the District Court of Boulder County, Colorado (the "Action"). The plaintiffs in the Action claimed that the Company owed them certain unpaid sales commissions, including with respect to Hyatt Corporation in connection with that certain Master Services and Equipment Purchase Agreement, as described above under Business. The Company and the plaintiffs executed a settlement agreement in February 2014 for $106,528 to be paid in 19 even monthly installments commencing March of 2014. As of December 31, 2015 the Company had paid its liability in full. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
SignalShare payroll tax matter
SignalShare LLC is in default of its payment obligations for payroll taxes to the IRS for the first and second quarter of 2015. The amount of trust fund taxes, including penalties and interest, is approximately $673,888. The IRS has also placed liens on SignalShare, LLC and attempted to levy certain of its receivables. The IRS has also indicated that it intends to pursue responsible persons for the amounts due. As a result of this matter, the Company has moved SignalShare's payroll process to its corporate offices in order to strengthen the controls over the payroll functions. As a result of the SSI bankruptcy, these amounts are included as part of the liabilities of discontinued operations.
SignalShare Office Lease
SignalShare received notice on October 1, 2015 that its lease with Aerial Realty Corp. for office space in Morrisville, NC was being terminated due to non-payment and that the office's locks were changed. The Landlord expressed its intention to avail itself of all remedies under the lease including the collection of waived rent (equal to $21,875), attorney's fees, brokerage fees and any other amounts due under the Lease which was under term until March 31, 2020 and approximating total cost of $287,000. The Company is reviewing its options and the Landlord's claims and cannot determine the ultimate outcome at this time. As a result of the SignalShare bankruptcy, these amounts are included in the liabilities of discontinued operations.
TIG
The Company received a letter from Technology Integration Group ("TIG") demanding payment of approximately $2,430,000 with respect to inventory and services that the Company purchased from TIG. TIG subsequently filed an action in California State Court (Case No. 37-2012-00046436-CU-BC-NC (the "Action"). On September 23, 2014, the Company entered into a Settlement Agreement and Mutual General Release with TIG. The Settlement Agreement was conditioned on the SPHC merger taking place. On March 24, 2015, the Company, Michael S. Wasik, Anthony DiPaolo and SSI entered into the Settlement Agreement and Mutual General Release with PC Specialists Inc. (d/b/a TIG), replacing the agreement signed in the fourth quarter of 2014. As of March 23, 2015, the Company owed TIG $3,003,267, consisting of $2,064,223 for equipment purchased and stored, $879,998 of interest on such amount and $59,046 of attorneys' fees and costs. Under the Settlement Agreement, the Company agreed to pay a settlement amount of $1,919,239, of which $400,000 was paid by SPHC upon the closing of the SMA. As a result, the Company, Wasik and DiPaolo were released from the Action and TIG consented to the transfer of rights and obligations under the Settlement Agreement to SSI with no recourse to the Company or SPHC. On April 5, 2016, counsel for TIG approached the Company regarding payment deficiencies under the settlement agreement and threatened further legal action. As of December 31, 2015 the Company had the entire liability due TIG recorded in accounts payable. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included as part of the liabilities of discontinued operations.
ScanSource
The Company received a District Court Civil Summons, dated August 23, 2013, in the matter of "ScanSource v. Roomlinx, Inc.", commenced in the District Court of Greenville County, South Carolina. The plaintiffs in such action claimed that the Company owed them approximately $473,000 with respect to inventory purchased by the Company. The amount is recorded in accounts payable in the accompanying consolidated balance sheets as of December 31, 2015 and December 31, 2014. On March 31, 2015, the Company and ScanSource entered into a settlement agreement with respect to such action in which SSI agreed to pay ScanSource a total of $471,000 plus interest as follows: (a) payment of $100,000 on or before June 1, 2015, (b) beginning June 1, 2015, interest accruing on the outstanding balance of 12% per annum until the balance is paid in full, (c) beginning July 1, 2015 and continuing for 12 months thereafter, payment of $8,000 per month, and (d) following the initial 12 month payment schedule set forth in (b), payment of $316,715 in 24 monthly payments according to an amortization schedule agreed to by the Company and ScanSource. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
WFG
The Company is in receipt of a letter dated November 10, 2014 on behalf of Wi-Fi Guys, LLC ("WFG") demanding payment from the Company for amounts relating to development and software services in the amount of $297,000. The Company evaluated all of its options, including legal options, with respect to the validity of the WFG letter and the alleged grounds for demanding payment and formally responded in a letter dated December 1, 2014 in which the Company denied WFG's claims and additionally made separate counter-claims against WFG. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
AGC
The Company is in receipt of a letter dated April 10, 2015 on behalf of America's Growth Capital, LLC d/b/a AGC Partners ("AGC") demanding payment from the Company for amounts relating to the occurrence of a strategic transaction between the Company and Signal Point Holdings Corp in the amount of $300,000. The Company has evaluated all of its options, including legal options, with respect to the validity of the AGC letter and the alleged grounds for demanding payment and formally responded in a letter dated April 16, 2015 in which the Company denied AGC's claims. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included as part of the discontinued operations.
NFS AND RELATED MATTERS
On January 28, 2016, NFS Leasing, Inc. ("NFS") filed suit against SignalShare, LLC and Signal Point Holdings Corp. ("SPHC"), wholly-owned subsidiaries of the Company, for non-payment of amounts due under certain agreements with NFS and two employees of SignalShare, LLC. NFS seeks $7,828,597, plus interest and attorneys' fees, from SignalShare, LLC and seeks enforcement of certain guarantees of the debt by SPHC and named officers of SignalShare, LLC. In July 2015, SignalShare, LLC converted certain equipment leases from NFS into a secured Term Loan. The Note evidencing the loans is secured by a subordinated security interest in the assets of SignalShare and SPHC and is guaranteed by SPHC. NFS has also sought to include subsidiaries of the Company in the litigation, including DMAG. Pursuant to an Intercreditor, Modification and Settlement Agreement, dated as of November 13, 2015 by and among NFS, SPHC, SignalShare LLC and the Company's senior lenders, such Intercreditor agreement excluded any security interest in the parent company, Roomlinx, Inc. or of the subsidiaries of SPHC, which are M2 nGage, M2 Communications, SPC and SSI. Thus, NFS' suit and claims reside solely in SignalShare LLC and SPHC, but none of the assets (other than SignalShare LLC) of SPHC. The case was filed in the U.S. District Court for the District of Massachusetts (Civ Action No. 16-10130). SPHC and SignalShare answered the complaint and are in the process of litigating the matter. SignalShare LLC and SPHC intend to vigorously defend the matter.
Notwithstanding the foregoing, NFS amended its complaint and added the new subsidiary of the Company, Digital Media Acquisition Group Corp. ("DMAG"), to the case. It also filed a motion for a preliminary injunction to prevent the corporate restructuring resulting from the Brookville/Veritas/Allied court actions. On June 15, 2016, NFS withdrew its request for injunctive relief regarding DMAG and was granted an injunction regarding SignalShare, LLC. to prevent the company from making certain payments and required certain information regarding SignalShare. The Company believes the new amended claims are without merit, is opposing such actions and has filed motions to dismiss the claim as it relates to DMAG. The companies will vigorously defend these matters if the parties are unable to resolve the dispute. As a result of the SignalShare bankruptcy filing, the case related to SignalShare is stayed. On the same day, Joseph Costanzo, a former employee of SignalShare and a codefendant in the litigation, filed a cross claim against SignalShare and SPHC and related parties ("SPHC Parties") alleging that he was induced by SignalShare and the SPHC Parties into entering certain agreements related to NFS. Any disputes between Costanzo, the SPHC Parties and SignalShare were settled pursuant to a settlement agreement executed between the parties. Pursuant to the terms of the Settlement Agreement, the parties mutually released each other from any claims and SPHC agreed to pay Joseph Costanzo $92,000 over a period of a year associated with amounts due.
Hyatt
The Company received a request for indemnification from Hyatt Corporation ("Hyatt") dated July 3, 2013 in connection with a case brought in US Federal Court in California by Ameranth, Inc., against, among others, Hyatt. In connection with such case, the plaintiffs have identified the Company's e-concierge software as allegedly infringing Ameranth's patents. The Company licenses the e-concierge software from a third party and accordingly has made a corresponding indemnification request to such third party. The Company believes that any such claim may also be covered by the Company's liability insurance coverage and accordingly the Company does not expect that this matter will result in any material liability to the Company.
On March 12, 2012, the Company and Hyatt Corporation ("Hyatt") entered into a Master Services and Equipment Purchase Agreement (the "MSA") pursuant to which the Company has agreed to provide in-room media and entertainment solutions, including its proprietary Interactive TV (or iTV) platform, high speed internet, free-to-guest, on-demand programming and related support services, to Hyatt-owned, managed or franchised hotels that are located in the United States, Canada and the Caribbean. Under the MSA, Hyatt will use its commercially reasonable efforts to cause its managed hotels to order the installation of the Company's iTV product in a minimum number of rooms in Hyatt hotels within certain time frames.
In December 2012, the Company and Hyatt mutually agreed to suspend certain Hyatt obligations under the MSA that had not been met; including the suspension of the obligations of Hyatt to cause a certain number of rooms in both Hyatt owned and managed properties to place orders for the Company's iTV products within certain time frames. At the time of the December 2012 suspension of these Hyatt obligations, the Company had installed certain services and products in approximately 19,000 rooms (including approximately 9,000 installs of its iTV product) in Hyatt hotels. During the year ended December 31, 2013, the Company completed the installation of approximately 1,000 additional rooms. As of December 31, 2015 and December 31, 2014, deposits received on statements of work for Hyatt properties are recorded as customer deposits in the consolidated balance sheets in the amounts of approximately $1,262,000.
In connection with the Merger Agreement, the Company and Hyatt entered into a Waiver and Consent Agreement dated as of March 11, 2014 (the "Hyatt Consent Agreement"), pursuant to which Hyatt provided its conditional consent and approval to the transactions contemplated by the Merger Agreement and any assignment of the Company's assets contemplated thereunder, including the assignment to SSI of the Company's right, title and interest under the MSA and under the Hotel Services & Equipment Purchase Agreements (the "HSAs") entered into by the Company with individual hotel owner entities.
On September 29, 2014, the Company received a letter from Hyatt (the "September 29th Letter") notifying the Company that Hyatt is terminating the HSAs with respect to the following five hotels in which the Company has yet to install any equipment or provide any services – the Hyatt Regency Indianapolis, the Hyatt Regency Greenwich, the Grand Hyatt New York City, the Hyatt Regency Coconut Point and the Hyatt Regency Lake Tahoe (collectively, the "Hotels"). Hyatt's September 29th Letter does not affect any Hyatt hotels under the MSA currently being serviced by the Company. Hyatt's termination of the HSAs is based on alleged noncompliance by the Company and SSI with certain provisions of the Hyatt Consent Agreement. The Company evaluated the validity of the Hyatt Letter and the alleged grounds for terminating the HSAs for the Hotels, and believes such grounds are without merit.
Hyatt's September 29th Letter also requested repayment of deposits in the aggregate amount of $966,000 paid to the Company by the Hotels in connection with the HSAs. A second letter dated November 14, 2014 (the "November 14th Letter") received by the Company from Hyatt demanded repayment of such deposits by November 21, 2014. Upon evaluating the validity of Hyatt's November 14th Letter and again determining that Hyatt's grounds for terminating the HSA and demanding the return of the aforementioned deposits are without merit, the Company formally responded in a letter to Hyatt dated March 3, 2015 wherein the Company denied Hyatt's claims. The Company subsequently received a third letter from Hyatt dated March 26, 2015 (the "March 26th Letter") in which Hyatt again demanded the repayment of the aforementioned deposits. The Company has evaluated the validity of the March 26th Letter and the alleged grounds for terminating the HSAs for the Hotels, and believes such grounds are without merit. The Company has not made any such repayment to Hyatt. On May 4, 2015, the Company received a letter from Hyatt alleging that the Hyatt Consent Agreement did not apply to the merger between Signal Point Holdings Corporation and the Company and further contends that such merger triggered Hyatt's right to terminate the MSA. The Company believes Hyatt's arguments and conclusion are without merit.
The Parties began negotiations to rectify the disputes between them and entered into a Settlement Agreement on November 17, 2015 providing for the orderly termination of iTV services at Hyatt locations. The Settlement Agreement also provided for the extension of high speed internet services for 36 months in retained Hyatt locations and gave the Company the right to bid on all future Wi-Fi installations at hotels and business center locations. The Settlement Agreement also provided that the deposit would be used to fund transitional services and future installation costs. Finally, the Settlement Agreement provided for mutual releases. See Note 18 "Commitments and Contingencies" in the accompanying consolidated financial statements.
Wincomm v. SignalShare.
SignalShare, LLC. received a demand letter from counsel for Winncom Technologies, Inc. demanding payment due under a note previously issued by SignalShare. The demand seeks payment of the $10,000 outstanding payment. The demand further states that if the payment is not made, Winncomm will seek payment on the entire note amount, $837,589, and threatens legal action. SignalShare has contacted Winncom's counsel and will seek to settle the matter amicably. SignalShare intends to settle the matter but has not provided WinnComm with a settlement offer as of this date. As a result of the SignalShare bankruptcy, these amounts are included in the liabilities of discontinued operations.
Network Cabling V. SignalShare.
On February 19, 2016, Network Cabling sued SignalShare, LLC. seeking $47,755 in damages for failure to pay amounts due. As a result of the SignalShare bankruptcy, these amounts will now be handled as part of the liabilities of discontinued operations.
See also "Legal Proceedings Concerning Our Principal Shareholder, Robert DePalo.
Cenfin Corporate Guaranty
On November 19, 2015, SignalShare Infrastructure, Inc. ("SSI") and the Company entered into a Guaranty and Payment Agreement with Cenfin LLC, a senior lender of the Company, whereby the M2 Communications borrowed $150,000 from SSI in exchange for an unsecured guaranty of the debt of SSI up to $1,500,000 until the $150,000 will be paid back to SSI. The Company believes its obligations, if any, under the Guaranty were satisfied and no amount is due. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included as part of the liabilities of discontinued operations.
Cenfin Default
On September 30, 2015, Roomlinx and its subsidiary SSI received a notice of default under the Amended and Restricted Revolving Credit and Surety Agreement with Cenfin LLC dated March 24, 2014 (the "Credit Agreement"). SSI was unable to pay the amounts due to Cenfin, LLC and the parties agreed to allow Cenfin to foreclose under Agreement. This relates to approximately $3,622,275 of indebtedness including approximately $308,772 of accrued interest incurred by SSI which holds Roomlinx's operations prior to the Company's March 27, 2015 acquisition of Signal Point Holdings Corp. On May 11, 2016 SSI completed the foreclosure sale of substantially all assets of SSI to a non-affiliated third party at a public auction pursuant to Article 9 of the Uniform Commercial Code, and these amounts are included as part of the liabilities of discontinued operations. The auction took place at the offices of DLA Piper LLP, 203 N. LaSalle Street, Chicago, Illinois 60601. There was one bidder and the transaction closed on May 11, 2016 and all employees of SSI were terminated and the operations of SSI ceased.
Cardinal Broadband, LLC. Sale:
The Company is in the process of selling its Cardinal Broadband, LLC subsidiary for approximately $375,000. In accordance with applicable settlement agreement and lender documentation, the proceeds of the sale have been pledged to Cenfin, LLC, a senior debt holder of SSI without any offset. The transaction closed effective May 1, 2016 and all assets of Cardinal, including its interest in Arista Communications, LLC., have been sold.
IT Hospitality Solutions LLC. v, SignalShare, LLC. And Signal Point Telecommunications Corp.
On February 16, 2016, SignalShare, LLC ("SSLLC") and Signal Point Telecommunications Corp. ("M2 Communications") were served with a complaint filed in Iredell County, North Carolina by IT Hospitality Solutions LLC, a former contractor of SSLLC, seeking damages for breach of contract from SSLLC and M2 Communications. The companies are reviewing the merit of the complaint and seek to vigorously defend the matter.
Other than the foregoing, no material legal proceedings to which the Company (or any officer or director of the Company, or any affiliate or owner of record or beneficially of more than five percent of the Common Stock, to management's knowledge) is party to or to which the property of the Company is subject is pending, and no such material proceeding is known by management of the Company to be contemplated.
Legal Proceedings Concerning Our Principal Shareholder, Robert DePalo
Robert DePalo currently owns approximately 31% of the issued and outstanding common stock of M2 Group. In connection with the SMA described in Item 1 above, Mr. DePalo resigned as a director, officer and/or employee of SPHC (and any subsidiaries thereof), as of March 27, 2015. As a result, Mr. DePalo has not been and will not be involved in the day to day management of the Company or any of its subsidiaries. On May 20, 2015, the New York County District Attorney charged Robert DePalo with various offenses relating to foreign investors. Simultaneously, the SEC commenced an action against Mr. DePalo (et al.) in the Southern District of New York based on the same facts alleged by the New York District Attorney. A copy of the complaint can be found on the SEC's website, www.sec.gov. The Company takes seriously the New York County District Attorney and SEC actions and will monitor these actions very closely.
The Company has no knowledge and cannot provide any further details regarding these proceedings against Mr. Depalo. The actions described therein have no relation to the Company or its wholly-owned subsidiaries, SPHC, SSI or DMAG. However, pursuant to the terms of Mr. DePalo's consulting agreement, the Company is obligated to pay 100% of Mr. DePalo's legal fees whether or not related to the agreement.
On February 24, 2016, Brookville Special Purpose Fund, LLC. ("Brookville"), Veritas High Yield Fund LLC ("Veritas") and Allied International Fund, Inc. ("Allied") (collectively the "Plaintiffs") filed suit in separate actions in the U.S. District Court for the Southern District of New York against Signal Point Holdings Corp., Signal Point Software Development Corp. and Signal Point Telecommunications Corp. ("Defendants") seeking foreclosure on the secured loans with the Defendants and the imposition of a temporary restraining order. On April 7, 2016, the parties entered into a settlement agreement in lieu of foreclosure upon the following terms:
- The Defendants affirmed the amounts owed under the secured loans
- The Defendants made payments to cure the defaults related to Brookville and Veritas and entered into a payment arrangement to cure the arrears related to Allied.
- Plaintiffs agreed to forbear from foreclosure provided the Defendants entered into a Restructuring, Omnibus Pledge, Security and Intercreditor Agreement which provides for, among other things, the transfer of 100% of the shares of Signal Point Telecommunications Corp. and SignalShare Software Development Corp. to a new holding company under Roomlinx, Inc.
- The Defendants agreed to meet with the Plaintiffs weekly to discuss operations and other matters.
- The Defendants agreed to provide notice to Plaintiffs of certain expenses over $25,000.
- The Defendants reduced the compensation of certain members of the management team.
- The Parties agreed to mutual releases.
- The Defendants agreed to indemnify the Plaintiffs for certain claims.
The settlement agreement was filed with the court and, in accordance with its terms, the Plaintiffs ceased foreclosure proceedings. On April 11, 2016, a Court Order was entered before J. Vernon S. Broderick in the U.S. District Court SDNY, detailing that in lieu of foreclosure proceedings, the Company will transfer the excluded entities into a new holding company with all equity of such entity pledged to Brookville, Veritas and Allied, as well as perfecting liens against all of the assets. In exchange for the forbearance of the foreclosure on the assets of the Debtors, the Company agreed to transfer the subsidiaries of SPHC (specifically, M2 Communications and M2 nGage), with the exception of SignalShare LLC and Signal Point Corp., to "NEWCO," a new subsidiary of the Company, so that the subsidiaries of SPHC will become subsidiaries of NEWCO. The Debtors granted the Secured Parties a lien on the assets of the Debtors and pledged the securities of NEWCO, M2 Communications and M2 nGage to the Secured Parties (collectively, the "Collateral"). NEWCO was formed as Digital Media Acquisition Group Corp. ("DMAG") and the shares of M2 Communications and M2 nGage were transferred to DMAG and the senior secured creditors received stock pledges in the shares of M2 Communications and M2 nGage owned by DMAG as required by the terms of the Settlement Agreement and the relevant loan documents.
Please refer to Section 13 "Certain Relationships and Related Transactions and Director Independence for a description of the relationship of the Plaintiffs to Mr. DePalo.
ITEM 4. MINE SAFETY DISCLOSURESNot applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES| SYMBOL | | TIME PERIOD | | LOW | | HIGH |
| | | | | | | | | |
| MTWO | | April 1, - June 30, 2016 | | $ | 0.27 | | $ | 0.38 |
| | | January 1, - March 31, 2016 | | $ | 0.21 | | $ | 0.39 |
| | | | | | | | | |
| | | January 1 - March 31, 2015 | | $ | 3.00 | | $ | 10.20 |
| | | April 1 - June 30, 2015 | | $ | 1.90 | | $ | 5.50 |
| | | July 1 - September 30, 2015 | | $ | 0.85 | | $ | 2.00 |
| | | October 1 - December 31, 2015 | | $ | 0.21 | | $ | 1.75 |
| | | | | | | | | |
| | | January 1, - March 31, 2014 | | $ | 5.40 | | $ | 24.00 |
| | | April 1, - June 30, 2014 | | $ | 12.00 | | $ | 18.00 |
| | | July 1, - September 30, 2014 | | $ | 7.20 | | $ | 16.80 |
| | | October 1, - December 31, 2014 | | $ | 2.40 | | $ | 8.40 |
| | | | | | | | | |
| RMLXP | | April 1 - June 30, 2016 | | $ | 0.10 | | $ | 0.11 |
| | | January 1 - March 31, 2016 | | $ | 0.10 | | $ | 0.16 |
| | | | | | | | | |
| | | January 1 - March 31, 2015 | | $ | 0.17 | | $ | 0.18 |
| | | April 1 - June 30, 2015 | | $ | 0.20 | | $ | 0.18 |
| | | July 1 - September 30, 2015 | | $ | 0.22 | | $ | 0.18 |
| | | October 1, - December 31, 2015 | | $ | 0.20 | | $ | 0.16 |
| | | | | | | | | |
| | | January 1, - March 31, 2014 | | $ | 6.00 | | $ | 8.40 |
| | | April 1, - June 30, 2014 | | $ | 12.60 | | $ | 15.60 |
| | | July 1, - September 30, 2014 | | $ | 12.60 | | $ | 14.40 |
| | | October 1, -December 31, 2014 | | $ | 10.20 | | $ | 14.40 |
The closing bid for the Company's Common Stock on the OTC Pink Limited on August 24, 2016 was $0.26. As of August 11, 2016, 136,019,348 shares of Common Stock were issued and outstanding (giving retroactive effect to the 1 for 60 reverse stock split and subsequent dividend) which were held of record by approximately 400 stockholders. As of August 11, 2016, 720,000 shares of Class A Preferred Stock were issued and outstanding, which were held of record by a single shareholder although we believe that an estimated 40 beneficial shareholders own Class A Preferred Stock. As of August 11, 2016, 2,495,000 shares of Series B Preferred Stock were issued and outstanding which were held of record by 17approximately 471 shareholders.
Dividends
The Company has not paid any cash dividends on its common stock. Dividends may not be paid on the common stock while there are accrued but unpaid dividends on the Class Aunder our Series E Preferred Stock, which bears a 9% cumulative dividend. As of December 31, 2015 accumulated but unpaid Class A Preferred Stock dividends aggregated $224,040. Payments must come from funds legally available for dividend payments. It is the current intention of the Company to retain any earnings in the foreseeable future to finance the growth and development of its business and not pay dividends on the common stock.Stock.
Issuer Purchases of Equity Securities
During 2015, by the Company did not repurchase any shares of its common or preferred stock.
Recent Sales of Unregistered Securities
The following sales of unregistered securities occurred during the year ended December 31, 2015, which were not previously reported:
On April 24, 2015, the Company issued 12,603,473 shares of common stock as dividends to its existing shareholders. The dividend shares are restrictedIssuer and could not be transferred without the prior written consent of the Company prior to December 31, 2015. The dividend shares are exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") as not involving a "sale" as such term is defined in Section 2(a)(3) of the Securities Act.
On July 30, 2015, the Company issued 61,927 restricted shares to Alan J. Werksman TTEE UTD 2/8/96 in settlement of a claim. The issuance was exempt from registration pursuant to Section 4(a)(2) under the Securities Act. The Company relied upon the representations and warranties made by Alan Werksman in the settlement agreement.
Affiliated Purchasers.
There were no placement agents or underwriters involved inpurchases made during the above transactions and no sales commissions were paid.fourth quarter of the issuer’s fiscal year.
Item 6. SELECTED FINANCIAL DATA[Reserved.]
Not required.
ITEMItem 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis should be read together with our consolidated financial statements, the accompanying notes to these financial statements, and the other financial information that appears elsewhere in this Annual Report on Form 10-K or our SEC filings.
CRITICAL ACCOUNTING POLICIES
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations discusses our
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are not statements of historical fact are forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” “may,” “will,” “should,” “could,” “potential,” “continue,” “intends,” “plans,” and similar words and terms used in the discussion of future operating and financial performance and plans identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results, or events and involve risks and uncertainties, and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
Introduction
This MD&A is provided as a supplement to, and should be read in conjunction with, the audited consolidated financial statements whichand footnotes thereto included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K to help provide an understanding of our financial condition, changes in financial condition and results of operations.
Our MD&A is organized as follows:
Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.
Results of Operations. This section provides an analysis of our results of operations for Fiscal Years 2022 and 2021 on a consolidated basis.
Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, as well as an analysis of our cash flows for Fiscal Years 2022 and 2021. The discussion of our financial condition and liquidity includes summaries of our primary sources of liquidity, our contractual obligations, and off balance sheet arrangements that may have been prepared in accordance withexisted at June 30, 2022.
Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies. This section cross-references a discussion of accounting policies generally acceptedconsidered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are discussed in the United States.notes to our consolidated and combined financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Business Overview
Description of our Business
Converge Acquisition
On March 22, 2022 (the “Closing Date”), the Company through its wholly owned subsidiary CD Acquisition Corp, executed a Membership Interest Purchase Agreement ("MIPA") for the acquisition of all the equity of Converge Direct, LLC and its affiliates ("Converge") and 40% of the equity of Converge Marketing Services, LLC, an affiliated entity, for an aggregate purchase price of $125.0 million valued at approximately $114.9 million. The preparationMIPA identifies the seller parties as the Converge Sellers.
Revenue
The Company has two material revenue streams;
Managed Services
The Company’s Managed Services are typically orientated around the management of a customer’s marketing, data, and/or creative program. The Company’s deliverables relate to the planning, designing, and activating of a solution program or set of work products. The Company executes this revenue stream by leveraging internal and external creative, technical or media-based resources, third party AdTech solutions, proprietary business intelligence systems, data delivery systems, and other key services required under the terms of a scope of work with a client. Our fees to our clients are billed in a variety of ways, which can consist of a percentage of a customer’s total budget, media spend, or retainer.
Performance Solutions
The Company’s Performance Services are typically orientated around the delivery of a predetermined event or outcome to a client. Typically, the revenue associated with the event (as agreed upon in a scope of work) is based on a click, lead, call, appointment, qualified event, case, sale, or other defined business metric. The Company engages in a myriad of consumer engagement tactics, ecosystems, and, methods to generate and collect a consumer’s interest in a particular service or good. Our fees associated with these clients are billed based on the occurrence of a click, lead, call, appointment, qualified event, case, sale, or other defined business metric.
Revenue Categories
A key focus of our revenue architecture and growth is how we generate from two Product Lines across all of our revenue streams. Our approach to growth has been to expand our Internal Brand and Data capabilities, which allow us to provide broader consumer outreach for all our clients and optimize of the cost of the customer engagement expense. Our sectors are curated to have consumer linkages that promote our ability to introduce consumers within our engagement ecosystems to our client programs for secondary benefit to us and our clients using the first-party data that we generate.
Client-Brand
Under the Client Brand product line, revenues are earned from the fees we charge to our customers when we advertise directly for them. In servicing our clients under this reportable segment, the consumer interacts directly with our client and does not interface with the Company at any point during the transaction process.
Internal-Brand and Data
Under the Internal-Brand product line, we earn revenues from the fees we charge to our customers when we engage with consumers under our internally owned and operated brand names. The end consumer interfaces directly with our brand and may be redirected to our customer based on information obtained during the transaction process or whose details may be passed on to a client for future engagement with a particular consumer. We generate rich first party data within this product line that can be monetized across a mix of customer acquisition campaigns and incremental revenue streams. Our innovative internal brands are capable of being utilized for an array of customer awareness and acquisition programs.
Costs of Revenue
Cost of revenues consists of the payments made to third parties, such as media costs and administrative fees (Google, Facebook, The Trade Desk, etc.), technology fees (The Trade Desk, Invoca, LiveRamp, etc.), production expenses (printing, logistics, etc), data costs, and other third-party expenses that Company incurs on behalf of a client that is needed to deliver the services.
General and Administrative Expenses
The Company’s selling, general, and administrative expenses primarily consist of administrative costs, including employee compensation and benefits, professional fees, as well as sales and marketing costs.
Income Taxes
See Note 15 to the consolidated financial statements requires management to make estimatesincluded in Item 8. Financial Statements and judgments that affect the reported amountsSupplementary Data of assets, liabilities, revenues and expenses, and the related disclosuresthis Annual Report on Form 10-K for more information on income taxes.
Accounts Receivable and Allowance for Doubtful Accounts - The Company extends credit to certain customers in the normal course of business, based upon credit evaluations, primarily with 30 – 60 day terms. The Company's reserve requirements are based on the best facts available to the Company and are reevaluated and adjusted as additional information is received. The Company's reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. Accounts are written off when they are deemed uncollectible.
Revenue Recognition – M2 Communications derives the majority of its revenue from monthly recurring fees and usage-based fees that are generated principally by sales of its network, carrier and subscription services.
Monthly recurring fees include the fees billed by M2 Communication's network and carrier services customers for lines in service and additional features on those lines. M2 Communication primarily bills monthly recurring fees in advance, and recognizes the fees in the period in which the service is provided.
Usage-based fees consist of fees billed by M2 Communication's network and carrier services customers for each call made. These fees are billed in arrears and recognized in the period in which the service is provided.
Subscriber fees include monthly recurring fees billed by M2 Communication's end-user subscribers for lines in service, additional features on those lines, and usage-based per-call and per-minute fees. Subscriber fees also consist of provision of access to data, wireless, and VoIP services. These fees are billed in advance for monthly recurring items and in arrears for usage-based items, and revenues are recognized in the period in which service is provided.
Deferred Revenue and Customer Prepayments - M2 Communication bills customers in advance for certain of its telecommunications services. If the customer makes payment before the service is rendered to the customer, M2 Communication records the payment in a liability account entitled customer prepayments and recognizes the revenue related to the communications services when the customer receives and utilizes that service, at which time the earnings process is complete.
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 2015 Compared toJune 30, 2022 versus the Year Ended December 31, 2014June 30, 2021
Revenues
Our revenuesThe table below sets forth, for the years ended December 31, 2015 and 2014 were approximately $10.6 million and $11.3 million, respectively, a decreaseperiods presented, our consolidated results of approximately $0.7 million or 6.1%. This decrease primarily relates to a change inoperations for the mixperiods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | Increase (Decrease) in Net Income |
| 2022 | | 2021 | |
| Amount | | % of Revenues | | Amount | | % of Revenues | |
| Revenues | $ | 116,409,703 | | | 100 | % | | $ | 16,192,000 | | | 100 | % | | $ | 100,217,703 | |
| Cost of revenues | 88,127,498 | | | 76 | % | | 7,504,000 | | | 46 | % | | 80,623,498 | |
| Gross margin | 28,282,205 | | | 24 | % | | 8,688,000 | | | 54 | % | | 19,594,205 | |
| Operating expenses: | | | | | | | | | |
| Selling, general and administrative expenses | 45,271,857 | | | 39 | % | | 25,372,000 | | | 157 | % | | 19,899,857 | |
| | | | | | | | | |
| Depreciation and amortization | 3,097,780 | | | 3 | % | | 2,299,000 | | | 14 | % | | 798,780 | |
| Restructuring and other related charges | 5,590,932 | | | 5 | % | | — | | | NM | | 5,590,932 | |
| Impairments and other (gains) losses, net | 7,708,677 | | | 7 | % | | (3,142,000) | | | (19) | % | | 10,850,677 | |
| Total operating expenses | 61,669,246 | | | | | 24,529,000 | | | | | |
| Operating loss | (33,387,041) | | | | | (15,841,000) | | | | | |
| Other income (expense): | | | | | | | | | |
| | | | | | | | | |
| Interest expense | (2,943,367) | | | (3) | % | | (7,000) | | | — | % | | $ | (2,936,367) | |
| Loss contingency on equity issuance | (3,615,000) | | | (3) | % | | — | | | NM | | $ | (3,615,000) | |
| Gain on change in fair value of derivative liabilities | 638,622 | | | 1 | % | | 72,000 | | | — | % | | $ | 566,622 | |
| Other income | 679,920 | | | 1 | % | | 452,000 | | | 3 | % | | $ | 227,920 | |
| Foreign exchange gain (loss) | (30,215) | | | — | % | | (48,000) | | | — | % | | $ | 17,785 | |
| Amortization expense of note payable discount | — | | | — | % | | (409,000) | | | (3) | % | | $ | 409,000 | |
| Total other income (expense) | (5,270,040) | | | | | 60,000 | | | — | % | | |
| Loss from operations before income taxes | (38,657,081) | | | | | (15,781,000) | | | (97) | % | | |
| Income tax expense | (35,925) | | | | | (216,000) | | | (1) | % | | 180,075 | |
| Net Loss | $ | (38,693,006) | | | | | $ | (15,997,000) | | | (99) | % | | |
| | | | | | | | | |
| NM - Percentage is not meaningful | | | | | | | | | |
The results of customer services to slightly lower priced products and the loss of some broadband customers due to extremely competitive pricing in the Company's largest market.
Cost of Sales
For the years ended December 31, 2015 and 2014, the cost of sales, excluding depreciation and amortization expenses, which is included in selling, general and administrative expense, were approximately $6.9 million and $8.1 million, respectively; a decrease of approximately $1.2 million or 13.9%,operations for the year ended December 31, 2015.June 30, 2022, have been significantly impacted by the Converge Acquisition. All financial results herein for the fiscal year ended June 30, 2022, include the results of operations of the Converge companies which are reflective of the period March 22, 2022 (the Acquisition closing date), though June 30, 2022. See Note 3 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information on the Converge Acquisition.
Revenues
Revenues for the year ended June 30, 2022, increased by approximately $100.2 million as compared with the prior year period, resulting in a total of approximately $116.4 million. The decrease reflectsincrease was attributable to the following:
| | | | | | | | | | | | | | | | | |
| Increase in managed services revenue | | | | | $ | 51,101,818 | |
| Increase in performance marketing revenue | | | | | 40,178,973 | |
| Other net increases | | | | | 8,936,912 | |
| | | | | $ | 100,217,703 | |
The increase in Managed Services revenue and Performance Marketing revenues is directly attributable to the Converge Acquisition and is reflective of the period March 22, 2022 (the date of the Converge Acquisition closing), through June 30, 2022. The Converge Acquisition contributed approximately $90.3 million in revenue during that 101 day period, which is representative of 78% of the Company's total revenue for fiscal year 2022.
The increase in other revenues of approximately $8.9 million was primarily driven by the gradual return to more normal business activities as a reductionresult of the lifting of government restrictions that were in Broadband and VoIP costsplace in the prior year period due to less volume plusCOVID-19.
Cost of Revenues
For the year ended June 30, 2022, cost savingsof revenues increased by approximately $80.6 million to $88.1 million as compared with the prior year period. The increase is primarily attributable to incremental costs of approximately $77.8 million resulting from the addition of the Converge business.
Gross Margin
For the year ended June 30, 2022, gross margin increased by approximately $19.6 million to $28.3 million, or 24% of revenue, as compared with the prior year period, primarily due to continued effortsthe increase in removing redundancies and excess costs.revenues partially offset by the increase cost of revenues related to the Converge Acquisition as discussed above.
Selling, General, and Administrative ExpenseExpenses
Total selling,Selling, general, and administrative expenseexpenses for the year ended December 31, 2015 and 2014 (excluding non-cash stock based compensation ofJune 30, 2022, increased by approximately $21.6$19.9 million and $1.9to $45.3 million inas compared with the years ended December 31, 2015 and 2014, respectively) was approximately $7.5 million and $8.5 million, respectively.prior year period. The net decrease of approximately $1.0 million, or a decrease of approximately 11.8% between the periods reflects cost related to ongoing cost containment efforts.
Operating Loss
Our operating loss increased to approximately $25.4 million for the year ended December 31, 2015 (included non-cash stock based compensation of approximately $21.6 million) compared to approximately $7.2 million (included non-cash stock based compensation of approximately $1.9 million) for the year ended December 31, 2014, for an increase of approximately $18.2 million. This increase is primarily attributable to an increase in non-cash stock basedemployee related costs of approximately $13.3 million, an increase in professional fees of approximately $4.2 million, an increase of approximately $1.5 million in miscellaneous costs, an increase in travel and entertainment costs of approximately $0.6 million, and an increase in office and occupancy costs of approximately $0.3 million.
The increase in employee related costs of approximately $13.6 million is primarily due to an increase in stock-based compensation of $8.7 million, increases in salaries and other related costs of approximately $19.7$1.7 million (exclusive of employees acquired with the Converge Acquisition), employee related costs of approximately $3.3 million directly attributable to the Converge Acquisition, and an increase in professional fees due to one-time costs incurred for legal, accounting, and other services performed related to the Converge Acquisition. These increases were partially offset by the resulting improvementa decrease in gross marginconsulting fees of approximately $3.5 million.
Depreciation and cost controls as discussed above.Amortization
Non-Operating
Interest expense increased from approximately $0.9 millionDepreciation and amortization expenses for the year ended December 31, 2014,June 30, 2022, increased to approximately $3.1 million from $2.3 million in the prior year period. The increase is primarily attributable to amortization of intangible assets acquired as a result of the Converge Acquisition.
Restructuring and Other Related Charges
For the year ended June 30, 2022, the company recorded approximately $5.6 million of restructuring charges related to employee severance and other employee related benefits. During the fourth quarter of 2022, the Company shut down Redeeem operations, as well as consolidated the operations for certain Troika entities. This has resulted in the departure of key executives as well as certain additional reductions in workforce in order to align with management's new strategic direction. There were no such amounts recorded in the prior year.
Impairments and Other (Gains) Losses, Net
For the year ended June 30, 2022, the company recorded approximately $7.7 million in net impairment charges and other gains, representing an increase of $10.9 million as compared with the prior year period. The increase is comprised of impairments of goodwill totaling approximately $8.8 million, the absence of a $3.1 million gain in the prior year period, and impairments of net intangible assets totaling $0.4 million. These increases were partially offset by gains in the current year period totaling $1.4 million.
For the year ended June 30, 2022, impairment charges of $8.8 million included of goodwill impairments of $6.7 million related to Mission UK as a result of the Sale agreement entered into on August 1, 2022, and goodwill impairment of $2.0 million and intangible assets impairments of $0.4 million related to the discontinuation of operations for the Redeeem subsidiary. See Note 3 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information.
The above increases were offset by $1.0 million gain on legal settlements, which was related to the Stephensons' settlement, (See Note 11 to the consolidated financial statements included in Item 15 Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information on the legal matters). The remaining increase included an approximate $0.3 million gain on government grant forgiven related to SBA-backed Paycheck Protection Program grants received due to the ongoing COVID-19 pandemic and a $0.2 million gain on rent abatement. For the year ended June 30, 2021, the Company recognized approximately $3.1 million of income from government grants.
There were no impairment charges recorded during the year ended June 30, 2021.
Interest Expense
Interest expense for the year ended December 31, 2015. This increase in interest expense was primarily attributableJune 30, 2022, is related to the additional interestCompany's Senior Secured credit facility, which was entered into in March 2022 to finance the Converge Acquisition (see "Liquidity and Capital Resources - Financing Agreements"). See Note 12 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information on the Company's Credit Facility.
Loss Contingency on Equity Issuance
For the year ended June 30, 2022, the company recorded approximately $3.6 million of loss contingency expenses per the Registration Rights Agreement related to conversionpartial liquidated damages as a result of preferred stocknot filing the registration statement by the effective date. As of the date of this filing , the Company had paid an aggregate of $2.0 million and will expect to a note during 2015 andowe an additional financing cost related to managing existing debt.
$1.0 million by September 30, 2022.
Gain on Change in Fair Value of Derivative Liabilities
For the years ended December 31, 2015June 30, 2022 and 2014,2021, the Company recognized otherapproximately $0.6 million and $0.1 million, respectively, of income from the change in fair value of derivative liabilities. The derivative liabilities are associated with the debt and equity financing related to the Converge acquisition.
Adjusted Earnings Before Interest, Tax, Deprecation, and Amortization ("Adjusted EBITDA")
The Company evaluates its performance based on several factors, of which the key financial measure is our net income (loss) before (i) interest expense, net (ii) income tax expense, (3) depreciation, amortization and impairments of approximately $15,000property and $98,000, respectivelyequipment, goodwill and other intangible assets, (iv) stock-based compensation expense or benefit, (v) restructuring charges or credits, and (vi) gain or losses on dispositions of business and associated settlements,
Management believes that the exclusion of stock based compensation expense or benefit allows investors to better track the performance of the company's business without regard to the settlement of an obligation that is not expected to be made ion cash
Adjusted EBITDA and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company's performance. The company uses revenue and Adjusted EBITDA measure as includedits most important indicators of its business performance, and evaluates managements effectiveness with specific reference to these indicators. Adjusted EBITDA should be viewed as a supplement to and not a substitute for net income (loss), cash flows from operating activities, and other measures of performance and/or liquidity presented in accordance with GAAP Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar titles used by other (expenses)companies. The company has presented the components that reconcile net loss, the most directly comparable GAAP financial measure, to adjusting operating income (loss).
The following is a reconciliation of net income (loss) to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Twelve Months Ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net Loss | $ | (18,056,006) | | | $ | (6,774,000) | | | $ | (38,693,006) | | | $ | (15,997,000) | |
| Interest expense | 2,796,367 | | | (28,000) | | | 2,943,367 | | | 7,000 | |
| Income tax expense | (54,075) | | | 193,000 | | | 35,925 | | | 216,000 | |
| Depreciation and amortization | 2,267,780 | | | 585,000 | | | 3,097,780 | | | 2,299,000 | |
| EBITDA | (13,045,934) | | | (6,024,000) | | | (32,615,934) | | | (13,475,000) | |
| Impairments and other (gains) losses, net | 7,967,677 | | | (607,000) | | | 7,708,677 | | | (3,142,000) | |
| Business Acquisition Costs included in SG&A | 320,000 | | | — | | | 2,200,000 | | | — | |
| Restructuring and other related charges | 5,590,932 | | | — | | | 5,590,932 | | | — | |
| Loss contingency on equity issuance | 3,615,000 | | | — | | | 3,615,000 | | | — | |
| Share based comp | 1,184,000 | | — | | 837,000 | | | 13,292,534 | | | 4,419,000 | |
| | | | | | | |
| Adjusted EBITDA | $ | 5,631,675 | | | $ | (5,794,000) | | | $ | (208,791) | | | $ | (12,198,000) | |
Favorable Adjusted EBITDA of $5.6 million, for the three months ending June 30, 2022, was primarily driven by the increase in revenues due to the accompanying consolidated statementsConverge acquisition (as discussed previously) combined with the off-setting of operations.
Discontinued Operations
Discontinued operations are theseveral one-time costs incurred as a result of the bankruptcy of SignalShare,ongoing restructuring and transformational efforts by management as well as non-cash charges incurred in the Article 9 salefourth quarter fiscal year 2022.
The Company has made expeditious restructuring decisions in order to avoid distraction by business matters that will not contribute to the transformational reorganization of the assetsbusiness to ensure that our company is well positioned to drive ongoing growth and value for our shareholders.
The fourth quarter contained several non-recurring costs including net impairment charges and other gains totaling $8.0 million, restructuring and other related charges totaling $5.6 million, a loss contingency on equity issuance of SSI$3.6 million and non-cash stock compensation expense of $1.2 million (which are reflected in SG&A).
LIQUIDITY & CAPITAL RESOURCES
Overview
Our primary sources of liquidity are cash, cash equivalents, and cash flows from the operations of our businesses. Our principal uses of cash include working capital-related items (including funding our operations), debt service, investments, and related loans and advances that we may fund from time to time, and liabilities from prior acquisitions. Our decisions as to the use of our available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the saletiming of Cardinal Broadbandcash flow generation. To the extent that we desire to access alternative sources of funding through the capital and credit markets, challenging U.S. and global economic and market conditions could adversely impact our ability to do so at that time.
We regularly monitor and assess our ability to meet our net funding and investing requirements. We believe we have sufficient liquidity from cash and cash equivalents and future cash flows from operations to fund our operations and service the credit facilities for the foreseeable future. See Note 12, Credit Facilities to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for a discussion of the Credit Facility.
Financing Agreements
On March 21, 2022, Troika Media Group Inc., and each subsidiary of Troika Media Group Inc. as guarantors, entered into a Financing Agreement with Blue Torch Finance LLC (“Blue Torch”) to act as Administrative Agent and Collateral Agent. As part of this Financing Agreement, we entered into a $76.5 million First Lien Senior Secured Term Loan (the “Credit Facility”) with Blue Torch which formed the majority of the purchase price of the Converge Acquisition, as well as for working capital and general corporate purposes.
The Credit Facility provides for: (i) a Term Loan in the amount of $76.5 million; (ii) an interest rate of the Libor Rate Loan of three (3) months; (iii) a four-year maturity, amortized 5.0% per year, payable quarterly; (iv) a one (1.0%) percent commitment fee and an upfront fee of two (2.0%) percent of the Credit Facility paid at closing, plus an administrative agency fee of $250 thousand per year; (v) a first halfpriority perfected lien on all property and assets including all outstanding equity of 2016the Company’s subsidiaries; (vi) 1.5% fully-diluted penny warrant coverage in the combined entity; (vii) mandatory prepayment for fifty (50%) percent of excess cash flow and 100% of proceeds from various transactions; (viii) customary affirmative, negative and financial covenants; (ix) delivery of audited financial statements of Converge; and (x) customary closing conditions. The Company agreed to customary restrictive financial and non-financial covenants in the terminationCredit Facility including, but not limited to, a debt leverage ratio, fixed charge coverage ratio, and maintaining liquidity of our wholesale telecom business unit in September 2013, resulting in a loss on discontinuedat least $6.0 million at all times. Additionally, the Company agreed that if Sid Toama or Thomas Marianacci cease to be involved with the day to day operations of approximately $55.1the Company, replacements reasonably suitable to Blue Torch shall be appointed within thirty (30) days.
The Company has received limited waivers due to non-compliance with certain covenants of the agreement. The company is currently addressing these items and expects to be in compliance during second quarter of fiscal year 2023.
The Company and each of its subsidiary Guarantors entered into a Pledge and Security Agreement (the “Security Agreement”) dated as of March 21, 2022, as a requirement with the Credit Facility. Each Guarantor pledged and assigned to the Collateral Agent and granted the Collateral Agent with a continuing security interest in all personal property and fixtures of the Guarantors (the “Collateral”) and all proceeds of the Collateral. All equity of the Guarantors was pledged by the Borrower.
On March 21, 2022, each of the Company’s Subsidiaries, as Guarantors, entered into an Intercompany Subordination Agreement (the “ISA”) with the Collateral Agent. Under the ISA, each obligor agreed to the subordination of such indebtedness of each other obligor to such other obligations.
On March 21, 2022, the Company entered into an Escrow Agreement with Blue Torch Finance LLC and Alter Domus (US) LLC acting as Escrow Agent. The Escrow Agreement provided for the escrow of $29.1 million (including impairment of goodwillthe $76.5 million proceeds, under the Credit Facility to be held until the audited financial statements of approximately $46.9)Converge Direct LLC and $3.8 millionaffiliates for years ended December 31, 2015 and 2014, respectively.
Net Loss
For the years ended December 31, 20152020 and 2014, the Company experienced net losses attributable2019, are delivered to common shareholdersBlue Torch Finance LLC., of approximately $81.7 million and $12.6 million, respectively, a net increase of approximately $69.0 million. This increase includes impairment of good will included in discontinued operations of approximately $46.9 million and additional stock based compensation recorded in 2015 of approximately $21.6 million. Net loss attributable to common shareholders increased by approximately $2.4 million with exclusion of the goodwill impairment and stock based compensation, which is primarily attributable to the increased payroll costs associated with the addition of software developers to help support our live-fi product, an increase in interest expense and the decrease in operating margins between the years as described above.was completed during Q4; however, escrow has not been released.
Related Party Transactions
CenFin LLC
Since June 5, 2009, the Company has maintained a Revolving Credit, Security and Warrant Purchase Agreement (the "Credit Agreement") with Cenfin LLC ("Cenfin"), an entity principally owned by significant shareholders of the Company (see Note 6 to the Consolidated Financial Statements). On March 24, 2015, inIn connection with the closingaforementioned note, the Company recorded deferred financing and issuance costs totaling approximately $9.2 million, including a $1.5 million upfront fee. The costs will be amortized over the life of the Subsidiary Merger,note using the effective interest rate method. During the year ended June 30, 2022, the company recorded $792 thousand in amortization expense and made principal payments of $956 thousand.
At any time on or after March 21, 2022, and on or prior to March 21, 2026, the lender has the right to subscribe for and purchase from Troika Media Group, Inc., up to 1,929,439 shares of Common Stock, subject to adjustment. The exercise price per share of Common Stock under this Warrant shall be $.01 per share. If at any time when this Warrant becomes exercisable and the Registration Statement is not in effect this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise”.
The Company is in negotiations with its Senior Secured Lender to revise the terms of its Financing Agreement relating to the Credit Facility.
See Note 12 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for a discussion of the Credit Facility.
Series E Private Placement
On March 16, 2022, the Company entered into an amended and restated Revolving Credit and Securitya Securities Purchase Agreement (the “Purchase Agreement”) with Cenfincertain institutional investors (the "Revolver"“Purchasers”). Cenfin consented, pursuant to the transfer of all of the Company's assets to SSI in consideration of (i) payment of $750,000 to CenFin reducing the balance owed to $3,962,000; and (ii) 7,061,295 shares of M2 Group common stock (5.07% of M2 Group's fully diluted shares). In addition, all subsequent payments are adjusted based on a pro-ration of the accelerated payment. The revolving loan is secured by the assets of SSI, but not secured by those of M2 Group (except to the extent not assigned to SSI) and not secured by any assets of SPHC, DMAG or their subsidiaries. Under a Stock Pledge Agreement, dated as of March 24, 2015,which the Company pledgedagreed to Cenfin all equity interests of SSIissue and Cardinal Broadband LLC. Interest is accrued at the Federal Funds Rate plus 5% per annum, payable quarterly, withsell, in a default rate of 13% per annum. The loan is repayable during the period ending March 15, 2017. The Revolver provides that CenFin, at its discretion, may lend up toprivate offering (the “March 2022 Private Placement”), an aggregate of $10,000,000. The Revolver contains covenants and restrictions customary for a facility$50.0 million of this size.
During the year ended December 31, 2015,securities, consisting of shares of Series E convertible preferred stock of the Company, made interest paymentspar value $.01 per share (the “Series E Preferred Stock”) and warrants to Cenfinpurchase (100% coverage) shares of $61,431common stock (the “Warrants”) (collectively, the Series E Preferred Stock and principal payments of $573,447. Amounts outstanding underWarrants are referred to as the Credit Agreement were $3,240,160 plus accrued interest of $160,931 as of December 31, 2015.
On June 30, 2015,“Securities”). Under the Company entered into the First Amendment (the "First Amendment) to the Amended and Restated Revolving Credit Agreement, dated as of June 30, 2015 (the "Credit Agreement"), by and among the Company, SSI and Cenfin. The material terms of the First Amendment provided that Cenfin would be entitledPurchase Agreement, the Company agreed to 33%sell 500,000 shares of its Series E Preferred Stock and Warrants to purchase up to 33,333,333 shares of the Company’s common stock (the “Conversion
Shares”). Each share of the Series E Preferred Stock has a stated value of $100 per share and was originally convertible, at any time, into shares of common stock at a conversion price of $1.50 per share (the “Conversion Price”), subject to adjustment. The Company’s co-managing underwriters were Kingswood Capital Markets (n/k/a E.F. Hutton), a division of Benchmarks Investments, Inc., and Westpark Capital, Inc. The Company sold the Securities for gross proceeds raised in any equity or debt financing activities by eitherof $50,000.
Associated with the Series E offering, the Company or SSI, not including operational leases, for so longfiled a registration statement on Form S-1 (No. 333-264112) which is pending before the Commission as there is any outstanding balance under the Credit Agreement for which only SSI is obligated (the "Cenfin Equity Payment Obligation"). In consideration of the First Amendment, the Company is responding to comments and SSI released Cenfin from all claims relatedanticipates further updates based upon the requirement to update the underlying financials to reflect the present financials. The registration statement seeks to register an aggregate of 200,000,000 shares of common stock for resale by the Purchaser, consisting of shares of common stock issuable to the loan documents.
On October 7, 2015, in settlementPurchasers upon conversion of a non-payment default, the Company and SSI entered into a Forbearance Agreement with Cenfin upon the following terms:
● The interest rate on each Revolving Loan (as defined) was increased500,000 shares of Series E Preferred Stock pursuant to the Federal Funds Rate plus 13%, from 5%.
● Subject to compliance by the Company and SSI with the terms and conditions of the Second AmendmentCertificate of Designation for the Series E Preferred Stock. The 500,000 shares of Series E Preferred Stock have a stated value of $100 per share, or an aggregate of $50.0 million. The shares were originally convertible at $1.50 per share, or an aggregate of approximately 33,333,333 shares of common stock, subject to adjustment, for reverse and forward stock splits, stock dividends, stock combinations and other such transactions. In addition, the Conversion Price will be downwardly adjusted the greater of (i) eighty (80%) percent of the average of the ten (10) lowest daily VWAPs during the forty (40) trading day period beginning on and including the Trading Day immediately follow the Effective Date of the initial Registration Statement, and (ii) the Floor Price of $0.25 per share unless a holder elects to shorten the adjustment period to all or a portion of the Series E Preferred Stock held by such person to between ten (10) and thirty-nine (39) trading days (the "Registration Reset Price").
As of September 27, 2022, the Registration Statement had not been declared effective by the SEC. As a result, the Company is required under the terms of the Registration Rights Agreement to pay to the Purchasers a partial liquidated damages penalty for failure to meet the effectiveness date requirement, which is determined to be the product of two (2%) percent and the Loanaggregate subscription amount paid by each Purchaser under the terms of the Purchase Agreement, Cenfin agreed to forebear from exercising its rights and remedies against SSI with respectpartial liquidated damages capped at fourteen (14%) percent of the subscription amount. Such partial liquidated damages will be owed to the defaultinvestors within seven days of the failure to meet the requirements for non-payment on September 29, 2015effectiveness, and will be owed monthly to the purchasers until the earlier of November 7, 2015 or a Forbearance Default (as defined) occurs (the "Forbearance Period"). SSI also agreed duringRegistration Statement is declared effective by the Forbearance Period not to make any payments to creditors or lenders of SSI without Cenfin's prior written consent, except for contractual payments, in the ordinary course of business to vendors of SSI.SEC.
● M2 Group (formerly Roomlinx) agreed during the Forbearance Period not to make any payments to any of the creditors or lenders of the Company (other than NFS Leasing) without first giving Cenfin two (2) business days prior written notice, except for contractual payments to vendors in the ordinary course of business.
On November 19, 2015, the CompanySeptember 26, 2022, we entered into a Guaranty and Paymentthe Exchange Agreement with the Purchasers, pursuant to which (i) each Purchaser exchanged its Warrants for the Company Guaranteed a $150,000 intercompany loan from SSINew Warrants and (ii) each Purchaser consented to the CompanyNew PIPE Terms, including an amendment and an additional installment payment of $75,000 was made to Cenfin. Until such time as the $150,000 is repaid to SSI, the Company guaranteed up to $1,500,000 of SSI debt to Cenfin.
On May 11, 2016, completed the Foreclosure Sale of substantially all assets of SSI (other than certain excluded agreements) pursuant to Article 9restatement of the Uniform Commercial Code. SSI terminated allterms of its employeesour Series E Preferred Stock.
In consideration for the issuance of the New Warrants and ceased operations. the other New PIPE Terms, we filed the amended and restated Certificate of Designation with the Secretary of State of the State of Nevada to effect certain changes contemplated by the Exchange Agreement.
The Foreclosure Sale resulted from SSI's inability to pay approximately $3,622,275 of indebtedness to SSI's senior lender, Cenfin, LLC. The winning bid was made by Single Digits, Inc., an unaffiliated New Hampshire corporation and accepted by Cenfin. There was no relationship between SSI or its affiliates and Single Digits priorPIPE Terms effect the following changes, among others, to the transaction.rights Series E Holders:
New Warrant Exercise Price: The consideration was $700,000 plus SSI's cash on hand at Closing less $207,106.72, such amount representing 75%New Warrant exercise price per share of deposits received by SSI prior to closing for future installations for which work had not been substantially completed for Hyatt. The amount of accounts receivables included in the transferred assets was approximately $440,000 as of May 9, 2016.
NFS Leasing, Inc.
On July 31, 2015, certain wholly owned subsidiaries of the Company identified below entered into the following agreements in connection with the conversion of certain equipment leases into secured loans (collectively referenced as the "NFS Loan Documents"):
· | Lease Schedule Termination and Loan Agreement (the "Termination Agreement"), by and between SignalShare, LLC ("SignalShare") and NFS Leasing, Inc. ("NFS"); |
· | Security Agreement by and between Signal Point Holdings Corp. ("SPHC") and NFS; |
· | Promissory Note issued by SignalShare to NFS in the principal amount of $4,946,212 (the "Note"); |
· | Corporate Guaranty Agreement by and between SPHC and NFS; and |
· | First Amendment to the Security Agreement by and between SignalShare and NFS. |
The NFS Loan Documentscommon stock is $0.55, provided that amounts owed by SignalShare to NFS pursuant to certain equipment leases would be converted into secured debt as evidenced by the Note. The Note provides for SignalShare to make seventy-five consecutive weekly paymentsif all shares of $71,207 with a final payment of $18,887 due upon maturity of the Note on December 19, 2016 (the "Maturity Date"). The Note is secured by subordinated security interests in all of the assets of SignalShare and SPHC. The Note is also guaranteed by SPHC. In addition to the payment obligations under the Note, the Termination Agreement provides that SignalShare will make concurrent weekly payments of $28,793 for payments dueSeries E Preferred Stock issued pursuant to the Master Equipment Lease Number: 2013-218 datedCertificate of Designation are not repurchased by the Company on or prior to November 26, 2022, on such date, the exercise price per share of the New Warrants will revert to $2.00, subject to further adjustment as set forth in the New Warrant.
Series E Conversion Price: The conversion price for the Series E Preferred Stock shall initially equal $0.40 per share, and so long as the arithmetic average of the daily volume-weighted average prices of the Common Stock for the calendar week prior to each of the following respective dates is lower than the Conversion Price at that time, the Conversion Price shall be downwardly adjusted by $0.01 on each of October 24, 2022, October 31, 2022, November 7, 2022, November 14, 2022 and November 21, 2022.
Standstill Period: The Purchasers agreed to the 60-day Standstill Period, during which each Series E Holder may convert not more than 50% of the Series E Preferred Stock held by such holder at the beginning of the Standstill Period.
Series E Buyout. During the Standstill Period the Company will use commercially reasonable efforts to raise funds to repurchase all outstanding shares of Series E Preferred Stock held by the Purchasers at a purchase price of $100 per share, subject to the provisions of the Certificate of Designation.
Limitation on Sales: During the Standstill Period, the Purchasers agreed not to sell shares of the Company’s common stock for a price less than $0.30 per share.
Liquidated Damages: The Company agreed to pay to the Purchasers all liquidated damages owed through September 21, 2022 (including any pro-rated amounts).
As of the date of this filing, the Company had paid an aggregate of $2.0 million as partial liquidated damages as a result of not filing the registration statement by July 5, 2022. As such, as of March 11, 2013 through the Maturity Date.
In connection with the NFS Loan Documents,June 30, 2022, the Company issued NFShas recorded a Warrant to purchase 1,111,111 shares of Common Stock at an exercise price of $1.80 per share with an exercise period of five years (the "Warrant").
On September 22, 2015, NFS notified SignalShare of a default for non-payment. On September 28, 2015 NFS withdrew the default. In exchange for withdrawing the default, NFS, SignalShare and SPHC agreed that unless NFS, on or before Friday, October 2, 2015, is in receipt of paymentcontingent liability in the amount of $389,416 or alternatively, if$3.6 million. See Note 16 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion.
The Company utilized the full amount of proceeds raised in the Series E offering to pay a forbearance arrangement satisfactory to NFS were not executed between the parties by the close of business (5:00 P.M.) on that day, NFS would be entitled to renew its Notice of Default to SignalShare and SPHC (with respect to its guaranty), in which event SignalShare and SPHC each would waive all applicable cure periods with respect to such default.
On October 2, 2015, NFS gave notice of default to SignalShare and SPHC and stated that NFS would seek payment from SignalShare under the Note and from SPHC under the Corporate Guaranty Agreement given to NFS by SPHC as security for the converted SignalShare loans. The parties negotiated a settlement upon the following material terms:
● SignalShare shall pay NFS via wire transfer the sum of $150,000 within one business day of its receiptportion of the finalcash payment from one offor Converge Direct, LLC and its customers, which is expected to be received on or about October 30, 2015.subsidiaries.
● SignalShare shall pay NFS the amount of $28,793 via wire transfer on each Monday, commencing October 12, 2015 through Monday November 16, 2015, under the Master Lease. SignalShare has made its first three payments under these terms on October 12, 19 and 26, 2015.
● SignalShare shall, on or before October 23, 2015, cause UCC termination statements to be filed by each of Brookville and Veritas.
● On or before November 16, 2015, if SignalShare and SPHC close a bridge loan funding, or any other similar funding event, NFS will receive a $500,000 payment which NFS will apply against the outstanding Term Note in accordance with the provisions of the Note.
● Upon NFS' receipt of the aforementioned $500,000 payment, NFS, in its sole discretion, may choose to restructure the remaining balance of the Note. In such event the $28,793 weekly Master Lease payments will remain in effect until the leases are paid in full.
● SignalShare shall, make a payment to NFS in the amount of $20,000 on or before December 1, 2015 as reimbursement of NFS's attorneys' fees and other expenses.
● SignalShare shall pay the past due Personal Property tax of $50,217 owed to NFS on or before December 15, 2015.
● One million shares of the Company's common stock will be issued to NFS upon, and subject to, NFS' execution of an Investment Intent Letter agreed to by the Company confirming that the shares are being acquired only for lawful investment purposes under applicable law.
In the event SignalShare or SPHC fails to timely pay to NFS any amounts set forth above, or otherwise fails to timely perform any other obligation set forth above, NFS shall have the right to immediately, upon e-mail notice to SignalShare reinstate the default, with no cure rights.
On November 18, 2015, NFS gave notice of Default to SignalShare and simultaneously gave notice to SPHC that NFS would be seeking payment under the SignalShare note pursuant to the corporate guarantee given NFS by SPHC as security for the converted SignalShare loans. The parties entered in negotiations in order to remove the default and restructure the obligations. On November 19, 2015, the parties agreed to restructure the loan and make certain payments to NFS. The parties formalized the agreement which modified the negotiated settlement resulting from the October 2, 2015 default as follows:
· | The $150,000 payment from the impending customer payment was increased to $250,000. |
· | The Company's agreed to share information with NFS and provide status updates. |
· | The payment dates associated with NFS' attorneys' fees and tax obligations were extended. |
· | SignalShare agreed to pay NFS 20% of any upfront initial Wi-Fi installation payment received. |
· | Effective 2/2/2016, the note monthly payment will be effective at a rate of $150,000 a month. |
· | Upon receipt of an additional $2,000,000 in funding, the term note will be re-amortized to a monthly payment of $250,000 until the note is repaid. |
See Item 3 "Legal Proceedings" regarding the current lawsuit brought by NFS. Subsequently, SignalShare filed for bankruptcy, and these amounts are included in the liabilities of discontinued operations.
LIQUIDITY & CAPITAL RESOURCES
As of December 31, 2015, the Company had approximately $36,000 in cash and cash equivalents. Working capital at December 31, 2015 was a deficit of approximately ($30.0) million as compared to approximately ($9.3) million at December 31, 2014. The increase in working capital deficit of approximately $20.7 million is primarily due to (i) a reduction in cash approximating $1.5 million, (ii) the additional working capital deficit resulted from the reverse merger of approximately $6.5 million, (iii) an increase in current maturities of debt related to the Company's various existing and new borrowings of approximately $10.8 million, and (iv) increase in deferred revenue of approximately $2.6 million. The remaining increase in working capital deficit of approximately $2.5 million is the net change in the working capital assets and liabilities.
Operating Activities
Net cash used in operating activities was approximately $4.6 million and $10.2 million for the years ended December 31, 2015 and 2014, respectively. The decrease in cash used in operations of $5.6 million was primarily attributable to insufficient funds to pay off past due liabilities and the management of accounts payable during 2015.
Investing Activities
Net cash provided by investing activities was approximately $0.8 million for the year ended December 31, 2015 compared to net cash used in investing activities of approximately $0.2 for the year ended December 31, 2014. Net cash provided by investing activities of approximately $0.8 million for the year ended December 31, 2015 was the cash acquired upon the reverse merger effective March 27, 2015.
Financing Activities
Net cash provided by financing activities was approximately $2.2 million and $11.9 million for the years ended December 31, 2015 and 2014, respectively. In 2015 the majority of cash provided by was from funds received related to issuance of common stock of approximately $1.6 million, various notes of approximately $1.5 million, and contributed capital received from a principal shareholder of approximately $615,000, offset by repayment of related party debt of approximately $0.8 million, payment of dividends to Series A Preferred Stock shareholder of $175,000 and repayments of debt related to discontinued operations of approximately $588,000. In 2014, the majority of the net cash provided by was from the proceed of the sale by the former Chief Executive Officer of the Company and principal shareholder, of shares of his personal Common Stock holdings with net proceeds of approximately $7.8 million paid to the Company and net proceeds received primarily related to capital leases of approximately $5.5 million offset by the net repayment of related party note of approximately $644,000 and the payment of dividends to Series A Preferred Stock shareholder of $625,000 .
Contractual Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Year 1 | | Years 2-3 | | Years 4-5 | | >5 Years | | Total |
Operating lease obligations (a) | | $ | 2,682,000 | | | $ | 5,067,000 | | | $ | 3,367,000 | | | $ | 2,826,000 | | | $ | 13,942,000 | |
Debt repayment (b) | | 3,825,000 | | | 7,650,000 | | | 64,069,000 | | | — | | | 75,544,000 | |
Contractual obligations (c) | | 9,344,000 | | | — | | | — | | | — | | | 9,344,000 | |
| Total | | $ | 15,851,000 | | | $ | 12,717,000 | | | $ | 67,436,000 | | | $ | 2,826,000 | | | $ | 98,830,000 | |
| | | | | | | | | | |
(a) Operating lease obligations primarily represent future minimum rental payments on various long-term noncancellable leases for office space. |
(b) Debt repayments consists of principal repayments required under the Company's Credit Facility. |
(c) Contractual obligations recorded on the balance sheet consist of the Company's obligations to the Converge Sellers arising from the Converge Acquisition. See Note 3 - Business Combinations and Dispositions. |
| | |
Cash Flow Discussion
Net cash used in operating activities increased approximately $0.3 million to $7.1 million for the year ended June 30, 2022, as compared to the prior year period. The increase is primarily due to a net increase in working capital which is reflective of the Converge Acquisition.
Net cash used in operating activities increased by approximately $4.5 million to $6.8 million for the year ended June 30, 2021, as compared to the prior year period. This increase was the result of approximately $3.1 million in gains from stimulus funding, a decrease of $2.0 million in impairment of goodwill, a decrease of $1.9 million in impairment of intangibles, a $1.8 million decrease in the amortization of intangibles, and a $2.7 million decrease in accounts receivable. This was offset by an approximate $2.6 million increase in contract liabilities relating to revenue, a $1.5 million increase in accounts payable, a $0.5 million increase in operating lease liabilities, a $0.5 million increase in long-term liabilities, and a decrease of $6.3 million gain from the derecognition of liabilities from discontinued operations.
Net cash used in investing activities increased by approximately $81.4 million to $82.9 million for the year ended June 30, 2022, as compared to the prior year period, related to the net cash paid for the Converge Acquisition.
Net cash used in investing activities increased by approximately $1.4 million to $1.5 million for the year ended June 30, 2021, as compared to the prior year period. The increase was the result of approximately $1.4 million in cash being paid for the Redeeem acquisition and an increase of $60 thousand in purchases of fixed assets.
Net cash provided by financing activities increased by approximately $93.5 million to $112.6 million for the year ended June 30, 2022. The increase was the result of approximately $69.7 million in net proceeds from the Credit Facility coupled with approximately $44.4 million of net proceeds related to the issuance of the Series E Convertible Preferred Stock private placement, partially offset by the absence of $20.7 million in net proceeds from the initial public offering during the year ended June 30, 2021.
Net cash provided by financing activities increased by approximately $16.8 million to $19.2 million for the year ended June 30, 2021, as compared to the prior year period. This increase was primarily the result of approximately $20.7 million in net proceeds from the initial public offering. This increase was offset by a decrease of approximately $1.0 million in proceeds from the sale of Series D preferred shares, a decrease of $0.9 million in proceeds relating to convertible note payables, and a $2.4 million increase in payments settling related party note payables.
Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for information regarding recently issued accounting pronouncements not yet adopted.
Critical Accounting Policies
The preparation of the Company's consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amount of revenues and expenses. Management believes its use of estimates in the consolidated financial statements to be reasonable. See Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information regarding the Company's use of estimates. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five (5) steps:
(i) identification of the contract, or contracts, with a customer;
(ii) identification of the performance obligations in the contract;
(iii) determination of the transaction price;
(iv) allocation of the transaction price to the performance obligations in the contract; and
(v) recognition of revenue when or as a performance obligation is satisfied.
Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested annually for impairment. The annual qualitative or quantitative assessments involve determining an estimate of the fair value of reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill exists. A qualitative assessment evaluates whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step quantitative goodwill impairment test. The first step of a quantitative goodwill impairment test compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss may be recognized. The amount of impairment loss is determined by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount. If the carrying amount exceeds the implied fair value then an impairment loss is recognized equal to that excess.
The Company has adopted the provisions of ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 requires goodwill impairments to be measured on the basis of the fair value of a reporting unit relative to the reporting unit’s carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. Thus, ASU 2017-04 permits an entity to record a goodwill impairment that is entirely or partly due to a decline in the fair value of other assets that, under existing GAAP, would not be impaired or have a reduced carrying amount. Furthermore, the ASU removes “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Accordingly, the goodwill of reporting unit or entity with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit/entity may indicate that goodwill is impaired.
We test our goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is June 30.
None of the goodwill prior to the Converge Acquisition is deductible for income tax purposes. The goodwill associated with the Converge Acquisition is deductible for income tax purposes on a straight-line basis over fifteen (15) years.
Intangible Assets
Intangible assets with finite useful lives consist of trade names, non-compete agreements, acquired workforce and customer relationships and are amortized on a straight-line basis over their estimated useful lives, which range from three to ten years. The estimated useful lives associated with finite-lived intangible assets are consistent with the estimated lives of the associated products and may be modified when circumstances warrant. Such assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset.
Beneficial Conversion Feature
The Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options, Emerging Issues Task Force (“EITF”) 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No 98-5 To Certain Convertible Instruments. The Beneficial Conversion Feature (“BCF”) of a convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of a convertible note when issued and also records the estimated fair value of any warrants issued with those convertible notes. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.
The BCF of a convertible note is measured by allocating a portion of the note’s proceeds to the warrants, if applicable, and as a reduction of the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which are credited to additional paid-in-capital. The value of the proceeds received from a convertible note is then allocated between the conversion features and warrants on an allocated fair value basis. The allocated fair value is recorded in the financial statements as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense using interest method.
Stock-Based Compensation
The Company recognizes stock-based compensation in accordance with ASC Topic 718 “Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
For non-employee stock-based compensation, the Company has adopted ASC 2018-07, Improvements to Nonemployee Share-Based Payment Accounting which expands on the scope of ASC 718 to include share-based payment transactions for acquiring services from non-employees and requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or the fair value of the services at the grant date, whichever is more readily determinable in accordance with ASC Topic 718.
Foreign Currency Translation:
The consolidated financial statements of the Company are presented in United States Dollars ("USD"). The functional currency for the Company is USD for all entities other than Mission Media Limited whose operations are based in the United Kingdom and their functional currency is British Pound Sterling ("GBP"). Transactions in currencies other than the functional currencies are recorded using the appropriate exchange rate at the time of the transaction. All assets and liabilities are translated into USD at balance sheet date, stockholders’ equity is translated at historical rates, and revenue and expense accounts are translated at the average exchange rate for the year or the reporting period. The translation adjustments are reported as a separate component of stockholders’ equity, captioned as accumulated other comprehensive (loss) income. Transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of operations.
The relevant translation rates are as follows: for the year ended June 30, 2022, closing rate at $1.219050 USD: GBP, average rate at $1.330358 USD: GBP, for the year ended June 30, 2021, closing rate at 1.382800 USD: GBP, average rate at 1.346692 USD: GBP.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data.
This item appears in a separate section following Item 14.
Item 9. Change in and Disagreements with Accountants and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Principal Executive Officer/Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company has recently implemented a robust internal procedure for creating, drafting, and filing reports, eliminating the need for third party vendors and improving the speed and accuracy of reports.
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Principal Executive Officer/Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. This rule defines internal control over financial reporting as a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:
o Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions;
o Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
With the participation of the Chief Executive Officer/Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on this evaluation, our management has concluded that our internal control over financial reporting was not effective as of June 30, 2022.
A significant deficiency is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses as of June 30, 2022, include insufficient accounting staff to ensure segregation of duties and the implementation of internal controls.
Remediation of Deficiencies and Material Weaknesses
We will be unable to remedy all material weaknesses present in our internal controls until we are able to hire additional employees, so that we may then introduce checks and balances on internal controls.
Since June 30, 2022, we have hired highly qualified and talented staff for the accounting functions and have been establishing proper processes and systems to remediate the deficiencies we have had: including the ability to properly cure for revenue recognition deficiencies which include: having persuasive evidence that an arrangement exists in the form of a signed agreement, the price is fixed and determinable by having a purchase order signed by our customer and the company, and written confirmation that goods or services have been delivered.
Preventive controls: We are currently establishing segregation of duties on main areas such as payroll, cash recording, and IT controls.
Detective controls: Management is implementing proper month end close processes in order to ensure that there is proper preparation and review over account reconciliations, specifically in the areas of cash, payroll, accrued expenses, revenue, and costs of revenues. The Company has hired a Director of Treasury and Risk Management as another level of review of certain financial transactions and review of bank account transactions.
Limitations on the Effectiveness of Internal Controls
For the period ended June 30, 2022, management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors or all potential fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements, due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns may occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risk.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The following table sets forth the names, ages, and positions of our executive officers, senior management, and directors as of September 23, 2022. Directors serve until the next annual meeting of stockholders or until their successors are elected and qualify. Officers are elected by the Board of Directors and their terms of offices are, except to the extent governed by employment contracts, at the discretion of the Board of Directors. There is no family relationship between any director, executive officer, or person nominated or chosen by the Company to become a director or executive officer.
Executive Officers and Directors
| | | | | | | | | | | | | | |
| Name | | Age
(as of 06/30/2022) | | Position |
| Sadiq (Sid) Toama | | 40 | | Chief Executive Officer, President, and Director |
| Erica Naidrich | | 48 | | Chief Financial Officer |
| Michael Tenore | | 48 | | General Counsel and Secretary |
| Thomas Marianacci | | 60 | | Chief Executive Officer of Converge Direct LLC |
| Randall Miles | | 66 | | Chairman of the Board |
| Wendy Parker | | 57 | | Director |
| Sabrina Yang | | 43 | | Director |
| Thomas Ochocki | | 46 | | Director |
| Martin Pompadur | | 87 | | Director |
Sadiq (Sid) Toama
Sadiq (Sid) Toama was elected President of Troika Media Group, Inc. and joined the Company’s Board of Directors on March 21, 2022. Subsequently, Mr. Toama was elected Chief Executive Officer of the Company. Mr. Toama joined Converge in 2016. He started his career as a commercial attorney in London, representing distressed brands through product liability and crisis management events. Mr. Toama oversaw complex and international cases, advising clients on legal and commercial strategies leveraging PR and marketing extensively to contest regulatory pressures and win back consumer confidence for his clients.
Having represented the leading children’s product manufacturer Maclaren, Mr. Toama became Maclaren’s Global Chief Executive Officer in 2011, instigating its global corporate and operational restructuring to help it rediscover its former glory days. Mr. Toama expanded Maclaren’s Brand standing, in part, by implementing multi-year licensing and product development partnerships with brands such as BMW, Gucci, Liberty, Juicy Couture, Cath Kidston, and Emirates Airlines. Mr. Toama oversaw Maclaren’s Product expansion into nursery products, furniture, hard goods, toys, and accessories as well as contract manufacturing for black label brands. Mr. Toama developed extensive luxury retail experience, selling premium products directly into over sixty countries and developing long term partnerships. Mr. Toama spent five years leading Maclaren’s shift to a vertically integrated business bringing functions as such as product development, sales, marketing, and eCommerce, as well as customer care in-house, across United Kingdom, France, Spain, Germany, USA, China, Japan, and Hong Kong. Sid instigated Maclaren’s move to a selective distribution model and the expansion into eCommerce which paved the way for emerging market expansion.
Beginning in 2016, Mr. Toama was the Chief Operating Officer of Converge. Mr. Toama’s primary focus has been on the digitization of the business and supporting clients to implement agile and optimized lower funnel customer acquisition solutions across their digital, in-store, and call center journeys. The drive has been to build the required infrastructure to transition the business to an outcome-based remuneration model, with higher margins which has been underwritten by an unwavering focus on Converge’s media investment measurement delivered by a robust focus on business intelligence.
Mr. Toama has architected and overseen the implementation of Enterprise Resource Planning and Business Intelligence platforms at a global and national level including NetSuite and Salesforce; with extensive experience in eCommerce, CRM, inventory management, and order management system implementation for B2B/B2C systems for internal teams as well as client operated systems.
Since 2016, Mr. Toama has spearheaded all ad-tech and mar-tech systems integrations and reporting for clients and internal teams to ensure on time delivery of data across all sales and marketing platforms. In particular, Mr. Toama has architected and implemented Converge’s proprietary business intelligence platform, Helix, to leverage disparate and unstructured and varied data points into actionable insights. Mr. Toama routinely works with clients to curate their implementation of ad-tech services with platforms such as The Trade Desk and other demand-side platforms such as Google and Adobe.
Erica Naidrich
On May 23, 2022, Troika Media Group, Inc. appointed Erica Naidrich to serve as the Company’s Chief Financial Officer replacing Christopher Broderick. Ms. Naidrich brings substantial financial and business knowledge to Troika, with experience within public companies in corporate finance, operational management systems, and financial reporting. Ms. Naidrich joins the Troika Executive Team to oversee the Company’s global finance and enterprise functions; she reports to Sid Toama, Chief Executive Officer and President of Troika.
Prior to joining Troika Media Group, Ms. Naidrich served as Vice President of Accounting and Controller for Madison Square Garden Entertainment Corp. (“MSG”), a leader in live sports, entertainment, and programming. Prior to her role at MSG, Ms. Naidrich held multiple Controller roles within the technology, consumer goods and professional services industries, in addition to spending eight years managing SEC Reporting in the private equity space. Ms. Naidrich started her career in Public Accounting for RSM and PricewaterhouseCoopers. Ms. Naidrich possesses valuable experience in Troika’s core sectors providing financial oversight of sports and entertainment, technology and media, private equity and professional services businesses.
Ms. Naidrich is a certified public accountant and obtained a Certificate in Accounting in June 2003 from the University of California, San Diego - La Jolla, California. Ms. Naidrich received a Bachelor of Arts in Communications Studies from West Virginia University, Morgantown, West Virginia in August 1996.
Michael Tenore
Michael Tenore was first appointed General Counsel and Vice President of Regulatory Affairs for the Company in March 2015. In July 2017, Mr. Tenore was elected Corporate Secretary. Prior to his appointment as Corporate Secretary, Mr. Tenore served as interim CEO and Director, assisting in consummating the Company’s Troika Acquisition in 2017.
Prior to joining the Company in March 2015 upon the merger with Signal Point Holdings Corporation, he held various legal and regulatory positions, including General Counsel and Vice President of Regulatory Affairs at RNK, Inc., a telecommunications and Internet provider. In these roles Mr. Tenore advocated before the Federal Communications Commission, legislatures, and multiple other state and federal regulatory commissions related to emergent technologies and legacy regulation.
Mr. Tenore is a member of the adjunct staff of Suffolk University Law School and belongs to the Federal Communications Bar Association, the Association of Corporate Counsel, and is a member of the Bar of the Commonwealth of Massachusetts. Mr. Tenore received his B.A. in Communications from Emerson College and his J.D. from Suffolk University Law School, both degrees with Latin Honors. Mr. Tenore has been on the Board of Directors for youth hockey and charitable organizations for the past ten (10) years.
Thomas Marianacci
Thomas Marianacci was appointed Chief Executive Officer of Converge Direct LLC and an advisor to the Board of Directors of the Company on March 21, 2022. Mr. Marianacci, a founding member of Converge, began his advertising career in 1985 and has been a successful entrepreneur since starting his first company in 1997. Early in his career, Mr. Marianacci worked in the general advertising business with SSC&B Lintas Worldwide, on major brand accounts such as Cover Girl and Burger King. After a stint on the brand advertising side of the marketing business, Mr. Marianacci switched his marketing focus to the data driven direct response marketing business working for Direct Media, Inc. from 1986 to 1992. At Direct Media, Mr. Marianacci worked in both the Business to Business and Business to Consumer marketing
divisions for his mentor Dave Florence, the founders of the direct mail list marketing business. From 1992 to 1997, Mr. Marianacci worked at Fred Singer Direct Marketing. In the summer of 1997, Mr. Marianacci founded his own media company – Present Media Resource Group, Inc., a media-buying firm focusing on Direct Mail List Marketing and Insert Media. The firm worked with notable clients such as Bertslesman Group, BMG/Columbia House, DirecTV, JC Penney Lifetouch Portrait Studios, First USA, Chase, and Sprint.
Randall Miles
On July 15, 2022, Randall Miles, was elected as Chairman of the Board of Directors, as well as a Director, of Troika Media Group, Inc.
Mr. Miles serves as Chairman & CEO of SCM Capital Group, a global transaction and strategic advisory firm. In addition, Mr. Miles sits on the boards of eXp World Holdings, Inc. (NASDAQ:EXPI) as Vice Chairman, private equity-backed Arthur H Thomas Companies as Vice Chairman, and Kuity, Inc. as Chairman.
For over thirty (30) years Mr. Miles has held senior executive leadership positions in global financial services, financial technology, and investment banking companies, including at bulge bracket, regional and boutique firms. His extensive investment experience advising companies on strategic and financial needs has spanned many disciplines while serving as CEO, Executive Committee Chair, Head of FIG, Head of M&A, and other responsibilities across these industries. Mr. Miles’ transactional and advisory experience is complemented by leadership of public and private equity backed financial technology, specialty finance, and software companies: Chairman and CEO at LIONMTS, where he was nominated for the Ernst & Young Entrepreneur of the Year award, CEO at Syngence Corporation, COO of AtlasBanc Holdings Corp., and CEO of Advantage Funding / NAFCO Holdings.
Mr. Miles has broad public, private, and non-profit board experience and has been active for many years in leadership roles with the Make-A-Wish Foundation. Mr. Miles holds a BBA from the University of Washington and holds FINRA licenses Series 7, 24, 63 and 79.
Wendy Parker
On April 27, 2022, Wendy Parker joined the Board of Directors as an independent Director. Since 2002, Ms. Parker is a London, England based barrister and has been a member of Gatehouse Chambers’ Commercial, Property and Insurance Groups in London where she undertakes most areas of work within those fields. She has developed a strong practice both as an adviser and advocate and has experience of appearing in the specialist commercial and property forums as well as Tribunals and the Court of Appeal.
Ms. Parker has been involved in many technically complex cases. She has a strong academic background which she combines with a practical and common sense approach in order to assist clients in achieving their objectives. Ms. Parker is a member of the United Kingdom Chancery Bar Association and the COMBAR (the Specialist Bar Association for Commercial Barristers advising the international business community).
Sabrina Yang
On April 27, 2022, Sabrina Yang joined the Company’s Board of Directors and where she serves as a member of the Audit Committee. Ms. Yang is a seasoned finance executive with over seventeen (17) years of experience in accounting, financial planning, and analysis (“FP&A”), M&A advisory, and corporate finance. Since 2021, Ms. Yang has served as CFO of Final Bell Holdings, Inc. (“Final Bell”), an industry leader in providing end-to-end product development and supply chain solutions to leading cannabis brands in the United States and Canada. During her tenure at Final Bell, she has led the reverse take-over transaction process, establishing a path for Final Bell to become a publicly traded company on the Canadian Stock Exchange. In conjunction with the reverse takeover, she also integrated and managed all of Final Bell’s administrative functions, including accounting, finance, legal, HR, and IT operations.
Prior to joining Final Bell and since 2018, Ms. Yang has served as CFO, on a part-time basis, of Apollo Program, a data-driven advertising technology company, where she ran all administrative and operating functions. She also served as deputy CFO for a private school with operations in both the United States and China. She has held prior roles in strategy, analytics, and FP&A at the Topps Company, a collectibles and licensing company, and at Undertone, a digital advertising company. Sabrina started her career with five (5) years at KPMG LLP in its transaction services team, in which she advised
clients on strategy, corporate finance, valuation, and financial modeling. Ms. Yang is a Certified Public Accountant with Masters of Science in Accounting and Applied Statistics from Louisiana State University.
Thomas Ochocki
Mr. Ochocki has served on the Board of Directors since 2018. He is serving on the Board of Directors representing the Coates families’ equity interest, and has over twenty (20) years of experience in stock brokering, private equity, and investment banking in the United Kingdom. He is currently Chief Executive Officer and majority stockholder of Union Investment Management Ltd., whose history dates back to The Union Discount Company of London (est. 1885). An Old Cholmeleian of Highgate School, Mr. Ochocki read Psychology & Computer Science at Liverpool University prior to working with Sony Interactive Entertainment on the PlayStation launch titles. He went on to manage and facilitate the development of over fifty (50) published video games before switching to his predominant career in the capital markets.
The Company believes that Mr. Ochocki’s broad entrepreneurial, financial, and business expertise and his experience with markets in the United Kingdom and interactive entertainment give him the qualifications and skills to serve as a Director.
Martin Pompadur
Mr. Pompadur was elected to the Board of Directors in April 2021 upon the listing on the Nasdaq Capital Market. Mr. Pompadur is a private investor, senior advisor, consultant, and Board member after a long career as a senior executive in media and entertainment. Mr. Pompadur began his career as a practicing attorney in Stamford, Connecticut in 1958 and entered the media field when in 1960, he joined American Broadcasting Companies, Inc. ("ABC, Inc."). He remained at ABC, Inc. for seventeen (17) years, culminating with his becoming the youngest person ever appointed a member of the ABC, Inc. Board of Directors. While at ABC, Inc., Mr. Pompadur held the positions of General Manager of the Television Network; Vice President of the Broadcast Division, which included the radio and television networks, the radio and television stations, news, sports and engineering; President of the Leisure Activities Group, which included Magazine Publishing, Records, Music Publishing, Motion Picture Theaters, Record and Tape distribution, and Motion Picture Production; and Vice President of ABC, Inc.
In 1977, Mr. Pompadur became President of Ziff Corporation, a position he held until 1982. Ziff Corporation was then the holding company for both Ziff-Davis Publishing Company, one of the world’s largest publishers of business publications and consumer special interest magazines, and Ziff-Davis Broadcasting Company, which operated six (6) network affiliated television stations. From 1982 until April 2007, Mr. Pompadur was Chairman and Chief Executive Officer of RP Companies’ various private and public limited partnerships (include two public limited partnerships with Merrill Lynch), which operated twelve (12) television stations, twenty-five (25) radio stations, and numerous cable television systems totaling 500,000 subscribers.
In 1985, Mr. Pompadur, as advisor to News Corporation, helped acquire for News Corporation the Metromedia television station group and wrote the business plan for the start-up of the Fox Television Network. In June 1998, Mr. Pompadur became Executive Vice President of News Corporation, President of News Corporation Eastern and Central Europe, and a member of News Corporation’s Executive Management Committee. In January 2000, Mr. Pompadur was appointed Chairman of News Corporation Europe. In his decade with News Corporation, he was instrumental in negotiating the merger of Stream and Telepiu to create Sky Italia in Italy, now of the world’s most successful Pay-TV businesses, and in creating and managing three (3) successful businesses: a television station group in several emerging countries; a radio station group in Russia and Bulgaria; and News Outdoor, the leading outdoor advertising company in Russia and other emerging countries.
In November 2008, Mr. Pompadur stepped down as a full-time employee of News Corporation to pursue other business interests. He then became a senior advisor to Oliver Wyman, consulting primarily in the Middle East. Mr. Pompadur also became global vice chairman media and entertainment for Macquarie Capital.
Mr. Pompadur is a board member of two (2) public companies: Nexstar Broadcasting Group and Truli Media Group. Previously, he was a board member of many public and private companies including Imax Corporation, ABC, Inc., BSkyB, Sky Italia, Premier World, Fox Kids Europe, Metromedia International, and Elong.
Mr. Pompadur graduated from Williams College in 1955 with a BA degree from the University of Michigan Law School in 1958 along with an LLB degree. The Company believes that Mr. Pompadur’s broad entrepreneurial, financial and business experience in television, media, and entertainment gives him the qualifications and skills to serve as a Director.
Senior Management
Set forth below is certain background and biographical information concerning our Senior Management.
| | | | | | | | | | | | | | |
| Name | | Age | | Position |
| Maarten Terry | | 59 | | President of Converge Marketing Services |
| Michael Carrano | | 54 | | Chief Marketing Officer of Converge |
Maarten Terry
Mr. Terry is a founding partner of Converge. He is also president of Converge Marketing Services, a certified minority-owned affiliated entity. Since inception, Mr. Terry has overseen the agency’s telecom vertical. He leads the team responsible for new subscriber acquisition for various divisions of AT&T, DirecTV, and Cricket Wireless.
Before joining Converge, Mr. Terry held various marketing and brand management positions at Time Inc., Philip Morris, Kraft Foods, and Scholastic Books. Mr. Terry is currently a Trustee of his alma mater, Connecticut College. He has also served on the boards of United Way of New Canaan and A Better Chance.
Michael Carrano
Mr. Carrano, Chief Marketing Officer at Converge, joined Converge in 2008. He is responsible for creating and accelerating the company’s marketing strategy and defining marketing strategies to support our clients’ overall business strategies and objectives. Mr. Carrano has significant experience across marketing functions and operations, product development, branding, lead generation, data analysis, and strategic planning. He is accountable for the development of marketing and media strategies across Converge’s client portfolio. During his tenure at Converge, the business has achieved double digit revenue growth.
Mr. Carrano’s background includes over twenty-five (25) years of agency and client side experience including various leadership positions held at BMG Music, Columbia House, and Doubleday Books where he drove brand growth and led their transformation from a mail order business to an online, eCommerce leader.
Board Composition
Our amended and restated bylaws provide that the number of directors shall be fixed from time to time by our Board of Directors. One director is currently fixed by our Board of Directors. Vacancies occurring on the Board of Directors may be filled by the vote or written consent of a majority of our stockholders or our directors. Nine (9) directors were serving on the board as of June 30, 2022.
Director Independence
We have operating lease commitments, note payable commitments,reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, our Board has determined that Wendy Parker, Sabrina Yang, Jeff Kurtz, John Belniak, and Martin Pompadur, five (5) of our nine (9) directors are “independent directors” as defined by the Nasdaq Capital Market.
Committees of our Board of Directors
Our Board of Directors has an Audit Committee, a Compensation Committee, and a Nominating and Governance Committee, each of which has the composition and responsibilities described below.
Audit Committee. Our audit committee is comprised of Jeff Kurtz, Sabrina Yang, and Martin Pompadur. Martin Pompadur serves as the chair of the committee and qualifies as an “audit committee financial expert” for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under the applicable Nasdaq Capital Market rules, a company listing in connection with its initial public offering is permitted to phase in its compliance with the independent audit committee requirements on the same schedule as it is permitted to phase in its compliance with the independent audit committee requirement pursuant to Rule 10A-3 under the Exchange Act. Pursuant to Rule 10A-3, a newly listed company
must have (1) one independent member at the time of listing; (2) a majority of independent members within ninety (90) days of listing; and (3) all independent members within one year of listing. All of the anticipated members of the audit committee will qualify as independent under Rule 10A-3. Our audit committee will be authorized to:
•appoint, compensate, and oversee the work of any registered public accounting firm employed by us;
•resolve any disagreements between management and the auditor regarding financial reporting;
•pre-approve all auditing and non-audit services;
•retain independent counsel, accountants, or others to advise the audit committee or assist in the conduct of an investigation;
•seek any information it requires from employees-all of whom are directed to cooperate with the audit committee’s requests-or external parties;
•meet with our officers, external auditors, or outside counsel, as necessary; and
•oversee that management has established and maintained processes to assure our compliance with all applicable laws, regulations and corporate policy.
Compensation Committee. Our compensation committee is comprised of Jeff Kurtz, Wendy Parker, and Martin Pompadur, with Martin Pompadur serving as chair of the committee. The Compensation Committee is authorized to:
•discharge the responsibilities of the Board of Directors relating to compensation of our directors, executive officers and key employees;
•assist the Board of Directors in establishing appropriate incentive compensation and equity-based plans and to administer such plans; and
•oversee the annual process of evaluation of the performance of our management; and
•perform such other duties and responsibilities as enumerated in and consistent with compensation committee’s charter.
Nominating and Governance Committee. Our nominating and governance committee is initially comprised Jeff Kurtz and Martin Pompadur and is authorized to:
•assist the Board of Directors by identifying qualified candidates for director nominees, and to recommend to the Board of Directors the director nominees for the next annual meeting of stockholders;
•lead the Board of Directors in its annual review of its performance;
•recommend to the Board of Directors nominees for each committee of the Board of Directors; and
•develop and recommend to the Board of Directors corporate governance guidelines applicable to us.
Executive Sessions
The Company intends to hold regularly scheduled Board of Directors meetings at which only independent directors will be present, as required by Nasdaq corporate governance rules.
Compensation Committee Interlocks and Insider Participation
Our compensation committee is comprised of Jeff Kurtz and Martin Pompadur. No member of our compensation committee will have at any time been an employee of ours. None of our executive officers serve as a member of the Board of Directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors or compensation committee.
Code of Ethics
We have adopted a Code of Ethics for our principal executive officers, which include our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The code concerns conflicts of interest and compliance with laws, rules and regulations of federal, state and local governments, foreign governments and other appropriate private and public regulatory agencies that govern our business. A copy of our Code of Ethics is filed as an exhibit to this Registration Statement.
Item 11. Executive Compensation.
Compensation Discussion and Analysis
The primary objectives of the Board of Directors with respect to executive compensation is to attract and retain the best possible executive talent, to motivate our executive officers to enhance our growth and profitability, to increase stockholder value, and to reward superior performance and contributions to the achievement of corporate objectives. The focus of our executive pay strategy is to tie short- and long-term cash and equity incentives to the achievement of measurable corporate and individual performance objectives, and to align executives’ incentives with stockholder value creation. To achieve these objectives, the Company will develop and maintain a compensation plan that ties a substantial portion of executives’ overall compensation to the Company’s sales, operational, and regulatory performance. Because we believe that the performance of every employee is important to our success, we will be mindful of the effect our executive compensation and incentive program has on all of our employees.
Our compensation plan is designed to attract and retain the best possible talent, and we recognize that different elements of compensation are more or less valuable depending on the individual. For this reason, we offer a broad range of compensation elements. We offer our executive team salaries that are competitive with the market, executive bonuses that are in line with our corporate goals and dependent on measurable results, plus stock option plans designed to retain talent, promote a sense of credit commitment. company ownership, and tie corporate success to monetary rewards. Specifically, all management employed by the Company or one of its subsidiaries are entitled to participate in an equity incentive plan that will compensate management if certain financial performance and milestones are met. The Company reserves the right to increase the size of the plan as it deems necessary, at its sole discretion.
Base salaries for our executive officers are determined based on the scope of their job responsibilities, prior experience, and depth of their industry skills, education, and training. Compensation paid by industry competitors for similar positions, as well as market demand, are also taken into account. Base salaries are reviewed annually as part of our performance management program, whereby merit or equity adjustments may be made. Merit adjustments are based on the level of success in which individual and corporate performance goals have been met or exceeded. Equity adjustments may be made to ensure base salaries are competitive with the market and will be determined using benchmark survey data.
Our compensation structure is primarily comprised of base salary, annual performance bonus, and stock options. In setting executive compensation, the Board of Directors will consider the aggregate compensation payable to an executive officer and the form of the compensation. The Board will seek to achieve an appropriate balance between immediate cash rewards and long-term financial incentives for the achievement of both annual and long-term financial and non-financial objectives.
Relationship of Elements of Compensation
Base Salary.Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. Base salaries are reviewed annually and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance, and experience. Annual reviews will typically be delivered in February of each year.
Discretionary Annual Bonus. The compensation committee will have the authority to award discretionary annual bonuses to our executive officers and senior management and will set the terms and conditions of those bonuses and take all other actions necessary for the plan’s administration. These awards are intended to compensate officers for achieving financial and operational goals and for achieving individual annual performance objectives. These objectives vary depending on the individual.
Long-Term Incentive Program.We believe that long-term performance is achieved through an ownership culture that encourages such performance by our executive officers through the use of stock and stock-based awards. Our stock compensation plans have been established to provide certain of our employees, including our executive officers, with incentives to help align those employees’ interests with the interests of stockholders.
Summary Compensation Table
The following table summarizes these commitmentssets forth the cash and non-cash compensation for awarded to or earned by (i) each individual serving as our principal executive officer and principal financial officer during the fiscal years ended June 30, 2022 and 2021, and
(ii) the three (3) most highly compensated individuals; and who received in excess of $100,000 in the form of salary and bonus during such fiscal year (collectively, the “named executive officers”).
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Name and
Principal Position | | Year | | Salary | | *Bonus | | | | Stock-Based Comp | | | | *Paid Deferred Comp Earnings | | All Other Comp | | Total |
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| Sadiq (Sid) Toama, | | 2022 | | $ | 115,385 | | | $ | — | | | | | $ | — | | | | | $ | — | | | $ | 13,167 | | | $ | 128,552 | |
| President and CEO (1) | | 2021 | | $ | — | | | $ | — | | | | | $ | — | | | | | $ | — | | | $ | — | | | $ | — | |
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| Erica Naidrich, | | 2022 | | $ | 44,102 | | | $ | 100,000 | | | | | $ | — | | | | | $ | — | | | $ | 3,931 | | | $ | 148,033 | |
Chief Financial Officer (2) | | 2021 | | $ | — | | | $ | — | | | | | $ | — | | | | | $ | — | | | $ | — | | | $ | — | |
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| Michael Tenore, | | 2022 | | $ | 250,000 | | | $ | 62,500 | | | | | $ | — | | | | | $ | — | | | $ | 61,613 | | | $ | 374,113 | |
| General Counsel (3) | | 2021 | | $ | 200,000 | | | $ | 87,500 | | | | | $ | — | | | | | $ | — | | | $ | — | | | $ | 287,500 | |
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| Andrew Bressman, | | 2022 | | $ | 227,999 | | | $ | — | | | | | $ | — | | | | | $ | — | | | $ | 76,014 | | | $ | 304,013 | |
| Advisor (4) | | 2021 | | $ | 481,500 | | | $ | 225,000 | | | | | $ | — | | | | | $ | 378,837 | | | $ | — | | | $ | 1,085,337 | |
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| Robert Machinist, | | 2022 | | $ | 235,000 | | | $ | — | | | | | $ | — | | | | | $ | — | | | $ | 9,789 | | | $ | 244,789 | |
| CEO & Chairman (5) | | 2021 | | $ | 270,000 | | | $ | 100,000 | | | | | $ | 1,558,844 | | | | | $ | 158,553 | | | $ | — | | | $ | 2,087,397 | |
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| Chris Broderick, | | 2022 | | $ | 547,917 | | | $ | 62,500 | | | | | $ | — | | | | | $ | — | | | $ | 90,646 | | | $ | 701,063 | |
| COO & CFO | | 2021 | | $ | 350,000 | | | $ | 137,500 | | | | | $ | — | | | | | $ | 199,058 | | | $ | — | | | $ | 686,558 | |
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| Daniel Pappalardo, | | 2022 | | $ | 369,761 | | | $ | 27,494 | | | | | $ | — | | | | | $ | — | | | $ | 65,355 | | | $ | 462,610 | |
| President & Director (6) | | 2021 | | $ | 347,288 | | | $ | — | | | | | $ | — | | | | | $ | 211,570 | | | $ | — | | | $ | 558,858 | |
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| Kevin Dundas, CEO, | | 2022 | | £ | 479,988 | | | £ | 1,000 | | | | | £ | — | | | | | £ | — | | | £ | — | | | £ | 480,988 | |
| Mission Media Ltd (7) | | 2021 | | £ | 400,000 | | | £ | — | | | | | £ | — | | | | | £ | 69,700 | | | £ | — | | | £ | 469,700 | |
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(1) Mr. Toama was elected Chief Executive Officer in April 2022 and was appointed President of the Company at the close of the Converge transaction. Mr. Toama was also granted 2,500,000 RSUs as part of his employment agreement with the Company.
(2) Ms. Naidrich was elected Chief Financial Officer in May 2022. Ms. Naidrich was also granted 200,000 RSUs as part of her employment agreement.
(3) Mr. Tenore was appointed General Counsel of the Company in 2016. His agreement was amended on January 1, 2022, increasing his yearly salary to $300,000. Additionally, Mr. Tenore was granted 700,000 RSUs, of which 500,000 have been exercised and 333,333 employee stock options.
(4) Mr. Bressman was the Managing Director and Assistant to the CEO and Chairman of the Board since March 2015. Under the terms of his Separation Agreement described below, his Consultant Agreement with SAB Management LLC terminated without cause effectively immediately prior to the listing of the Company’s securities on the Nasdaq Capital Market.
(5) Mr. Machinist was elected Chief Executive Officer in March 2018. On January 1, 2021, he was awarded 500,000 warrants exercisable at $0.75 per share for six (6) years as executive compensation in fiscal 2020 and 2021, which had been forfeited by a former director. Mr. Machinist resigned from the Company on May 19, 2022.
(6) Mr. Pappalardo was elected President of Troika Design Group Inc., the Company’s wholly owned subsidiary, on June 12, 2017. Mr. Pappalardo resigned from the Company on April 15, 2022.
(7) Mr. Dundas has been the CEO of Mission Media Limited since September 2017. Mr. Dundas' consultancy with the Company's former Mission affiliate terminated on August 1, 2022.
Employment Agreements
Employment Agreement with Sadiq (“Sid”) Toama
The Company has entered into an Executive Employment Agreement (“EEA”) made effective as of March 21, 2022, with Sadiq (“Sid”) Toama to be the President of the Company. He was elected Chief Executive Officer on May 19, 2022. His duties shall be consistent with his experience and position as shall be assigned to him from time to time by the Company’s Board of Directors. The EEA is for an initial term of five (5) years, with automatic renewals for one (1) year unless either party terminates on at least ninety (90) days’ prior written notice before the end of a term.
Mr. Toama’s annual base salary is $500,000 subject to bonus increases at least annually upon mutually agreed-to performance milestones, as well as discretionary bonuses. Mr. Toama received restricted stock units (“RSUs”) for 2,500,000 shares, vesting one-third on the first anniversary date of the EEA and two-thirds in two (2) equal installments on the second and third anniversary dates of the EEA. Mr. Toama shall participate, to the extent eligible, in all employee benefits. He also receives an auto allowance of $1,000 per month and life insurance benefits of $9,135 per year.
Mr. Toama is entitled to twelve (12) months then-current base salary as severance, plus pro rata bonuses, as well as immediate vesting of options and stock grants if he is terminated other than for Cause (as defined) or by the Company for Good Reason (as defined). Upon death or disability, all options or shares that would have vested during the twenty-four (24) months following death or disability shall immediately vest. Upon a Change of Control (as defined), all of Mr. Toama’s then-unvested Shares or options shall immediately vest, all performance bonuses (both current and future) shall be immediately due and payable, and after a Change of Control, if Mr. Toama terminates his employment with the Company, he shall also receive twelve (12) months of severance pay. In the event that any payment constitutes an amount payable under a non-qualified deferred compensation plan following a separation from service, such payment shall not be paid within six (6) months following his separation from service.
Provided the Company is paying Mr. Toama, for one (1) year from his termination date, he cannot: (i) compete, directly or indirectly, anywhere in the U.S. as an employee, consultant or director or have any financial interest in a competitive business; or (ii) hire, solicit for services, encourage the resignation of any employee or consultant (devoting more than 70% of consultant’s time) to a consulting business.
Employment Agreement with Erica Naidrich
The Company entered into an EEA with Erica Naidrich as Chief Financial Officer dated May 23, 2022 (“Agreement”). The Agreement is for three (3) years with automatic renewals for additional one (1) year periods unless terminated by either party upon sixty (60) days prior written notice. Ms. Naidrich has an annual base salary of $400,000. She received a one-time signing bonus of $100,000 on August 31, 2022. She is also eligible for discretionary bonuses as determined by the Compensation Committee and a yearly bonus of thirty (30%) percent of her base salary subject to meeting the objectives set forth by the Chief Executive Officer, President, and the Audit Committee of the Company’s Board of Directors and continued employment at the time payment is due. Ms. Naidrich will be granted 200,000 five (5) year Restricted Stock Units vesting over three (3) years and will be eligible to participate fully in any other long-term equity incentive programs. The Agreement provides that during the term of employment and for three (3) months after termination, Ms. Naidrich shall not compete with the Company nor solicit employees of the Company. There was no material prior relationship between the Company and Ms. Naidrich. She also receives an auto allowance of $1,000 per month.
Employment Agreement with Thomas Marianacci
The Company has entered into an EEA made effective as of March 21, 2022, with Thomas Marianacci to be the Chief Executive Officer of Converge and its affiliates, Converge Direct Interactive, LLC, Converge Marketing Services, LLC, and Lacuna Ventures, LLC (collectively, “Converge”). His duties shall be consistent with his experience, expertise, and position, as shall be assigned to him from time to time by the Company’s Chief Executive Officer and the Board of Directors. The EEA is for an initial term of three (3) years, with automatic renewals for one (1) year unless either party terminates on at least ninety (90) days’ prior written notice before the end of a term.
Mr. Marianacci’s base salary shall be $350,000 subject to bonus increases at least annually upon mutually agreed-to performance milestones, as well as discretionary bonuses. Mr. Marianacci shall receive restricted stock units for 1,000,000 shares, vesting one-third on the first anniversary date of the EEA and two-thirds in two equal installments on the second and third anniversary dates of the EEA. Mr. Marianacci shall participate, to the extent eligible, in all employee benefits. He will also receive a auto allowance of $1,000 per month and life insurance benefits of $8,285 per year.
Mr. Marianacci is entitled to twelve (12) months then-current base salary as severance, plus pro rata bonuses, as well as immediate vesting of options and stock grants if he is terminated other than for Cause (as defined) or by the Company for Good Reason (as defined). Upon death or disability, all options or shares that would have vested during the twenty-four (24 months following death or disability shall immediately vest. Upon a Change of Control (as defined), all of Mr. Marianacci’s then-unvested Shares or options shall immediately vest, all performance bonuses (both current and future) shall be immediately due and payable, and after a Change of Control, if Mr. Marianacci terminates his employment with the Company, he shall also receive twelve (12) months of severance pay. In the event that any payment constitutes an amount payable under a non-qualified deferred compensation plan following a separation from service, such payment shall not be paid within six (6) months following his separation from service.
(70%) percent of consultant’s time) to a consulting business.
Employment Agreement with Robert Machinist
On May 1, 2018, the Company entered into an EEA with Robert Machinist, as Chief Executive Officer of the Company. The Agreement is for two (2) years with automatic renewals for additional one (1) year periods unless terminated by either party upon ninety (90) days prior written notice. Mr. Machinist was compensated at an annual base salary of $210,000. Effective April 1, 2021, Mr. Machinist’s annual base salary increased to $300,000. He was eligible for discretionary bonuses as determined by the Compensation Committee. Mr. Machinist was granted 333,333 warrants, vesting quarterly over two (2) years. The termination provisions are substantially the same as those for Mr. Broderick below, except that upon termination for a reason other than cause, Mr. Machinist will be entitled to severance payments equal to twelve (12) months’ salary and $90,000 for the maintenance of an administrative assistant paid over twelve (12) months. Following the listing of the Company’s securities on the Nasdaq Capital Market, Mr. Machinist was awarded a bonus of $100,000 by the Company’s Board of Directors. Mr. Machinist resigned from the Company on May 19, 2022.
Employment Agreement with Christopher Broderick
The Company entered into an Amended and Restated EEA (dated February 15, 2017) with Christopher J. Broderick as of June 1, 2017, which was amended on June 12, 2017, and June 5, 2018, to be its Chief Operating Officer and oversee the day-to-day operations and technical support organizations of the Company. The Agreement was for five (5) years with yearly automatic two (2) year extensions unless either party gives a non-renewal notice not less than ninety (90) days prior to the relevant anniversary of the commencement date. Mr. Broderick was compensated at a base salary of $350,000 per year and was eligible for an annual discretionary bonus to be set by the Compensation Committee of the Board of Directors. Mr. Broderick would receive $37,500 in the event he assisted in closing one or more corporate acquisitions each in the excess of $10,000,000. Mr. Broderick was granted options to purchase 800,000 shares of Common Stock, exercisable fifty (50%) percent on July 1, 2018 and fifty (50%) percent vesting on July 1, 2019, provided the closing price of the Company’s Common Stock is at least $0.45 per share at the time of vesting. His agreement provided for full participation in Company benefits plus an auto allowance of $1,000 per month.
Upon death or disability, Mr. Broderick, or his estate, shall receive all accrued compensation and any prorated bonus, and any equity that would have vested during the twenty-four (24) month period beginning on the date of death or disability shall immediately vest. If Mr. Broderick is terminated for Cause (as defined), or resigns without Good Reason (as defined), he shall receive accrued compensation and any vested equity. If he is terminated other than for Cause or he terminates for Good Reason, Mr. Broderick will receive accrued compensation, prorated bonus, payment for COBRA, twelve (12) months’ severance of his then annual base salary, and reasonable outplacement services.
Upon a Change of Control (as defined), all of Mr. Broderick s non-vested equity shall immediately vest in full and, if he then terminates employment for Good Reason, he shall be entitled to one-year s severance of his annual base salary. Mr. Broderick is subject to a three (3) month non-compete and non-solicitation provision from termination of his employment anywhere in the United States. He is also covered under the Company's directors and officers liability insurance for up to one (1) year from termination of employment. On January 1, 2022, Mr. Broderick’s contract was amended to increase his yearly salary to $400,000. Mr. Broderick resigned from the Company on June 8, 2022.
Employment Agreement with Daniel Pappalardo
On June 9, 2017, Troika Design Group, Inc., the Company’s wholly-owned subsidiary, entered into an EEA with Daniel Pappalardo, as its President. The Agreement was for five (5) years with yearly automatic two (2) year extensions unless either party gives a non-renewal notice not less than ninety (90) days prior to the relevant anniversary date thereafter. Mr. Pappalardo was being compensated at an annual base salary of $347,287.92. He is eligible for a bonus under a Performance
Bonus Plan to be implemented by the Company; a cash bonus based upon a profit-sharing plan, and a discretionary bonus determined by the Compensation Committee. Mr. Pappalardo was granted options to purchase 500,000 shares of Common Stock with fifty (50%) percent vesting on July 1, 2018, and fifty (50%) percent vesting on July 1, 2019. These options shall be fully vested and exercisable if he is terminated without Cause (as defined), by him for Good Reason (as defined) or as a result of death or disability. Mr. Pappalardo is entitled to all employee benefits plus a $1,000 per month auto allowance. The termination provisions are substantially the same as those above for Mr. Broderick, except: (a) Mr. Pappalardo shall participate in the Performance Bonus Plan until it expires and is entitled to reasonable outplacement services if he is terminated other than for Cause (as defined) or he terminates with Good Reason (as defined); and (b) his non-compete and non-solicitation period is for one (1) year in consideration of his sale of the business of the Company.
Mr. Pappalardo resigned from the Company on April 15, 2022. Pursuant to his employment agreement, the Company will pay Mr. Pappalardo a severance payment equal to one (1) year of his current base salary of $347,287.92 in semi-annual installments unless he chooses to continue to be paid bi-monthly. All other terms of his contract will be honored. Additionally, as of June 30, 2022, the Company owes the founder and CEO of Troika Design Group, Inc. Dan Pappalardo, former director of the Company and former President of Troika Design Group, Inc. $100,000. The loan is due and payable on demand and accrues interest at 10.0% per annum.
Employment Agreement with Michael Tenore
The Company entered into an Amended and Restated EEA as of October 21, 2016, with Michael Tenore as General Counsel of the Company. The Term under the agreement was until December 31, 2015:2019; however, on the second and subsequent anniversary dates of the agreement, the term was automatically extended for one (1) year unless either party gives a non-renewal notice not less than ninety (90) days prior to the anniversary date. Mr. Tenore was compensated at an annual base salary of $200,000. Effective January 1, 2022, Mr. Tenore’s annual base salary increased to $300,000, and he is eligible for an annual discretionary bonus to be set by the Compensation Committee of the Board of Directors.
Upon death or disability, Mr. Tenore or his estate, shall receive all accrued compensation and any prorated bonus, and any equity that would have vested during the twelve (12) month period beginning on the date of death or disability shall immediately vest. If Mr. Tenore is terminated for Cause (as defined) or resigns without Good Reason (as defined), Mr. Tenore will receive accrued compensation and any vested equity. If he is terminated other than for Cause or he terminates for Good Reason (as defined), Mr. Tenore will receive accrued compensation, prorated bonus, payment for COBRA, twelve (12) months’ severance and reasonable outplacement services.
| Years ended | | Line of | | | Note | | | Capital/Finance | | | Operating | | | Minimum | |
| December 31, | | Credit | | | Payable | | | Leases | | | Leases | | | Payments | |
| | | (Discontinued
operations) | | | (Continuing and Discontinued operations) | | | (Discontinued
operations) | | | (Continuing and Discontinued operations) | | | (Continuing and Discontinued operations) | |
| | | | | | | | | | | | (b) | | | | |
| 2016 | | $ | 3,240,160 | | | $ | 8,191,905 | (a) | | $ | 2,580,700 | | | $ | 412,589 | | | $ | 17,082,504 | |
| 2017 | | | - | | | | 281,680 | | | | - | | | | 339,434 | | | | 621,114 | |
| 2018 | | | - | | | | 305,056 | | | | - | | | | 346,567 | | | | 651,623 | |
| 2019 | | | - | | | | 330,375 | | | | - | | | | 157,348 | | | | 487,723 | |
| 2020 | | | - | | | | 357,796 | | | | - | | | | 15,216 | | | | 373,012 | |
| Thereafter | | | - | | | | 523,678 | | | | - | | | | - | | | | 523,678 | |
| | | $ | 3,240,160 | | | $ | 9,990,490 | | | $ | 2,580,700 | | | $ | 1,271,154 | | | $ | 17,082,504 | |
Employment Agreement with Kyle Hill
(a) | Included $4,943,782 related to discontinued operations |
On May 21, 2021, the Company’s wholly-owned Troika IO (f/k/a Redeeem Acquisitions Corp.) entered into a three (3) year employment agreement with Mr. Hill to serve as Redeeem’s President and as Head of Digital Assets of the Company. The employment agreement provides for an annual salary of $300,000 and a discretionary bonus for the term, subject to one (1) year extensions unless earlier terminated. On June 7, 2022, Mr. Hill resigned from the Company.(b) | Includes $134,564, $55,972, $57,658, $59,384 and $15,216 related to discontinued operations for 2016, 2017, 2018, 2019 and 2020, respectively |
Separation Agreement with Christopher Broderick
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On June 8, 2022, Christopher J. Broderick, Chief Operating Officer and former Chief Financial Officer of Troika Media Group, Inc. (the “Company”), entered into a Separation Agreement and resigned effective June 10, 2022, for personal reasons unrelated to the management or operations of the Company. He had maintained his position with the Company since 2017. His departure follows the Company’s recent acquisition of Converge Direct. As part of his employment agreement, Mr. Broderick was entitled to severance and certain other benefits which were incorporated into a severance agreement.The severance agreement provided for a severance equal to one (1) year at his current salary which will be paid in two (2) equal installments payable on June 30, 2022, and September 30, 2022. All options or restricted stock units (“RSUs”) held by Mr. Broderick shall no longer be subject to continued employment with the Company.The Company and Mr. Broderick exchanged mutual releases and waivers of claims against each other.
Separation and Waiver and Release Agreement with Kyle Hill
On June 7, 2022, Kyle Hill, President of Troika IO, entered into a Separation and Waiver and Release Agreement with the Company and tendered his resignation to the Company for personal reasons unrelated to the management or operations of the Company. As part of Mr. Hill’s severance agreement, he was afforded nine (9) months of severance at his current salary which shall end on March 15, 2023.Mr. Hill also agreed to return 1,231,967 shares of common stock provided to him as part of the purchase price for Redeeem, LLC.Such shares were provided to him at a price of $2.67 per share, or approximately $3,289,351, as provided in the Redeeem, LLC transaction documents.Mr. Hill remains subject to any lock-up agreements associated with his retained equity.The Company and Mr. Hill exchanged mutual releases and waivers of claims against each other.
Separation Agreement with Robert Machinist
On May 19, 2022, Robert Machinist resigned as Chief Executive Officer of the Company and all employment by the Company’s subsidiaries for personal reasons unrelated to the management or operations of the Company. He will remain a director and Chairman of the Board of the Company. Pursuant to his Employment Agreement, Mr. Machinist will be paid one (1) year of severance at his current base salary of $550,000 paid over the next year.
Pension Benefits
Each of Troika Design Group and Mission Media has a 401(k) benefit plan.
Non qualified Deferred Compensation
We are exposed to market risks, primarily changes in U.S. and LIBOR interest rates and risk from potential changesdo not have any non-qualified defined contribution plans or other deferred compensation plans.
Director Compensation
Our non-employee directors who have been granted warrants or options for their services during the last fiscal year ended June 30, 2022, described in the U.S./Canadian currency exchange ratesfollowing table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash ($) | | Stock Awards ($) | | Option Awards ($) | | All Other Compensation ($) | | Total ($) |
| Daniel Jankowski | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Thomas Ochocki | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Sabrina Yang | | $ | 7,500 | | | $ | 37,000 | | | $ | — | | | $ | — | | | $ | 44,500 | |
| Wendy Parker | | $ | 15,000 | | | $ | 37,000 | | | $ | — | | | $ | — | | | $ | 52,000 | |
| Jeff Kurtz | | $ | — | | | $ | 186,000 | | | $ | — | | | $ | — | | | $ | 186,000 | |
| John Belniak | | $ | — | | | $ | 37,000 | | | $ | — | | | $ | — | | | $ | 37,000 | |
| Martin Pompadur | | $ | 7,500 | | | $ | 15,000 | | | $ | — | | | $ | — | | | $ | 22,500 | |
Limitation of Officers’ and Directors’ Liability and Indemnification
Our Articles of Incorporation limits the liability of our directors and provides that our directors will not be personally liable for monetary damages for breach of their fiduciary duties as they relatedirectors, except liability for: (i) breach of a director’s duty of loyalty, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) the unlawful payment of a dividend or an unlawful stock purchase or redemption, and (iv) any transaction from which a director derives an improper personal benefit. Our Articles of Incorporation also provides that we shall indemnify our directors to the fullest extent permitted under the Nevada Revised Statutes. In addition, our Bylaws provide that we shall indemnify our directors to the fullest extent authorized under the laws of the State of Nevada. Our Bylaws also provide that our Board of Directors shall have the power to indemnify any other person that is a party to an action, suit, or proceeding by reason of the fact that the person is an officer or employee of our company.
Under Section 78.7502 of the Nevada Revised Statutes, we have the power to indemnify our directors, officers, employees, or agents who are parties or threatened to be made parties to any threatened, pending, or completed civil, criminal, administrative, or investigative action, suit, or proceeding (other than an action by or in the right of the Company) arising
from that person’s role as our director, officer, employee, or agent against expenses, including attorney’s fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit, or proceeding if the person (a) acted in good faith and in a manner the person reasonably believed to be in or not opposed to our servicesbest interests, and, purchases forwith respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful, and (b) is not liable pursuant to Nevada Revised Statutes Section 78.138, and performed his powers in good faith and with a view to the interests of the Corporation.
Under the Nevada Revised Statutes, we have the power to indemnify our Canadian customers.
Foreign exchange gain / (loss)
Transactions denominateddirectors, officers, employees, and agents who are parties or threatened to be made parties to any threatened, pending, or completed action or suit by or in the right of the Company to procure a judgment in our favor arising from that person’s role as our director, officer, employee, or agent against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person (a) acted in good faith and in a foreign currency give risemanner the person reasonably believed to be in or not opposed to our best interests and (b) is not liable pursuant to Section 73.138 of the Nevada Revised Statutes.
These limitations of liability, indemnification, and expense advancements may discourage a stockholder from bringing a lawsuit against directors for breach of their fiduciary duties. The provisions may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if settlement and damage awards against directors and officers pursuant to these limitations of liability and
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer, or controlling person in a successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Insurance: The Registrant maintains directors and officer’s liability insurance, which covers directors and officers of the Registrant against certain claims or liabilities arising out of the performance of their duties.
Compensation Committee Interlocks and Insider Participants. Jeff Kurtz and Martin Pompadur, independent directors, served as members of the Compensation Committee during the fiscal year ended June 30, 2022. Neither had any interlocking relationship and there was no inside participation.
Compensation Committee Report. The Compensation Committee consisting of Jeff Kurtz and Martin Pompadur has reviewed and discussed the Compensation Discussion and Analysis with Management. Based on the Compensation Committee’s review and discussions of this item, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The table sets forth certain information as of September 23, 2022, with respect to the beneficial ownership of the Company's Common Stock by (i) each person that beneficially holds more than 5% of the outstanding shares of the Company based solely on the Company's review of SEC filings, (ii) each director of the Company, and (iii) each Named
Executive Officer ("NEO") of the Company. The following table reflects the beneficial ownership of our common stock by the following persons:
| | | | | | | | | | | | | | |
| | Shares of Common Stock (1) |
| Names of Beneficial Owners | | Number | | % |
| Peter Coates | | 10,591,710 | | | 16.5% |
Thomas Marianacci (2) | | 7,020,000 | | | 10.9% |
| Thomas Ochocki (3) | | 4,318,334 | | | 6.7% |
Robert B. Machinist (4) | | 3,166,667 | | | 4.9% |
| Kyle Hill (5) | | 2,771,926 | | | 4.3% |
| Daniel Pappalardo (6) | | 2,071,267 | | | 3.2% |
Sadiq (Sid) Toama (7) | | 1,970,000 | | | 3.1% |
Christopher Broderick (8) | | 1,800,000 | | | 2.8% |
Michael Tenore (9) | | 1,033,333 | | | 1.6% |
Jeff Kurtz (10) | | 633,334 | | | 1.0% |
Kevin Dundas (11) | | 391,667 | | | * |
| Daniel Jankowski (12) | | 366,666 | | | * |
| Martin Pompadur (13) | | 70,000 | | | * |
____________
*Less than 1% of the issued and outstanding shares of common stock.
(1)Based on 64,209,616 shares of common stock issued and outstanding as of September 23, 2022.
(2)Of these shares, ten (10%) percent are held in escrow until March 21, 2023, under the terms of an escrow agreement and the Converge Acquisition. Does not include 1,000,000 RSUs which vest in three (3) equal installments on March 21, 2023, 2024, and 2025.
(3)These shares include 1,475,000 shares of common stock held by Mr. Ochocki and 575,000 held by Union Investment Management and 1,193,334 held by Union Eight, affiliates of Mr. Ochocki. Also includes 1,075,000 warrants held by Mr. Ochocki.
(4)Includes: (i) warrants to purchase 166,667 shares of Common Stock exercisable at $0.75 per share and vested in three (3) equal installments over a three (3) year period from the date of grant on August 1, 2017. On May 1, 2018, in connection with his appointment as Chief Executive Officer of the Company, Robert Machinist was awarded warrants to purchase 166,667 shares of Common Stock immediately exercisable at $0.75 per share for five (5) years as executive compensation in each of fiscal 2018 and 2019. On January 1, 2021, Mr. Machinist was awarded 500,000 warrants exercisable at $0.75 per share for five (5) years as executive compensation for fiscal 2020 and 2021, which had been forfeited by a former director; and (ii) 1,500,000 shares were issued upon conversion of RSUs.
(5)Pursuant to the terms of a lock-up agreement dated May 21, 2021, and the Separation Agreement dated June 7, 2022, 1,231,967 of these shares are subject to vesting on the following schedule: one-third on May 21, 2022; one-third on May 21, 2023; and one-third on May 21, 2024.
(6)Of these shares, 500,000 are issuable upon exercise of options granted to Mr. Pappalardo on June 12, 2017, which are exercisable at $0.75 per share. One-half (50%) of the options vested on July 1, 2018, and the remaining one-half (50%) vested on July 1, 2019. 200,000 RSUs awarded by the Company on January 10, 2022, and 1,371,267 shares of Common Stock received in connection with the June 2017 Troika Merger.
(7)Of these shares ten (10%) percent are held in escrow until March 21, 2023, under the terms of an escrow agreement under the Converge Acquisition. Does not include 2,500,000 RSUs which vest in three (3) equal installments on March 21, 2023, 2024, and 2025.
(8)Of these shares, (i) 800,000 are issuable upon exercise of options granted to Mr. Broderick on June 12, 2017, which are exercisable at $0.75 per share. One-half (50%) of the options vested on July 1, 2018, and the remaining one-half (50%) vested on July 1, 2019; (ii) 200,000 RSUs are vested but unexercised; and (iii) 800,000 were issued upon conversion of RSUs.
(9)Of these shares, (i) 333,333 are issuable upon exercise of options granted to Mr. Tenore in October 2017, which are exercisable at $0.75 per share. One-half (50%) of the options vested on July 1, 2018, and the remaining one-half (50%) vested on July 1, 2019; (ii) 200,000 RSUs are vested and unexercised; and (iii) 500,000 were issued upon conversion of RSUs.
(10)Of these shares: (i) 66,667 are issuable upon exercise of 66,667 warrants issued to Mr. Jeff Kurtz on June 16, 2017, upon his election to the Board of Directors. These warrants are exercisable at $0.75 per share and vested in equal installments over a two (2) year period from the date of grant. On May 1, 2018, Mr. Kurtz was issued 200,000 five (5) year warrants exercisable at $0.75 per share commencing on May 1, 2019. Mr. Kurtz was issued 66,667 warrants exercisable at $0.75 per share to bring his total allotment to 333,333 warrants, in line with other Board members. Mr. Kurtz was awarded 150,000 five (5) year warrants at an exercise price of $1.24 per share on
October 12, 2021, as a final installment to bring his compensation in line with other senior Board members; and (ii) 150,000 shares were issued upon conversion of the RSUs.
(11)Includes: (i) 266,667 warrants issued on March 14, 2019, exercisable at a price of $1.50 per share in consideration for his services. Fifty (50%) percent of the warrants vested on December 31, 2019, and the remainder vested upon the April 2021 uplisting of the Company’s securities, and (ii) 200,000 shares issuable upon conversion of RSUs vesting 125,000 shares on April 30, 2022, shares.
(12)Mr. Jankowski served on the Board of Directors representing Union Investment Management, but his holdings do not include Union Investment Management shares described in Ochocki Footnote 3 above. Includes: (i) 33,333 shares of Common Stock issuable upon exercise of warrants issued for consulting services rendered by Dovetail Trading Ltd. and Union Investment Management and Union Eight Ltd., each of which Mr. Jankowski is a principal; and 66,667 shares of Common Stock issuable upon exercise of warrants issued as a Member of the Board of Directors.
(13)Mr. Pompadur was granted 20,000 warrants to purchase common stock of the Company which vested nine (9) months from the date of issuance upon his joining the Board, exercisable for five (5) years at $0.75 per share; and 50,000 shares were issued upon conversion of RSUs.
Item 13. Certain Relationships and Related Person Transactions and Director Independence.
The following is a description of the transactions we have engaged in during the year ended June 30, 2022 with our directors, executive officers and beneficial owners of more than five percent of our voting securities and their affiliates.
See “Executive Compensation” for the terms and conditions of employment agreements and senior management consulting agreements and options and warrants issued to officers, directors, consultants, and senior management of the Company.
Converge Direct, LLC Acquisition
Certain terms of the Converge Acquisition resulted in amounts remaining to be paid to the Converge Sellers. At the time of the Acquisition the Company owed to Converge Sellers (i) an approximate $4.34 million payment under the terms of the Membership Interest Purchase Agreement dated as of November 22, 2021 (“MIPA”) on account of excess working capital retained by the Company and (ii) a $5.0 million payment pursuant to a gain (loss)side letter agreement, dated as of March 9, 2022 (the “Side Letter”), by the Borrower and Converge Direct, LLC which specified that $5.0 million of the purchase price will be retained by the Company for working capital and be repaid 12 months from the Acquisition date.
Union Ventures Limited purchase of Mission-Media Holdings Limited
On August 1, 2022, Troika-Mission Holdings, Inc, ("TMH or Seller"), a subsidiary of the Company, entered into an Equity Purchase Agreement (the “Purchase Agreement”) with Union Ventures Limited (“UVL”), a company organized under the 2006 Companies Act in the United Kingdom (“Buyer”). UVL is a company owned by Union Investments Management Limited which is shareholder and affiliated with Daniel Jankowski, a former director of the Company, and Thomas Ochocki, a current Director of the Company. Per the agreement, the Buyer shall purchase from Sellers, all of Sellers' right, title, and interest in and to Sellers' respective Mission UK Shares, including any and all liabilities and assets on an as is basis (the "Mission UK Shares") in Mission-Media Holdings Limited, a private limited company incorporated under the Laws of England and Wales ("Mission UK"). As consideration for all the Mission UK Shares, Buyer shall pay Sellers an aggregate purchase price, not to exceed $1,000 USD (the "Aggregate Purchase Price").
Policy for Approval of Related Person Transactions
Pursuant to a written charter to be adopted by our proposed audit committee upon the consummation of the offering, the audit committee will be responsible for reviewing and approving, prior to our entry into any such transaction, all transactions in which we are a participant and in which any of the following persons has or will have a direct or indirect material interest:
•our executive officers;
•our directors;
•the beneficial owners of more than five (5%) percent of our securities;
•the immediate family members of any of the foregoing persons; and
•any other persons whom our Board determines may be considered related persons.
For purposes of this policy, “immediate family members” means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and any person (other than a tenant or employee) sharing the household with the executive officer, director or five percent beneficial owner.
In reviewing and approving such transactions, our audit committee shall obtain, or shall direct our management to obtain on its behalf, all information that the committee believes to be relevant and important to a review of the transaction prior to its approval. Following receipt of the necessary information, a discussion shall be held of the relevant factors if deemed to be necessary by the committee prior to approval. If a discussion is not deemed to be necessary, approval may be given by written consent of the committee. This approval authority may also be delegated to the chair of the audit committee in some circumstances. No related person transaction shall be entered into prior to the completion of these procedures.
Our audit committee or its chair, as the case may be, shall approve only those related person transactions that are determined to be in, or not inconsistent with, our best interest and our stockholders’ best interests, taking into account all available facts and circumstances as the committee or the chair determines in good faith to be necessary. These facts and circumstances will typically include, but not be limited to, the benefits of the transaction to us; the impact on a director’s independence in the event the related person is a director, an immediate family member of a director or an entity in which a director is a partner, stockholder or executive officer; the availability of other sources for comparable products or services; the terms of the transaction; and the terms of comparable transactions that would be available to unrelated third parties or to employees generally. No member of our audit committee shall participate in any review, consideration or approval of any related person transaction with respect to which the member or any of his or her immediate family members is the related person.
Item 14. Principal Accountant Fees and Services.
The following table presents: estimated fees for professional audit services rendered by RBSM LLP for the audit of our annual financial statements and for other services for the fiscal years ended June 30, 2022 and 2021,
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Statements for the Year Ended | | Audit Fees | | Audit related fees | | Tax Fees | | Other Fees |
| June 30, 2022 | | $ | 770,000 | | | $ | 117,500 | | | $ | — | | | $ | — | |
| June 30, 2021 | | $ | 360,000 | | | $ | — | | | $ | — | | | 150,000 | |
As defined by the SEC, (i) “audit fees” are fees for professional services rendered by our principal accountant for the audit of our annual financial statements and review of financial statements included in selling, generalour Form 10-K, or for services that are normally provided by the accountant in connection with statutory and administrative expenses inregulatory filings or engagements for those fiscal years; (ii) “audit-related fees” are fees for assurance and related services by our principal accountant that are reasonably related to the consolidated statementsperformance of operations and comprehensive loss. For the years ended December 31, 2015 and 2014, transaction losses were not material.
Translation of Financial Results
Because we translate a portionaudit or review of our financial results from Canadian dollars to U.S. dollars, fluctuations instatements and are not reported under “audit fees;” (iii) “tax fees” are fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for products and services provided by our principal accountant, other than the valueservices reported under “audit fees,” “audit-related fees,” and “tax fees.”
Audit Fees for the fiscal years ended June 30, 2022 and 2021, were for professional services rendered for the audits and quarterly reviews of the Canadian dollar directly effect our reported consolidated results. We do not hedge againstfinancial statements of the possible impactCompany, consents, and other assistance required to complete the year-end audit of this risk. A ten percent adverse change in the foreign currency exchange rate would not havefinancial statements.
As the Company has a significant impact on our consolidated results of operationsformal audit committee, the services described above were approved by the audit committee under the de minimus exception provided by Rule 2-01(c)(7)(i)(C) under Regulation S-X. Further, as the Company has a formal audit committee, the Company has audit committee pre-approval policies and comprehensive loss or financial position.procedures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.PART IV
Item 15. Exhibits and Financial Statement Schedules
| | | | | | | | | | | |
| The following documents are filed as part of this report: | | |
| | | Page No. |
| The financial statements as indicated in the table of contents on page | | F-1 |
| Exhibits | | 23 |
M2 nGage Group, Inc. and Subsidiaries
(Formerly Roomlinx, Inc. and Subsidiaries)
Index to Consolidated Financial Statements
For the Years Ended December 31, 2015 and 201455
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
M2 nGage Troika Media Group, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of M2 nGageTroika Media Group, Inc. (Formerly Roomlinx, Inc.) and Subsidiaries (the "Company")Company) as of December 31, 2015June 30, 2022 and 20142021, and the related consolidated statements of operations and comprehensive loss, changes in deficitstockholders’ equity, and cash flows for each of the two years in the two-year period ended December 31, 2015. June 30, 2022, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Wemisstatement, whether due to error or fraud. The Company is not required to have, nor were notwe engaged to perform, an audit of the Company'sits internal control over financial reporting. OurAs part of our audits, included considerationwe are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
InCritical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, referredtaken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to above present fairly, in all material respects,which they relate.
Accounting for the consolidatedBusiness Combination of Converge Direct, LLC and Affiliates —Refer to Note 3 and Note 9 to the financial position of M2 nGage Group, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for eachstatements
Description of the two years in the period ended December 31, 2015, in conformity with generally accepted accounting principles.Matter:
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discusseddescribed in Note 3 to the accompanying consolidated financial statements, the Company has incurred recurringcompleted an acquisition of Converge Direct, LLC and affiliates for net losses, used cashconsideration of $114.9 million in operating activities, and had negative working capital, which raise substantial doubt about its ability to continuethe year ended June 30, 2022. The Company accounted for this acquisition as a going concern. Management's plansbusiness combination. This included cash paid of $95.0 million, an obligation to pay an additional $5.0 million after June 30, 2023 that was discounted to $4.7 million and the issuance of 12.5 million shares of common stock valued at $14.9 million. The Company assumed an operating lease that had an unfavorable lease terms valued as a reduction of the right of use asset by $2.0 million.
The fair values of identified intangible assets consisted of technology of $10.4 million, tradenames of $7.1 million and customer relationships of $53.65 million. Goodwill, which represents the excess of the consideration paid over the fair value of the net tangible assets and intangible assets acquired, of $45.6 million was also recorded. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about
future performance of the acquired business. The significant assumptions used to form the basis of the forecasted results included revenue growth rates, discount rates, tax amortization benefit factor, and other intangible specific assumptions. For customer relationships these included the customer survival factor, the gross margin, and customary asset charges. For technology these included obsolescence factors and technology royalty rate. For trade names this included trade name royalty rate. These significant assumptions were forward-looking and could be affected by future economic and market conditions.
The principal considerations for our determination that performing procedures relating to the valuation of intangible assets as a critical audit matter are (1) there was a high degree of auditor judgment and subjectivity in regardapplying procedures relating to the fair value of intangible assets acquired due to the significant judgment by management when developing the estimates and (2) significant audit effort was required in evaluating the significant assumptions relating to the estimates, including the income projections and discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these matters are describedprocedures and evaluating the audit evidence obtained.
How we addressed the Matter in Note 3. Theour Audit:
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements do not include any adjustments that might result fromstatements. These procedures included the outcomefollowing:
a.Reading the underlying agreements and testing management’s application of this uncertainty.the relevant accounting guidance
b.Inquiry of management regarding the development of the assumptions used in the valuation of the intangible assets.
c.Testing management’s process included evaluating the appropriateness of the valuation models, testing the completeness, accuracy, and relevance of underlying data used in the models, and testing the reasonableness of significant assumptions, including the income and expense projections.
d.Reviewed the credentials and evaluated the experience, qualifications and objectivity of the Company’s specialist, a third-party valuation firm.
/s/ e.Obtained an understanding of the nature of the work the Company’s specialist performed, including the objectives and scope of the specialist’s work; the methods or assumptions used; and a comparison of the methods or assumptions used with industry standards and historical data.
f.Identified and evaluated assumptions developed by the specialist considering assumptions generally used in the specialist’s field; supporting evidence provided by the specialist; existing market data; historical or recent experience and changes in conditions and events affecting the Company.
g.Evaluated the Company’s estimates of future revenue projections by completing a retrospective comparison to historical revenue and support for revenue growth rates. We tested the significant assumptions discussed above, as well as the completeness and accuracy of the underlying data used in the projected cash flows and valuations.
h.RBSM, LLP
utilized professionals with specialized skill and knowledge to assist in evaluating the reasonableness of significant assumptions.
August 29, 2016
New York, New York | | | | | |
| /s/ RBSM LLP |
| |
| We have served as the Company’s auditor since 2014. |
| Las Vegas, Nevada |
September 28, 2022
PCAOB ID Number 587 | |
- 48 -
Troika Media Group, Inc. and SubsidiariesConsolidated Balance Sheets | | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 32,673,801 | | | $ | 12,066,000 | |
| Accounts receivable, net | 9,421,497 | | | 1,327,000 | |
| Prepaid expenses and other current assets | 1,289,183 | | | 671,000 | |
| Contract assets | 23,586,036 | | | — | |
| | | |
| Total current assets | 66,970,517 | | | 14,064,000 | |
| Other assets | 2,124,832 | | | 626,000 | |
| Property and equipment, net | 589,205 | | | 343,000 | |
| Right-of-use lease assets | 8,965,426 | | | 6,887,000 | |
| Amortizable intangible assets, net | 70,306,005 | | | 2,603,000 | |
| Goodwill | 55,349,535 | | | 19,368,000 | |
| | | |
| | | |
| Total assets | $ | 204,305,520 | | | $ | 43,891,000 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 15,298,068 | | | $ | 2,362,000 | |
| Accrued and other current liabilities | 28,649,548 | | | 6,001,000 | |
| Acquisition liabilities | 9,108,504 | | | — | |
| | | |
| | | |
| Current portion of long-term debt, net of deferred financing costs | 1,538,220 | | | — | |
| Convertible notes payable | 50,000 | | | 50,000 | |
| Note payable - related party, current | 100,000 | | | 200,000 | |
| Net related party payables, current | — | | | 41,000 | |
| Contract liabilities | 11,321,159 | | | 5,973,000 | |
| Operating lease liabilities, current | 2,682,457 | | | 3,344,000 | |
| Taxes payable, net | 689,882 | | | 62,000 | |
| Derivative liabilities- financing warrants | 30,215,221 | | | 13,000 | |
| Stimulus loan program, current | — | | | 22,000 | |
| Contingent liability | 3,615,000 | | | — | |
| Total current liabilities | 103,268,059 | | | 18,068,000 | |
| Long-term liabilities: | | | |
| Long-term debt, net of deferred financing costs | 65,581,203 | | | — | |
| Operating lease liabilities, non-current | 8,994,073 | | | 5,835,000 | |
| | | |
| Preferred stock liability | 15,996,537 | | | — | |
| | | |
| | | |
| | | |
| Stimulus loan program, non-current | — | | | 547,000 | |
| | | |
| Other liabilities | 74,909 | | | 703,000 | |
| | | |
| Total liabilities | 193,914,781 | | | 25,153,000 | |
| Commitment and contingencies (Note 11) | | | |
| Stockholders’ equity: | | | |
| Preferred stock, $0.01 par value: 15,000,000 shares authorized | | | |
| Series A Preferred Stock ($0.01 par value: 5,000,000 shares authorized, 0 and 720,000 shares issued and outstanding as of June 30, 2022 and 2021, respectively) | — | | | 7,000 | |
| Series B Convertible Preferred Stock ($0.01 par value: 3,000,000 shares authorized, 0 and 0 shares issued and outstanding as of June 30, 2022 and 2021, respectively) | — | | | — | |
| Series C Convertible Preferred Stock ($0.01 par value: 1,200,000 shares authorized, 0 and 0 shares issued and outstanding as of June 30, 2022 and 2021, respectively) | — | | | — | |
| Series D Convertible Preferred Stock ($0.01 par value: 2,500,000 shares authorized, 0 and 0 shares issued and outstanding as of June 30, 2022 and 2021, respectively) | — | | | — | |
| Series E Convertible Preferred Stock ($0.01 par value: 500,000 shares authorized, 0 shares issued and outstanding as of June 30, 2022) | 8,000 | | | — | |
| Common stock, ($0.001 par value: 300,000,000 shares authorized, 64,209,616 and 39,496,588 shares issued and outstanding as of June 30, 2022 and 2021, respectively) | 43,660 | | | 40,000 | |
| Additional paid-in-capital | 236,876,523 | | | 204,788,000 | |
| Stock payable | — | | | 1,210,000 | |
| Accumulated deficit | (225,582,006) | | | (186,889,000) | |
| Accumulated Other comprehensive loss | (955,438) | | | (418,000) | |
| Total stockholders’ equity | 10,390,739 | | | 18,738,000 | |
| Total liabilities and stockholders’ equity | $ | 204,305,520 | | | $ | 43,891,000 | |
M2 nGage Group, Inc. and Subsidiaries (Formerly Roomlinx, Inc. and Subsidiaries) Consolidated Balance Sheets As of December 31, 2015 and 2014 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash | | $ | 35,570 | | | $ | 1,584,541 | |
| Accounts receivable, net | | | 232,388 | | | | 314,941 | |
| Prepaid expenses and deferred cost | | | 237,493 | | | | 180,268 | |
| Deferred finance fees - current | | | 208,858 | | | | - | |
| Other current assets | | | 45,613 | | | | 62,173 | |
| Current assets of discontinued operations | | | 9,565,096 | | | | 3,133,351 | |
| Total current assets | | | 10,325,018 | | | | 5,275,274 | |
| Property, equipment and software, net | | | 61,516 | | | | 10,828 | |
| Intangible assets, net | | | 2,004,166 | | | | 2,104,167 | |
| Security deposits | | | 684,179 | | | | 775,341 | |
| Other assets | | | - | | | | 20,575 | |
| Other assets of discontinued operations | | | - | | | | 5,800,450 | |
| Total Assets | | $ | 13,074,879 | | | $ | 13,986,635 | |
| | | | | | | | | |
| Liabilities and Deficit | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 5,159,171 | | | $ | 4,310,346 | |
| Current maturities of notes payable, related party | | | 3,160,622 | | | | 832,030 | |
| Accrued expenses | | | 1,455,098 | | | | 864,368 | |
| Note payable and other obligations, current portion | | | 87,500 | | | | - | |
| Deferred revenue and customer prepayments | | | 825,859 | | | | 756,052 | |
| Other current liabilities | | | 702,283 | | | | - | |
| Current liabilities of discontinued operations | | | 28,892,528 | | | | 7,803,134 | |
| Total current liabilities | | | 40,283,061 | | | | 14,565,930 | |
| Non-current liabilities | | | | | | | | |
| Long-term portion of notes payable, related party | | | 1,798,585 | | | | 2,067,601 | |
| Nonconvertible Series A prefered stock, related party | | | - | | | | 10 | |
| Other liabilities of discontinued operations | | | - | | | | 5,040,948 | |
| Total non-current liabilities | | | 1,798,585 | | | | 7,108,559 | |
| Total liabilities | | | 42,081,646 | | | | 21,674,489 | |
| Commitments and contingencies | | | - | | | | - | |
| | | | | | | | | |
| Deficit | | | | | | | | |
| M2 nGage Group, Inc. stockholders' deficit | | | | | | | | |
| Preferred stock, par value $0.20 per share, 5,000,000 shares authorized: | | | | | | | | |
Class A - 720,000 and nil shares authorized, issued and outstanding (liquidation preference of $144,000 and $0 at December 31, 2015 and 2014, respectively) | | | 144,000 | | | | - | |
Preferred stock, par value $0.01 per share, 10,000,000 shares authorized and nil and 1,010
shares designated and outstanding at December 31, 2015 and 2014, respectively: | |
Series A preferred stock, par value $0.01 per share, 1,000 shares designated, nil and 1,000 shares issued and outstanding at December 31, 2015 and 2014, respectively | | | - | | | | - | |
Series B preferred stock, par value $0.01 per share, 10 shares designated, nil and 10 shares
issued and outstanding at December 31, 2015 and 2014, respectively | | | - | | | | - | |
Common stock, par value $0.001 per share, 400,000,000 shares authorized, 136,019,348 and 115,282,137 shares issued and outstanding at December 31, 2015, and 2014, respectively | | | 136,018 | | | | 115,282 | |
| Additional paid-in capital | | | 105,353,800 | | | | 45,179,249 | |
| Accumulated deficit | | | (134,629,262 | ) | | | (52,982,385 | ) |
| Accumulated other comprehensive loss | | | (3,556 | ) | | | - | |
| Total M2 nGage Group, Inc. stockholders' deficit | | | (28,999,000 | ) | | | (7,687,854 | ) |
| Non-controlling interest - discontinued operations | | | (7,767 | ) | | | - | |
| Total deficit | | | (29,006,767 | ) | | | (7,687,854 | ) |
| Total Liabilities and Deficit | | $ | 13,074,879 | | | $ | 13,986,635 | |
The accompanying notes are an integral part of these consolidated financial statements.
M2 nGageTroika Media Group, Inc. and Subsidiaries
(Formerly Roomlinx, Inc. and Subsidiaries)
Consolidated Statements of Operations and Comprehensive Loss
For the years ended December 31, 2015 and 2014
| | | | | | | |
| | | 2015 | | | 2014 | |
| | | | | | | | | |
| Revenues | | $ | 10,610,520 | | | $ | 11,294,276 | |
| Cost of sales, excluding depreciation and amortization which is included in selling, general and administrative expense | | | 6,933,066 | | | | 8,053,486 | |
| Gross margin | | | 3,677,454 | | | | 3,240,790 | |
| Operating Expenses | | | | | | | | |
| Selling, general and administrative expense | | | 29,070,604 | | | | 10,417,592 | |
| Total operating Expenses | | | 29,070,604 | | | | 10,417,592 | |
| Operating loss | | | (25,393,150 | ) | | | (7,176,802 | ) |
| Other expense | | | | | | | | |
| Interest expense, net | | | (982,252 | ) | | | (896,298 | ) |
| Other (expense) income, net | | | (14,776 | ) | | | (97,686 | ) |
| Total other expense | | | (997,028 | ) | | | (993,984 | ) |
| Loss from continuing operations before income taxes | | | (26,390,178 | ) | | | (8,170,786 | ) |
| Income tax expense (benefit) | | | - | | | | - | |
| Loss from continuing operations | | | (26,390,178 | ) | | | (8,170,786 | ) |
| Loss from discontinued operations, net of tax | | | (55,089,466 | ) | | | (3,825,760 | ) |
| Net loss | | | (81,479,644 | ) | | | (11,996,546 | ) |
| Less: Net loss attributable to non-controlling interest - discontinued operations | | | 7,767 | | | | - | |
Net loss attributable to M2 nGage Group, Inc. | | | (81,471,877 | ) | | | (11,996,546 | ) |
Less: Dividends on preferred stock | | | (175,000 | ) | | | (600,000 | ) |
Net loss attributable to M2 nGage Group, Inc. common shareholders | | $ | (81,646,877 | ) | | $ | (12,596,546 | ) |
| | | | | | | | |
| Other comprehensive loss | | | | | | | | |
| Net loss | | $ | (81,479,644 | ) | | $ | (11,996,546 | ) |
| Currency translation loss | | | (3,556 | ) | | | - | |
| | | (81,483,200 | ) | | | (11,996,546 | ) |
| Comprehensive loss attributable to non-controlling - discontinued operations | | | (11,323 | ) | | | - | |
| Comprehensive loss attributable to M2 nGage Group, Inc. common shareholders | | $ | (81,471,877 | ) | | $ | (11,996,546 | ) |
| | | | | | | | | |
| Loss per share | | | | | | | | |
| Basic and diluted loss per common share from | | | | | | | | |
| Continuing operations, attributable to M2 nGage Group, Inc. commons shareholders | | $ | (0.20 | ) | | $ | (0.08 | ) |
| Discontinued operations, attributable to M2 nGage Group, Inc. commons shareholders | | | (0.42 | ) | | | (0.03 | ) |
| Net loss attributable to M2 nGage Group, Inc. common shareholders | | $ | (0.62 | ) | | $ | (0.11 | ) |
| Weighted average number of common shares outstanding | | | | | | | | |
| Basic and diluted | | | 130,771,837 | | | | 113,136,711 | |
| | | | | | | | | | | |
| For the Year Ended June 30, |
| 2022 | | 2021 |
| | | |
| Revenues, net | $ | 116,409,703 | | | $ | 16,192,000 | |
| Cost of revenues | 88,127,498 | | | 7,504,000 | |
| Gross margin | 28,282,205 | | | 8,688,000 | |
| Operating expenses: | | | |
| Selling, general and administrative expenses | 45,271,857 | | | 25,372,000 | |
| | | |
| Depreciation and amortization | 3,097,780 | | | 2,299,000 | |
| Restructuring and other related charges | 5,590,932 | | | — | |
| Impairment and other losses (gains), net | 7,708,677 | | | (3,142,000) | |
| | | |
| Total operating expenses | 61,669,246 | | | 24,529,000 | |
| Operating loss | (33,387,041) | | | (15,841,000) | |
| Other (expense) income: | | | |
| | | |
| Amortization expense of note payable discount | — | | | (409,000) | |
| Loss contingency on equity issuance | (3,615,000) | | | — | |
| Interest expense | (2,943,367) | | | (7,000) | |
| Foreign exchange loss | (30,215) | | | (48,000) | |
| | | |
| Gain on change in fair value of derivative liabilities | 638,622 | | | 72,000 | |
| Other income, net | 679,920 | | | 452,000 | |
| | | |
| Total other (expense) income | (5,270,040) | | | 60,000 | |
| Loss from operations before income taxes | (38,657,081) | | | (15,781,000) | |
| Income tax expense | (35,925) | | | (216,000) | |
| | | |
| | | |
| Net loss | $ | (38,693,006) | | | $ | (15,997,000) | |
| Foreign currency translation adjustment | (537,438) | | | (671,000) | |
| Comprehensive loss | $ | (39,230,444) | | | $ | (16,668,000) | |
| | | |
| Loss per share: | | | |
| Basic | $ | (0.79) | | | $ | (1.03) | |
| Diluted | $ | (0.67) | | | $ | — | |
| | | |
| Weighted-average number of common shares outstanding: | | | |
| Basic | 49,225,698 | | | 15,544,032 | |
| Diluted | 57,604,077 | | | 15,544,032 | |
The accompanying notes are an integral part of these consolidated financial statements.
Troika Media Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock -
Series A | | | Preferred Stock -
Series B | | | Preferred Stock -
Series C | | | Preferred Stock -
Series D | | Preferred Stock - Series E | | | | Common Stock | | Additional
Paid In
Capital | | Stock
Payable | | Accumulated
Deficit | | Accumulated
other
comprehensive
Income (Loss) | | Total
Stockholders'
Equity |
| | | $0.01 Par Value | | | $0.01 Par Value | | | $0.01 Par Value | | | $0.01 Par Value | | $0.01 Par Value | | | | $0.001 Par Value | | | | | |
| | | | Amount | | | | Amount | | | | Amount | | | | Amount | | Capital | | | | Amount | | | | | |
| BALANCE — June 30, 2020 | | | | $ | 7,000 | | | | | $ | 25,000 | | | | | $ | 9,000 | | | | | $ | 20,000 | | | $ | — | | | | | $ | 16,000 | | | $ | 176,262,000 | | | $ | 1,300,000 | | | $ | (170,892,000) | | | $ | 253,000 | | | $ | 7,000,000 | |
| Net loss | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | — | | | (15,997,000) | | | — | | | (15,997,000) | |
| Sale of common stock in initial public offering, gross | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | 6,000 | | | 23,994,000 | | | — | | | — | | | — | | | 24,000,000 | |
| Offering costs relating to initial public offering | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | (3,298,000) | | | — | | | — | | | — | | | (3,298,000) | |
| Record stock payable relating to Redeeem acquisition | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | 1,210,000 | | | — | | | — | | | 1,210,000 | |
| Record vested portion of deferred compensation relating to Redeeem | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 362,000 | | | — | | | — | | | — | | | 362,000 | |
| Conversion of preferred stock – series B upon up-listing | | | | — | | | | | (25,000) | | | | | — | | | | | — | | | — | | | | | 1,000 | | | 24,000 | | | — | | | — | | | — | | | — | |
| Conversion of preferred stock – series C upon up-listing | | | | — | | | | | — | | | | | (9,000) | | | | | — | | | — | | | | | 12,000 | | | 147,000 | | | — | | | — | | | — | | | 150,000 | |
| Conversion of preferred stock – series D upon up-listing | | | | — | | | | | — | | | | | — | | | | | (20,000) | | | — | | | | | 5,000 | | | 15,000 | | | — | | | — | | | — | | | — | |
| Cashless issuance of common stock related to the exercise of options | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Cashless issuance of common stock related to the exercise of warrants | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Cashless issuance of common stock related to convertible notes payables | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | 1,000 | | | 1,749,000 | | | — | | | — | | | — | | | 1,750,000 | |
| Stock-based compensation on options | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 881,000 | | | — | | | — | | | — | | | 881,000 | |
| Stock-based compensation on warrants | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 3,176,000 | | | — | | | — | | | — | | | 3,176,000 | |
| Beneficial conversion features on convertible promissory notes | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 144,000 | | | — | | | — | | | — | | | 144,000 | |
| Retirement of common stock | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | (3,000) | | | 3,000 | | | — | | | — | | | — | | | — | |
| Issuance of common stock related to stock payable | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | 2,000 | | | 1,298,000 | | | (1,300,000) | | | — | | | — | | | — | |
| Warrants granted for convertible promissory notes | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 12,000 | | | — | | | — | | | — | | | 12,000 | |
| Imputed interest on convertible note payable | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 19,000 | | | — | | | — | | | — | | | 19,000 | |
| Foreign currency translation loss | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | — | | | — | | | (671,000) | | | (671,000) | |
| BALANCE — June 30, 2021 | | | | 7,000 | | | | | — | | | | | — | | | | | — | | | — | | | | | 40,000 | | | 204,788,000 | | | 1,210,000 | | | (186,889,000) | | | (418,000) | | | 18,738,000 | |
| Net loss | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | — | | | (38,693,006) | | | — | | | (38,693,006) | |
| Issuance of common stock related to Redeeem acquisition | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 1,210,000 | | | (1,210,000) | | | — | | | — | | | — | |
| Issuance of common stock related to contractors for service | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock related to Converge Acquisition | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 14,875,000 | | | — | | | — | | | — | | | 14,875,000 | |
| Issuance of common stock to employee | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 104,000 | | | — | | | — | | | — | | | 104,000 | |
| Issuance of common stock to contractors | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 40,000 | | | — | | | — | | | — | | | 40,000 | |
| Equity issuance costs | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Record vested portion of deferred compensation relating to Redeeem, net of forfeiture | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | 3,660 | | | 3,011,389 | | | — | | | — | | | — | | | 3,015,049 | |
| Issuance of preferred stock for PIPE | | | | — | | | | | — | | | | | — | | | | | — | | | 8,000 | | | | | — | | | (5,000) | | | — | | | — | | | — | | | 3,000 | |
| Stock-based compensation | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | 13,292,534 | | | — | | | — | | | — | | | 13,292,534 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redemption of preferred stock - Series A | | | | (7,000) | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | (439,400) | | | — | | | — | | | — | | | (446,400) | |
| Equity issuance costs | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Foreign currency translation gain | | | | — | | | | | — | | | | | — | | | | | — | | | — | | | | | — | | | — | | | — | | | — | | | (537,438) | | | (537,438) | |
| BALANCE — June 30, 2022 | | | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | — | | | $ | 8,000 | | | | | $ | 43,660 | | | $ | 236,876,523 | | | $ | — | | | $ | (225,582,006) | | | $ | (955,438) | | | $ | 10,390,739 | |
M2 nGage Group, Inc. and Subsidiaries (Formerly Roomlinx, Inc. and Subsidiaries) Consolidated Statements of Changes in Deficit For the years ended December 31, 2015 and 2014 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | Non-Contolling | | | | |
| | | Class A | | | Series A | | | Series B | | | | | | | | | Additional | | | | | | other | | | Interest - | | | | |
| | | Preferred Stock | | | Preferred Stock | | | Preferred Stock | | | Common Stock | | | Paid-in | | | Accumulated | | | Comprehensive | | | Discontinued | | | Total | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | loss | | | Operations | | | Deficit | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2013, as adjusted for reverse stock split and recapitalization | | | - | | | $ | - | | | | 1,000 | | | $ | - | | | | 10 | | | $ | - | | | | 109,156,213 | | | $ | 109,157 | | | $ | 26,701,156 | | | $ | (40,385,839 | ) | | $ | - | | | $ | - | | | $ | (13,575,526 | ) |
| Contributed capital from a principal shareholder | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 7,826,753 | | | | - | | | | - | | | | - | | | | 7,826,753 | |
| Issuance of common stock for conversion of the Robert DePalo Special Opportunity Fund, related party | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,544,268 | | | | 2,544 | | | | 3,050,577 | | | | - | | | | - | | | | - | | | | 3,053,121 | |
| Issuance of common stock for conversion of the Brookville Special Purpose Fund, related party | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,065,606 | | | | 2,065 | | | | 3,096,351 | | | | - | | | | - | | | | - | | | | 3,098,416 | |
| Issuance of common stock for conversion of the Veritas High Yield Fund, related party | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 516,050 | | | | 516 | | | | 773,557 | | | | - | | | | - | | | | - | | | | 774,073 | |
| Common stock issued in connection with the acquisition of Incubite | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,000,000 | | | | 1,000 | | | | 1,799,000 | | | | - | | | | - | | | | - | | | | 1,800,000 | |
| Stock based compensation | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,931,855 | | | | - | | | | - | | | | - | | | | 1,931,855 | |
| Preferred stock dividends | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (600,000 | ) | | | - | | | | - | | | | (600,000 | ) |
| Net loss for the period | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (11,996,546 | ) | | | - | | | | - | | | | (11,996,546 | ) |
| Balance at December 31, 2014 | | | - | | | | - | | | | 1,000 | | | | - | | | | 10 | | | | - | | | | 115,282,137 | | | | 115,282 | | | | 45,179,249 | | | | (52,982,385 | ) | | | - | | | | - | | | | (7,687,854 | ) |
| Shares retained by Roomlinx' shareholders in connection with the shares exchange merger transaction | | | 720,000 | | | | 144,000 | | | | - | | | | - | | | | - | | | | - | | | | 19,758,619 | | | | 19,758 | | | | 35,545,756 | | | | - | | | | - | | | | - | | | | 35,709,514 | |
| Preferred stock dividends of Series A | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (175,000 | ) | | | - | | | | - | | | | (175,000 | ) |
| Buyback and cancellation of Series A Preferred Stock | | | - | | | | - | | | | (1,000 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,100,042 | ) | | | - | | | | - | | | | - | | | | (2,100,042 | ) |
| Cancellation of Series B Preferred Stock | | | - | | | | - | | | | - | | | | - | | | | (10 | ) | | | - | | | | - | | | | - | | | | 10 | | | | - | | | | - | | | | - | | | | 10 | |
| Sale of common stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 916,665 | | | | 916 | | | | 1,631,043 | | | | - | | | | - | | | | - | | | | 1,631,959 | |
| Shares issued related to settlement | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 61,927 | | | | 62 | | | | 111,407 | | | | - | | | | - | | | | - | | | | 111,469 | |
| Contributed capital from a shareholder | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 615,004 | | | | - | | | | - | | | | - | | | | 615,004 | |
| Stock based compensation | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 21,596,317 | | | | - | | | | - | | | | - | | | | 21,596,317 | |
| Warrants issued to lenders | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,419,539 | | | | - | | | | - | | | | - | | | | 2,419,539 | |
| Warrants issued for marketing servies | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 355,517 | | | | - | | | | - | | | | - | | | | 355,517 | |
| Foreign currency translation loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,556 | ) | | | - | | | | (3,556 | ) |
| Net loss for the period | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (81,471,877 | ) | | | - | | | | (7,767 | ) | | | (81,479,644 | ) |
| Balance at December 31, 2015 | | | 720,000 | | | $ | 144,000 | | | | - | | | $ | - | | | | - | | | $ | - | | | | 136,019,348 | | | $ | 136,018 | | | $ | 105,353,800 | | | $ | (134,629,262 | ) | | $ | (3,556 | ) | | $ | (7,767 | ) | | $ | (29,006,767 | ) |
The accompanying notes are an integral part of thesethe consolidated financial statements.
Troika Media Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
M2 nGage Group, Inc. and Subsidiaries (Formerly Roomlinx, Inc. and Subsidiaries) Consolidated Statements of Cash Flows For the years ended December 31, 2015 and 2014 | |
| | | | | | | |
| | | 2015 | | | 2014 | |
| Cash flow from operating activities: | | | | | | |
| Net loss | | $ | (81,479,644 | ) | | $ | (11,996,546 | ) |
| Adjustment to reconcile loss to net cash used in operating activities - | | | | | | | | |
| Depreciation and amortization | | | 3,622 | | | | 49,472 | |
| Amortization of debt discount and deferred financing costs | | | 457,325 | | | | 175,408 | |
| Amortization of intangible asset | | | 100,000 | | | | 100,000 | |
| Bad debt expense, net of recovery | | | 59,440 | | | | 101,680 | |
| Stock based compensation | | | 21,596,317 | | | | 1,931,855 | |
| Non-cash expenses | | | 15,469 | | | | - | |
| Stock issued for settlement expense | | | 111,469 | | | | | |
| Loss from discontinued operations | | | 55,089,466 | | | | 3,825,760 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Decrease (Increase) in accounts receivable | | | 23,113 | | | | (131,365 | ) |
| Increase in prepaid expenses and other current assets | | | (40,665 | ) | | | (1,150 | ) |
| Increase in other assets | | | (643,211 | ) | | | (33,466 | ) |
| Increase in accounts payable and accrued expenses | | | 1,360,290 | | | | 400,609 | |
| Increase in deferred revenue and customer prepayments | | | 69,807 | | | | 301,476 | |
| Cash used in discontinued operations, net | | | (1,324,000 | ) | | | (4,930,509 | ) |
| Net cash used in operating activities | | | (4,601,202 | ) | | | (10,206,776 | ) |
| Cash flows from investing activities | | | | | | | | |
| Purchase of machinery and equipment | | | - | | | | (8,990 | ) |
| Cash provided by (used) in investing activities of discontinued operations, net | | | 812,756 | | | | (169,255 | ) |
| Net cash provided by (used in) investing activities | | | 812,756 | | | | (178,245 | ) |
| Cash flows from financing activities | | | | | | | | |
| Proceeds from issuance of common Stock | | | 1,631,959 | | | | - | |
| Contributed capital from principal Shareholder | | | 615,004 | | | | 7,826,753 | |
| Payment of related party loans | | | (790,980 | ) | | | (78,044 | ) |
| Proceeds from notes payable - related party, net | | | 760,000 | | | | (644,220 | ) |
| Proceeds of notes payable, net | | | 789,783 | | | | - | |
| Proceeds from (repayment of) capital lease transactions, net | | | - | | | | (17,643 | ) |
| Payment of Series A preferred stock dividend | | | (175,000 | ) | | | (625,000 | ) |
| Cash used in financing activities of discontinued operations, net | | | (587,735 | ) | | | 5,472,630 | |
| Net cash provided by financing activities | | | 2,243,031 | | | | 11,934,476 | |
| Effect of foreign exchange fluctuation in cash | | | (3,556 | ) | | | - | |
| Net (decrease) increase in cash | | | (1,548,971 | ) | | | 1,549,455 | |
| Cash, beginning of period | | | 1,584,541 | | | | 35,086 | |
| Cash, end of period | | $ | 35,570 | | | $ | 1,584,541 | |
| | | | | | | | | |
| Supplementary disclosure of cash flow information | | | | | | | | |
| Cash paid during the period for - | | | | | | | | |
| Interest | | $ | 1,338,638 | | | $ | 866,763 | |
| Income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| Supplemental disclosure or non-cash investing and financing activities: | | | | | | | | |
| Common stock issued in connection with the merger | | $ | 35,565,514 | | | $ | - | |
| Common stock issued in connection with the acquisition of Incubite | | $ | - | | | $ | 1,800,000 | |
| Fixed assets purchased under capital lease obligation | | $ | 59,925 | | | $ | 88,000 | |
| Equipment purchased under financed lease payable for resale | | $ | - | | | $ | 33,551 | |
| Repayment of capital leases payable made directly by customer | | $ | 166,320 | | | $ | 190,697 | |
| Conversion of the Robert DePalo Special Opportunity Fund debt into equity | | $ | - | | | $ | 3,053,121 | |
| Conversion of the Brookville Special Purpose fund debt into equity | | $ | - | | | $ | 3,098,416 | |
| Conversion of the Veritas High Yield Fund debt into equity | | $ | - | | | $ | 774,073 | |
| Software development capitalized cost against accounts payable balance | | $ | 33,858 | | | $ | 42,820 | |
| Equipment purchased against accounts payable balance | | $ | 10,636 | | | $ | - | |
| Accounts receivable and capital lease obligation for finance transactions | | $ | - | | | $ | 215,670 | |
| Equipment purchased for resale and deferred costs incurred against accounts payable balance | | $ | 1,947,102 | | | $ | 953,730 | |
| Class A preferred stock assumed in connection with the reverse acquisition | | $ | 144,000 | | | $ | - | |
| Repayment of notes payable made directly by customer | | $ | 995,753 | | | $ | 466,866 | |
| Warrants issued to lenders | | $ | 2,419,539 | | | $ | - | |
| Warrants issued for marketing services | | $ | 355,517 | | | $ | - | |
| Software development costs reclassified into fixed assets | | $ | 483,276 | | | $ | - | |
| Buyback and termination of preferred stock series A and B | | $ | 2,100,032 | | | $ | - | |
| Capital leases converted to as notes payable | | $ | 4,946,213 | | | $ | - | |
| | | | | | | | | | | |
| For the Year Ended June 30, |
| 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net loss | $ | (38,693,006) | | | $ | (15,997,000) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation | 146,890 | | | 131,000 | |
| Amortization of intangibles | 2,950,889 | | | 2,168,000 | |
| Amortization of right-of-use assets | 783,752 | | | 1,112,000 | |
| | | |
| Amortization of deferred financing costs | 791,292 | | | — | |
| Impairment and other charges | 7,708,677 | | | (3,142,000) | |
| Stock-based compensation | 16,307,583 | | | 4,419,000 | |
| Common stock issuances | 80,800 | | | |
| Warrants related to financing of convertible note payable | — | | | 12,000 | |
| Imputed interest for note payable | — | | | 19,000 | |
| Gain on change in fair value of derivative liabilities | (638,622) | | | (72,000) | |
| Discount on derivative liability | — | | | 85,000 | |
| Provision (reversal) for bad debt | (124,058) | | | (260,000) | |
| Preferred shares converted to common stock | — | | | 150,000 | |
| Beneficial conversion features on convertible promissory notes | — | | | 144,000 | |
| Tax provision on income | — | | | 216,000 | |
| Loss contingency on equity issuance | 3,615,000 | | | — | |
| Change in operating assets and liabilities: | | | |
| Accounts receivable | 13,360,992 | | | (226,000) | |
| Prepaid expenses | (526,186) | | | (527,000) | |
| Accounts payable and accrued expenses | 8,622,568 | | | 1,246,000 | |
| Other assets | (24,234,556) | | | 3,000 | |
| | | |
| Operating lease liability | (3,123,381) | | | (919,000) | |
| Due to related parties | 828,249 | | | 41,000 | |
| Other long-term liabilities | (624,103) | | | 477,000 | |
| Contract liabilities relating to revenue | 5,663,946 | | | 2,376,000 | |
| Contract liabilities to government grant | — | | | 1,706,000 | |
| | | |
| Net cash used used in operating activities | (7,103,274) | | | (6,838,000) | |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Net cash paid for acquisition of Converge | (82,730,000) | | | — | |
| | | |
| Net cash paid for acquisition of Redeeem | — | | | (1,376,000) | |
| Purchase of fixed assets | (163,824) | | | (158,000) | |
| Net cash used in investing activities | (82,893,824) | | | (1,534,000) | |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Proceeds from bank loan, net of debt issuance cost | 69,717,960 | | | — | |
| Proceeds from the issuance of preferred stock, net of offering costs | 44,405,000 | | | — | |
| Proceeds from initial public offering, net of offering costs | — | | | 20,702,000 | |
| Proceeds from stimulus loan programs | — | | | 569,000 | |
| Principal payments made for bank loan | (956,250) | | | — | |
| Payments to note payable of related party | (100,000) | | | (2,479,000) | |
| Payments made for the redemption of Series E preferred stock | (446,400) | | | — | |
| Proceeds from convertible note payable | — | | | 500,000 | |
| Payments to convertible note payable | — | | | (135,000) | |
| Net cash provided by financing activities | 112,620,310 | | | 19,157,000 | |
| | | |
| Effect of exchange rate on cash | (2,015,411) | | | (425,000) | |
| | | |
| Net increase in cash, cash equivalents | $ | 20,607,801 | | | $ | 10,360,000 | |
| CASH AND CASH EQUIVALENTS — beginning of year | 12,066,000 | | | 1,706,000 | |
| CASH AND CASH EQUIVALENTS — end of year | $ | 32,673,801 | | | $ | 12,066,000 | |
| | | |
| Supplemental disclosure of cashflow information: | | | |
| Cash paid during the period for: | | | |
| Income taxes | $ | — | | | $ | — | |
| Interest expense | $ | 1,998,958 | | | $ | — | |
| Noncash investing and financing activities: | | | |
| Preferred shares converted into common stock upon uplisting | $ | — | | | $ | 54,000 | |
| Shares to be issued for Converge acquisition | $ | 14,875,000 | | | $ | — | |
| Shares to be issued for Redeeem acquisition | $ | — | | | $ | 1,210,000 | |
| Issuance of common stock related to convertible note payable | $ | — | | | $ | 1,750,000 | |
| Issuance of common stock related to stock payable | $ | — | | | $ | 1,300,000 | |
| | | |
| Right-of-use assets acquired through operating leases | $ | — | | | $ | 2,642,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
TROIKA MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended June 30, 2022 and 2021
- 52 -NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
M2 nGageTroika Media Group, Inc. (“Company”, “our” or “we”) is a professional services company that architects and Subsidiaries(Formerly Roomlinx, Inc. builds enterprise value in consumer facing brands to generate scalable performance driven revenue growth. The Company delivers a three solutions pillars that CREATE brands and Subsidiaries)
experiences and CONNECT consumers through emerging technology products and ecosystems to deliver PERFORMANCE based measurable business outcomes.Notes to Consolidated Financial Statements
December 31, 2015 and 2014
1. Organization
Description of Business – M2 nGage Group, Inc. (formerly Roomlinx, Inc.)On March 22, 2022 (the "Company"“Closing Date”), "RMLX' or "M2 Group" or the "Registrant") was incorporated under the laws of the state of Nevada. The Company through its subsidiaries, provides high speed wired and wireless broadband services to customers located throughout the United States, turnkey services including all technology, infrastructure and expertise necessary to construct both temporary and permanent broadband wireless networks at large event forums, such as stadiums and concert venues and sells, installs, and services in-room media and entertainment solutions for hotels, resorts, and time share properties; including its proprietary Interactive TV platform, internet, and free to guest and video on demand programming. The Company also sells, installs and services telephone, internet, and television services for residential consumers. The Company develops software and integrates hardware to facilitate the distribution of Hollywood, adult, and specialty content, business applications, national and local advertising, and concierge services. The Company also sells, installs and services hardware for wired networking solutions and wireless fidelity networking solutions, also known as Wi-Fi, for high-speed internet access to hotels, resorts, and time share locations. The Company installs and creates services that address the productivity and communications needs of hotel, resort and time share guests, as well as residential consumers. The Company may utilize third party contractors to install such hardware and software.
Merger - On March 14, 2014, the Company entered into anwholly owned subsidiary Converge Acquisition Corp executed a Membership Interest Purchase Agreement and Plan of Merger ("Merger Agreement"MIPA") with Signal Point Holdings Corp. ("SPHC" or "Holdings") and Roomlinx Merger Corp., a wholly-owned subsidiary of the Company ("Merger Subsidiary" or "RMLX Merger Corp."). On February 10, 2015, the Company and SPHC terminated the Merger Agreement due to unexpected delays in meeting the closing conditions by the then extended termination date almost one year after the original agreement was entered into. On March 27, 2015, the Company and SPHC agreed upon new terms for the transactionacquisition of all the equity of Converge Direct, LLC and simultaneously signed and completedits affiliates ("Converge") for an aggregate purchase price of $125.0 million valued at $114.9 million. The MIPA identifies the Subsidiary Merger Agreement (the "SMA") described in Note 13. Upon the terms and subject to the conditions set forth in the SMA, RMLX Merger Corp. was merged with and into SPHC, a provider of domestic and international telecommunications services, with SPHC continuingseller parties as the surviving entity in the merger as a wholly-owned subsidiary of the Company (the "Subsidiary Merger"). The existing business of the Company was transferred into a newly-formed, wholly-owned subsidiary named SignalShare Infrastructure, Inc. ("SSI").Converge Sellers. See Note 133 - Acquisitions for additional information. full discussion on the transaction.
Basis of Presentation
SPHC is comprised of its wholly owned subsidiaries; M2 nGage Communications, Inc. (formerly Signal Point Telecommunication Corp) ("M2 Communications" or "SPTC"), M2 nGage, Inc. (formerly SignalShare Software Development Corp.) ("M2 nGage" or "SignalShare Software"), SignalShare LLC ("SignalShare") and Signal Point Corp. ("SPC") (see "discontinued operations" Note 6 related to SignalShare and SPC)
SignalShare Infrastructure, Inc. ("SSI") is comprised of its wholly owned subsidiaries Canadian Communications LLC ("CCL"), Cardinal Connect, LLC ("Connect"), Cardinal Broadband, LLC ("CBL"), and Arista Communications, LLC ("Arista"), a 50% owned subsidiary controlled by SSI and Cardinal Hospitality, Ltd. ("CHL") (see "discontinued operations" Note 6).
On July 28, 2016, the Company changed its name from Roomlinx, Inc to M2 nGage Group, Inc. and subsequently changed the names of its two operating subsidiaries to reflect the new branding of the Company. Signal Point Telecommunications Corp. was changed to M2 nGage Communications, Inc. and SignalShare Software Development Corp. was changed to M2 nGage, Inc.
In addition, the corporate structure was changed to realign the businesses pursuant to a settlement agreement related to a related party note payable (see note 8). The M2 Communications and M2 nGage subsidiaries of SPHC were transferred to a new holding company, Digital Media Acquisition Group Corp. (DMAG), and DMAG is the 100% shareholder of both subsidiaries. The Company is the sole owner of DMAG.
The Company is registered to transact businesses within various states throughout the United States.
2. Reverse Acquisition
On March 27, 2015, the Company entered into and completed a Subsidiary Merger Agreement ("SMA") (more fully discussed in note 13) with SPHC (a private company). Upon closing of the transaction, SPHC's Shareholders transferred their 100% ownership in SPHC's common stock and Series A Preferred Stock in exchange for an aggregate of 115,282,137 shares of the common stock of RMLX (approximately 85.4% of voting control of the Company)reports on a one-to-onefiscal year basis plus the assumption of the Class A Preferred Stock of RMLX. As part of the agreement, RMLX's existing shareholders retained 19,758,619 shares of the Company's Common Stock and 720,000 shares of class A Preferred Stock (representing approximately 14.6% of voting control of RMLX upon consummation of the reverse acquisition) in exchange for 100% of SPHC common stock and Series A Preferred Stock.
For financial accounting purposes, this transaction was treated as a reverse acquisition by SPHC, and resulted in a recapitalization with SPHC being the accounting acquirer and RMLX as the acquired company. The consummation of this reverse acquisition resulted in a change of control. Accordingly, the historical financial statements prior to the acquisition are those of the accounting acquirer, SPHC, and have been prepared to give retroactive effect to the reverse acquisition completedending on March 27, 2015, and represent the operations of SPHC. TheJune 30th. In these consolidated financial statements, after the acquisition date, March 27, 2015 include the balance sheets of both companies at historical cost, the historical results of SPHCfiscal years ended June 30, 2022 and 2021, are referred to as “Fiscal Year 2022” and “Fiscal Year 2021,” respectively, and the results of the Company from the acquisition date. All share and per share information in the accompanying consolidated financial statements and footnotes has been retroactively restatedfiscal year ending June 30, 2023, is referred to reflect the recapitalization.as “Fiscal Year 2023”.
The following table summarizes the assets acquired and liabilities assumed from the reverse acquisition transaction:
| Property and equipment | | $ | 78,807 | |
| Cash in bank | | | 812,756 | |
| Account receivable | | | 856,282 | |
| Leases receivable | | | 575,471 | |
| Prepaid expenses | | | 151,604 | |
| Inventory | | | 129,665 | |
| Other assets | | | 83,215 | |
| Current liabilities | | | (5,922,133 | ) |
| Debt | | | (3,640,839 | ) |
| Liabilities of discontinued operations | | | (117,573 | ) |
| Other liabilities | | | (144,807 | ) |
| Class A preferred stock | | | (144,000 | ) |
| Goodwill | | | 42,847,066 | |
| Total | | $ | 35,565,514 | |
The fair value of the consideration effectively transferred by SPHC and the group's interest in RMLX is $35,565,514 (19,758,619 shares), the remaining 14.6% of ownership with a per share fair value of $1.80). Management of the Company followed the guidance of the reverse acquisitions on fair value of the consideration transferred pursuant to ASC 805-40-55-9 to 55-12 and concluded that SPHC's per share fair value of $1.80 is deemed the most reliable measure.
3. Going Concern Matters
At December 31, 2015, the Company had $35,570 in cash on hand, had incurred a net loss of approximately $81.5 million (including the impairment of goodwill of approximately $47 million) and net cash used of approximately $4.6 million in operating activities for the year ended December 31, 2015. In addition, the Company had negative working capital (current liabilities exceeded current asset) of approximately $30.0 million. The negative working capital was primarily comprised of approximately $5.2 million of accounts payable, approximately $2.3 million of accrued expenses, deferred revenue and customer prepayment, approximately $3.2 million of debt and approximately $19.3 million of working capital deficit of discontinued operations that is substantially all related to debt and accounts payable.
The Company's cash balance and revenues generated are not currently sufficient and cannot be projected to cover its operating expenses for the next twelve months from the date of this report. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans include attempting to improve its business profitability, its ability to generate sufficient cash flow from its operations to meet its operating needs on a timely basis, obtain additional working capital funds through equity and debt financing arrangements, and restructure on-going operations to eliminate inefficiencies to raise cash balance in order to meet its anticipated cash requirements for the next twelve months from the date of this report. However, there can be no assurance that these plans and arrangements will be sufficient to fund the Company's ongoing capital expenditures, working capital, and other requirements. Management intends to make every effort to identify and develop sources of funds. The outcome of these matters cannot be predicted at this time. There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.
The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital and achieve profitable operations. The accompanying consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
4. Summary of Significant Accounting Policies and Principles of Consolidation
Basis of Consolidation - The Company's consolidated financial statements include the financial statementsaccounts of RMLXTMG, and its wholly-owned subsidiaries, SPHC, SSITroika Design Group, Inc., Troika Services Inc., Troika Analytics Inc., Troika Productions, LLC (California), Troika-Mission Holdings, Inc. (New York), Mission Culture LLC (Delaware), Mission-Media Holdings Limited (England and DMAG.Wales), Mission Media USA, Inc. (New York), and Troika IO, Inc. (f/k/a Redeeem Acquisition Corp) (California), Converge Direct, LLC (New York), Converge Marketing Services, LLC (to the extent of 40%) (New York), Converge Interactive, LLC (New York), and Lacuna Ventures, LLC (New York). All significant intercompany accounts and transactions have been eliminated in consolidation.
Discontinued Operations – On May 3, 2016 Cenfin, the senior secured lenderFor purposes of SSI, sold all right, title and interest in substantially all personal property of SSI to the highest qualified bidder at a public auction pursuant to Article 9 of the Uniform Commercial Code. There was one bidder and the transaction closed on May 11, 2016 and all employees of SSI were terminated and the operations of the company ceased. Meeting the definition under applicable accounting standards of a discontinued operation, all periods presentedcomparability, certain prior period amounts have been reclassified to present these operations as discontinued operations. Financial informationconform to the current year presentation in the consolidated financial statements and related notes have also been revised to reflect the results of the discontinued operations for all periods presented (See Note 6).
Effective May1, 2016, the stock of CBL (including its 50% interest in Arista) were sold. Meeting the definition under applicable accounting standards of a discontinued operation, all periods presented have been reclassified to present these operations as discontinued operations. Financial information in the consolidated financial statements and related notes have also been revised to reflect the results of the discontinued operations for all periods presented (See Note 6).
During January 2016, the Company closed down the operations of SignalShare. This decision was made as a result of a continuing decline in revenue and increasing costs. As a result of the decision to shut down SignalShare, all applicable employees were terminated. On July 5, 2016, SignalShare filed for bankruptcy voluntarily pursuant to Chapter 7 of the Bankruptcy Code. Accordingly, SignalShare has been classified as discontinued operations in all periods presented. Financial information in the consolidated financial statements and related notes have also been revised to reflect the results of the discontinued operations for all periods presented (See Note 6).
During the year ended December 31, 2013, SPHC closed down the operations of SPC. This decision was made as a result of a continuing decline in revenues, increasing costs and Federal and state regulatory environment that continued to pressure margins in the SPC businesses. As a result of the decision to shut down SPC, all applicable employees were terminated, as were leases for facilities and office space. Meeting the definition under applicable accounting standards of a discontinued operation, all periods presented have been reclassified to present these operations as discontinued operations. Financial information in the consolidated financial statements and related notes have also been revised to reflect the results of the discontinued operations for all periods presented (See Note 6).
SPC operated in the communications services industry providing voice, data, and Internet services through residential and commercial telephone service, Voice over Internet Protocol ("VoIP") enabled services, prepaid and post-paid calling cards, conference calling, and wholesale carrier terminations. It was a registered and certified competitive local exchange carrier ("CLEC") providing local exchange services primarily in the New England region, and was also a licensed and registered interexchange carrier ("IXC") or "long distance" carrier, providing domestic and international long distance services. SPC marketed its services to customers either directly or through reseller channels.
During the year ended December 31, 2013, SSI terminated all hotel contracts serviced by Cardinal Hospitality, Ltd. (see Note 6) meeting the definition under applicable accounting standards for discontinued operations. The liabilities assumed in connection with the reverse acquisition included $114,012 related to Cardinal Hospitality, Ltd., which has been included in the accompanying consolidated balance sheet as of December 31, 2015 under the line item of "Current liabilities of discontinued operations".
Use of estimates - The preparation of consolidated financial statements in conformityaccordance with accounting principles generally accepted in the United States of America (“GAAP”).
Impact of the COVID-19 Pandemic
The Company's operations and operating results were materially impacted by the COVID-19 pandemic (including COVID-19 variants) and actions taken by governmental authorities. The Company received loans totaling $3.4 million in relief under the CARES Act in the form of Small Business Administration ("SBA") backed loans in SBA stimulus Payroll Protection Program ("PPP") funding. The Company received approximately $1.7 million in April 2020, of which the majority of these funds were used for payroll. As per the US Government rules, the funds used for payroll, healthcare benefits, and other applicable operating expenses can be forgiven and the Company reported them as such in December 2020 considering the Company believes we have substantially met these conditions. On August 14, 2020, the Company received an additional $500,000 in loans with 30-year terms under the SBA’s “Economic Injury Disaster Loan” program which the Company used to address any cash shortfalls that resulted from the pandemic. In February 2021, the Company obtained additional relief under the CARES Act in the form of an SBA backed loan and received an additional $1.7 million in SBA stimulus PPP funds which was used for payroll, healthcare benefits, and other applicable operating expenses. The Company has met all conditions for the forgiveness of the funding and no amounts are due as of June 30, 2022.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of Troika Media Group, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Business Combinations and Investments in Nonconsolidated Affiliates
The acquisition method of accounting for business combinations requires management to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which the Company is allowed to adjust the provisional amounts recognized for a business combination).
The Company’s investments in nonconsolidated affiliates are primarily accounted for using the equity method of accounting and are carried at cost, plus or minus the Company’s share of net earnings or losses of the investment, subject to certain other adjustments. The cost of equity method investments includes transaction costs of the acquisition. As required by GAAP, to the extent that there is a basis difference between the cost and the underlying equity in the net assets of an equity investment, the Company allocates such differences between tangible and intangible assets. The Company’s share of net earnings or losses of the investment, inclusive of amortization expense for intangible assets associated with the investment, is reflected in equity in earnings (loss) of nonconsolidated affiliates on the Company’s consolidated and combined statements of operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions thatabout future events. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure ofreported, disclosures about contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses duringexpenses. Such estimates include the reporting period. The accounting estimates that require management's most significantassessment of the collectability of accounts receivable and subjective judgments include revenue recognition, the valuationdetermination of long-lived assets, goodwill, the valuation and recognition of stock-based compensation expense and acquired indefinite-lived intangible assets. In addition, the Company has other accounting policies that involve estimates such as the allowance for doubtful accounts, valuation of warrants and options, goodwill, intangible assets, other long-lived assets, and tax accruals. In addition, estimates are used in revenue reserves,recognition, performance and share-based compensation, depreciation and amortization, litigation matters and other matters.Management believes its use of estimates in the determinationfinancial statements to be reasonable.
Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the general economic environment and actions it may take in the future. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on management’s best judgment at a point in time and, as such, these estimates may ultimately differ from actual results. Changes in estimates resulting from weakness in the economic environment or other factors beyond the Company’s control could be material and would be reflected in the Company’s financial statements in future periods.
Revenue Recognition
The Company generates revenue principally from two material revenue streams; managed services and performance management.
The Company’s managed services are typically orientated around the management of a customer’s marketing, data and/or creative program. The Company’s deliverables relate to the planning, designing and activating of a solution program or set of work products. The Company executes this revenue stream by leveraging internal and external creative, technical or media-based resources, third party AdTech solutions, proprietary business intelligence systems, data delivery systems, and other key services required under the terms of a scope of work with a client. Revenue in certain cases is earned based on a percentage (%) of a customer’s total budget (or media spend) or retainer, which is recognized as a net revenue, while other revenue is recognized on a gross basis.
The Company’s Performance Services are typically orientated around the delivery of a predetermined event or outcome to a client. Typically, the revenue associated with the event (as agreed upon in a scope of work) is based on a click, lead, call, appointment, qualified event, case, sale, or other defined business metric. The Company engages in a myriad of consumer engagement tactics, ecosystems, and methods to generate and collect a consumer’s interest in a particular service or good.
The Company's revenue recognition policies that describe the nature, amount, timing, and uncertainty associated with each major revenue source from contracts with customers are described in Note 4.
Cost of Revenues
Cost of revenues primarily consists of necessary costs incurred to generate revenue. Examples include payment for advertising and marketing services engaged for on behalf of a client, direct labor incurred, and certain creative design and production related costs. These costs are typically expensed as incurred.
Advertising
Advertising costs are typically charged to expense when incurred. The Company may receive rebates on advertising from co-operative advertising agreements with several vendors and suppliers. These rebates are recorded as a reduction to the related advertising and marketing expense. Total advertising costs classified in selling, general, and administrative during the years ended June 30, 2022 and 2021, were approximately $199,000 and $0, respectively.
Income Taxes
The Company accounts for its income taxes in accordance with Income Taxes Topic of the useful lives of long-lived assets, theFASB ASC 740, which requires recognition of the fair value of assets acquired and liabilities assumed in business combinations, accruals for estimated tax and legal liabilities, valuation allowance for deferred tax assets and costliabilities for future tax consequences attributable to differences between the financial statement carrying amounts of revenue disputesexisting assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for communications services. Actual results may differ from these estimates under different assumptions or conditionsconsolidated financial reporting purposes and such amounts recognized for tax purposes and are measured by applying enacted tax rates in effect in years in which the differences could be material.are expected to reverse.
Cash and Cash Equivalents - For purposes ofThe Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement presentation,benefit of a tax position only after determining that the Company considers all highly liquid investmentsrelevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with maturities of three months or less to be cash and cash equivalents.the relevant tax authority.
Accounts Receivable and Allowance for Doubtful Accounts - The Company extends credithas net operating losses for both their US and UK entities; however, a full valuation allowance was recorded due to certain customersuncertainties in realizing the normal coursedeferred tax asset (Note 15 – Income Taxes).
Stock-based compensation
The Company recognizes stock-based compensation in accordance with ASC Topic 718 “Stock Compensation”, which requires the measurement and recognition of business, based upon credit evaluations, primarily with 30 – 60 day terms. The Company's reserve requirements arecompensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the best facts available toestimated fair values.
For non-employee stock-based compensation, the Company has adopted ASC 2018-07, Improvements to Nonemployee Share-Based Payment Accounting which expands on the scope of ASC 718 to include share-based payment transactions for acquiring services from non-employees and are reevaluated and adjusted as additional information is received. The Company's reserves are alsorequires stock-based compensation related to non-employees to be accounted for based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. Accounts are written off when they are deemed uncollectible.
Property, equipment, and software - Property, equipment, and software are recorded at cost, using the straight-line method over the estimated useful life of the related assets as shown below.
Telephone equipment | 5 – 9.5 years |
Machinery and equipment | 3 – 10 years |
Furniture and fixtures | 5 – 7 years |
Vehicles | 4 – 5 years |
Leasehold improvements | 3 years |
Computer software | 3 years |
Leasehold improvements are depreciated over the shorter of their estimated useful lives or their reasonably assured lease terms.
Major improvements that extend the useful life or add functionality to property are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred.
At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any gains or losses are reflected in the consolidated statements of operations.
The Company performs periodic internal reviews to determine depreciable lives of its property, equipment and software based on input from Company personnel, actual usage and the physical condition of the Company's property, equipment and software.
Accounts Payable Claims and Disputes - The Company has established a systematic approach to record accounts payable based on invoice amount, net of claims filed and acknowledged by vendors, as well as any additional credits received. Billings from carriers frequently require adjustment to reflect the Company's correct usage of those carrier services. All claims by the Company against vendors are netted against payables to those vendors and expect to be settled through credits issued by vendors. Any additional credits received such as late fees usually waived by vendors, are generally insignificant.
Revenue Recognition – M2 Communications derives the majority of its revenue from monthly recurring fees and usage-based fees that are generated principally by sales of its network, carrier and subscription services.
Monthly recurring fees include the fees billed by M2 Communications's network and carrier services customers for lines in service and additional features on those lines. M2 Communications primarily bills monthly recurring fees in advance, and recognizes the fees in the period in which the service is provided.
Usage-based fees consist of fees billed by M2 communications' network and carrier services customers for each call made. These fees are billed in arrears and recognized in the period in which the service is provided.
Subscriber fees include monthly recurring fees billed by M2 communications' end-user subscribers for lines in service, additional features on those lines, and usage-based per-call and per-minute fees. Subscriber fees also consist of provision of access to data, wireless, and VoIP services. These fees are billed in advance for monthly recurring items and in arrears for usage-based items, and revenues are recognized in the period in which service is provided.
Deferred Revenue and Customer Prepayments - M2 Communications bills customers in advance for certain of its telecommunications services. If the customer makes payment before the service is rendered to the customer, M2 Communications records the payment in a liability account entitled customer prepayments and recognizes the revenue related to the communications services when the customer receives and utilizes that service, at which time the earnings process is complete.
Advertising Costs - Advertising costs are expensed as incurred. Advertising expense for the year ended December 31, 2015 and 2014 were approximately $0 and $269, respectively.
Prepaid Expenses and Other Current Assets - Prepaid expenses and other current assets consist of services, insurance, maintenance contracts and refundable deposits. Other than refundable deposits, prepayments are expensed on a straight-line basis over the corresponding life of the underlying agreements.
Cost of sales - Cost of sales consists primarily of leased transport charges and usage costs for local and long distance calls. Leased transport charges are the payments the Company makes to lease the telephone and data transmission lines it uses to connect customers to the Company's network and to connect the Company's network to the networks of other carriers. Usage costs for local and long distance calls are the costs incurred to connect the calls made by customers that are terminated on the networks of other carriers. These costs may include an estimate of charges for which invoices have not yet been received, and may be based upon the estimated number of transmission lines and facilities in service, estimated minutes of use, estimated amounts accrued for pending disputes with other carriers, as well as upon the contractual rates charged by the Company's service providers. Subsequent adjustments to these estimates may occur after the bills are received for the actual costs incurred, but these adjustments generally are not expected to have a material impact on the operating results based on management's historical experience.
Judgment is required in estimating the ultimate outcome of the dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from estimates and such differences could be material.
Selling, General and Administrative Expenses - The Company's selling, general and administrative expenses are defined as expenses incurred by the Company that relate directly to the day-to-day operations and the administration of the Company. These costs consist primarily of, but are not limited to, compensation, depreciation and amortization, commissions, selling and marketing, customer service, billing, corporate administration, engineering, personnel and other costs.
Concentration of Credit Risk - Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents and accounts receivable. Exposure to losses on accounts receivable is principally dependent on each customer's financial condition. The Company monitors its exposure for customer credit losses and maintains allowances for anticipated losses. The Company places its cash and cash equivalents in financial institutions insured by the Federal Depository Insurance Corporation, to the maximum amount of that coverage. Additionally, the Company limits its amount of credit exposure to any one institution. The Company has never experienced any losses in these accounts and believes that its credit risk exposure with respect to cash balances held by depository institutions is limited.
Concentrations - The Company currently leases its transport capacity from a limited number of suppliers and is dependent upon the availability of transmission facilities owned by the suppliers. The Company is vulnerable to the risk of renewing favorable supplier contracts and timeliness of the supplier in processing the Company's orders for customers, and is at risk related to regulation and regulatory developments that govern the rates to be charged to the Company and, in some instances, whether certain facilities are required to be made available to the Company. The Company has three major suppliers: Verizon Communications, Inc., Level 3 Communications, LLC and Altiva, LLC that account for approximately 59% of its cost of services for the year ended December 31, 2015 and two major suppliers: Verizon Communications, Inc. and Alteva LLC that account for a combined 50% of its cost of services for the year ended December 31, 2014. Verizon, Level 3 Communications and Alteva LLC accounted for a combined 29% of the balance in accounts payable at December 31, 2015. Verizon and Alteva LLC accounted for a combined 28% of the balance in accounts payable at December 31, 2014.
Goodwill - Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. In accordance with the provisions of ASC 350 "Intangibles — Goodwill and Other" ("ASC 350"), the Company does not amortize goodwill or other acquired intangible assets with indefinite useful lives. The Company has identified two reporting units as defined in ASC 350. Goodwill is assessed for impairment at least annually, based upon the Company's estimate of the fair value of the reporting units.
The Company assesses the carrying value of its goodwill at December 31 of each fiscal year. In accordance with the Intangibles - Goodwill and Other Topic, goodwill of a reporting unit will also be tested for impairment between annual tests if a triggering event occurs, as defined by the "Intangibles – Goodwill and Other Topic," that could potentially reducerelated stock or the fair value of the reporting unitservices at the grant date, whichever is more readily determinable in accordance with ASC Topic 718.
Cash and Cash Equivalents
The Company considers the balance of its investment in funds that substantially hold highly liquid securities that mature within three months or less from the date the fund purchases these securities to be cash equivalents. The carrying amount of cash and cash equivalents either approximates fair value due to the short-term maturity of these instruments or is at fair value. Checks outstanding in excess of related book balances are included in accounts payable in the accompanying consolidated balance sheets. The Company presents the change in these book cash overdrafts as cash flows from operating activities.
Short-Term Investments
Short-term investments included investments that (i) had original maturities of greater than three months and (ii) the Company had the ability to convert into cash within one year. The Company classified its short-term investments at the time of purchase as “held-to-maturity” and re-evaluated its classification quarterly based on whether the Company had the intent and ability to hold until maturity. Short-term investments, which were recorded at cost and adjusted for accrued interest, approximate fair value. Cash inflows and outflows related to the sale and purchase of short-term investments are classified as investing activities in the Company’s consolidated and combined statements of cash flows.
Accounts Receivable
Accounts receivable is recorded at net realizable value. The Company maintains an allowance for credit losses to reserve for potentially uncollectible receivables. The allowance for credit losses is estimated based on the Company’s consideration of credit risk and analysis of receivables aging, specific identification of certain receivables that are at risk of not being paid, past collection experience and other factors. As of June 30, 2022 and 2021, the Company had $552,000 and $521,000, in allowance for doubtful accounts, respectively.
Property and Equipment and Other Long-Lived Assets
Property and equipment and other long-lived assets, including amortizable intangible assets, are stated at cost or acquisition date fair value, if acquired. Expenditures for new facilities or equipment, and expenditures that extend the useful lives of existing facilities or equipment, are capitalized and recorded at cost. The useful lives of the Company’s long-lived assets are based on estimates of the period over which the Company expects the assets to be of economic benefit to the Company. In estimating the useful lives, the Company considers factors such as, but not limited to, risk of obsolescence, anticipated use, plans of the Company, and applicable laws and permit requirements. Depreciation starts on the date when the asset is available for its intended use. Costs of maintenance and repairs are expensed as incurred.
Property and equipment are depreciated on a straight-line basis using the estimated lives indicated below its carrying value.(in years):
| | | | | | | | | | | |
| | | Estimated Useful Lives |
| Computer equipment | | | 3 |
| Website design | | | 5 |
| Office machine & equipment | | | 5 |
| Furniture & fixtures | | | 7 |
| Leasehold improvements | | | 7 |
| Tenant incentives | | | 7 |
Testing
Intangible assets with finite lives are depreciated on a straight-line basis using the estimated lives indicated below (in years):
| | | | | | | | | | | |
| | | Estimated Useful Lives |
| Customer Relationships | | | 10 |
| Non-core customer relationships | | | 8 |
| | | |
| Technology | | | 5 |
| Tradename | | | 10 |
| Workforce acquired | | | 3 |
Impairment of long-lived-assets
The Company evaluates, on a periodic basis, long-lived assets to be held and used for impairment of goodwill per US GAAP follows a two-step impairment test model and, an additional, initial qualitative assessment related to goodwill impairment. Inin accordance with the relevant accounting standards,reporting requirements of ASC 360-10. The evaluation is based on certain impairment indicators, such as the Company has chosen not to implement this initial qualitative assessment in making itsnature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If these impairment decision with respect to goodwill recorded in its accounts and has proceeded directly to step 1 as explained below:
Step 1. Theindicators are present or other factors exist that indicate that the carrying amount of the asset is compared withmay not be recoverable, then an estimate of the undiscounted value of expected future operating cash flows it is expectedused to generate. Ifdetermine whether the carryingasset is recoverable and the amount is lower than the undiscounted cash flows, noof any impairment loss is recognized and Step 2 is not necessary. If the carrying amount is higher than the undiscounted cash flows, then Step 2 quantifies the impairment loss.
Step 2. An impairment loss is measured as the difference between the carrying amount of the asset and its estimated fair value. FairThe fair value is definedestimated using valuation techniques such as market prices for similar assets or discounted future operating cash
flows. Intangible asset impairment charges recorded were $445,667 and $0 for the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date.years ended June 30, 2022 and 2021, respectively.
The Company determined that at March 31, 2015,has adopted the provisions of ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 requires goodwill created throughimpairments to be measured on the Company's reverse acquisition in connection with the SMA could not be supported through the projected future cash flowsbasis of the Company. Accordingly, the Company determined that the goodwill arising from the March 27, 2015 reverse acquisition transaction was impaired and an impairment charge of $42,847,066 was included in the loss from discontinued operations during the year ended December 31, 2015.
In addition, The Company determined that at December 31, 2015, the goodwill remaining on its books from the 2013 acquisition of SignalShare could not be supported through the projected future cash flows of the Company due to the operations being discontinued in January 2016. Accordingly, the Company determined that the goodwill was impaired and an impairment charge of $4,121,284 was included in the loss from discontinued operations during the year ended December 31, 2015.
Impairment of Long Lived Assets - In accordance with ASC 360 "Property, Plant, and Equipment" (the "PP&E Topic"), long-lived assets are periodically evaluated for potential impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In the event that periodic assessments determine that the carrying amount of the asset exceeds the sum of the undiscounted cash flows (excluding interest on any borrowings used to fund the assets) that are expected to result from the use and eventual disposition of the asset, the Company would recognize an impairment loss to the extent the carrying amount exceeded the fair value of a reporting unit relative to the property. The Company estimatesreporting unit’s carrying amount rather than on the fair value using available market informationbasis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. Thus, ASU 2017-04 permits an entity to record a goodwill impairment that is entirely or other industry valuation techniques such as present value calculations.
There has been no indication since then thatpartly due to a decline in the fair value of other assets that, property, plantunder existing GAAP, would not be impaired or have a reduced carrying amount. Furthermore, the ASU removes “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Accordingly, the goodwill of reporting unit or entity with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit/entity may indicate that goodwill is impaired. For the years ended June 30, 2022 and 2021, a goodwill impairment charge of approximately $8.71 million and $0, respectively, was recorded as a result of the Company’s annual impairment assessment. The total impairment charge consisted of approximately $2.0 million for Redeeem and $6.7 million for MUK. See Note 9.
Leases
The Company’s leases primarily consist of corporate office space. The Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the lease term is assessed based on the date when the underlying asset is made available by the lessor for the Company’s use. The Company’s assessment of the lease term reflects the non-cancellable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain not to exercise, as well as periods covered by renewal options which the Company is reasonably certain to exercise. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
The Company determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated and combined statements of operations and statements of cash flows over the lease term.
For leases with a term exceeding 12 months, a lease liability is recorded on the Company’s consolidated balance sheets at lease commencement reflecting the present value of the fixed minimum payment obligations over the lease term. A corresponding right-of-use (“ROU”) asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. In addition, the ROU asset is adjusted to reflect any above or below market lease terms under acquired lease contracts.
The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as the Company has elected to account for lease and non-lease components together as a single lease component. ROU assets associated with finance leases are presented separate from ROU assets associated with operating leases and are included within Property and equipment, has declined.net on the Company’s consolidated balance sheets. For purposes of measuring the present value of the Company’s fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in the underlying leasing arrangements are typically not readily determinable. The Company’s incremental borrowing rate reflects the rate it would pay to borrow on a secured basis and incorporates the term and economic environment surrounding the associated lease.
DeferredFor operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For finance fees - current - Deferred finance fees - current consistleases, the initial ROU asset is depreciated on a straight-line basis over the lease term, along with recognition of deferred financing costsinterest expense associated with debt that has been reclassifiedaccretion of the lease liability, which is ultimately reduced by the related fixed payments. For leases with a term of 12 months or less (“short-term leases”), any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the consolidated balance sheets. Variable lease costs for both operating and finance leases, if any, are recognized as current due to their default status.incurred and such costs are excluded from lease balances recorded on the consolidated balance sheets.
Other Assets - Other assets consist primarily of long term leases receivable and long term accounts receivables- leases and direct.
Fair Value of Financial Instruments - We adopted the guidance of ASC 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes aMeasurement
The fair value hierarchy is based on inputs to classify the inputsvaluation techniques that are used in measuringto measure fair value as follows:that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or
liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
•Level 1 - Inputs are unadjusted quotedI — Quoted prices for identical instruments in active markets for identical assets or liabilities available at the measurement date.markets.
•Level 2 - Inputs are quotedII — Quoted prices for similar assets and liabilitiesinstruments in active markets,markets; quoted prices for identical or similar assets and liabilitiesinstruments in markets that are not active,active; and model-derived valuations whose inputs other than quoted prices that are observable or whose significant value drivers are observable.
•Level III — Instruments whose significant value drivers are unobservable.
Fair-value estimates discussed herein are based upon certain market assumptions and inputs derived from or corroborated by observable market data.
Level 3 - Inputs are unobservable inputs which reflect the reporting entity's own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the bestpertinent information available information.
to management as June 30, 2022 and 2021. The respective carrying amounts reported in the consolidated balance sheets forvalue of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, loansliabilities, and convertible notes payable. Fair values for these items were assumed to approximate carrying values because of their short term nature or they are payable deferred revenueon demand. The Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as the fair values were determined by using the Black-Scholes option-pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives.
Concentration of Credit Risk
Financial instruments that potentially may subject the Company to a concentration of credit risk consist principally of cash and other currentcash equivalents and accounts receivable. The Company maintains cash and cash equivalent account balances with financial institutions in the United States and United Kingdom which at times exceed federally insured limits for accounts in the United States. Considering deposits with these institutions can be redeemed on demand, the Company believes there is minimal risk. As of June 30, 2022 and 2021, the Company had approximately $30.0 million and $10.1 million in cash that was uninsured, respectively.
For the fiscal years ending June 30, 2022 and 2021, six (6) customers accounted for 74.1% and 42.4% of our net revenues, respectively. As of June 30, 2022, and 2021, three (3) customers made up 75.9% and 44.2%, respectively, of the net receivable balance. The Company believes there is minimal risk; however, it will continue to monitor.
Beneficial Conversion Feature
The Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options, Emerging Issues Task Force (“EITF”) 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No 98-5 To Certain Convertible Instruments. The Beneficial Conversion Feature (“BCF”) of a convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of a convertible note when issued and also records the estimated fair value of any warrants issued with those convertible notes. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.
The BCF of a convertible note is measured by allocating a portion of the note’s proceeds to the warrants, if applicable, and as a reduction of the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which are credited to additional paid-in-capital. The value of the proceeds received from a convertible note is then allocated between the conversion features and warrants on an allocated fair value basis. The allocated fair value is recorded in the financial statements as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense using interest method.
Derivative Liability
The Company analyzes all financial instruments with features of both liabilities approximateand equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect their fair market value at each period end with any increase or decrease in the fair value being recorded in results of
operations. The fair value of derivative instruments such as convertible note payables are valued using the Black-Scholes option-pricing model based on various assumptions.
Foreign Currency Translation
The consolidated financial statements of the short term maturityCompany are presented in U.S. dollars. The functional currency for the Company is U.S. dollars for all entities other than Mission Media Limited whose operations are based in the United Kingdom and their functional currency is British Pound Sterling (GBP). Transactions in currencies other than the functional currencies are recorded using the appropriate exchange rate at the time of these instruments. ASC 825-10 "Financial Instruments," allows entities to voluntarily choose to measure certain financialthe transaction. All assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding financial instruments.
Foreign Currency Translation and Comprehensive Income (Loss) - The US Dollar is the functional currency of the Company. Assets and liabilities denominated in foreign currencies are re-measuredtranslated into USU.S. Dollars at each reporting period-end exchange rates. Income and expenses are translated at an average exchangebalance sheet date using closing rate, for the reporting periods,shareholders’ equity is translated at historical rates and revenue and expense accounts are translated at the resultingaverage exchange rate for the year or the reporting period. The translation gain (loss) adjustments are accumulatedreported as a separate component of the deficit.
Foreign currencystockholders’ equity, captioned as accumulated other comprehensive (loss) income. Transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than respective local currenciesthe functional currency are included in other income (expense) in the consolidated statements of operationsoperations.
The relevant translation rates are as follows: for the year ended June 30, 2022, closing rate at $1.219050 US$: GBP, yearly average rate at $1.330358 US$: GBP, for the year ended June 30, 2021, closing rate at 1.382800 US$: GBP, yearly average rate at 1.346692 US$: GBP.
Comprehensive loss
Comprehensive loss is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. For the Company, comprehensive loss.loss for the years ending June 30, 2022 and 2021, included net loss and unrealized gains (losses) from foreign currency translation adjustments.
Earnings per Share
Net income (loss) per common share is calculated in accordance with ASC Topic: 260 Earnings Per Share - The Company computes earningsper Share. Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock andoutstanding during the period. The computation of diluted net loss per share does not include dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company's stock options and warrants. Potentially dilutive securities, purchase stock options and warrants, are excluded from the calculation when their inclusion would be anti-dilutive, such as periods when a net loss is reported or when the exercise price of the instrument exceeds the fair market value. Accordingly,in the weighted average shares outstanding haveas they would be anti-dilutive. In periods where the Company has a net loss, all dilutive securities are excluded.
The following are dilutive common stock equivalents as of June 30, which were not been adjusted for dilutive shares. Outstanding stock options and warrants are not consideredincluded in the calculation of loss per share, since the Company had a net loss from continuing operations and net loss:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Convertible preferred stock | 381,333 | | | 48,000 | |
| Stock payables | — | | | 588,354 | |
| Stock options | 3,616,836 | | | 2,766,467 | |
| Stock warrants | 6,771,223 | | | 7,248,702 | |
| Financing warrants | 70,270,019 | | | — | |
| Restricted stock units | 4,450,000 | | | — | |
| Total | 85,489,411 | | | 10,651,523 | |
Stimulus Funding
In accordance with IAS-20, Accounting for Government Grants and Disclosure of Government Assistance, the proceeds from government grants are to be recognized as a deferred income liability and reported as income as the impact of the potential common stock would be anti-dilutive.
Income Taxes - The Company accounts for income taxes using the asset/liability method prescribed by ASC 740, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilitiesrelated costs are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company applied the provisions of ASC 740-10-50, "Accounting for Uncertainty in Income Taxes," which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our consolidated financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company's liability for income taxes. Any such adjustment could be material to the Company's results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of December 31, 2015,expensed. On June 30, 2022, the Company had no uncertain tax positions,deferred income liabilities. On June 30, 2021, the Company recorded deferred income liabilities of approximately $270,000 within contract liabilities and will continue to evaluate for uncertain positions$569,000 within stimulus loans, respectively. For the fiscal years ending June 30, 2022 and 2021, the Company recognized approximately $0.3 million and $3.1 million in the future.income from government grants, respectively.
Legal and Contingency Reserves - The Company accounts for legal and other contingencies in accordance with ASC 450 "Contingencies." Loss contingencies are accrued by a charge to income if two conditions are met. The first condition is that information existing prior to the issuanceRecent Accounting Pronouncements
ASU 2016-01
Accounting Pronouncements Adopted
In January 2016, the FinancialAugust 2020, FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other and Derivatives and Hedging—Contracts in Entity’s Own Equity: Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2016-01,for Convertible Instruments and Contracts in an Entity’s Own Equity” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affectsimplifies the accounting for equity investments, financial liabilities underconvertible instruments by removing the fair value option,separation models for convertible debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.treasury stock method will be no longer available. The new standardguidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company has adopted the guidance effective July 1, 2021.
In December 2019, the FASB issued amended guidance in the form of ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and interimclarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2017,2020 and uponinterim periods within those annual periods, with early adoption anpermitted. An entity should applythat elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company has adopted the guidance effective July 1, 2021.
Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Subtopic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by means of a cumulative-effect adjustment toaddressing diversity in practice and inconsistency. ASU 2021-08 is effective for the balance sheet atCompany beginning June 1, 2023. This update should be applied prospectively on or after the beginningeffective date of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income.amendments. The Company is currently evaluating the impacteffect of adopting this guidance.ASU.
In November 2015, the FASB issued (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes. Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flows, and did not have any effect on prior periods due to the full valuation allowance against the Company's net deferred tax assets.
In September 2015,March 2022, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement – Period Adjustments. Changes to2022-02, “Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings (TDRs) for measurement-period adjustments relatecreditors and amends the guidance on “vintage disclosures” to business combinations. Currently, an acquiring entity is requiredrequire disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to retrospectively adjustaccounting for credit losses under the balance sheet amounts of the acquiree recognized at the acquisition datecurrent guidance and adds enhanced disclosures for creditors with a corresponding adjustmentrespect to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognizedloan refinancing and restructurings for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standardborrowers experiencing financial difficulty. ASU 2022-02 is effective for both public and private companies for periodsthe Company in fiscal year beginning after December 15, 2015. Adoptionon July 1, 2023. The adoption of this new standard is not expected to have a material impact on the Company'sCompany’s consolidated financial statements.
ASU 2015-15
In August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2021-04—Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company is currently evaluating the effect of adopting this ASU.
NOTE 3 – BUSINESS COMBINATIONS AND DISPOSITIONS
Redeeem, LLC
Redeeem Asset Purchase
On May 21, 2021 (“Closing Date”), the Company through its wholly owned subsidiary Redeeem Acquisition Corp executed an asset purchase agreement for the acquisition of all the assets and specific liabilities of Redeeem, LLC, a California limited liability company (“Redeeem”). The asset purchase agreement identifies the seller parties as Redeeem,
LLC and Kyle Hill. The purchase price consisted of an aggregate cash payment of $1.2 million , 452,929 shares of the Company’s common stock valued at $1.2 million at $2.6715 per share, and a cash payment of $166 thousand relating to specific liabilities. The Company accounted for the transaction under the purchase method of accounting in accordance with the provisions of ASC Topic 805 Business Combinations (ASC 805).
In addition to the purchase price detailed above, the Company also agreed to provide 3,623,433 shares of the Company’s common stock valued at approximately $9.68 million at $2.6715 per share to Redeeem’s employees which will be vested over three (3) years. For the years ended June 30, 2022 and 2021, the Company recognizedapproximately $3.0 million and $0.4 million, respectively, in stock-based compensation relating to the vested portion of this deferred compensation. For further detail, please see Note 14 – Stockholders’ Equity.
Redeeem Disposition
During fourth quarter 2022, the Company wound down operations of Redeeem, LLC and on June 7, 2022, Mr. Kyle Hill, the seller of Redeeem, entered into a separation agreement with the Company (“Separation Agreement”). The terms of the Separation Agreement provided that the compensation for the Redeeem purchase would be modified and Hill would forfeit 1,231,967 of the 3,623,433 shares placed in escrow. The remaining escrow balance of 1,231,968 shares at June 7, 2022, would continue to be governed by the terms of the escrow agreement. As a result, the Company impaired the net value of the intangible assets and goodwill acquired with the purchase, totaling approximately $2.5 million as of June 30, 2022, as well as returned the 1.2 million shares forfeited by Mr. Hill to Treasury stock, valued at $3.0 million (based on share price of $2.6715 at June, 11, 2021).
Converge Acquisition
On March 22, 2022 (the “Closing Date”), the Company through its wholly owned subsidiary CD Acquisition Corp, executed a Membership Interest Purchase Agreement ("ASU"MIPA") 2015-15, "Interest - Imputationfor the acquisition of Interest (Subtopic 835-30)all the equity of Converge Direct, LLC and its affiliates ("Converge") and 40% of the equity of Converge Marketing Services, LLC an affiliated entity, for an aggregate purchase price of $125.0 million valued at $114.9 million. The MIPA identifies the seller parties as the Converge Sellers.
PURCHASE PRICE
The purchase price consisted of an aggregate cash payment of 95.0 million, $5.0 million cash withheld by the company for use in working capital to be repaid in twelve (12) months and approximately $4.3 million representing excess working capital as provided for in the MIPA. The remaining $25.0 million was paid in the form of 12.5 million shares of the Company’s restricted common stock at a price of $2.00 per share, which was valued at $1.19 per share for $14.9 million. All 12.5 million shares are subject to a nine (9) month lock-up period. Pursuant to the provisions of the MIPA dated as of November 22, 2021, as amended, an aggregate of $2.5 million (10%) or 1,250,000 shares of the common stock issued to the Sellers are held in escrow to secure against claims for indemnification. The escrowed shares shall be held until the later of (a) one year from the Closing Date, or (b) the resolution of indemnification claims. The Company is accounting for the transaction under the purchase method of accounting in accordance with the provisions of ASC Topic 805 Business Combinations (ASC 805).On the Closing Date, Converge became a wholly-owned subsidiary.
The Company recorded the $5.0 million payable due at March 21, 2023, at its net present value of $4.7 million at June 30, 2022. Further, pursuant to the MIPA, the Company recorded an additional liability totaling $4.3 million which represents the excess net working capital value received by the Company at the purchase date. Per the terms of the MIPA, this amount was to be repaid within 120 days of closing. The total $9.1 million is included within acquisition liabilities on the consolidated balance sheets.
On March 21, 2022, the Company entered into employment agreements with Sid Toama and Tom Marianacci, two (2) former owners of Converge. Mr. Toama was appointed President of TMG and Mr. Marianacci is serving as President of the Converge entities.
PURCHASE PRICE ALLOCATION
The Company negotiated the purchase price based on the expected cash flows to be derived from their operations after integration into the Company’s existing distribution, production and service networks. The acquisition purchase price is allocated based on the fair values of the assets acquired and liabilities assumed, which are based on management estimates and third-party appraisals. The Company engaged a valuation expert to provide guidance to management which was
considered and in part relied upon in completing its purchase price allocation. The excess of the purchase price over the aggregate estimated fair value of net assets acquired was allocated to goodwill.
The following table summarizes the allocation of the purchase price of the assets acquired related to the acquisition as of the closing date:
| | | | | |
| Current assets | $ | 33,856,000 | |
| Fixed assets | 233,000 | |
| Other non-current assets | 4,340,000 | |
| Intangible assets | 71,100,000 | |
| Goodwill | 45,519,000 | |
| Current liabilities | (34,904,000) | |
| Other non-current liabilities | (5,506,000) | |
| Consideration | $ | 114,638,000 | |
INTANGIBLE ASSETS
The estimated fair values of the identifiable intangible assets acquired were calculated using an income valuation approach which requires a forecast of expected future cash flows either through the use of relief-from-royalty method or multi-period excess earnings methods ("MPEEM")." ASU 2015-15 provides guidance The estimated useful lives are based on the Company’s experience and expectations as to the presentationduration of the time the Company expects to realize benefits of the assets.
The estimated fair values of the identifiable intangible assets acquired, estimated useful lives and subsequentrelated valuation methodology are as follows:
| | | | | | | | | | | | | | |
| Intangible Assets: | Preliminary Fair Value | Life in Years | Discount Rate | Valuation Method |
| Customer relationships | $ | 53,600,000 | | 10 | 17.8% | Income (MPEEM) |
| Technology | 10,400,000 | | 5 | 17.8% | Income (Relief-from-Royalty) |
| Tradename | 7,100,000 | | 10 | 18.8% | Income (Relief-from-Royalty) |
| $ | 71,100,000 | | | | |
The Company will amortize the intangible assets above on a straight line basis over their estimated useful lives.
UNAUDITED PRO FORMA OPERATING RESULTS
The following unaudited pro forma information presents the combined results of operations as if the acquisition of Converge, LLC, had been completed on July 1, 2020.
| | | | | | | | | | | |
| For the Year
Ended June 30, 2022 | | For the Year
Ended June 30, 2021 |
| Project Revenues | $ | 302,835,652 | | | $ | 270,137,501 | |
| Cost of revenues | (251,811,502) | | | (232,031,173) | |
| Gross margin | 51,024,150 | | | 38,106,327 | |
| Operating expenses | (62,086,247) | | | (44,786,105) | |
| EBITDA | (11,062,097) | | | (6,679,777) | |
| Other expenses | (18,531,800) | | | (4,145,355) | |
| Net loss | $ | (29,593,897) | | | $ | (10,825,132) | |
| | | |
| Basic loss per share | $ | (0.60) | | | $ | (0.70) | |
NOTE 4 – REVENUE AND ACCOUNTS RECEIVABLE
The Company generates revenues primarily by delivering both managed services and performance based marketing services to customers. The Company’s revenue recognition policies that describe the nature, amount, timing and uncertainty associated with each major source of revenue from contracts with customers are summarized below.
Managed and Professional Services
Company provides a service (such as, but not limited to, media planning, media buying, media ROI measurement, and media or marketing performance reporting). The Company is compensated for the delivery of debt issuanceservices and/or goods to a client and the revenue includes both the anticipated costs to deliver the product or service as well as the Company’s margin, which is arranged in one of three ways (i) a predetermined retainer amount (ii) cost plus margin or (3) a predetermined commission percentage based on the total media spend executed by Company on a client’s behalf.
As per ASC 606-10-25-31, the Company recognizes managed and professional service fees over time by measuring the progress toward complete satisfaction of a performance obligation by measuring its performance in transferring control of the services contractually delivered to a client by applying the input method. Revenue is recognized based on the extent of inputs expended toward satisfying a performance obligation and it was determined that the best judge of inputs is the costs consumed by a project in relation to its total anticipated costs. As part of the close process the Company compiles a preliminary percentage of completion ("POC") for each project which is the ratio of incurred costs to date in relation to the anticipated costs from the production team’s approved budgets. The POC ratio is then applied to the contracted revenue and the pro-rated revenue is then recognized accordingly.
Consultative service engagements typically do not incur a significant amount of direct costs; however, any costs are recognized as incurred. Professional services fees are recognized evenly throughout the term of the agreement.
Performance Marketing (“Pay Per Event”)
Company provides to its clients the ability to pay for a marketing or sales event rather than incurring the media and services expense in a managed service engagement. The Company utilizes the same functions that it delivers in its managed services offering but only charges a client for a predetermined marketing or sales outcome. The fees in this situation will typically be tied to a (i) cost per phone call, (ii) cost per web form lead, (iii) cost per consumer appointment, (iv) cost per qualified lead, and (v) cost per sale. There is a premium that is charged to the client for the Performance Marketing service due to the fact that the Company is taking on the cost risk associated with the services and media that it is executing without knowing that revenue will be generated. The risk is mitigated by the fact that the client has agreed to purchase the “work product’” (lead, call, etc.) at a predetermined cost and the Company charges higher margins associated with the service.
The Company recognizes revenues for performance advertising when a user engages with the advertisement, such as a click, a view, or a purchase. Generally, advertising revenues are reported on a gross basis, that is, the amounts billed to our customers are recorded as revenues, and amounts paid to suppliers are recorded as cost of revenues. Where we are the principal, we control the advertising and services before it is transferred to our customers. Our control is evidenced by our being primarily responsible to our customers and having a level of discretion in establishing pricing.
The Company’s payment terms vary by the type of customer. Generally, payment terms range from prepayment to sixty (60) days after revenue is earned.
Principal versus Agent Revenue Recognition
Our customers reimburse for expenses relating to the out-of-pocket costs associated with linethe provision of credit arrangements. WeManaged Services engagements. This includes third party expenses such as media costs and administrative fees, technology fees, production expenses, data costs, and other third-party expenses that the Company incurs on behalf of a client that is needed to deliver the services. As per 606-10-25-31, the Company recognizes reimbursement income over time by measuring the progress toward complete satisfaction of a performance obligation by measuring its performance in transferring control of the services contractually delivered to a client by applying the input method. The revenue is recognized based on the extent of inputs expended toward satisfying a performance obligation and it was determined that the best judge of input is the costs incurred to date in relation to the anticipated costs. As a result, unless an overage or saving is identified, the reimbursement income equates to the reimbursement costs incurred. Given that the Company contracts directly with the
majority of the vendors and is liable for any overages, the Company is deemed a principal in this revenue transaction as they have control over the asset and transfer the asset themselves. As a result, this transaction is recorded gross rather than net.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. The timing of revenue recognition for each performance obligation is dependent upon the facts and circumstances surrounding the Company’s satisfaction of its respective performance obligation. The Company allocates the transaction price for such arrangements to each performance obligation within the arrangement based on the estimated relative standalone selling price of the performance obligation. The Company’s process for determining its estimated standalone selling prices involves management’s judgment and considers multiple factors including company specific and market specific factors that may vary depending upon the unique facts and circumstances related to each performance obligation. Key factors considered by the Company in developing an estimated standalone selling price for its performance obligations include, but are not limited to, prices charged for similar performance obligations, the Company’s ongoing pricing strategy and policies including using expected cost-plus margin, and consideration of pricing of similar performance obligations sold in other arrangements with multiple performance obligations.
Contract Balances from Contracts with Customers
An account receivable is recorded when there is an unconditional right to consideration based on a contract with a customer. The Company’s payment terms generally do not expectexceed forty-five days after revenue is earned. As of June 30 2022 and 2021, there was an accounts receivable balance of $9.4 million and $1.3 million, respectively. For certain types of contracts with customers, the adoptionCompany may recognize revenue in advance of ASU 2015-15the contractual right to invoice the customer, resulting in an amount recorded to contract assets. Once the Company has an unconditional right to consideration under these contracts, the contract assets are reclassified to accounts receivable. As of June 30, 2022 the Company had a contract asset balance of $23.6 million. There were no such amounts recorded at June 30, 2022.
When consideration is received from a customer prior to transferring services to the customer under the terms of a contract, a contract liability (deferred revenue) is recorded. Deferred revenue is recognized as revenue when, or as, control of the services is transferred to the customer and all revenue recognition criteria have been met. As of June 30, 2022 and 2021, there was a deferred revenue balance of approximately $11.3 million and $6.0 million, respectively. Revenue recognized for the year ended June 30, 2022, relating to the deferred revenue balance as of July 1, 2021, was $4.3 million.
NOTE 5 – RESTRUCTURING CHARGES
For the year ending June 30, 2022, the Company underwent organizational changes to further streamline operations. These measures included the departure or termination of certain employees and executives. During Fiscal Year 2022, the Company recorded approximately $5.6 million for restructuring charges related to the termination benefits provided to employees, inclusive of $3.3 million of share-based compensation expenses for the acceleration of stock award vesting, which is reflected in additional paid-in capital. As of June 30, 2022, the Company had accrued severance of approximately $1.6 million, which is expected to be paid by the end of Fiscal Year 2023.
NOTE 6 – INVESTMENT IN NONCONSOLIDATED AFFILIATE
On March 22, 2022, the Company acquired 40% of the equity of Converge Marketing Services, LLC, an affiliate of Converge, which is accounted for under the equity method of accounting. At the acquisition date, the Company's carrying amount of the investment was insignificant. See Note 3 for more information on the Converge Acquisition.
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 30:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Computer equipment | $ | 841,000 | | | $ | 697,000 | |
| Website design | 6,000 | | | 6,000 | |
| Office machine & equipment | 91,000 | | | 97,000 | |
| Furniture & fixtures | 413,000 | | | 438,000 | |
| Leasehold improvements | 379,000 | | | 135,000 | |
| Tenant incentives | — | | | 145,000 | |
| 1,730,000 | | | 1,518,000 | |
| Accumulated depreciation | (1,141,000) | | | (1,175,000) | |
| Net book value | $ | 589,000 | | | $ | 343,000 | |
During the years ended June 30, 2022 and 2021, depreciation expense was $147,000 and $131,000, respectively.
In April 2021, the Company terminated the lease agreement for Mission-Media Limited’s office at 32 Shelton Street in London and relocated to a new office space at 19-23 Fitzroy Street in London. As a result of a move, $33,000 in leasehold improvements in net book value associated with the Shelton Street office was taken as a loss in the fiscal year ending June 30, 2021. Due to the effect of early termination of operating lease, a gain of $36,000 representing the difference between the right of use asset and the lease liability was recorded. Please see Note 8 – Leases for additional detail.
NOTE 8 – LEASES
The Company has various operating leases for office space. The Company currently has no finance leases. Some leases include options to extend the lease term. The exercise of lease renewal options is generally at the Company’s discretion. The depreciable life of leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.
The leases generally provide for fixed annual rentals plus certain other costs. The Company’s lease agreements do not include any material residual value guarantees or material restrictive covenants. Since the Company’s leases do not provide an implicit interest rate, the Company used its incremental borrowing rate as of Adoption Date to determine the present value of future lease payments for all operating leases that commenced prior to that date.
The following table summarizes the weighted-average remaining lease term and discount rate for operating leases:
| | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| Weighted average discount rate | | 5.5% | | 5.0% |
| Weighted average remaining lease term in years | | 3.6 years | | 3.2 years |
For the fiscal years ending June 30, 2022 and 2021, the Company recorded approximately $1.8 million and $2.6 million in lease expense, respectively.
| | | | | | | | | | | | | | |
| As of June 30, 2022, the maturities of the Company’s operating lease liabilities are as follows: |
| | | | |
| Fiscal year ending June 30, 2023 | | | | $ | 2,682,000 | |
| Fiscal year ending June 30, 2024 | | | | 2,678,000 | |
| Fiscal year ending June 30, 2025 | | | | 2,389,000 | |
| Fiscal year ending June 30, 2026 | | | | 1,979,000 | |
| Fiscal year ending June 30, 2027 | | | | 1,388,000 | |
| Thereafter | | | | 2,826,000 | |
| Total undiscounted operating lease payments | | | | 13,942,000 | |
| Less: imputed interest | | | | (2,266,000) | |
| Total operating lease liabilities | | | | $ | 11,676,000 | |
| Less: current portion of operating lease liabilities | | | | (2,682,000) | |
| Non-current operating lease liabilities | | | | $ | 8,994,000 | |
Lease Abatements
During fiscal year 2022, the company entered into lease abatement agreements with certain landlords. A gain on rent abatement of approximately $222,000 was recorded during the year ended June 30, 2022. As of June 30, 2022, approximately $639,000 of past due rent payments was recorded in accrued expenses.
Sublease Agreements
On January 19, 2018, Mission Media USA, Inc. entered into a four-year sublease agreement pertaining to the aforementioned office space in New York, NY. The sublease commenced on March 1, 2018, and ended January 2022. The lease income was $22,496 per month escalating annually at 3.0%.
On April 19, 2018, Mission-Media Limited entered into a sublease agreement pertaining to a floor within the aforementioned office space in London, UK. The sublease commenced in April 2018 and terminated in March 2021. The lease income was £5,163 per month.
NOTE 9 – INTANGIBLE ASSETS & GOODWILL
Intangible assets consisted of the following:
| | | | | | | | | | | |
| As of June 30, |
| 2022 | | 2021 |
| Customer relationship | $ | 58,560,000 | | | $ | 4,960,000 | |
| Non-core customer relationships | 760,000 | | | 760,000 | |
| Non-compete agreements | 1,430,000 | | | 1,430,000 | |
| Technology | 10,920,000 | | | 520,000 | |
| Tradename | 7,570,000 | | | 470,000 | |
| Workforce acquired | 2,125,000 | | | 2,125,000 | |
| 81,365,000 | | | 10,265,000 | |
| Less: accumulated impairment expense | (446,000) | | | — | |
| Less: accumulated amortization | (10,613,000) | | | (7,662,000) | |
| | | |
| Net book value | $ | 70,306,000 | | | $ | 2,603,000 | |
Purchased intangible assets with finite useful lives are amortized over their respective estimated useful lives (using a straight-line method for customer relationships and trade names) to their estimated residual values, if any. The Company’s finite-lived intangible assets consist of customer relationships, contractor and resume databases, trade names, and internal use software and are being amortized over periods ranging from two to nine years. Purchased intangible assets are reviewed annually to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, recoverability is assessed
by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the rate of amortization is accelerated and the remaining carrying value is amortized over the new shorter useful life. For the fiscal years ending June 30, 2022 and 2021, the Company recorded approximately $0.4 million and $0 in impairment expense related to intangibles, respectively.
During the years ended June 30, 2022 and 2021, amortization expense was approximately $3.0 million and $2.2 million, respectively.
| | | | | |
| Future amortization expense is as follow for the years ending June 30, | |
| 2023 | $ | 8,713,000 | |
| 2024 | 8,427,000 | |
| 2025 | 8,423,000 | |
| 2026 | 8,332,000 | |
| 2027 | 6,765,000 | |
| Thereafter | 29,646,000 | |
| $ | 70,306,000 | |
During the years ended June 30, 2022 and 2021, the Company recorded goodwill impairments charge of approximately $2.0 million and $6.7 million, respectively, related to the Redeeem and Mission UK subsidiaries, as a result of the Company’s annual impairment assessment. Goodwill will be reassessed during our next annual measurement date of June 30, 2023. As of June 30, 2022 and 2021, the change in carrying value of Goodwill are listed below:
| | | | | | | | |
| Balance at ended June 30, 2020 | | $ | 17,362,000 | |
| Goodwill acquired during the year | | 2,006,000 | |
| Goodwill impairment | | — | |
| Balance at ended June 30, 2021 | | 19,368,000 | |
| Goodwill acquired during the year | | 45,518,000 | |
| Goodwill impairment | | (8,711,926) | |
| Change in goodwill from foreign currency | | (824,539) | |
| Balance at ended June 30, 2022 | | $ | 55,349,535 | |
As of June 30, 2022, net goodwill was comprised of gross goodwill of $64.9 million and accumulated impairment of $8.7 million.
NOTE 10 – ACCRUED EXPENSES
As of June 30, 2022 and 2021, the Company recorded approximately $28.6 million and $6.0 million in accrued expenses, respectively. | | | | | | | | | | | |
| As of June 30, |
| 2022 | | 2021 |
| Accrued expenses | $ | 26,996,253 | | | $ | 4,819,000 | |
| Accrued payroll | 851,276 | | | 294,000 | |
| Accrued taxes | 802,019 | | | 888,000 | |
| | $ | 28,649,548 | | | $ | 6,001,000 | |
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Commitments
As of June 30, 2022, commitments of the Company in the normal course of business in excess of one year are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Payments Due by Period | |
| | Year 1 | | Years 2-3 | | Years 4-5 | | >5 Years | | Total | |
Operating lease obligations (a) | | $ | 2,682,000 | | | $ | 5,067,000 | | | $ | 3,367,000 | | | $ | 2,826,000 | | | $ | 13,942,000 | | |
Debt repayment (b) | | 3,825,000 | | | 7,650,000 | | | 64,069,000 | | | — | | | 75,544,000 | | |
| Total | | $ | 6,507,000 | | | $ | 12,717,000 | | | $ | 67,436,000 | | | $ | 2,826,000 | | | $ | 89,486,000 | | |
| | | | | | | | | | | |
(a) Operating lease obligations primarily represent future minimum rental payments on various long-term noncancellable leases for office space. | |
(b) Debt repayments consists of principal repayments required under the Company's Credit Facility. | |
| | | |
Legal Matters
We may become a party to litigation in the normal course of business. In the opinion of management, there are no legal matters involving us that would have a material adverse effect onupon our financial position,condition, results of operations or cash flows.
ASU 2015-14
In August 2015, the FASB issued ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606)." The amendments in this ASU defer the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are still evaluating the effect of the adoption of ASU 2014-09.
ASU 2015-11
In July 2015,2021, the FASB issued ASU No. 2015-11, "SimplifyingCompany entered into a settlement agreement regarding the MeasurementStephenson legal dispute which settled all matters between the Company and the former owners of Inventory (Topic 330)." ASU 2015-11 simplifies the accountingMission entities. The agreement provided for the valuationfull payment of all inventory not accounted for using the last-in, first-out ("LIFO") method by prescribing that inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.
ASU 2015-05
In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)." ASU 2015-05 provides guidance regarding the accounting for a customer's fees paid in a cloud computing arrangement; specifically about whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2015 on either a prospective or retrospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2015-05 to have a material effect on our financial position, results of operations or cash flows.
ASU 2015-03
In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments are to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. We have adopted ASU 2015-03 on January 1, 2016.
There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
5. Acquisitions
Acquisition of Assets of Incubite, Inc. – On December 9, 2014, SPHC and its wholly-owned subsidiary, M2nGage, Inc. (formerly SignalShare Software Development Corp/Signalpoint Media Corp) and Incubite, Inc. ("Incubite") and its members entered into an Agreement and Plan of Reorganization whereby Incubite exchanged the assets of Incubite for interest in SPHC that were distributed to the Incubite Members. The acquisition of Incubite has been accounted for as an asset acquisition.
SPHC paid consideration to the members of Incubite of $1,800,000 comprised of 1,000,000 shares of Common Stock of SPHC issued to the Incubite Members at the Closing.
The following table summarizes the recognized amounts of assets acquired.
| Identifiable intangible assets. | | $ | 1,800,000 | |
| Total consideration | | $ | 1,800,000 | |
6. The Shutdown of SPC, CHL, SignalShare, CBL and SSI and their Presentation as Discontinued Operations
Shutdown of SPC
On June 30, 2013, SPHC closed down the operations of SPC. This decision was made as a result of a continuing decline in revenues, increasing costs and Federal and state regulatory environment that continued to pressure margins in the SPC businesses. As a result of the decision to shut down SPC, all applicable employees were terminated, as were leases for facilities and office space.
Shutdown of CHL
On December 20, 2013, SSI closed down the operations of CHL. This decision was made as a result of a continuing decline in revenues and SSI's decision to not invest in upgrading old technology and the hotels not willing to purchase newer technology.
Shutdown of SignalShare
During January 2016, the Company closed down the operations of SignalShare. This decision was made as a result of a continuing decline in revenue and increasing costs. On July 5, 2016, SignalShare filed for voluntary bankruptcy pursuant to Chapter 7 of the Bankruptcy Code.
Sale of CBL
Effective May 1, 2016, the stock of CBL (including its 50% interest in Arista) were sold to an unaffiliated third party.
Shutdown of SSI
On May 3, 2016 Cenfin, the senior secured lender of SSI, sold all right, title and interest in substantially all personal property of SSI to the highest qualified bidder at a public auction pursuant to Article 9 of the Uniform Commercial Code. There was one bidder and the transaction closed on May 11, 2016 and all employees of SSI were terminated and the operations of SSI ceased.
Discontinued Operations Presentation
As disclosed above, SPC was closed on June 30, 2013 and all operations at that subsidiary ceased, CHL was closed on December 20, 2013 and all operations at that subsidiary ceased. SignalShare was closed in January 2016 and filed for bankruptcy on July 5, 2016 and all operations at that subsidiary ceased. CBL was sold on May 1, 2016 and all operations at that subsidiary ceased. SSI was closed on May 11, 2016 and all operations at that subsidiary ceased. Therefore, at December 31, 2015 and 2014, these subsidiaries are presented in the consolidated financial statements as discontinued operations and their financial results are summarized as one-line items in the consolidated financial statements.
The primary components of the amounts reported as discontinued operations are summarized in the following table:
Loss from Discontinued Operations
| | | For the years ended
December 31, | |
| | | | | | | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Revenues | | $ | 8,378,753 | | | $ | 5,630,918 | |
| Cost of sales | | | 7,880,958 | | | | 5,708,659 | |
| Gross profit | | | 497,795 | | | | (77,741 | ) |
| Selling, general and administrative expenses | | | 5,923,213 | | | | 3,357,619 | |
| Impairment of goodwill | | | 46,968,350 | | | | - | |
| Other expenses. | | | (2,845,104 | ) | | | (526,710 | ) |
| Other income. | | | 149,406 | | | | 136,310 | |
| Loss from discontinued operations before income taxes | | | (55,089,466 | ) | | | (3,825,760 | ) |
| Income taxes. | | | - | | | | - | |
| Loss from discontinued operations, net of tax. | | $ | (55,089,466 | ) | | $ | (3,825,760 | ) |
Assets and Liabilities of Discontinued Operations
| | | Balance at
December 31, | |
| | | 2015 | | | 2014 | |
| Assets | | | | | | |
| Cash | | $ | 267,952 | | | $ | 926,258 | |
| Accounts receivable, net | | | 2,230,635 | | | | 736,321 | |
| Leases receivable, current portion | | | 250,464 | | | | - | |
| Prepaid expenses and deferred cost | | | 1,431,550 | | | | 401,250 | |
| Equipment Purchased for Sale | | | 2,058,396 | | | | 1,069,522 | |
| Security Deposits | | | 345,261 | | | | - | |
| Property, plant and equipment held for sale | | | 867,280 | | | | - | |
| Other current assets | | | 2,113,558 | | | | - | |
| Total current assets of discontinued operations | | | 9,565,096 | | | | 3,133,351 | |
| Property, plant and equipment, net | | | - | | | | 435,428 | |
| Goodwill | | | - | | | | 4,121,284 | |
| Security Deposits | | | - | | | | 255,795 | |
| Other assets | | | - | | | | 987,943 | |
| Total assets of discontinued operations | | $ | 9,565,096 | | | $ | 8,933,801 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 13,808,274 | | | $ | 5,377,354 | |
| Line of credit, net of discount, current portion | | | 3,240,161 | | | | - | |
| Capital leases payable | | | 2,580,700 | | | | 2,425,043 | |
| Customer deposits | | | 1,767,761 | | | | - | |
| Note payable and other obligations, current portion | | | 4,943,782 | | | | - | |
| Deferred revenue and Customer Prepayments | | | 2,551,850 | | | | 737 | |
| Total current liabilities of discontinued operations | | | 28,892,528 | | | | 7,803,134 | |
| Non-current lease obligations | | | - | | | | 5,040,948 | |
| Total liabilities of discontinued operations | | $ | 28,892,528 | | | $ | 12,844,082 | |
Summary of Significant Accounting Policies Related to Discontinued Operations
Accounts Receivable and Allowance for Doubtful Accounts in discontinued operations - The Company extended credit to certain customers in the normal course of business, based upon credit evaluations, primarily with 30 – 60 day terms. The Company's reserve requirements are based on the best facts availabledue to the Company and are reevaluatedallowed the Stephensons to sell the shares subject to a leak-out period. The agreement was filed with the Court and adjusteda settlement payment of approximately $0.9 million was recognized in the twelve (12) months ending June 30, 2022. In addition to this cash settlement, the Company also reversed approximately $0.1 million in accruals relating to the Stephensons which was recorded as additional information is received. other income.
NOTE 12 – CREDIT FACILITIES
On March 21, 2022, Troika Media Group Inc., and each subsidiary of Troika Media Group Inc. as guarantors, entered into a Financing Agreement with Blue Torch Finance LLC (“Blue Torch”), as Administrative Agent and Collateral Agent.
This $76.5 million First Lien Senior Secured Term Loan (the “Credit Facility”) formed the majority of the purchase price of the Converge Acquisition, as well as for working capital and general corporate purposes.
The Company's reserves are also basedCredit Facility provides for: (i) a Term Loan in the amount of $75.0 million; (ii) an interest rate of the Libor Rate Loan of three (3) months; (iii) a four-year maturity, amortized 5.0% per year, payable quarterly; (iv) a 1.0% commitment fee and an upfront fee of 2.0% ($1.5 million) of the Credit Facility paid at closing (capitalized into the Credit Facility bringing the initial loan balance to $76.5 million), plus an administrative agency fee of $250,000 per year; (v) a first priority perfected lien on amounts determined by using percentages appliedall property and assets including all outstanding equity of the Company’s subsidiaries; (vi) 1.5% fully-diluted penny warrant coverage in the combined entity; (vii) mandatory prepayment for 50% of excess cash flow and 100% of proceeds from various transactions; (viii) customary affirmative, negative and financial covenants; (ix) delivery of audited financial statements of Converge; and (x) customary closing conditions. The Company agreed to certain aged receivable categories. These percentages are determined by a variety of factorscustomary restrictive financial and non-financial covenants in the Credit Facility including, but not limited to, current economic trends, historical paymenta debt leverage ratio, fixed charge coverage ratio, and bad debt write-off experience. Accounts are written off when they are deemed uncollectible. Further,maintaining liquidity of at least $6.0 million at all times.
The Company has received limited waivers due to non-compliance with certain covenants of the agreement. The company is currently addressing these items and has expects to be in compliance during 2014, SignalSharesecond quarter of fiscal year 2023.
The Company and each of its subsidiary Guarantors entered into a Pledge and Security Agreement (the “Security Agreement”) dated as of March 21, 2022, as a requirement with the Credit Facility. Each Guarantor pledged and assigned to the Collateral Agreement and granted the Collateral Agent with a continuing security interest in all personal property and fixtures of the Guarantors (the “Collateral”) and all proceeds of the Collateral. All equity of the Guarantors was pledged by the Borrower.
On March 21, 2022, each of the Company’s Subsidiaries, as Guarantors, entered into an agreementIntercompany Subordination Agreement (the “ISA”) with onethe Collateral Agent. Under the ISA, each obligor agreed to the subordination of its customers, wherebysuch indebtedness of each other obligor to such other obligations.
On March 21, 2022, the collections wouldCompany entered into an Escrow Agreement with Blue Torch Finance LLC and Alter Domus (US) LLC, as Escrow Agent. The Escrow Agreement provides for the escrow of $29.1 million of the $76.5 million proceeds, under the Credit Facility to be made in 36 monthly installments. Asheld until the audited financial statements of Converge Direct LLC and affiliates for the years ended December 31, 20152020 and 2014, $167,820 and $167,820 and $69,925 and $335,640 were accounted as "Accounts Receivable Short Term Direct" and "Accounts Receivable Long Term Direct"2019, are delivered to Blue Torch Finance LLC, which were included in "Accounts receivable, net" and "Other current assets", respectively, indelivered during fourth quarter 2022.
In connection with the accompanying consolidated balance sheets as current assets of discontinued operations and as presented above, "Assets and Liabilities of Discontinued Operations".
The Company evaluated outstanding customer invoices for collectability. The assessment and related estimates are based on current credit-worthiness and payment history. As of December 31, 2015 and 2014,aforementioned note, the Company recorded an allowance for doubtful accounts in the amount of approximately $80,000deferred debt and $-0-, respectively.
Inventory in discontinued operations - Inventory, principally large order quantity items which are required for the Company's mediaissuance costs totaling $9.2 million. The discount and entertainment installations, is stated at the lower of cost (first-in, first-out) basis or market. The Company generally maintains only the inventory necessary for contemplated installations. Work in process represents the cost of equipment related to installations which were not yet completed.
The Company performs an analysis of slow-moving or obsolete inventory periodically, and any necessary valuation reserves, which could potentiallyissuance costs will be significant, are included in the period in which the evaluations are completed. As of December 31, 2015 and 2014, the inventory obsolescence reserve of approximately $113,000 and $-0-, respectively, was mainly related to raw materials, and results in a new cost basis for accounting purposes. Inventory balances are recorded in other current assets in the assets of discontinued operations
Leases Receivable in discontinued operations- Leases receivable represent direct sales-type lease financing to cover the cost of installation. These transactions result in the recognition of revenue and associated costs in full upon the customer's acceptance of the installation project and give rise to a lease receivable equal to the gross lease payments and unearned income representing the implicit interest in these lease payments. Unearned income is amortized over the life of the lease tonote using the effective interest income on a monthly basis.rate method. The carrying amountscompany recognized approximately $0.8 million in amortization of leases receivable are reduced by a valuation allowance that reflectsdeferred financing costs for the Company's best estimateyear ended June 30, 2022, and made principal payments totaling approximately $1.0 million.
The initial allocation of the amounts thatdebt and debt issuance costs at Closing Date were as follows:
| | | | | |
| Principal balance | $ | 76,500,000 | |
| Fair value of warrants | $ | (2,433,000) | |
| Original issue discount | $ | (1,500,000) | |
| Debt issuance costs | $ | (5,287,000) | |
| Outstanding balance, net | $ | 67,280,000 | |
| Current portion | $ | (1,538,000) | |
| Long-term portion | $ | 65,742,000 | |
| |
| |
| |
The initial allocation of the debt and debt issuance costs at June 30, 2022, were as follows:
| | | | | |
| Principal balance | $ | 75,544,000 | |
| |
| |
| Debt issuance costs | $ | (8,425,000) | |
| Outstanding balance, net | $ | 67,119,000 | |
| Current portion | $ | (1,538,000) | |
| Long-term portion | $ | 65,581,000 | |
The payments of principal to be made are as follows:
| | | | | |
| FY 2023 | $ | 3,825,000 | |
| 2024 | 3,825,000 | |
| 2025 | 3,825,000 | |
| 2026 | 64,069,000 | |
| $ | 75,544,000 | |
At any time on or after March 21, 2022, and on or prior to March 21, 2026, the lender has the right to subscribe for and purchase from Troika Media Group, Inc., up to 1,929,439 shares of Common Stock, subject to adjustment. The exercise price per share of Common Stock under this Warrant shall be $.01 per share. If at any time when this Warrant becomes exercisable and the Registration Statement is not in effect this Warrant may notalso be collected. This estimate is based on an assessmentexercised, in whole or in part, at such time by means of current creditworthiness and payment history. a “cashless exercise”.
NOTE 13 – NOTES PAYABLE – RELATED PARTIES
As of December 31, 2015June 30, 2022 and 20142021, the Company owed the founder and CEO of Troika Design Group, Inc. Dan Pappalardo approximately $0.1 million and $0.2 million, respectively. In April 2021, the Company paid $17 thousand to Dan Pappalardo representing the miscellaneous expense reimbursements. The loans were due and payable on demand and accrue interest at 10.0% per annum. In April 2021, the Company paid $300,000 to the estate of Sally Pappalardo representing the outstanding principal of $235,000 and accrued interest of $65,000. The holder provided the Company a signed release acknowledging all obligations under the note had been paid in full.
On January 27, 2019, Daniel Jankowski and Tom Ochocki (collectively the “Lenders”) entered into a facility agreement with Mission Media Limited (“MML”) in order to provide certain funds allowing MML to exit administration in the United
Kingdom. Mr. Ochocki, as primary lender, provided MML £1,594,211 ($2,227,000) which was received in January 2019. The same agreement allowed the Company to draw upon Mr. Jankowski in upwards of £992,895 ($1,373,000); however, the funds were not needed. Mr. Ochocki was a member of the Board of the Company and subsequent to the loan, Mr. Jankowski was appointed to the Board. Both Lenders were appointed to the Board of Mission Media Holdings Limited. The loan had a repayment date of January 2022 and an interest rate of 0%. In April 2021, the balance of $2,227,000 was paid in full. Imputed interest of $3,000 was recorded for this facility agreement in the fiscal year ending June 30, 2021. There was no valuation allowanceimputed interest recorded for this facility agreement in the fiscal year ended June 30, 2022.
Total interest expense on notes payable related party was necessary.approximately $16,000 and $7,000 during the years ended June 30, 2022 and 2021, respectively.
Below is a breakout showing the short term and long term portions of note payable related party:
| | | | | | | | | | | |
| As of June 30, |
| 2022 | | 2021 |
| Short term portion | | | |
| Dan Pappalardo | $ | 100,000 | | | $ | 200,000 | |
| $ | 100,000 | | | $ | 200,000 | |
Software Development
NOTE 14 – STOCKHOLDERS’ EQUITY
SERIES E PREFERRED STOCK PRIVATE PLACEMENT AND RENEGOTIATION
On March 21, 2022, the Company filed with the Nevada Secretary of State a Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock, pursuant to NRS 78.1955 of the Nevada Revised Statutes (the “CoD”). Pursuant to the CoD, the Company authorized 500,000 shares of Series E Preferred Stock, $.01 par value, with a Stated Value of $100 per share.
As of March 18, 2022, pursuant to the Nevada Revised Statutes (the “NRS”), we received a written consent in discontinued operations- At December 31, 2015lieu of a meeting of Stockholders from 20 principal stockholders, representing approximately 57.0% of the total possible votes outstanding (the “Majority Stockholders”), authorizing the following:
The sale of $50.0 million of shares of Series E Convertible Preferred Stock, par value $0.01 per share (the Series E Preferred Stock”), with accompanying, 100% warrant coverage (the “Warrants”), with certain purchasers’ signatory thereto (the “Purchasers”). The Series E Preferred Stock and 2014, SignalShare had incurredWarrants include certain reset and capitalized $483,276anti-dilution provisions that could reduce the conversion prices and $444,218, respectively,exercise prices thereof down to $0.25 (the “Floor Price”) which is a significant discount to the current market price. For purposes of complying with Rule 5635(d) of the Nasdaq Stock Market rules, the shareholders approved the issuance of more than 19.99% of the current total issued and outstanding shares of Common Stock upon conversion of the Series E Preferred Stock and exercise of the Warrants, including, but not limited to, reducing the Floor Price.
In addition, the Majority Stockholders approved the amendment to Article Three of the Articles of Incorporation to reflect an increase in software development costs relatedthe number of authorized shares of all classes of stock which the Company shall have the authority to issue from 315,000,000 shares to 825,000,000 shares, such shares being designated as follows: (i) 800,000,000 shares of Common Stock, and (ii) 25,000,000 shares of preferred stock, par value $.01 per share.
On September 26, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with the Purchasers, pursuant to which (i) each Purchaser exchanged its Live-Fi software system. The amounts capitalized representWarrants for new warrants to purchase our common stock (the “New Warrants”) and (ii) ) each Purchaser consented to an amendment and restatement of the costs incurredterms of our Series E convertible preferred stock, par value $0.01 per share (the “Series E Preferred Stock”) as well as other changes in the terms of the private placement effected by the Company on March 16, 2022 (collectively, the “New PIPE Terms”).
In consideration for the useissuance of outside vendorsthe New Warrants and dothe other New PIPE Terms, we filed an amended and restated certificate of designation for the Series E Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Nevada to effect certain changes contemplated by the Exchange Agreement.
The New PIPE Terms effect the following changes, among others, to the rights Series E Holders:
New Warrant Exercise Price: The New Warrant exercise price per share of common stock is $0.55, provided that if all shares of Series E Preferred Stock issued pursuant to the Certificate of Designation are not includerepurchased by the capitalizationCompany on or prior to November 26, 2022, on such date, the exercise price per share of internal software development costs. The Live-Fi software amount is includedthe New Warrants will revert to $2.00, subject to further adjustment as set forth in the New Warrant.
Series E Conversion Price: The conversion price for the Series E Preferred Stock shall initially equal $0.40 per share, and so long as the arithmetic average of the daily volume-weighted average prices of the Common Stock for the calendar week prior to each of the following respective dates is lower than the Conversion Price at that time, the Conversion Price shall be downwardly adjusted by $0.01 on each of October 24, 2022, October 31, 2022, November 7, 2022, November 14, 2022 and November 21, 2022.
Standstill Period: The Company and the Purchasers will enter into a 60-day standstill period ending on November 26, 2022 (the “Standstill Period”), during which each Series E Holder may convert not more than 50% of the Series E Preferred Stock held by such holder at the beginning of the Standstill Period.
Series E Buyout. During the Standstill Period the Company will use commercially reasonable efforts to raise funds to repurchase all outstanding shares of Series E Preferred Stock held by the Purchasers at a purchase price of $100 per share, subject to the provisions of the Certificate of Designation.
As of the date of this filing , the Company had paid an aggregate of $2.0 million as partial liquidated damages as a result of not filing the registration statement by July 5, 2022. It is also expected that the Company will owe an additional $1.6 million in partially liquidated damages for the month of September. As such, as of June 30, 2022, the Company has recorded a contingent liability in the amount of $3.6 million.
REVERSE STOCK SPLIT
In September 2020, the Company amended its articles of incorporation and enacted a reverse stock split of one share for each fifteen (15) shares and the accompanying consolidated balance sheets underfinancials reflect the line item "Other assets"reverse stock split retroactively.
The reverse stock split resulted in a decrease in authorized shares of all classes of stock from 615,000,000 to 315,000,000 shares consisting of 300,000,000 shares of common stock at December 31, 2014. During September 2015a par value of $0.001 and 15,000,000 shares of preferred stock at a par value of $0.01 per share. Prior to the Live-Fi software was fully developedreverse stock split, the Company had 600,000,000 shares of common stock at a par value of $0.001, 15,000,000 shares of preferred stock at a par value of $0.20 per share.
INITIAL PUBLIC OFFERING AND NASDAQ LISTING
On April 22, 2021, the Company completed an underwritten public offering of 5,783,133 shares of common stock and reclassified to property, plantwarrants at a public offering price of $4.15 per share for aggregate gross proceeds of $24.0 million. After deducting underwriting commissions and equipment held for sale onother offering expenses, the December 31, 2015 consolidated balance sheet.
Accounts Payable Claims and Disputes- Company received approximately $20.7 million in net proceeds. The Company has established a systematic approach to record accounts payable basedlisted its common stock and warrants on invoice amount, netthe Nasdaq Capital Market under the symbols “TRKA” and “TRKAW”, respectively, and trading began on April 20, 2021.
COMMON STOCK
As of claims filedJune 30, 2022 and acknowledged by vendors, as well as any additional credits received. Billings from carriers frequently require adjustment to reflect the Company's correct usage of those carrier services. All claims by2021, the Company against vendors are netted against payableshas 64,209,616 and 39,496,588 shares of common stock issued and outstanding, respectively.
In January 2021, the Company reported the return of the 2,666,667 shares of the Company’s stock granted to those vendorsthe Stephensons regarding the aforementioned legal dispute. Upon their termination for Cause, the restricted shares held in escrow were forfeited back to the Company. Please see Note 11 – Commitments and expectContingencies for additional detail.
STOCK PAYABLE
In the fiscal year ended June 30, 2021, the Company recorded a stock payable of approximately $1.2 million relating to the acquisition of Redeeem, LLC. As per the asset purchase agreement dated May 21, 2021, 452,929 shares of common stock were due to be settled through credits issued by vendors. Any additional credits received such as late fees usually waived by vendors, are generally insignificant.
Revenue Recognition of discontinued operations- SignalShare derives revenues from the construction of both temporaryto Redeeem’s employees and permanent broadband installation serviceswere valued at large event forums.
SignalShare product sales are only recognized as revenue at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery or service is completed, no other significant obligations of the Company exist and collectability is reasonably assured.
SignalShare also recognizes revenue on the basis of the milestone method for revenue recognition for services delivered related to the installation of temporary or permanent wireless Internet solutions as$2.6715 per the contract arrangement and when the performance and acceptance criteria have been met and agreed to by the customer.
Revenue arises from setting up a Wi-Fi network for an event, an equipment sales contract, an equipment rental contract, consulting services and support and maintenance contracts. The table below describes the accounting for the various components of SignalShare's revenues.
Product | | Recognition Policy |
| | |
Event Services (Setting up a Wi-Fi network) Workshops and Workshop Certificates | | Deferred and recognized upon the completion of the event |
| | |
Equipment sales | | Recognized at the time delivered and installed at the customer location |
| | |
Equipment rental contract | | Deferred and recognized as services are delivered, or on a straight-line basis over the initial term of the rental contract |
| | |
Consulting services (on Wi-Fi networks, installation, maintenance) | | Recognized as services are delivered |
| | |
Support and Maintenance contract | | Deferred and recognized on a straight-line basis over the term of the arrangement |
SSI derives its revenue from the installation and ongoing services of in-room media, entertainment, and HD television programming solutions in addition to wired networking solutions and WiFi Fidelity networking solutions. Revenue is recognized when all applicable recognition criteria have been met, which generally include a) persuasive evidence of an existing arrangement; b) fixed or determinable price; c) delivery has occurred or service has been rendered and; d) collectability of the sales price is reasonably assured.
Installations and service arrangements are contractually predetermined and such contractual arrangements may provide for multiple deliverables, revenue is recognized in accordance with ASC Topic 650, Multiple Deliverable Revenue. The application of ASC Topic 650 may result in the deferral of revenue recognition for installations across the service period of the contract and the re-allocation and/or deferral of revenue recognition across various service arrangements. Below is a summary of such application of the revenue recognition policy as it relates to installation and service arrangements SSI has with its customers.
SSI enters into contractual arrangements to provide multiple deliverables which may include some or all of the following - system installations and a variety of services related to high speed internet access, free-to-guest, video on demand and iTV systems as well as residential phone, internet and television. Each of these elements must be identified and individually evaluated for separation. The term "element" is used interchangeably with the term "deliverable" and SSI considers the facts and circumstances as it relates to its performance obligations in the arrangement and includes product and service elements, a license or right to use an asset, and other obligations negotiated for and assumed in the agreement. Analyzing an arrangement to identify all of the elements requires the use of judgment. In the determination of the elements included in Roomlinx agreements, embedded software and inconsequential or perfunctory activitiesshare. These shares were taken into consideration.
Once the Deliverables have been identified, we determine the relative fair value of each element under the concept of Relative Selling Price ("RSP") for which SSI applied the hierarchy of selling price under ASC Topic 605 as follows:
VSOE - Vendor specific objective evidence ("VSOE") is still the most preferred criteria with which to establish fair value of a deliverable. VSOE is the price of a deliverable when a company sells it on an open market separately from a bundled transaction.
TPE - Third party evidence ("TPE") is the second most preferred criteria with which to establish fair value of a deliverable. The measure for the pricing of this criterion is the price that a competitor or other third party sells a similar deliverable in a similar transaction or situation.
RSP - RSP is the price that management would use for a deliverable if the item were sold separately on a regular basis which is consistent with company selling practices. The clear distinction between RSP and VSOE is that under VSOE, management must sell or intend to sell the deliverable separately from the bundle, or has sold the deliverable separately from the bundle already. With RSP, a company may have no plan to sell the deliverable on a stand-alone basis.
Hospitality Installation Revenues
Hospitality installations include High Speed Internet Access ("HSIA"), Interactive Television ("iTV"), Free to Guest ("FTG") and Video on Demand ("VOD"). Under the terms of these typical product sales and equipment installation contracts, a 50% deposit is due at the time of contract execution and is recorded as deferred revenue. Upon the completion of the installation process, deferred revenue is realized. However, in some cases related to VOD installations or upgrades, the Company extends credit to customers and records a receivable against the revenue recognized at the completion of the installation.
Additionally, SSI may provide the customer with a lease financing arrangement provided the customer has demonstrated its credit worthiness to the satisfaction of SSI. Under the terms and conditions of the lease arrangements, these leases have been classified and recorded as Sale-Type Leases under ASC Topic 840-30 and accordingly, revenue is recognized upon completion and customer acceptance of the installation which gives rise to a lease receivable and unearned income.
Hospitality Service, Content and Usage Revenues
SSI provides ongoing 24/7 support to both its hotel customers and their guests, content and maintenance as applicable to those products purchased, installed and serviced under contract. Generally, support is invoiced in arrears on a monthly basis with content and usage, which are dependent on guest take rates and buying habits. Service maintenance and usage revenue also includes revenue from meeting room services, which are billed as the events occur.
At times, SSI entered into arrangements with its customers in which a minimum revenue amount earned from content in a specific hotel will be agreed to by both parties. If the revenue earned by the Company exceeds this minimum revenue amount for a defined period ("Revenue Overage"), SSI may be required to pay to the customer an amount up to the Revenue Overage. The related Revenue Overage amount is recorded as a reduction of the hospitality services revenue.
Residential Revenues
Residential revenues consist of equipment sales and installation charges, support and maintenance of voice, internet, and television services, and content provider residuals, installation commissions, and management fees. Installations charges are added to the monthly service fee for voice, internet, and television, which is invoiced in advance creating deferred revenue to be realized in the appropriate period. SSI's policy prohibits the issuance of customer credits during the month of cancelation. SSI earns residuals as a percent of monthly customer service charges and a flat rate for each new customer sign up. Residuals are recorded monthly. Commissions and management fees are variable and therefore revenue is recognized at the time of payment.
The Company recognizes revenue in accordance with accounting principles generally accepted in the United States ("US GAAP"), specifically Accounting Standards Codification ("ASC") 605 "Revenue Recognition," which requires satisfaction of the following four basic criteria before revenue can be recognized:
a. | There is persuasive evidence that an arrangement exists; |
b. | Delivery has occurred or services have been rendered; |
c. | The fee is fixed and determinable; and |
d. | Collectability is reasonably assured. |
The Company bases its determination of the third and fourth criteria above on the Company's judgment regarding the fixed nature of the fee it has charged for the services rendered and products delivered, and the prospects that those fees will be collected. If changes in conditions should cause it to determine that these criteria likely will not be met for some future transactions, revenue recognized for any reporting period could be materially adversely affected.
Company management continually reviews and evaluates the collectability of revenues. For further information, please see "Accounts Receivable and Allowance for Doubtful Accounts." The Company's management makes estimates of future customer credits and settlements due to various disputes on pricing and other terms of the contracts, through the analysis of historical trends and known events. Provisions for customer credits and settlements are recorded as a reduction of revenue when incurred and estimable. Since any revenue allowances are recorded as an offset to revenue, any future increases or decreases in the allowances will positively or negatively affect revenue by the same amount.
Deferred Revenue and Customer Prepayments of discontinued operations- SignalShare, from time to time, enters into leasing transactions to finance certain customer projects. In these leasing transactions, SignalShare receives payment from the third-party leasing company and uses the cash received to fund the project. All revenues related to these types of projects are deferred until the project is completed and the customer has approved the installation. At that time, SignalShare records the revenue previously deferred as it has no further obligation to the customer and the earnings process is complete. As of December 31, 2015 and 2014, SignalShare recorded $2,351,755 and $737, respectively, in deferred revenue and $937,005 and $398,732, respectively, in prepaid expenses for incomplete customer projects.
Leases Receivable of discontinued operations- As of December 31, 2015, the Company had approximately $269,514 in leases. These leases have terms of 60 months and an average interest rate of 9.5% per annum. The Company did not enter into any new leasesissued in the year ended December 31, 2015. The long term portion in included in other current assets.
Future minimum receipts on leases receivable are as follows:
| Years Ended December 31, | | Minimum Receipts | |
| | | | |
| 2016 | | | $ | 250,464 | |
| 2017 | | | | 19,050 | |
| | | | $ | 269,514 | |
June 30, 2022.
- 67 -
PREFERRED STOCK
Property, Plant and Equipment of discontinued operations, net:
Property, equipment and equipment consistOn April 14, 2022, notice was given that all 720,000 shares of the following:
| | Balance at | |
| | December 31, | |
| | 2015 | | 2014 | |
| | | | | |
| Property, Plant and Equipment | | | | |
| Machinery and equipment | | $ | 1,402,263 | | | $ | 511,224 | |
| Furniture, fixtures and equipment | | | 632,530 | | | | 3,934 | |
| Software. | | | 762,779 | | | | 127,060 | |
| Total property, equipment and software | | | 2,797,572 | | | | 642,218 | |
| Less: accumulated depreciation | | | (1,930,292 | ) | | | (206,790 | ) |
| Property, plant and equipment, net | | $ | 867,280 | | | $ | 435,428 | |
During 2014, the Company sold certain assets held for resale for total proceeds of $45,000.Issuer’s outstanding 9% Series A Preferred Stock will be redeemed. The Company recognized a gain of $44,250 on the sale related to this transaction. In addition, during 2014, management evaluated the carrying value of assets held for resale and recorded a write off of $102,238. Accordingly, the Company recognized $57,988 as loss on sales of assets, net for the year ended December 31, 2014.
Capital Lease Obligations of discontinued operations:
The Company had several capital lease obligations. Property under those capital lease obligations (included in property, equipment and software as per above) at December 31, 2015 and 2014 consistredemption of the following:
| | December | |
| | 2015 | | 2014 | |
| | | | | |
| Capital Lease Property | | | | |
| Machinery & equipment | | $ | 550,278 | | | $ | 564,228 | |
| Software | | | 125,587 | | | | 125, 587 | |
| Less: Accumulated depreciation | | | (279,800 | ) | | | (274,815 | ) |
| Net capital lease property | | $ | 396,065 | | | $ | 415,000 | |
DepreciationSeries A Preferred Stock was effected on May 31, 2022 (the “Redemption Date”) at a price equal to $0.20 per share, plus an amount equal to all accrued and amortization expense of leased property under capital lease obligations amounted to $78,859 and $82,303 forunpaid dividends thereon but not including the years ended December 31, 2015 and 2014, respectively.
SignalShare Lease Transactions - Capital
Future minimum lease obligations under the capital leases consist of the following at December 31, 2015:
| Year | | Amount | |
| | | | |
| 2016 | | $ | 2,713,655 | |
| Total | | | 2,713,655 | |
| Less – amounts representing interest | | | (338,095 | ) |
| Present value of net minimum lease payments | | | 2,375,560 | |
| Less: Current portion | | | (2,375,560 | ) |
| Net long-term portion | | $ | - | |
SignalShare Lease Transactions – Finances
SignalShare finances certain sales to customers through a third-party leasing company on their behalf. Once the equipment installation is complete, SignalShare recognizes the revenues and costs related to these transactions. Payments to the third-party leasing company are made directly by SignalShare's customer and, if applicable, the customer has the option to purchase the equipment at the end of the lease for an additional payment.
At the inception of the lease, the third-party leasing company remits cash to SignalShareRedemption Date in an amount equal to the$0.42 per share, for a total payment of $0.62 per share (the “Redemption Price”). The total aggregate amount of the lease, less finance costs to be collected over the lease term. SignalShare purchases the equipment and completes the installation. The equipment is immediately expensed, as are the costsredemption was $446,440. Holders of the installation and the finance component of the lease is charged to cost of goods sold. Thus all of the revenue and costs are recorded immediately upon completion of the installation.
SignalShare is the lessee and is ultimately responsible for the payments under the lease. Since the equipment is installed on the customer's property, the customer controls the equipment and the ultimate decision with regard to purchasing the equipment at the end of the lease term, SignalShare records an accounts receivable and a lease liability in its accounting books and records. The accounts receivable and lease liability are offset each month as the customer makes payments directly to the third-party leasing company. Where leases extend beyond twelve months, the related accounts receivable and payable are discounted at the imputed interest rate in the lease. In effect, SignalShare is a guarantor of the lease in the event that its customer does not make the required lease payments. Since the inception of this program in mid-2013, SignalShare has not had to make any lease payments on behalf of any customer.
The lease related accounts receivable and the lease obligations, together with the balance sheet caption that contains each amount are as follows:
| | Balance at | |
| | December 31, | |
| | 2015 | | 2014 | �� |
| | | | | |
| Lease accounts receivable | | | | |
| Current portion (accounts receivable) | | $ | 151,672 | | | $ | 149,507 | |
| Long-term portion (other assets) | | | 53,468 | | | | 208,086 | |
| Total lease accounts receivable | | $ | 205,140 | | | $ | 357,593 | |
| | | | | | | | | |
| Lease obligations | | | | | | | | |
| Current portion (capital leases payable) | | $ | 205,140 | | | $ | 149,507 | |
| Long-term portion (non-current lease obligations). | | | - | | | | 208,086 | |
| Total lease obligations | | $ | 205,140 | | | $ | 357,593 | |
Leases payable incurred on behalf of customers during the years ended December 31, 2015 and 2014 were $0 and $215,670, respectively. Repayment of capital lease payable made by customers directly to the third party leasing company during the years ended December 31, 2015 and 2014 amounted to $166,320 and $190,697, respectively.
Below is the summary of SignalShare lease transactions at December 31, 2015:
| | Capital Leases | | Finance Leases | | Total | |
| | | | | | | |
| Leases payable - current portion | | $ | 2,375,560 | | | $ | 205,140 | | | $ | 2,580,700 | |
| Leases payable - long term portion | | | - | | | | - | | | | - | |
| Total leases payable | | $ | 2,375,560 | | | $ | 205,140 | | | $ | 2,580,700 | |
Below is the summary of SignalShare lease transactions at December 31, 2014:
| | Capital Leases | | Finance Leases | | Total | |
| | | | | | | |
| Leases payable - current portion | | $ | 2,275,536 | | | $ | 149,507 | | | $ | 2,425,043 | |
| Leases payable - long term portion | | | 4,832,862 | | | | 208,086 | | | | 5,040,948 | |
| Total leases payable | | $ | 7,108,398 | | | $ | 357,593 | | | $ | 7,465,991 | |
During the year ended December 31, 2015 and 2014, the Company recorded interest expenses related to these leases of $775,922 and $229,060, respectively.
Accrued interest amounted to $177,926 and $0 as of December 31, 2015 and 2014, respectively, which has been included in accrued expenses in accompanying consolidated balance sheets of discontinued operations.
Line of Credit- Related Party of discontinued operations:
On September 5, 2009, RMLX entered into a Revolving Credit, Security and Warrant Purchase Agreement (the "Credit Agreement") with Cenfin, LLC ("Cenfin"), an entity principally owned by significant shareholders of the Company. The Credit Agreement permitted us to borrow up to $25 million until September 5, 2017. On May 3, 2013, the Company and Cenfin executed a fourth amendment to the Credit Agreement which provided Cenfin sole and absolute discretion related to funding any advance requested by Roomlinx. Advances must be repaid at the earlier of five years from the date of borrowing or at the expiration of the Credit Agreement. The principal balance may be repaid at any time without penalty. Borrowings accrued interest through October 7, 2015, payable quarterly on the unpaid principal at a rate equal to the Federal Funds Rate at July 15 of each year plus 5%. On October 7, 2015 the Company and Cenfin executed a forbearance agreement increasing the interest to a rate equal to the Federal Funds Rate at July 15 of each year plus 13% (approximately 13.13% per annum at December 31, 2015). The Credit Agreement is collateralized by substantially all of the assets of SSI, and requires us to maintain a total outstanding indebtedness to total assets ratio of less than 3 to 1.
The amount outstanding under the Credit Agreement was $3,388,554 at December 31, 2015, which is part of the liabilities assumed in connection with the reverse acquisition transaction completed on March 27, 2015. These advances will be repaid at various dates between 2015 and 2017.
The Credit Agreement requires that, in conjunction with each advance, RMLX issue Cenfin warrants to purchase shares of our common stock equal to 50% of the principal amount funded divided by (i) $120.00 on the first $5,000,000 of borrowings on or after July 15, 2010 ($4,712,000 as of December 31, 2012) or (ii) thereafter the fair market value of the Company's common stock on the date of such draw for advances in excess of $5,000,000. The exercise price of the warrants is $120.00 for the warrants issued on the first $5,000,000 of borrowings made after July 15, 2010 and, thereafter, the average of the high and low market price for the Company's common stock on the date of issuance. The exercise period of these warrants expired three years from the date of issuance.
The fair value of warrants issued under of the Credit Agreement using the Black-Scholes pricing model was approximately $2,760,000 which is being amortized and charged to operating results as additional interest expense over the term of the related indebtedness. The unamortized balance of the debt discount was $148,393 at December 31, 2015. During the year ended December 31, 2015, the Company amortized $190,998 (for the period from March 27, 2015 through December 31, 2015) as debt discount expense. Borrowings outstanding are reported net of the debt discount.
On March 24, 2015, in conjunction with the Subsidiary Merger Agreement, Cenfin entered into an Amended and Restated Revolving Credit Security Agreement with SSI and RMLX (the "Cenfin Infrastructure Credit Agreement"). Pursuant to the Cenfin Infrastructure Credit Agreement, Cenfin consented to the contribution of substantially all the assets of RMLXrecord as of the dateRedemption Date received the Redemption Price upon presentation and surrender of the mergerPreferred Stock as described in the notice. Upon redemption, dividends on the Preferred Stock ceased to SSIaccrue and Cenfin was accordingly granted a continuing security interest in all rights of the assets of SSI and a pledge by RMLX of allHolders terminated, except to the proceeds of the equity of SSI. Cenfin's security interest in the RMLX assets was thereafter limited to certain non-assignable contracts that remained with RMLX following the merger.
During the year ended December 31, 2015, the Company made interest payments to Cenfin of $61,431 and principal payments of $573,447. Net amounts outstanding under the Credit Agreement were $3,240,160 plus accrued interest of $160,931 as of December 31, 2015.
On June 30, 2015, Roomlinx entered into the First Amendment (the "First Amendment) to the Amended and Restated Revolving Credit Agreement, dated asRedemption Price. As of June 30, 2015 (the "Credit Agreement"), by2022, 0 shares of Series A Preferred Stock were issued and among the Company, SSI and Cenfin. The material terms of the First Amendment provided that Cenfin would be entitled to 33% of the gross proceeds raised in any equity or debt financing activities by either the Company or SSI, not including operational leases, for so long as there is any outstanding balance under the Credit Agreement for which only SSI is obligated (the "Cenfin Equity Payment Obligation"). In consideration of the First Amendment, the Company and SSI released Cenfin from all claims related to the loan documents.
On October 7, 2015, in settlement of a non-payment default, Roomlinx and SSI entered into a Forbearance Agreement with Cenfin upon the following terms:
● The interest rate on each Revolving Loan (as defined) was increased to the Federal Funds Rate plus 13%, from 5%.
● Subject to compliance by the Company and SSI with the terms and conditions of the Second Amendment and the Loan Agreement, Cenfin agreed to forebear from exercising its rights and remedies against SSI with respect to the default for non-payment on September 29, 2015 until the earlier of November 7, 2015 or a Forbearance Default (as defined) occurs (the "Forbearance Period"). SSI also agreed during the Forbearance Period not to make any payments to creditors or lenders of SSI without Cenfin's prior written consent, except for contractual payments, in the ordinary course of business to vendors of SSI.
● Roomlinx agreed during the Forbearance Period not to make any payments to any of the creditors or lenders of the Company (other than NFS Leasing) without first giving Cenfin two (2) business days prior written notice, except for contractual payments to vendors in the ordinary course of business.
On November 19, 2015,March 16, 2022, the Company entered into a GuarantySecurities Purchase Agreement with certain institutional investors to issue and Paymentsell in a private offering an aggregate of $50.0 million of securities, consisting of shares of Series E convertible preferred stock of the Company, par value $.01 per share and warrants to purchase (100% coverage) shares of common. Under the terms of the Purchase Agreement, the Company agreed to sell 500,000 shares of its Series E Preferred Stock and Warrants to purchase up to 33,333,333 shares of the Company’s common stock. Each share of the Series E Preferred Stock has a stated value of $100 per share and is convertible into shares of common stock at a conversion price of $1.50 per share subject to adjustment. The Preferred Stock is perpetual and has no maturity date. The Preferred Stock will not be subject to any mandatory redemption or other similar provisions. All future shares of Preferred Stock shall rank junior to the Series E Preferred Stock, except if at least a majority of the Series E Preferred Stock expressly consent, to the creation of the Parity Stock of Senior Preferred Stock.
The Conversion Price of the Series E Preferred Stock and the Exercise Price of the Warrants is subject to adjustment for: (a) stock dividends and stock distributions; (b) subsequent rights offerings; (c) pro rata distributions; and (d) Fundamental Transactions (as defined).
The Conversion Price is also subject to downward adjustment (the “Registration Reset Price”) to the greater of (i) eighty (80%) percent of the average of the ten (10) lowest daily VWAPs during the forty (40) trading day period beginning on and including the Trading Day immediately follow the Effective Date of the initial Registration Statement in July 2022, and (ii) the Floor Price of $0.25 per share.
The Company issued accompanying Common Stock Purchase Warrants (the “Warrants”) exercisable for five (5) years at $2.00 per share, to purchase an aggregate of 33,333,333 shares of Common Stock. The exercise price is subject to the same Registration Reset Price, as described above. The Floor Price is $0.25 per share.
At the time, using the Black-Scholes model, the Company recorded a market value of approximately $28.4 million which is included on the balance sheet within derivative liabilities- financing warrants. At June 30, 2022 the market value of such warrants was $28.4 million and a resultant gain on change in fair value of derivative liabilities was recorded for approximately $0.6 million.
As of June 30, 2022, 0 shares of Series A Preferred Stock were issued and outstanding; 0 shares of Series B Preferred Stock were issued and outstanding; 0 shares of Series C Preferred Stock were issued and outstanding; 0 shares of Series D Preferred Stock were issued and outstanding; and 500,000 shares of Series E Preferred Stock were issued and outstanding.
On September 26, 2022, we entered into an Exchange Agreement with the Purchasers, pursuant to which (i) each Purchaser exchanged its Warrants for new warrants to purchase our common stock and (ii) each Purchaser consented to an amendment and restatement of the terms of our Series E Convertible Preferred Stock, as well as other changes in the terms of the private placement effected by the Company Guaranteedon March 16, 2022. See Note 16 – Subsequent Events.
CONVERSION OF CONVERTIBLE NOTE PAYABLE RELATED PARTY
In July 2020, the holder of a $150,000 intercompany loan from SSIrelated party convertible promissory note of $1.3 million elected to convert the debt into shares of the Company’s common stock at a rate of $0.75 per share for 1,733,334 shares.
CONVERSION OF CONVERTIBLE NOTE PAYABLES
In the fiscal year ended June 30, 2021, the Company and an additional installment paymentissued a total of $75,000 was made to Cenfin. Until such time as $150,000 is repaid to Cenfin, the Company guaranteed up to $1,500,000 of SSI debt to Cenfin.
Future minimum payments under the line of credit are as follows:
| Years ended December 31, | | Minimum Payments | |
| | | | |
| 2016 | | $ | 3,388,554 | |
| Unamortized Debt Discount | | | (148,393 | ) |
| Net line of credit balance | | | 3,240,161 | |
| Less Current Portion | | | (3,240,161 | ) |
| Net line of credit balance | | $ | - | |
During the year ended December 31, 2015 and 2014, the Company recorded interest expenses of $207,040 and $0, respectively.
During the year ended December 31, 2015 and 2014, the Company recorded amortization of debt discount of $190,998 and $0, respectively.
Accrued interest amounted to $160,931 and $0 as of December 31, 2015 and 2014, respectively, which has been included in accrued expenses in accompanying consolidated balance sheets of discontinued operations.
Notes Payable of discontinued operations:
FCC note - monthly principal and interest payment of $1,188; interest at 11% per annum; and matures in August 2016.
NFS bridge loans - During the year ended December 31, 2015, SignalShare received bridge loans totaling $1,075,712 (due on September 15, 2015 and October 1, 2015) (including interest of $96,518) for Wi-Fi overlay expansion projects. As of December 31, 2015, $995,753 of these loans have been repaid directly by SignalShare. This note is in default. See Note 18 "Commitments and of Contingencies."
Tran short term note - During the year ended December 31, 2015, SignalShare borrowed $300,000 on a short term basis. The balance was due on August 1, 2015. On September 11, 2015, SignalShare executed the First Amendment and Allonge to Promissory Note and on November 19, 2015 the Second Allonge and Amendment to Promissory Note which added the accrued interest of $45,000 to the principal balance746,069 shares of the Company’s common stock as a result of holders of convertible note and establish monthly payment terms with the final payment due inpayables electing to convert. A total of approximately $1.8 million convertible note payables were converted at an average conversion price of $2.15 per share.
DEFERRED COMPENSATION
On May 2016.
NFS note – On July 31, 2015, the SignalShare converted a series of capital leases into note with the same lender (NFS). The note was for $4,946,213 and is payable in 75 weekly installments of $71,207 including interest at 11.4% per annum. This note is in default. In respect to this arrangement, the Company recorded the deferred financing fees of $377,746 to be amortized over 75 weeks.
For the years ended December 31, 2015 and 2014, the Company amortized $125,915 and $-0- of deferred financing fees, respectively. Unamortized deferred financing costs amounted to $251,830 and $-0- as of December 31, 2015 and 2014, respectively.
As of December 31, 2015, the Company had the following outstanding notes payable of discontinued operations:
| | | Amount | |
| | | | |
| FCC note | | $ | 8,932 | |
| NFS bridge loans | | | 79,959 | |
| Tran short term note | | | 345,000 | |
| NFS note | | | 4,509,891 | |
| Total | | $ | 4,943,782 | |
During the year ended December 31, 2015, the Company recorded interest expenses related to discontinued operations of $2,153,886.
Accrued interest amounted to $479,233 as of December 31, 2015, which has been included in accrued expenses in the accompanying consolidated balance sheets of discontinued operations
Noncontrolling Interest of discontinued operations - The Company recognizes non-controlling interest as equity in the consolidated financial statements separate from the parent company's equity (deficit). Non-controlling interest results from a partner in Arista Communications, LLC ("Arista"), which the Company owned 50% of Arista. The amount of net income (loss) attributable to non-controlling interests is included in consolidated net income (loss) on the consolidated statements of operations and comprehensive loss. For the year ended December 31, 2015, the non-controlling interests' share of net loss totaled $7,767 (for the period from the reverse acquisition consummation date, March 27, 2015 through December 31, 2015). Additionally, operating losses are allocated to non-controlling interests even when such allocation creates a deficit balance for the non-controlling interest member.
7. Property, Equipment and Software, net
Property, equipment and software consist of the following:
| | Balance at | |
| | December 31, | |
| | 2015 | | 2014 | |
| | | | | |
| Property, Equipment and Software | | | | |
| Machinery and equipment | | $ | 4,635,055 | | | $ | 4,635,055 | |
| Equipment offsite | | | 121,808 | | | | 121,808 | |
| Furniture, fixtures and equipment | | | 195,529 | | | | 141,220 | |
| Trucks and autos | | | 36,040 | | | | 36,040 | |
| Total property, equipment and software | | | 4,988,432 | | | | 4,934,123 | |
| Less: accumulated depreciation | | | (4,926,916 | ) | | | (4,923,295 | ) |
| Property, equipment and software, net | | $ | 61,516 | | | $ | 10,828 | |
Depreciation and amortization expense was $3,622 and $49,471 for the years ended December 31, 2015 and 2014, respectively. Depreciation and amortization expense for all periods was included in the selling, general and administrative expense caption in the accompanying consolidated statements of operations.
8. Notes Payable — Related Parties
A summary of the outstanding balance of the various notes payable is as follows:
| | | Balance at | |
| | | December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| | | | | | | |
| Brookville Special Purpose Fund | | $ | 2,102,496 | | | $ | 2,284,161 | |
| Veritas High Yield Fund, net of $0 and $43,258 unamortized debt discount at December 31, 2015 and 2014, respectively | | | 385,509 | | | | 615,470 | |
| Allied International Fund, Inc. | | | 371,161 | | | | - | |
| Allied International Fund Series A | | | 2,100,042 | | | | - | |
| Total notes payable – related parties | | | 4,959,208 | | | | 2,899,631 | |
| Less: current portion of notes payable – related parties | | | (3,160,623 | ) | | | (832,030 | ) |
| Long-term portion of notes payable, related party | | $ | 1,798,585 | | | $ | 2,067,601 | |
On March 31, 2014, the Brookville Special Purpose Fund maturity date was extended to January 1, 2016 and the Veritas High Yield Fund maturity date was extended to April 1, 2016. The notes have been converted to a payment schedule that will fully amortize the existing balances of the notes payable by the maturity dates of the notes. The interest rates for these two notes payable remain at the originally negotiated 14% interest rate per annum.
Accrued interest related to the Brookville Special Purpose Fund, the Veritas High Yield Fund and the Robert DePalo Special Opportunity Fund was capitalized as part of the balance of these notes payable at December 31, 2013 and are included in the repayment obligations of the Brookville Special Purpose Fund and the Veritas High Yield Fund. The capitalized interest on the Robert DePalo Special Opportunity Fund was included in the conversion of that note payable to SPHC's common equity on March 14, 2014.
For the years ended December 31, 2015 and 2014, the Company amortized $43,259 and $117,708, respectively, of debt discount and $20,575 and $57,702 of deferred financing costs, respectively.
During the year ended December 31, 2015 and 2014, the Company recorded interest expenses of $719,273 and $908,047, respectively, and during the year ended December 31, 2015, the Company recorded interest expenses of $52,304, which has been included in accrued expenses in accompanying consolidated balance sheets.
Accrued interest amounted to $498,321 and $94,935 as of December 31, 2015 and 2014, respectively, which has been included in accrued expenses in accompanying consolidated balance sheets.
On March 27, 2015 and March 30, 2015,21, 2021, the Company entered into two notes with Allied International Fund, Inc. ("Allied")an agreement to acquire the assets and specific liabilities of Redeeem, LLC for $255,000$2.6 million consisting of $1.2 million in cash, $166,000 in specific liabilities, and $275,000, respectively, which were due$1.2 million of the Company’s common stock (Note 3 – Business combinations and payable on April 3, 2015 and April 15, 2015, respectively. Both notes carry interest at twenty percent (20%) per year. As of December 31, 2015 the balance of these two loans are $166,161 and $205,000, respectively. During the year ended December 31, 2015, the Company recorded interest expenses of $52,304, which has been included in accrued expenses in accompanying consolidated balance sheets.
On October 26, 2015, SPHC and all of SPHC's subsidiaries (the "Subsidiaries") entered into Series A Preferred Termination, Loan and General Release Agreement (the "Series A Agreement"), by and among SPHC, Allied International Fund, Inc. ("Allied") and Roomlinx, wherebydispositions). In addition, the Company agreed to cancelprovide equity to its employees to be vested over three (3) years valued at approximately $9.7 million representing 3,623,433 shares of the series A preferredCompany’s common stock in exchange for a Secured Promissory Note, issued by SPHCat conversion price of $2.6715 per share. Given the equity is contingent on the employees being employed and all of its subsidiaries to Allied providing total aggregate payments (principal and interest) of $2,700,000 (the "Allied Note"), which is secured by the existing Security Agreement by and between SPHC and Allied, dated as of July 31, 2015. As of December 31, 2015, the outstanding balance was $2,100,042 and during the year ended December 31, 2015,are vested over three (3) years, the Company is treating this as deferred compensation and the expenses are recorded interestas the equity is vested. The vested portion of the deferred compensation was charged to additional paid-in capital and the expenses are recorded as stock-based compensation. In August 2021, all 3,623,433 shares of $27,863, which has been includedthe Company’s common stock were issued to Redeeem’s employees and held in accrued expensesan escrow account subject to the vesting schedule in accompanying consolidated balance sheets.the aforementioned escrow agreement.
Accrued interest amounted to $80,167 as of December 31, 2015, which has been included in accrued expenses in accompanying consolidated balance sheets.
On February 23, 2016, Brookville Special Purpose Fund, LLC. ("Brookville"), Veritas High Yield Fund and ("Veritas") and Allied (collectively "Plaintiffs") filed suit in separate actions inJune 7, 2022, Mr. Kyle Hill, the U.S. District Court for the Southern Districtseller of New York against Signal Point Holdings Corp., Signal Point Software Development Corp. and Signal Point Telecommunications Corp. ("Defendants") seeking foreclosure on the secured loans with the Defendants and the imposition of a temporary restraining order.
On April 7, 2016, M2 Group and Brookville, et al. settled the litigation as follows. SPHC in order to forebear the current foreclosures with its secured lenders,Redeeem, entered into a Restructuring, Omnibus Pledge, Security and Intercreditorseparation agreement with the Company (“Separation Agreement”). The terms of the Separation Agreement (the "Omnibus Agreement") which M2 Group consented to.
In exchangeprovided that the compensation for the forbearanceRedeeem purchase would be modified and Hill would forfeit 1,231,967 of the foreclosure onshares presently in escrow and the assets of the Debtors (i.e., SPHC, M2 nGage Communications, Inc. and M2 nGage, Inc.), the Company agreedremaining 1,231,968 shares would continue to transfer the subsidiaries of SPHC (specifically, M2 Communications and M2 nGage), with the exception of SignalShare LLC and SPC, to "Digital Media Acquisition Group Corp., ("DMAG")," a new subsidiary of the Company, so that the subsidiaries of SPHC will become subsidiaries of DMAG. The Debtors granted the Secured Parties a lien on the assets of the Debtors and pledged the securities of DMAG, M2 Communications and M2 nGage to the Secured Parties (collectively, the "Collateral").
The Parties: (i) reaffirmed the priorities of the Secured Parties in the Collateral; and (ii) agreed that the Secured Parties' subordinated security interest in the assets of Signal Share LLC shall be governed by the terms of the Intercreditor, Modification and Settlement Agreement dated asescrow agreement. As of November 13, 2015 by and among SPHC, Signal Share, the Secured Parties and NFS Leasing, Inc. ("NFS") in which agreement NFS acknowledged that it never has, nor will it ever have any security interest in the SPHC Excluded Entities which included a) M2 Communications, b) SPC, c) M2 nGage, d) the Company, e) Signal Point Infrastructure, Inc. and their respective Affiliates.
The Parties agreed to representations, warranties and covenants consistent with the prior Loan Documents. Upon an event of default, the Secured Parties shall have all remedies confirmed in the Loan Documents at law and equity, and all rights and remedies of a secured party under the UCC. Any deficiency upon a dispositionJune 30, 2022, 1,231,968 shares of the Collateral will bear interest at 15% per annum plus reasonable attorneys' fees.Company’s common stock were issued, but not vested.
A schedule of principal payments for the Brookville, Veritas, Allied and Allied International Fund Series A notes payable, by year, is set forth below.
Year | | Amount | |
| | | | |
| 2016 | | $ | 3,160,622 | |
| 2017 | | | 281,680 | |
| 2018 | | | 305,056 | |
| 2019 | | | 330,375 | |
| 2020 | | | 357,796 | |
| Thereafter | | | 523,678 | |
| Total | | $ | 4,959,207 | |
9. Note Payable
Zencos note – On October 19, 2015, the SPHC borrowed $87,500 on a short term basis from Zencos Consulting LLC. The note was due on November 19, 2015 with interest of $10,000. The note accrued interest at the default rate of 35%. As of the December 31, 2015, no payments have been made on this note.
During the year ended December 31, 2015,June 30, 2022, and 2021, the Company recorded interest expensesapproximately $3.0 million and $0.4 million, respectively, in stock-based compensation associated with the vested portion of $14,363 which has been accruedthe deferred compensation. In addition, during the fourth quarter fiscal year 2022, the Company recorded in settlement expense approximately $3.3 million in deferred stock compensation expense related to the aforementioned additional shares related to the Separation Agreement. As of June 30, 2022, there was $0 deferred compensation outstanding related to the Redeeem acquisition. Please see Note 3 for further discussion on the Redeeem disposition.
EXERCISE OF WARRANTS BY FORMER DIRECTOR
In May 13, 2021, former director Jeffrey Schwartz exercised 166,667 in warrants at a closing price of $2.81 and included in accrued expensesan exercise price of $0.75 resulting in the accompanying consolidated balance sheets.cashless issuance of 122,183 shares of common stock.
EXERCISE OF OPTIONS BY FORMER OFFICER
10. Related Party Transactions — StockholdersIn May 14, 2021, former officer Robert Schwartz exercised 222,000 in warrants at a closing price of $2.92 and an exercise price of $0.75 resulting in the cashless issuance of 165,145 shares of common stock.
WARRANTS
A significant shareholderDuring the fiscal year ended June 30, 2022, the Company issued warrants to certain directors and consultants to purchase 300,000 shares of the Company’s common stock between $0.36 and $1.24 per share which vested during various terms and were valued at $174,634. The Company managesrecorded compensation of $68,000 for the Brookville Special Purpose Fund,vested portion during the fiscal year ended June 30, 2022.
FINANCING WARRANTS
Classified as Derivative Liabilities
During the fiscal year ended June 30, 2022, the Company recorded $6,000 gain on change in fair value of derivative liabilities related to warrants issued to Series E investors, which were initially valued at approximately $28.4 million.
During the fiscal year ended June 30, 2022, the Company recorded approximately $0.6 million gain on change in fair value of derivative liabilities related to warrants issued to the our Lender in connection with our Credit Facility, which were initially valued at approximately $2.4 million.
Reconciliation of the derivative liabilities are as follows:
During the fiscal year ended June 30, 2021, the Company issued warrants to current investors to purchase 832,223 shares of the Company’s common stock between $0.75 and $3.75 per share as additional consideration, which were valued at approximately $2.5 million. The Company recorded warrants expense of approximately $2.1 million during the year ended June 30, 2021, related to these issuances.
During the fiscal year ended June 30, 2021, the Company issued warrants to current note holders to purchase 480,000 shares of the Company’s common stock between $0.75 and $1.95 per share as additional consideration, which were valued at approximately $1.8 million. The Company recorded warrants expense of $413,000 during the year ended June 30, 2021, related to these issuances.
The Company uses the Black-Scholes Model to determine the fair value of warrants granted. Option-pricing models require the input of highly subjective assumptions, particularly for the expected stock price volatility and the Veritas High Yield Fund.
expected term of options. Changes in the subjective input assumptions can materially affect the fair value estimate. The expected stock price volatility assumptions are based on the historical volatility of the Company’s common stock over periods that are similar to the expected terms of grants and other relevant factors. The Company derives the expected term based on an average of the contract term and the vesting period taking into consideration the vesting schedules and future employee behavior with regard to option exercise. The risk-free interest rate is based on U.S. Treasury yields for a maturity approximating the expected term calculated at the date of grant. The Company has never paid any cash dividends on its common stock and the Company has no intention to pay a dividend at this time; therefore, the Company assumes that no dividends will be paid over the expected terms of warrants awards.
The SPHC Series A preferred stock is owned by Allied a company whose president isCompany determines the wife of a major shareholder. The Series A preferred stock was issued to Allied for certain guarantees and other consideration. SPHC recognized Series A Preferred Stock dividendsassumptions used in the amountvaluation of $175,000 and $600,000warrants awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such, the Company may use different assumptions for warrants granted throughout the year.
The Company has utilized the following assumptions in its Black-Scholes warrant valuation model to calculate the estimated grant date fair value of the warrants during the years ended December 31, 2015June 30, 2022 and 2014, respectively. Preferred stock dividends payable amounted to $0 and $25,000 as2021:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Volatility - range | 63.5% - 65.0% | | 63.5% - 65.8% |
| Risk-free rate | 0.7% - 3.6% | | 0.2% - 0.9% |
| Contractual term | 4 years - 10 years | | 4.0 - 5.0 years |
| Exercise price | $0.36 - $3.75 | | $0.75 - $3.75 |
SAB Management LLC ("SAB") of which Andrew Bressman, Managing Director and Head of Business Development, is a Member, provides consulting services to the Company relating to strategic planning, product development and general business and financial matters. SAB is being paid at the rate of $425,000 per year.
11. Accrued Expenses
Accrued expenses consistA summary of the following:warrants granted, exercised, forfeited, and expired are presented in the table below:
| | Balance at | |
| | December 31, | |
| | 2015 | | 2014 | |
| | | | | |
| | | | | |
| Cost of service | | $ | 446,031 | | | $ | 466,016 | |
| Selling, general and administrative expense | | | 867,594 | | | | 269,916 | |
| Compensation | | | 141,473 | | | | 128,436 | |
| Total | | $ | 1,455,098 | | | $ | 864,368 | |
12. Operating Lease Commitments
The Company leases office space in New Jersey under an operating lease that expires in April 2019. The office lease requires the Company to pay escalating rental payments over the terms of the lease. The Company accounts for rent expense in accordance with ASC 840, "Leases" that requires rentals to be charged to operations on a straight-line basis. The Company performs a deferred rent analysis when a new lease is entered into and when the current leases have been renewed or amended. Rent expense for continuing operations was $297,284 and $278,203 for the years ended December 31, 2015 and 2014, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Warrants | | Weighted-Average Exercise
Price | | Weighted-Average Grant-
Date Fair Value | | Aggregate Intrinsic Value of
Outstanding Warrant
Shares | | Weighted-Average
Remaining Contractual
Term (in years) |
| Outstanding July 1, 2020 | 7,858,741 | | $ | 1.52 | | | $ | 1.92 | | | $ | 9,234,295 | | | 3 |
| Granted | 1,439,556 | | 1.00 | | | 3.00 | | | 3,938,467 | | | 0.80 |
| Exercised | (166,667) | | 0.75 | | | — | | | — | | | 0 |
| Forfeited | — | | — | | | — | | | — | | | 0 |
| Expired | (835,222) | | 5.48 | | | 4.17 | | | (1,014,295) | | | 0 |
| Outstanding June 30, 2021 | 8,296,408 | | $ | 1.05 | | | $ | 1.90 | | | $ | 12,158,467 | | | 2.2 |
| Granted | 300,000 | | 0.36 | | | 0.26 | | | 35,500 | | | 9.9 |
| Exercised | — | | — | | | — | | | — | | | 0 |
| Forfeited | — | | — | | | — | | | — | | | 0 |
| Expired | (1,825,185) | | 0.75 | | | 0.28 | | | (1,950,000) | | | 0 |
| Outstanding June 30, 2022 | 6,771,223 | | $ | 1.05 | | | $ | 1.94 | | | $ | 10,243,967 | | | 2.4 |
| Vested and exercisable June 30, 2022 | 5,770,263 | | 0.99 | | | 1.90 | | | 8,710,260 | | | 2.4 |
| Non-vested June 30, 2022 | 1,000,960 | | $ | 1.35 | | | $ | 2.20 | | | $ | 1,533,707 | | | 3.5 |
The following table summarizes the future minimum lease commitmentsrange of exercise prices and weighted average remaining contractual life for outstanding and exercisable warrants under the non-cancelable operating office leaseCompany’s warrant plans as of December 31, 2015.June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding Warrant Shares | | Exercisable Warrant Shares |
| Exercise price range | | Number of Warrant Shares | | Weighted average remaining contractual life | | Number of Warrant Shares | | Weighted average remaining contractual life |
| $ | 0.75 | | | 5,476,222 | | 2.4 years | | 4,903,118 | | 2.3 years |
| $ | 0.36 | | | 125,000 | | 9.2 years | | — | | — |
| $ | 1.24 | | | 150,000 | | 3.3 years | | 75,000 | | 3.3 years |
| $ | 1.50 | | | 400,000 | | 1.9 years | | 400,000 | | 1.9 years |
| $ | 1.95 | | | 26,667 | | 3.5 years | | 8,908 | | 3.5 years |
| $ | 0.84 | | | 25,000 | | 3.5 years | | 12,500 | | 3.5 years |
| $ | 3.00 | | | 66,667 | | 2.7 years | | 66,667 | | 2.7 years |
| $ | 3.75 | | | 501,668 | | 2.7 years | | 304,070 | | 3.0 years |
| | 6,771,224 | | 2.4 years | | 5,770,263 | | 2.4 years |
| December 31, | | Amount | |
| | | | |
| 2016 | | $ | 278,025 | |
| 2017 | | | 283,462 | |
| 2018 | | | 288,909 | |
| 2019 | | | 97,964 | |
| Total | | $ | 948,360 | |
2017 EQUITY INCENTIVE PLAN
13.On June 13, 2017, the Board adopted and approved an amendment to the Troika Media Group, Inc. 2015 Employee, Director and Consultant Equity Incentive Plan (the “Equity Plan”), to change the name from M2 nGage Group, Inc. to Troika Media Group, Inc., in order to attract, motivate, retain, and reward high-quality executives and other employees, officers, directors, consultants, and other persons who provide services to the Company by enabling such persons to acquire an equity interest in the Company. Under the Plan, the Board (or the compensation committee of the Board, if one is established) may award stock options, either stock grant of shares of the Company’s common stock, incentive stock options (“ISOs”) under IRS section 422, or a non-qualified stock option (“Non-ISOs”) (collectively “Options”). The Plan allocates 3,333,334 shares of the Company’s common stock (“Plan Shares”) for issuance of equity awards under the Plan.
As of June 30, 2022, the Company has granted, under the Plan, awards in the form of non-qualified stock options ("NQSOs") for all 3,333,334 shares.
2021 EQUITY INCENTIVE PLAN
On March 27, 2015,October 28, 2021, the Board adopted, and a majority of outstanding shares subsequently approved, the 2021 Employee, Director & Consultant Equity Incentive Plan (the “2021 Plan”). The prior Equity Plan did not have any remaining authorized shares. The 2021 Plan is intended to attract and retain employees, directors and consultants, to involve them to work for the benefit of the Company or its affiliated entities, and SPHC signedto provide additional incentive for them to promote the Company’s success. The 2021 Plan provides for the award of stock options, either ISOs or NQSOs, restricted shares and completedrestricted stock units (RSUs). The 2021 Plan authorized 12,300,000 shares of Common Stock for the "SMA". Pursuantissuance of awards under the 2021 Plan. As of the date of this report, an aggregate of 4,400,000 RSUs had been awarded to executive officers and directors and 7,900,000 RSUs had been awarded to employees. In addition the Company has issued 3,500,000 RSUs to certain executives of Converge related to the termsacquisition agreement and conditions of a SMA by and amongrelated to their continued employment with the Company. These RSUs were issued outside the 2021 Equity Incentive Plan.
ISOs Awards
In the fiscal year ending June 30, 2022, the Company SPHC, SSIissued to employees and RMLX Merger Corp.,directors of the Company completedoptions to purchase, in the merger with SPHC (the "Closing"). Following the February 10, 2015 termination of a prior Merger Agreement, the SMA was negotiated based upon, among other things, significantly revised settlement agreements with the Company's major creditors. These included, among other things, Cenfin LLC, the Company's secured lender, obtaining 5%aggregate, 720,169 shares of the approximately 15%Company’s common stock between $1.49 and $3.75 per share which were valued at $850,000. The Company recorded options expense of $89,000 during the fiscal year ending June 30, 2022, related to these issuances.
In the fiscal year ending June 30, 2021, the Company did not issue any options to purchase the Company’s common stock.
The Company uses the Black-Scholes Model to determine the fair value of Options granted. Option-pricing models require the input of highly subjective assumptions, particularly for the expected stock price volatility and the expected term of options. Changes in the subjective input assumptions can materially affect the fair value estimate. The expected stock price volatility assumptions are based on the historical volatility of the Company’s common stock over periods that are similar to the expected terms of grants and other relevant factors. The Company derives the expected term based on an average of the contract term and the vesting period taking into consideration the vesting schedules and future employee behavior with regard to option exercise. The risk-free interest rate is based on U.S. Treasury yields for a maturity approximating the expected term calculated at the date of grant. The Company has never paid any cash dividends on its common stock and the Company has no intention to pay a dividend at this time; therefore, the Company assumes that no dividends will be paid over the expected terms of option awards.
The Company determines the assumptions used in the valuation of Option awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at those grant dates. As such, the Company may use different assumptions for options granted throughout the year.
The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated grant date fair value of the options during the year ended June 30, 2022 :
| | | | | |
| 2022 |
| Volatility - range | 64.2% - 65.2% |
| Risk-free rate | 0.7% - 1.2%% |
| Contractual term | 3.0 years |
| Exercise price | $1.49 - $3.75 |
A summary of the Options granted to employees under the Plan as of June 30, 2022, are presented in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted-Average Exercise
Price | | Weighted-Average Grant-
Date Fair Value | | Aggregate Intrinsic Value of
Outstanding Option Shares | | Weighted-Average
Remaining Contractual
Term (in years) |
| Outstanding June 30, 2020 | 3,377,222 | | $ | 1.10 | | | $ | 1.06 | | | $ | 2,030,000 | | | 0.7 |
| Granted | — | | — | | | — | | | — | | | — |
| Exercised | (222,222) | | 0.75 | | | — | | | — | | | — |
| Forfeited | — | | — | | | — | | | — | | | — |
| Cancelled | (66,667) | | 0.75 | | | 3.12 | | | (200,001) | | | — |
| Outstanding June 30, 2021 | 3,088,333 | | 1.13 | | | 1.06 | | | 1,829,999 | | | 0.4 |
| Granted | 720,169 | | 2.51 | | | 1.18 | | | (5,767) | | | 3 |
| Exercised | — | | — | | | — | | | — | | | — |
| Forfeited | — | | — | | | — | | | — | | | — |
| Cancelled | (150,669) | | — | | | — | | | — | | | — |
| Outstanding June 30, 2022 | 3,657,833 | | 1.39 | | | 1.12 | | | 1,824,232 | | | 0.6 |
| Vested and exercisable June 30, 2022 | 2,997,972 | | 1.04 | | | 1.09 | | | 1,806,539 | | | 0.2 |
| Non vested June 30, 2022 | 659,861 | | $ | 2.96 | | | $ | 1.28 | | | $ | 17,693 | | | 2.3 |
The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable options under the Company’s option plans as of June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding Options Shares | | Exercisable Option Shares |
| Exercise price range | | Number of Option Shares | | Weighted average remaining contractual life | | Number of Option Shares | | Weighted average remaining contractual life |
| $ | 0.75 | | | 2,456,666 | | 0.1 years | | 2,534,444 | | 0.1 years |
| $ | 1.49 | | | 10,000 | | 2.4 years | | 0 | | — |
| $ | 1.50 | | | 200,000 | | 0.0 years | | 200,000 | | 0.0 years |
| $ | 2.08 | | | 245,001 | | 1.9 years | | 3,889 | | 1.5 years |
| $ | 2.61 | | | 344,500 | | 3.0 years | | 57,417 | | 3.0 years |
| $ | 2.84 | | | — | | 0.0 years | | — | | — |
| $ | 3.00 | | | — | | 0.7 years | | — | | — |
| $ | 3.75 | | | 401,666 | | 1.0 years | | 202,222 | | 0.7 years |
| | 3,657,833 | | 0.6 years | | 2,997,972 | | 0.2 years |
During the years ended June 30, 2022 and 2021, the Company has recorded $538,000 and $0, respectively, as compensation expense related to vested options issued, net of forfeitures. As of June 30, 2022 and outstanding fully diluted common2021, total unrecognized share-based compensation related to unvested options was approximately $1.1 million and $0, respectively.
NOTE 15 – INCOME TAXES
Troika Media Group Inc. and domestic subsidiaries file on a consolidated U.S. federal tax basis and state tax returns on a consolidated, combined or separate basis depending on the applicable laws for the years ending June 30, 2022 and 2021. Mission Media Holdings, LTD and Mission Media, LTD are foreign subsidiaries of the Company which file tax returns in the United Kingdom.
Troika Media Group Inc. the parent company of Troika Design Group Inc., Digital Media Acquisition Corporation, SignalPoint Corporation, Signal Point Holdings Corporation, Troika Services, Inc., Troika Analytics, Inc., Troika-Mission Holdings, Inc., Mission Media USA, Inc., and Troika IO, Inc. are subject to the U.S. federal tax rate of 21% and approximately up to 9% state tax for the years ending June 30, 2022 and 2021. We have two operating subsidiaries in the
UK, Mission Media Holdings, LTD and Mission Media, LTD, which are subject to a tax rate of 19% for the years ending June 30, 2022 and 2021.
Income tax (benefit) expense from continuing operations on an estimated GAAP basis for the year ending June 30, 2022, consisted of the following:
| | | | | | | | | | | | | | | | | |
| Current | | Deferred | | Total |
| Federal | $ | (37,109) | | | $ | — | | | $ | (37,109) | |
| State | 73,034 | | | — | | | 73,034 | |
| Foreign | — | | | — | | | — | |
| Subtotal | 35,925 | | | — | | | 35,925 | |
| Valuation allowance | — | | | — | | | — | |
| Total | $ | 35,925 | | | $ | — | | | $ | 35,925 | |
Income tax (benefit) expense from continuing operations on an estimated GAAP basis for the year ending June 30, 2021, consisted of the following:
| | | | | | | | | | | | | | | | | |
| Current | | Deferred | | Total |
| Federal | $ | 37,000 | | | $ | 152,000 | | | $ | 189,000 | |
| State | 27,000 | | | — | | | 27,000 | |
| Foreign | — | | | — | | | — | |
| Subtotal | 64,000 | | | 152,000 | | | 216,000 | |
| Valuation allowance | — | | | — | | | — | |
| Total | $ | 64,000 | | | $ | 152,000 | | | $ | 216,000 | |
A reconciliation of the estimated federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| | | | | | | | | | | |
| June 30, 2022 | | June 30, 2021 |
| Taxes calculated at federal rate | 21.0 | % | | 21.0 | % |
| Foreign taxes | (4.3) | % | | (0.1) | % |
| Debt settlement | 0.2 | % | | 2.6 | % |
| Stock compensation | (2.2) | % | | (1.2) | % |
| Change in valuation allowance | (15.4) | % | | (25.4) | % |
| State taxes net of federal benefit | 1.2 | % | | 1.9 | % |
| Revaluation of deferred | — | % | | — | % |
| Acquisition - domestic | — | % | | — | % |
| Acquisition - foreign | — | % | | — | % |
| Goodwill impairment | (1.3) | % | | — | % |
| Other adjustments | 0.9 | % | | 1.7 | % |
| Provision for income taxes | 0.2 | % | | 0.4 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2022 and 2021, are presented below:
| | | | | | | | | | | |
| June 30, 2022 | | June 30, 2021 |
| Deferred Tax Assets | | | |
| Net operating loss carryforwards | $ | 9,242,000 | | | $ | 5,320,000 | |
| Accounts receivable reserve | 137,000 | | | 131,000 | |
| Contribution carryover | 11,000 | | | 6,000 | |
| Section 163 (j) limitation | 649,000 | | | 120,000 | |
| Stock based compensation | 1,132,000 | | | 1,611,000 | |
| Accrued interest | 82,000 | | | 89,000 | |
| Contract liabilities | 2,187,000 | | | — | |
| Deferred rent | 303,000 | | | — | |
| Net right-of-use assets | — | | | 1,772,000 | |
| Other accruals | — | | | — | |
| Total Deferred Tax Assets | 13,743,000 | | | 9,049,000 | |
| | | |
| Deferred Tax Liabilities | | | |
| Fixed Assets | (117,000) | | | (112,000) | |
| Intangibles | (98,000) | | | (513,000) | |
| Goodwill | (171,000) | | | — | |
| Deferred Revenue | — | | | (179,000) | |
| Total Deferred Tax Liabilities | (386,000) | | | (804,000) | |
| Net Deferred Tax Assets | 13,357,000 | | | 8,245,000 | |
| Valuation Allowance | (13,357,000) | | | (8,245,000) | |
| | | |
| Net deferred tax / (liabilities) | $ | — | | | $ | — | |
The Company is in the process of reviewing its current deferred tax balances and the above amounts for the periods ending June 30, 2022 and 2021, are estimated, but may not be all inclusive.
Deferred tax assets and liabilities are computed by applying the estimated enacted federal, foreign and state income tax rates to the gross amounts of future taxable amounts and future deductible amounts and other tax attributes, such as net operating loss carryforwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which these deductible temporary differences reverse.
During the year ending June 30, 2022, the estimated valuation allowance increased by approximately $5.1 million to $13.3 million, as compared to $8.2 million as of June 30, 2021. The increase in valuation allowance is primarily related to an increase in net operating losses as well as stock-based compensation. The total valuation allowance results from the Company’s position that it is more likely than not able to realize their net deferred tax assets.
At June 30, 2017, and prior to this date, the Company had estimated federal and state net operating loss carryforwards. For the periods prior to the year ending June 30, 2017, the Company is unable to accurately verify or compute the applicable federal and state net operating losses. The Company’s tax year end was on a calendar year end December 31. Such losses may not be utilizable or possibly eliminated under IRC Section 382/383, change of ownership rules. Management is in the process of reviewing IRC Section 382/383 at the time of this filing for the period indicated. The federal net operating loss for the period ending June 30, 2021, is estimated to be approximately $20.6 million and for state $6.3 million. The federal net operating loss for the period ending June 30, 2022, is estimated to be approximately $37.8 million and for state $13.1 million. These carryforwards may be subject to an annual limitation under I.R.C. §§ 382 and 383 and similar state provisions, if the Company experienced one or more ownership changes which would limit the amount of the NOL and tax credit carryforwards that can be utilized to offset future taxable income. In general, an ownership change, as defined by
I.R.C. §§ 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than fifty (50) percentage points over a three-year period. The Company followinghas not completed an I.R.C. § 382/383 analysis. If a change in ownership were to have occurred, NOL and tax credit carryforwards could be eliminated or restricted. If eliminated, the Merger. Underrelated asset would be removed from the SMA,deferred tax asset schedule with a corresponding reduction in the Company's wholly-owned subsidiary RMLX Merger Corp.,valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact the Company’s effective tax rate. As of June 30, 2022 and 2021, the Company’s UK entity Mission Media Limited carryforward NOLs were approximately $4.0 million and $3.9 million, respectively.
On June 12, 2017, the Company entered into a Delaware corporation, was mergedmerger agreement with Troika Design Group, Inc. and into SPHC,subsidiaries (“Design”) and Daniel Pappalardo, the sole shareholder of Design. In conjunction with SPHCthis merger, we believe that the Company experienced an “ownership change” within the meaning of Sections 382 and its operating subsidiaries surviving383 of the Code. An ownership change is generally defined as a wholly-owned subsidiarymore than fifty (50) percentage point increase in equity ownership by “5 percent shareholders” (as that term is defined for purposes of Sections 382 and 383 of the Company (the "Merger"). The existing business of Roomlinx was transferred into a newly-formed, wholly-owned subsidiary named SSI. The Company's President and Chief Executive Officer, Michael S. Wasik, resigned from all positions withCode) in any three-year period or since the parent Company and was named President and Chief Executive Officer of SSI.last ownership change if such prior ownership change occurred within the prior three-year period. As a result of the Merger,ownership change on June 12, 2017, the shareholderslimitations on the use of SPHC,pre-change losses and other carry forward tax attributes in Sections 382 and 383 of the Code apply and the Company may not be able to utilize any portion of their NOL carry forwards from the years prior to June 12, 2017, and the portion of the NOL for June 30, 2017, allocable to the portion of the year prior to June 12, 2017. NOLs from subsequent years should not be affected by the ownership change on June 12, 2017.
There is a privately-owned Delaware corporation, receivednew tax on global intangible low-taxed income ("GILTI") of subsidiaries of US parents. This new tax law is based on the excess of foreign income over a specified return (deemed return on tangible assets of foreign corporation). This will result in a US tax on foreign earnings where: (i) there is not a large aggregate foreign fixed asset base; and (ii) foreign earnings are taxed at a low rate. For ASC 740 (Accounting for Income Tax), it is acceptable to recognize the GILTI in the year in which it is included on the tax return on the basis that it is triggered by the existence, on an aggregate basis, of "excess" low-taxed foreign income in that year. For IFRS tax accounting and GAAP, it is acceptable to recognize the charge for GILTI in the year in which it is included on the tax return on the basis that it is triggered by the existence, on an aggregate basis, of "excess" low-taxed foreign income in that year. Since the Mission foreign subsidiaries for the year ending June 30, 2022, recorded an operating loss of approximately 85%$7.4 million. There is no current GILTI tax recorded as a period cost. The Company is in the process of the Fully Diluted (as defined therein) common stock of the Company in exchange for 100% ownership interest in SPHC's common stock and Series A Preferred Stock. The merger consideration was determined by the Company, afterreviewing GILTI, as it is computed on a thorough review of prospective acquisitions, the benefits of the transaction, including accesscumulative basis, as it relates to capital, increased market opportunities and reach, perceived synergies, efficiencies and other financial considerations,United States Repatriation Tax, as well as a strategic growth plan contemplated by management of the combined entity. This transaction has been accounted for as a reverse acquisition where SPHC is the accounting acquirer and RMLX is the acquired company or the accounting acquiree. Accordingly, the historical financial statements prior to the consummation of the reverse acquisition transaction are those of SPHC.
Upon the Closing, the accounting acquirer, SPHC, acquired all the assets and assumed all the liabilities of the Company and immediately transferred such assets and liabilities into SSI, a newly-formed Nevada corporation wholly owned by the Company. As a result of the foregoing, SSI and SPHC and their respective subsidiaries are now the principal operating subsidiaries of the Company.
Pursuant to the terms of the SMA, the Company made a $750,000 cash payment to Cenfin, reducing the amount of the Revolving Loan with Cenfin to $3,962,000, bearing interest at approximately 5% per annum, and Cenfin received 7,061,295 shares of common stock. This revolving loan is secured by the assets of SSI, but not those of the parent company (except to the extent not assigned to SSI) and not by any assets of SPHC.
Pursuant to the terms and conditions of the SMA, the Board of Directors of the Company declared a dividend of 12,590,317 shares of common stock to existing stockholders who held 107,007 shares of Common Stock or an aggregate of 12,697,324 shares (9.41% of the fully diluted shares) prior to the consummation of the reverse acquisition transaction. Cenfin was issued 7,061,295 (5.23% of the fully diluted shares) shares and at consummation, the SPHC shareholders were issued 115,282,137 (85.36% of the fully diluted shares) exclusive of 4,160,000 option shares for one to one basis. All of the dividend shares and Cenfin shares are subject to a nine-month lock-up agreement, subject to certain registration rights. Prior to the merger, on March 20, 2015, the Company effected a one-for-sixty reverse stock split (the "Reverse Stock Split") resulting in 107,007 shares of Common Stock to be outstanding.
The foregoing summary of the terms and conditions of the SMA does not purport to be complete, and is qualified in its entirety by reference to the full text of the SMA, which is attached as an exhibit to the Company's Form 8-K filed on April 2, 2015.
As of the closing date, all outstanding shares of the Company's preferred stock described below shall continue to be outstanding until such time as determined by the Company's Board of Directors. All outstanding Company options are exercisable (at $36.00 or more per share) and all outstanding warrants, continue to be exercisable for the same number of shares at the exercise price, adjusted for the Reverse Stock Split.
In addition to the 115,282,137 shares of common stock issued to the former SPHC shareholders, the 4,160,000 options held by the SPHC option holders and 250,000 warrants held by warrant holders were exchanged on a one for one basis for options and warrants in the Company.
GILTI.
As of December 31, 2015, the Company's equity consisted of the following:
Class A Preferred Stock
The Company has authorized 5,000,000 preferred shares with a $0.20 par value, of which 720,000 shares have been designated as Class A Preferred Stock. The Class A Preferred Stock has a liquidation preference of $0.20 per share and is entitled to receive cumulative annual dividends at the rate of 9%, payable in either cash or additional shares of Class A Preferred Stock, at the option of the Company. As of December 31, 2015, there were 720,000 shares of Class A Preferred Stock issued and outstanding. Undeclared Class A Preferred Stock dividends accumulated and unpaid as of December 31, 2015 and 2014, were $224,040 and $211,080, respectively; these dividends are not included in accrued expenses.
Series B Preferred Stock.
See Note 19 "Subsequent Events" for information concerning the authorization of Series B Preferred Stock in January 2016.
SPHC Series A Preferred Stock
Pursuant to the SMA, the Company contracted to adopt series A preferred stock of SPHC, which was subsequently redeemed by SPHC. The Preferred Stock ranked senior to all of the Common Stock of SPHC, par value $0.001 per share; in each case as to distributions of assets upon liquidation, dissolution or winding up whether voluntary or involuntary. The Preferred Stock had a liquidation value of $5,000 per share.
On October 26, 2015, M2 Group, SPHC and all of SPHC's subsidiaries (the "Subsidiaries") entered into Series A Preferred Termination, Loan and General Release Agreement (the "Series A Agreement"), by and among SPHC, Allied and M2 Group, whereby the Company agreed to cancel the series A preferred stock in exchange for a Secured Promissory Note, issued by SPHC and all of its subsidiaries to Allied providing total aggregate payments (principal and interest) of $2,700,000 (the "Allied Note"), which is secured by the existing Security Agreement by and between SPHC and Allied, dated as of July 31, 2015.
Dividends payable on the shares of Series A Preferred Stock were initially an aggregate amount equal to one percent (1%) of the aggregate gross revenues per month of the Company and any of its consolidated subsidiaries, joint ventures, partnerships and/or licensing arrangements. Subsequent to entering into the Allied Preferred Stock transaction, the dividend terms were amended such that the amount of the monthly dividend was changed to 1% of revenue or $50,000 per month, whichever calculation produces a higher dividend. As of April 2015, no additional dividends have been declared by the board of directors and pursuant to the buyout no additional dividends are payable. SPHC recognized Series A Preferred Stock dividends in the amount of $175,000 and $600,000 for the years ended December 31, 2015 and 2014, respectively. Preferred stock dividends payable amounted to $0 and $25,000 as of December 31, 2015 and 2014, respectively, which the December 31, 2014 balance has been included in accrued expenses and was paid in January 2015.
SPHC Series B Preferred Stock
In July 2013, SPHC authorized the issuance of 10 shares of Series B preferred stock ("Series B Preferred Stock") to its majority shareholder. There are no cash and/or cumulative dividends authorized for the Series B Preferred Stock, but the provisions of the Series B Preferred Stock permitted the holder to exercise control over a broad range of the Company actions.
On October 26, 2015, the Company, SPHC and all of SPHC's subsidiaries (the "Subsidiaries") entered into Series B Preferred Termination, Consulting Agreement Modification and Settlement Agreement (the "Series B Agreement"), by and among the Company, SPHC, the Subsidiaries and Robert DePalo ("DePalo"), whereby the Series B preferred stock was cancelled in exchange for the Company agreeing that (subject to shareholder approval and the applicable laws and regulations) it would amend its charter and other relevant documents to provide for (a) the Company not approving any reverse stock splits without the affirmative vote of the holders of at least fifty one percent (51%) of the issued and outstanding common stock (b) for a period of two (2) years the Company will not issue any class of stock with supermajority voting rights, (c) DePalo will have the right to appoint one member to the Board of Directors of the Company, subject to such person not being a relative of DePalo and independent of DePalo, and (d) Until the expiration of the Consulting Agreement, by and between the Company and DePalo, DePalo will be entitled to a monthly payment of $17,500 that shall not be paid, but shall accrue, until the Company and DePalo agree or the Company obtains funding in the amount of $8,000,000 and thereafter payments of accrued arrears and regular payments will continue on a monthly basis for the term of the Consulting Agreement.
Common Stock
Common Stock: The Company had authorized 400,000,000 shares of $0.001 par value common stock as of December 31, 2015, there were 136,019,348 shares of Common Stock issued and outstanding. As of December 31, 20142019, the Company had 115,282,137 shares issued and outstanding.
Contributions by Shareholder
During 2015, the majority shareholderan estimated net operating loss (NOL) carryforward of SPHC contributed $615,004 which amount was recorded as additional paid-in capital and was allocatedapproximately $38.4 million. The NOL carryforward estimated to contributed capital from the majority shareholder.
During 2014, the Company's majority shareholder contributed $7,826,753 which amount was recorded as additional paid-in capital and was allocatedbegins to contributed capital from majority shareholder.
Sale of common shares
During 2015, the Company sold 916,665 shares of its common stock at a price of $1.80 which amount was recorded as additional paid-in capital and was allocated to contributed capital from the majority shareholder.
Common shares issuedexpire in settlement
On July 30, 2015, the Company issued 61,927 of its common stock valued at $111,469 in settlement of a claim with a shareholder. The Company relied upon the representations and warranties made by the shareholder in the settlement agreement.
The purchase of Incubite on December 9, 2014
On December 9, 2014, in exchange for the assets of Incubite, Holdings issued 1,000,000 shares of Common Stock of the Company valued at $1.8 million.
Conversion of debt to equity
On October 14, 2014, in connection with signing the merger agreement, the $3,053,121 balance of The Robert DePalo Special Opportunity Fund was converted into equity using an agreed upon $1.20 per common share exchange price.
In addition, on March 31, 2014, there were additional conversions of Brookville Special Purpose Fund and Veritas High Yield Fund notes payable to equity, both conversions using an exchange price of $1.50 per common share. There were conversions of $3,098,416 of the principal amount of Brookville Special Purpose Fund notes payable into 2,065,607 shares of Holdings' common stock. There were conversions of $774,073 of the principal amount of Veritas High Yield Fund notes payable into 516,050 shares of Holdings' common stock.
14. Warrants, Stock Option Plans and Stock Appreciation Rights
Warrants:
As of December 31, 2015, the Company had 2,838,888 of warrants outstanding, which were issued in connection with a lender relationship of SignalShare, for marketing related services, and as part of the sale of company common stock under a private placement, as set forth below.
The Company issued 250,000 warrants to NFS during the first quarter of 2015 and 1,111,111 during the third quarter of 2015. The warrants were fair valued at $444,282 and $1,975,257, respectively, and recorded as deferred finance fees and being amortized over a five-year period and 75-week period, respectively. During the year ended December 31, 2015, the Company amortized $691,218 to interest expense related to these warrants. The same was presented and disclosed under the line items "discontinued operations".
The Company issued 200,000 warrants to an outside consultant in connection with marketing services during the third quarter of 2015. The shares were fair valued at $355,517 and recorded as deferred marketing fees and amortized over the balance of 2015 to marketing expense.
Also, during the year ended December 31, 2015 1,277,777 warrants issued with sale of common stock, the same was not valued being the cost of equity transactions.
The following are the assumptions utilized in the estimation of fair value of warrants granted during 2015:
Expected term | | 5 years | |
Expected volatility | | | 222 | % |
Risk free interest rate | | | 1.60 | % |
Dividend yield | | | 0 | % |
The following is a summary of warrant activity for the year ended December 31, 2015:
| | | Shares Underlying Warrants | | | Weighted Average Exercise Price | | | Weighted Remaining Contractual Life (in years) | | | | Aggregate Intrinsic Value |
| | | | | | | | | | | | | | | |
| Outstanding at January 1, 2014 | | | - | | | $ | - | | | - | | | $ | - |
| Issued | | | 250,000 | | | | 1,80 | | | 4.92 | | | | - |
| Outstanding at January 1, 2015 | | | 250,000 | | | | 1.80 | | | 4.92 | | | | - |
| Issued | | | 2,588,888 | | | | 1.80 | | | 4.57 | | | | - |
| Warrants assumed through reverse acquisition | | | 11,214 | | | | 170.17 | | | - | | | | - |
| Expired/Cancelled | | | (11,214 | ) | | | 170.17 | | | - | | | | - |
| Outstanding and exercisable at December 31, 2015 | | | 2,838,888 | | | $ | 1.80 | | | 4.51 | | | $ | - |
Stock Options:
In 2004, the Company adopted a long term incentive stock option plan (the "Stock Option Plan") which covers key employees, officers, directors and other individuals providing bona fide services to the Company. On December 27, 2012, subject to stockholder approval, the board of directors voted to amend the Stock Option Plan to (i) adjust the maximum allowable shares of common stock upon exercise of options which may be granted from 1,200,000 to 2,000,000 shares of common stock and (ii) remove the provision from the Stock Option Plan which provided that any shares that are surrendered to or withheld by the Company in connection with any award or that are otherwise forfeited after issuance shall not be available for purchase pursuant to incentive stock options intended to qualify under2024. Under Section 422 of the Internal Revenue Code of 1986, as amended.
Pursuant to the terms of the Subsidiary Merger Agreement, in April 2015, the Company adopted the SPHC 2015 employees, Directors and Consultants Equity Incentive Plan (the "2015 Plan"). The purpose of the 2015 Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship, and to stimulate an active interest of these persons in our development and financial success. Under the 2015 Plan, we are authorized to issue up to 12,000,000 shares of Common Stock, including incentive stock options intended to qualify under Section 422382 of the Internal Revenue Code of 1986, as amended non-qualified(“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock options, stock appreciation rights, performance shares, restricted stockownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and long term incentive awards. The 2015 Plan will be administered by our board of directors until authority has been delegated to a committeeaggregation rules which combine unrelated shareholders that do not individually own 5% or more of the Board of Directors. The options vestcorporation’s stock into one or more “public groups” that may be treated as determined5-percent shareholder) increases by the Board of Directors and are exercisable for a period of no more than 10 years.
A summary50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). In general, the annual use limitation equals the aggregate value of common stock option activity underat the Stock Option Plan is presented below:
| | | Shares Underlying Options | | | Weighted Average Exercise Price | | | Weighted Remaining Contractual Life (in years) | | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | |
Outstanding at January 1, 2014 | | | - | | | $ | - | | | - | | | $ | - | |
| Granted and Issued | | | 795,000 | | | | 1.80 | | | 4.90 | | | | | |
| Outstanding at December 31, 2014 | | | 795,000 | | | | 1.80 | | | 4.90 | | | | - | |
| Granted and Issued | | | 4,885,000 | | | | 1.80 | | | 3.95 | | | | - | |
| Options assumed through reverse acquisition | | | 14,221 | | | | 97.92 | | | - | | | | - | |
| Expired/Cancelled | | | (484,396 | ) | | | 2.46 | | | - | | | | - | |
| Outstanding at December 31, 2015 | | | 5,209,825 | | | | 2.00 | | | 4.18 | | | | - | |
| Exercisable at December 31, 2015 | | | 2,043,105 | | | | 2.31 | | | 4.18 | | | | - | |
| Un-exercisable at December 31, 2015 | | | 3,166,720 | | | $ | 1.80 | | | 4.19 | | | | - | |
The following are the assumptions utilized in the estimation of stock-based compensation related to the stock options granted for the years ended December 31, 2015 and 2014:
| | | 2015 | | | 2014 | |
| | | | | | | |
| Expected term | | 5 years | | | 5 years | |
| Expected volatility | | | 254 | % | | | 195 | % |
| Risk free interest rate | | | 0.58 | % | | | 1.07 | % |
| Dividend yield | | | 0 | % | | | 0 | % |
Stock Appreciation Right Agreements
On August 12, 2014, the Board of Directors of SPHC authorized Stock Appreciation Rights Agreements (the "Agreements") by and between SPHC and a consultant for the Company (the "Recipients"). These Agreements were adopted by RMLX upon the completiontime of the reverse merger. The Agreements granted stock appreciation rights ("SARs") as an inducement for the Recipients to promote the best interests of the Company and its stockholders. The spread between the then fair market value of the Company's common stock, par value $0.001 per share ("Common Stock") on the grant date and the then fair market value of the stock on the date of exercise shall be payable to the Recipients, less applicable tax withholdings.
Set forth below is information with regard to the individuals, number of shares and exercise price of the SARs issued as of October 30, 2014.
The SARs are subject to graded vesting provisions and may only be exercised when the Recipients SARs have vested. The SARs vested 50% on January 10, 2015 and 50% on January 10, 2016 and the SARs may only be exercised in the year in which they vest. Thus, 50% was forfeited. Vested SARs that remain unexercised at the end ofownership change multiplied by a vesting year will expire at that time. Any unvested SARs will be immediately forfeited and canceled in the event that a Recipient's employment or other service with the Company is terminated for any reason.
● | Aaron Dobrinsky, President or an entity of his choosing, SARs were authorized for 3,500,000 shares of Common Stock at $0.50 per share, provided Mr. Dobrinsky remains employed by the Company. |
● | Christopher Broderick, Chief Operating Officer, or an entity of his choosing SARs were authorized for 3,500,000 shares of Common Stock at $0.50 per share, provided Mr. Broderick remains employed by the Company. |
● | SAB Management LLC, an entity owned by Andrew Bressman, Managing Director and his wife, SARs were authorized for 8,500,000 shares of Common Stock at $0.10 per share, provided Mr. Bressman remains employed by the company. |
The following are the assumptions utilized in the estimation of stock-based compensation related to the SARs granted for the year ended December 31, 2014:
| 2014 | |
| | |
Expected term | 2 years | |
Expected volatility | | | 221 | % |
Risk free interest rate | | | 0.48 | % |
Dividend yield | | | 0 | % |
Set forth below is information with regard to the individuals, number of shares and exercise price of the SARs issued as of March 20, 2015:
The SARs are subject to graded vesting provisions and may only be exercised when the Recipients SARs have vested. The SARs will vest on January 10, 2017 and the SARs may only be exercised in the year in which they vest., thus, 50% were forfeited. Vested SARs that remain unexercised at the end of a vesting year will expire at that time. Any unvested SARs will be immediately forfeited and canceled in the event that a Recipient's employment or other service with the Company is terminated for any reason.
● | Aaron Dobrinsky, President or an entity of his choosing, SARs were authorized for 1,750,000 shares of Common Stock at $0.50 per share, provided Mr. Dobrinsky remains employed by the Company. |
● | Christopher Broderick, Chief Operating Officer, or an entity of his choosing SARs were authorized for 1,750,000 shares of Common Stock at $0.50 per share, provided Mr. Broderick remains employed by the Company. |
● | SAB Management LLC, an entity owned by Andrew Bressman, Managing Director and his wife, SARs were authorized for 4,250,000 shares of Common Stock at $0.10 per share, provided Mr. Bressman remains employed by the Company. |
Set forth below is information with regard to the individuals, number of shares and exercise price of the SARs issued as of March 27, 2015:
The SARs are subject to graded vesting provisions and may only be exercised when the Recipients SARs have vested. The SARs will vest 50% on January 10, 2017 and 50% on January 10, 2018 and the SARs may only be exercised in the year in which they vest. Vested SARs that remain unexercised at the end of a vesting year will expire at that time. Any unvested SARs will be immediately forfeited and canceled in the event that a Recipient's employment or other service with the Company is terminated for any reason.
● | Two executives of SignalShare, SARs were authorized for 2,000,000 shares of Common Stock at $1.80 per share, provided they remain employed by the Company. |
Set forth below is information with regard to the individuals, number of shares and exercise price of the SARs issued as of August 1, 2015:
The SARs are subject to graded vesting provisions and may only be exercised when the Recipients SARs have vested. The SARs will vest 50% on January 10, 2017 and 50% on January 10, 2018 and the SARs may only be exercised in the year in which they vest. Vested SARs that remain unexercised at the end of a vesting year will expire at that time. Any unvested SARs will be immediately forfeited and canceled in the event that a Recipient's employment or other service with the Company is terminated for any reason.
● | Steven Vella, Chief Financial Officer, or an entity of his choosing SARs were authorized for 1,500,000 shares of Common Stock at $0.50 per share, provided Mr. Vella remains employed by the Company. |
The following are the assumptions utilized in the estimation of stock-based compensation related to the SARs granted for the years ended December 31, 2015:
| 2015 | |
| | |
Expected term | 3 years | |
Expected volatility | | | 216 | % |
Risk free interest rate | | | 0.92 | % |
Dividend yield | | | 0 | % |
A summary of SAR activity is presented below:
| | | Shares Underlying SARs | | | Weighted Average Exercise Price | | | Weighted Remaining Contractual Life (in years) | | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | |
Outstanding at January 1, 2014 | | - | | | $ | - | | | - | | | $ | - | |
Granted and Issued | | 15,500,000 | | | | 0.28 | | | 2.0 | | | | - | |
| Outstanding at January 1, 2015 | | 15,500,000 | | | | 0.28 | | | 2.0 | | | | - | |
| Granted and Issued | | 11,250,000 | | | | 0.44 | | | 1.37 | | | | - | |
| Expired/Cancelled | | (7,750,000 | ) | | | 0.28 | | | - | | | | - | |
| Outstanding at December 31, 2015 | | 19,000,000 | | | | 0.37 | | | 1.78 | | | | - | |
| Exercisable at December 31, 2015 | | - | | | | - | | | | - | | | | - | |
| Un-exercisable at December 31, 2015 | | 19,000,000 | | | $ | 0.37 | | | | 1.78 | | | $ | - | |
The Company recorded stock-based compensation expense of $21,596,317 and $1,931,855 for the years ended December 31, 2015 and 2014, respectively. The amounts are recorded in selling, general and administrative expense in the consolidated statements of operations and comprehensive loss. At December 31, 2015, there was approximately $19.2 million in unrecognized compensation cost related to options and SARs that will be recorded over future periods of approximately three years.
Due to the discontinuance of certain operations via sale and shutdown (see note 19, 1 million unvested SARS and approximately 2.7 million options (1.2 million vested and 1.5 million unvested) terminated through August 18, 2016.
15. Income Taxes
Tax returns for M2 Group and its subsidiaries have not been prepared and filed for the year ended December 31, 2015. It is not expected that M2 Group and its subsidiaries would have a tax liability for any periods included in the accompanying consolidated financial statements.
At December 31, 2015 and 2014, the Company had federal and state net operating loss carry forwards of approximately $133.1 million and $51.6 million, respectively, that begin to expire in 2022.
| | | December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Statutory federal income tax rate | | | 35.0 | % | | | 35.0 | % |
| Combined average statutory state and local income tax rate (7.4%) net of federal benefits | | | 4.8 | % | | | 4.8 | % |
| Net operating losses and other tax benefits for which no current benefit is being realized | | | (39.8 | )% | | | (39.8 | )% |
| Effective tax rate | | | 0.0 | % | | | 0.0 | % |
Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing the deferred tax asset and liabilities result principally from the following for the years ended December 31, 2015 and 2014.
| | | December 31, | |
| | | 2015 | | | 2014 | |
| Deferred tax assets | | | | | | |
| Net operating loss carryforwards | | $ | 46 ,586,000 | | | $ | 18,071,000 | |
| State and local operating loss carryforwards | | | 6,389,000 | | | | 2,478,000 | |
| Less: valuation allowance | | | (52,975,000 | ) | | | (20,549,000 | ) |
| Net deferred tax asset | | $ | - | | | $ | - | |
specified tax-exempt interest rate. The Company has not completed its evaluation of NOL utilization Limitations under IRCa study as to whether there is a Section 382 changelimitation on its NOLs that will limit the use of ownership rules. Ifits NOLs in the future. The Company has hadrecorded a change in ownership the NOL's would be limited as to the amount that could be utilized each year, basedvaluation allowance on the Internal Revenue Code,entire NOL as amended.
16. Arista Communications, LLC.
SSI has a 50% joint venture ownership in, and managesit believes that it is more likely than not that the operations for Arista Communications, LLC ("Arista"). The other 50% of Arista is owned by Wiens Real Estate Ventures, LLC, a Colorado limited liability company ("Weins"). SSI acquired its 50% interest in Arista through its acquisition of Canadian Communications, LLC, on October 1, 2010.
Arista provides telephone, internet, and television services to residential and business customers located in the Arista community in Broomfield, Colorado. As the operations manager for Arista, in accordance with ASC 810, Consolidation, the Company determined that Arista is a variable interest entity that must be consolidated. M2 Group reports 100% of Arista revenues and expenses in its consolidated statements of operations and comprehensive loss and 100% of Arista assets, liabilities, and equity transactions on its consolidated balance sheets. M2 Group then records the non-controlling interest allocation.
Financial information for Arista Communications, LLC, for the period from March 27, 2015 (date of Acquisition) to December 31, 2015 is as follows:
| | | Period from March 27, to December 31, 2015 | |
| | | | |
| Revenue | | $ | 53,991 | |
| Direct Costs | | | (43,663 | ) |
| Operating expenses | | | (25,862 | ) |
| Net loss | | $ | (15,534 | ) |
Weins' share of the net loss is $7,767 for the period from March 27, 2015 (date of Acquisition) to December 31, 2015.
Arista has been classified as discontinued operations under SSI, see Note 6.
17. Pro-forma Financial Information
The following presents the pro-forma combined results of operations of the Company in connectiondeferred tax asset associated with the reverse acquisition transaction completed on March 27, 2015 for the years ended December 31, 2015 and 2014, after giving effect to certain pro-forma adjustments and assuming the reverse acquisition transaction completed asNOLs will not be realized regardless of the beginning of 2014.whether an “ownership change” has occurred.
These pro-forma results are presented in compliance with the adoption of Accounting Standards Update ("ASU") 2010-29, Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations, and are not necessarily indicative of the actual consolidated results of operations had the acquisitions actually occurred on January 1, 2014 or of future results of operations of the consolidated entities:
| | | For the years ended December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Revenues | | $ | 10,610,520 | | | $ | 11,294,276 | |
| Cost of sales | | | 6,933,066 | | | | 8,053,486 | |
| Gross profit | | | 3,677,454 | | | | 3,240,790 | |
| Selling, general and administrative expenses | | | 29,070,604 | | | | 10,417,592 | |
| Operating loss | | | (25,393,150 | ) | | | (7,176,802 | ) |
| Interest expense, net | | | (982,252 | ) | | | (896,298 | ) |
| Other income, net | | | (14,776 | ) | | | (97,686 | ) |
| Loss from continuing operations before income taxes | | | (26,081,396 | ) | | | (8,170,786 | ) |
| Income taxes. | | | - | | | | - | |
| Loss from continuing operations | | | (26,390,178 | ) | | | (8,170,786 | ) |
| Loss from discontinued operations | | | (13,105,307 | ) | | | (6,496,780 | ) |
| Net loss | | | (39,495,485 | ) | | | (14,667,566 | ) |
| Net loss attributable to the non-controlling interest – discontinued operations | | | 9,106 | | | | 8,243 | |
| Net loss attributable to M2 nGage Group, Inc. | | | (39,486,379 | ) | | | (14,659,323 | ) |
Less: Dividends on preferred stock | | | (175,000 | ) | | | (600,000 | ) |
Net loss attributable to M2 nGage Group, Inc. common shareholders | | | (39,661,379 | ) | | | (15,259,323 | ) |
Other comprehensive income - currency translation loss | | | 10,196 | | | | 10,520 | |
| Comprehensive loss | | $ | (39,651,183 | ) | | $ | (15,248,803 | ) |
These pro-forma financial statements reflect the results of SSI and Signalshare being classified as discontinued operations and therefore being reflected in the lin item above as loss from discontinued operations.
18. Commitments and Contingencies
Non-Income Taxes
The Company remits state excise tax on various telecommunication services, as it is the Company's position that the telephone service originates in the states where the equipment or customers are located or the services are rendered. State taxing authorities are constantly revising the laws and regulations with regard to telecommunication services and therefore, the Company is subject to potential excise tax in other jurisdictions based upon these constantly changing laws and regulations. However, the Company cannot determine such potential amount as of December 31, 2015.
Litigation
The Company is party to various legal proceedings and claims related to its normal business operations. In the opinion of management, the Company has substantial and meritorious defenses for these claims and proceedings in which it is a defendant, and believes these matters will be ultimately resolved without a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. The aggregate provision for losses related to contingencies arising in the ordinary course of business is not material, individually or in the aggregate, to the consolidated operating results for the years ended December 31, 2015 and 2014.
El Dorado Offices 2, LP
The Company received notice that El Dorado Offices 2, LP ("Landlord") had filed suit against the Companydelinquent 2016, 2017 and SignalShare Infrastructure, Inc. associated with amounts due under a terminated office space lease2018 federal, state and an associated promissory note. The Landlord seeks approximately $326,000, plus costs, associated with the failurelocal tax returns in October 2020. These tax returns remain open to repay the promissory note. The Company was served with the complaint on November 24, 2015 and answered the Complaint. On June 1, 2016 the matter was settled during court ordered mediation for a total amount of $125,000 paid in installmentsaudit until October 2016. Subsequently, the Company had a Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.2023.
CLC Networks and Skada
The Company is in receipt of a District Court Civil Summons, dated May 29, 2012, in the matter of "CLC Networks, Inc. and Skada Capital, LLC v. Roomlinx, Inc.", commenced in the District Court of Boulder County, Colorado (the "Action"). The plaintiffs in the Action claimed that the Company owed them certain unpaid sales commissions, including with respect to Hyatt Corporation in connection with that certain Master Services and Equipment Purchase Agreement, as described above under Business. The Company and the plaintiffs executed a settlement agreement in February 2014 for $106,528 to be paid in 19 even monthly installments commencing March of 2014. As of December 31, 2015 the Company had paid its liability in full. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
SignalShare payroll tax matter
SignalShare LLC is in default of its payment obligations for payroll taxes to the IRS for the first and second quarter and part of third quarter of 2015. The amount of trust fund taxes outstanding as of December 28, 2016 March, 2016 is $673,888.63 which includes penalties and interest. The IRS has filed liens against SignalShare and may pursue personal action against the responsible SignalShare management team members if payment of the trust fund balance is not made. As a result of this matter, the Company has moved SignalShare's payroll process to its corporate offices in order to strengthen the controls over the payroll functions. Subsequently, the SignalShare filed bankruptcy, these amounts are included in the liabilities of discontinued operations.
SignalShare Office Lease
SignalShare received notice on October 1, 2015 that its lease with Aerial Realty Corp. for office space in Morrisville, NC was being terminated due to non-payment and that the office's locks were changed. The Landlord expressed its intention to avail itself of all remedies under the lease including the collection of waived rent (equal to $21,875.), attorney's fees, brokerage fees and any other amounts due under the Lease which was under term until March 31, 2020 and approximating total cost of $287,000. The Company is reviewing its options and the Landlord's claims and cannot determine the ultimate outcome at this time. A a result of the SignalShare bankruptcy, these amounts are included in the liabilities of dicontinued operations.
- 85 -NOTE 16 – SUBSEQUENT EVENTS
Sale Tax Lien
TIG
The Company received a letter from Technology Integration Group ("TIG") demanding payment of approximately $2,430,000 with respect to inventory and services that the Company purchased from TIG. TIG subsequently filed an action in California State Court (Case No. 37-2012-00046436-CU-BC-NC (the "Action"). On September 23, 2014, the Company entered into a Settlement Agreement and Mutual General Release with TIG. The Settlement Agreement was conditioned on the SPHC merger taking place. On March 24, 2015, the Company, Michael S. Wasik, Anthony DiPaolo and SSI entered into the Settlement Agreement and Mutual General Release with PC Specialists Inc. (d/b/a TIG), replacing the agreement signed in the fourth quarter of 2014. As of March 23, 2015, the Company owed TIG $3,003,267, consisting of $2,064,223 for equipment purchased and stored, $879,998 of interest on such amount and $59,046 of attorneys' fees and costs. Under the Settlement Agreement, the Company agreed to pay a settlement amount of $1,919,239, of which $400,000 was paid by SPHC upon the closing of the SMA. As a result, the Company, Wasik and DiPaolo were released from the Action and TIG consented to the transfer of rights and obligations under the Settlement Agreement to SSI with no recourse to the Company or SPHC. On April 5, 2016, counsel for TIG approached the Company regarding payment deficiencies under the settlement agreement and threatened further legal action. As of December 31, 2015 the Company has the entire liability due TIG recorded in accounts payable. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
ScanSource
The Company received a District Court Civil Summons, dated August 23, 2013, in the matter of "ScanSource v. Roomlinx, Inc.", commenced in the District Court of Greenville County, South Carolina. The plaintiffs in such action claimed that the Company owed them approximately $473,000 with respect to inventory purchased by the Company. The amount is recorded in accounts payable in the accompanying consolidated balance sheets as of December 31, 2015 and December 31, 2014. On March 31, 2015, the Company and ScanSource entered into a settlement agreement with respect to such action in which Roomlinx agreed to pay ScanSource a total of $471,000 plus interest as follows: (a) payment of $100,000 on or before June 1, 2015, (b) beginning June 1, 2015, interest accruing on the outstanding balance of 12% per annum until the balance is paid in full, (c) beginning July 1, 2015 and continuing for 12 months thereafter, payment of $8,000 per month, and (d) following the initial 12 month payment schedule set forth in (b), payment of $316,715 in 24 monthly payments according to an amortization schedule agreed to by the Company and ScanSource. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
WFG
The Company is in receipt of a letter dated November 10, 2014 on behalf of Wi-Fi Guys, LLC ("WFG") demanding payment from the Company for amounts relating to development and software services in the amount of $297,000. The Company evaluated all of its options, including legal options, with respect to the validity of the WFG letter and the alleged grounds for demanding payment and formally responded in a letter dated December 1, 2014 in which the Company denied WFG's claims and additionally made separate counter-claims against WFG. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
Hyatt
The Company received a request for indemnification from Hyatt Corporation ("Hyatt") dated July 3, 2013 in connection with a case brought in US Federal Court in California by Ameranth, Inc., against, among others, Hyatt. In connection with such case, the plaintiffs have identified the Company's e-concierge software as allegedly infringing Ameranth's patents. The Company licenses the e-concierge software from a third party and accordingly has made a corresponding indemnification request to such third party. The Company believes that any such claim may also be covered by the Company's liability insurance coverage and accordingly the Company does not expect that this matter will result in any material liability to the Company.
On March 12, 2012, the Company and Hyatt Corporation ("Hyatt") entered into a Master Services and Equipment Purchase Agreement (the "MSA") pursuant to which the Company has agreed to provide in-room media and entertainment solutions, including its proprietary Interactive TV (or iTV) platform, high speed internet, free-to-guest, on-demand programming and related support services, to Hyatt-owned, managed or franchised hotels that are located in the United States, Canada and the Caribbean. Under the MSA, Hyatt will use its commercially reasonable efforts to cause its managed hotels to order the installation of the Company's iTV product in a minimum number of rooms in Hyatt hotels within certain time frames.
In December 2012, the Company and Hyatt mutually agreed to suspend certain Hyatt obligations under the MSA that had not been met; including the suspension of the obligations of Hyatt to cause a certain number of rooms in both Hyatt owned and managed properties to place orders for the Company's iTV products within certain time frames. At the time of the December 2012 suspension of these Hyatt obligations, the Company had installed certain services and products in approximately 19,000 rooms (including approximately 9,000 installs of its iTV product) in Hyatt hotels. During the year ended December 31, 2013,June 30, 2022, the Company completedwas notified of an amount due regarding a New York State sales tax audit for the installationperiod of approximately 1,000 additional rooms. As of DecemberJune 30, 2010, through May 31, 2015 and December 31, 2014, deposits received on statements of work for Hyatt properties are recorded as customer deposits in the consolidated balance sheets in the amounts of approximately $1,262,000.
In connection with the Merger Agreement, the Company and Hyatt entered into a Waiver and Consent Agreement dated as of March 11, 2014 (the "Hyatt Consent Agreement"), pursuant to which Hyatt provided its conditional consent and approval to the transactions contemplated2016. The funds were garnished by the Merger Agreement and any assignment of the Company's assets contemplated thereunder, including the assignment to SSI of the Company's right, title and interest under the MSA and under the Hotel Services & Equipment Purchase Agreements (the "HSAs") entered into by the Company with individual hotel owner entities.
On September 29, 2014, the Company received a letter from Hyatt (the "September 29th Letter") notifying the Company that Hyatt is terminating the HSAs with respect to the following five hotels in which the Company has yet to install any equipment or provide any services – the Hyatt Regency Indianapolis, the Hyatt Regency Greenwich, the Grand Hyatt New York City,State Department of Taxation and Finance from the Hyatt Regency Coconut Point and the Hyatt Regency Lake Tahoe (collectively, the "Hotels"). Hyatt's September 29th Letter does not affect any Hyatt hotels under the MSA currently being serviced by the Company. Hyatt's termination of the HSAs is basedTroika Bank account on alleged noncompliance by the Company and SSH with certain provisions of the Hyatt Consent Agreement. The Company evaluated the validity of the Hyatt Letter and the alleged grounds for terminating the HSAs for the Hotels, and believes such grounds are without merit.
Hyatt's September 29th Letter also requested repayment of deposits in the aggregate amount of $966,000 paid to the Company by the Hotels in connection with the HSAs. A second letter dated November 14, 2014 (the "November 14th Letter") received by the Company from Hyatt demanded repayment of such deposits by November 21, 2014. Upon evaluating the validity of Hyatt's November 14th Letter and again determining that Hyatt's grounds for terminating the HSA and demanding the return of the aforementioned deposits are without merit, the Company formally responded in a letter to Hyatt dated March 3, 2015 wherein the Company denied Hyatt's claims. The Company subsequently received a third letter from Hyatt dated March 26, 2015 (the "March 26th Letter") in which Hyatt again demanded the repayment of the aforementioned deposits. The Company has evaluated the validity of the March 26th Letter and the alleged grounds for terminating the HSAs for the Hotels, and believes such grounds are without merit. The Company has not made any such repayment to Hyatt. On May 4, 2015, the Company received a letter from Hyatt alleging that the Hyatt Consent Agreement did not apply to the merger between Signal Point Holdings Corporation and the Company and further contends that such merger triggered Hyatt's right to terminate the MSA. The Company believes Hyatt's arguments and conclusion are without merit.
The Parties began negotiations to rectify the disputes between them and entered into a Settlement Agreement on November 17, 2015 providing for the orderly termination of iTV services at Hyatt locations. The Settlement Agreement also provided for the extension of high speed internet services for 36 months in retained Hyatt locations and gave the Company the right to bid on all future Wi-Fi installations at hotels and business center locations. The Settlement Agreement also provided that the deposit would be used to fund transitional services and future installation costs. Finally, the Settlement Agreement provided for mutual releases.
AGC
July 8, 2022. The Company is currently engaged with a tax firm
to assess the liability and recover funds. As of June 30, 2022, the approximately $0.8 million is recorded in receipt ofaccrued expenses on the balance sheet.
Director Election
On July 15, 2022, Randall Miles, was elected as a letter dated April 10, 2015 on behalf of America's Growth Capital, LLC d/b/a AGC Partners ("AGC") demanding payment from the Company for amounts relating to the occurrence of a strategic transaction between the Company and Signal Point Holdings Corp in the amount of $300,000. The Company has evaluated all of its options, including legal options, with respect to the validitydirector, as well as Chairman, of the AGC letterBoard of Directors (the “Board”) of Troika Media Group, Inc. (the “Company”).
Mission UK
In August 2022, the Company’s board of directors approved the sale of Mission-Media Holdings Limited and the alleged groundsits UK subsidiary Mission Media Limited (collectively, “Mission UK”) to a third-party for demanding paymenta purchase price of $1,000. Mission UK is a brand experience and formally responded in a letter dated April 16, 2015 in which the Company denied AGC's claims. See Note 19 "Subsequent Events." Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
NFS LITIGATION AND RELATED MATTERS
On January 28, 2016, NFS Leasing, Inc. ("NFS") filed suit against SignalShare, LLC and SPHC, wholly-owned subsidiaries of the Company, for non-payment of amounts due under certain agreements with NFS and two employees of SignalShare, LLC. NFS seeks $7,828,597, plus interest and attorneys' fees, from SignalShare, LLC and seeks enforcement of certain guarantees of the debt by SPHC and named officers of SignalShare, LLC. In July 2015, SignalShare, LLC converted certain equipment leases from NFS into a secured Term Loan. The Note evidencing the loans is secured by a subordinated security interests in the assets of SignalShare and SPHCcommunications agency, and is guaranteed by SPHC. Pursuant to an Intercreditor, Modification and Settlement Agreement, dated as of November 13, 2015 by and among NFS, SPHC, SignalShare LLC and the Company's senior lenders, such Intercreditor agreement excluded any security interest in the parent company, Roomlinx, Inc. or of the subsidiaries of SPHC, which are M2 nGage, M2 Communications, SPC and SSI. Thus, NFS' suit and claims reside solely in SignalShare LLC and SPHC, but none of the assets (other than SignalShare LLC) of SPHC. The case was filed in the U.S. District Court for the District of Massachusetts (Civ Action No. 16-10130). SPHC and SignalShare answered the complaint and are in the process of litigating the matter. SignalShare LLC and SPHC intend to vigorously defend the matter.
NFS has also sought to include the subsidiaries of the Company in the litigation, including the DMAG. Pursuant to an Intercreditor, Modification and Settlement Agreement, dated as of November 13, 2015 by and among NFS, SPHC, SignalShare LLC and the Company's senior lenders, such Intercreditor agreement excluded any security interest in the parent company, M2 Group, or of the subsidiaries of SPHC, which are M2 nGage, M2 Communications, SPC and SSI. Thus, NFS' suit and claims reside solely in SignalShare LLC and SPHC, but none of the assets (other than SignalShare LLC) of SPHC. However, NFS amended its complaint and added the newa subsidiary of the Company, Digital Media Acquisition Group Corp. ("DMAG"), to the case. It also filed a motion for a preliminary injunction to prevent the corporate restructuring resulting from the Brookville/Veritas/Allied court actions. On June 15, 2016, NFS withdrew its request for injunctive relief regarding DMAG and was granted an injunction regarding SignalShare, LLC. to prevent the company from making certain payments and required certain information regarding SignalShare. The Company believes the new amended claims are without merit, is opposing such actions and has filed motions to dismiss the claim as it relates to DMAG. The companies will vigorously defend these matters if the parties are unable to resolve the dispute. As a result of the SignalShare bankruptcy filing, the case related to SignalShare is stayed. On the same day, Joseph Costanzo, a former employee of SignalShare and a codefendant in the litigation, filed a cross claim against SignalShare and SPHC and related parties ("SPHC Parties") alleging that he was induced by SignalShare and the SPHC Parties into entering certain agreements related to NFS. Any disputes between Costanzo, the SPHC Parties and SignalShare were settled pursuant to a settlement agreement executed between the parties. Pursuant to the terms of the Settlement Agreement, the parties mutually released each other from any claims and SPHC agreed to pay Joseph Costanzo $92,000 over a period of a year associated with amounts due. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, these amounts are included in the liabilities of discontinued operations.
Company.Wincomm v. SignalShare.
SignalShare, LLC. received a demand letter from counsel for Winncom Technologies, Inc. demanding payment due under a note previously issued by SignalShare. The demand seeks payment of the $10,000 outstanding payment. The demand further states that if the payment is not made, Winncomm will seek payment on the entire note amount, $837,589, and threatens legal action. SignalShare has contacted Winncom's counsel and will seek to settle the matter amicably. SignalShare intends to settle the matter but has not provided WinnComm with a settlement offer as of this date. As a result of the SignalShare bankruptcy, these amounts are included in the liabilities of discontinued operations.
Network Cabling V. SignalShare
Network Cabling sued SignalShare, LLC. seeking $47,755 in damages for failure to pay amounts due. As a result of the SingalShare bankruptcy, these amounts are included in the liabilities of discontinued operations.
IT Hospitality Solutions, LLC. v. SignalShare and Signal Point Telecommunications Corp.
On January 27, 2016, IT Hospitality Solutions, LLC. filed suit against Signal Point Telecommunications Corp. ("SPTC") and SignalShare, LLC. in the Superior Court of Irenell County, North Carolina alleging failure to pay certain amounts due in the amount of approximately $453,850. On April 11, 2016, SPTC and SignalShare filed motions to dismiss for failure to state claims upon which relief can be granted. The companies intend to vigorously defend this case. As a result of the SingalShare bankruptcy, any claims related to SignalShare will be addressed by the bankruptcy court.
See also "Legal Proceedings Concerning Our Principal Shareholder, Robert DePalo.
Cenfin Corporate Guaranty
On November 19, 2015, SignalShare Infrastructure, Inc. ("SSI") and the Company entered into a Guaranty and Payment Agreement with Cenfin LLC, a senior lender of the Company, whereby the SPTC borrowed $150,000 from SSI in exchange for an unsecured guaranty of the debt of SSI up to $1,500,000 until the $150,000 was paid back to Cenfin. As of this date, the amount has been paid in full.
Cenfin Default
On September 30, 2015, M2 Group and its subsidiary SSI received a notice of default under the Amended and Restricted Revolving Credit and Surety Agreement with Cenfin LLC dated March 24, 2014 (the "Credit Agreement"). SSI was unable to pay the amounts due to Cenfin, LLC and the parties agreed to allow Cenfin to foreclose under Agreement. This relates to approximately $3,622,275 of indebtedness including approximately $308,772 of accrued interest incurred by SSI which holds RoomLinx's operations prior to the Company's March 27, 2015 acquisition of Signal Point Holdings Corp. On May 11, 2016 SSI completed the foreclosure sale of substantially all assets of SSI to a non-affiliated third party at a public auction pursuant to Article 9 of the Uniform Commercial Code. The auction took place at the offices of DLA Piper LLP, 203 N. LaSalle Street, Chicago, Illinois 60601. There was one bidder and the transaction closed on May 11, 2016 and all employees of SSI were terminated and the operations of the company ceased.
Cardinal Broadband, LLC. Sale:
The Company is in the process of selling its Cardinal Broadband, LLC subsidiary for approximately $375,000. In accordance with applicable settlement agreement and lender documentation,negotiating the proceedsrepayment of the sale have been pledgedapproximate $13.0 million due to Cenfin, LLC, a senior debt holderrelated party balance. It is anticipated that the fair value of the Signal Share Infrastructure, Inc., without any offset. The transaction closed on May 1, 2016, as athis negotiated repayment amount and timing of such will result all assets and operations for Cardinal Broadband, including its interest in Arista Communications, Inc., were sold.
Other than the foregoing, no material legal proceedings to which the Company (or any officer or director of the Company, or any affiliate or owner of record or beneficially of more than five percent of the Common Stock, to management's knowledge) is party to or to which the property of the Company is subject is pending, and no such material proceeding is known by management of the Company to be contemplated.
Legal Proceedings Concerning Our Principal Shareholder, Robert DePalo
Robert DePalo currently owns approximately 31% of the issued and outstanding common stock of M2 nGage Group, Inc. In connection with the SMA described in Item 1 above, Mr. DePalo resigned as a director, officer and/or employee of SPHC (and any subsidiaries thereof), as of March 27, 2015. As a result, Mr. DePalo has not been and will not be involved in the day to day management of the Company or any of its subsidiaries. On May 20, 2015, the New York County District Attorney charged Robert DePalo with various offenses relating to foreign investors. Simultaneously, the SEC commenced an action against Mr. DePalo (et al.) in the Southern District of New York based on the same facts alleged by the New York District Attorney. A copy of the complaint can be found on the SEC's website, www.sec.gov. The Company takes seriously the New York County District Attorney and SEC actions and will monitor these actions very closely.
M2 nGage Group, Inc. has no knowledge and cannot provide any further details regarding these proceedings against Mr. DePalo. The actions described therein have no relation to the Company or its wholly-owned subsidiary, SPHC. However, pursuant to the terms of Mr. DePalo's consulting agreement, the Company is obligated to pay 100% of Mr. DePalo's legal fees whether or not related to the agreement.
Other
The Company is dependent on the use of incumbent local exchange carriers' local and transport networks and access services to provide telecommunications services to its customers. Charges for leasing local and transport network components and purchasing special access services historically have made up a significant percentage of both the Company's and the Predecessor Company's overall cost of providing telecommunications services to its customers. These network components and services are purchased in each market through interconnection agreements, special access contracts, commercial agreements or a combination of such agreements from the incumbent local exchange carrier, or, where available, from other wholesale network service providers. These costs are recognized in the period in which the services are delivered and are included as a component of the Company's cost of sales.
Other than the foregoing, no material legal proceedings to which the Company (or any officer or director of the Company, or any affiliate or owner of record or beneficially of more than five percent of the Common Stock, to management's knowledge) is party to or to which the property of the Company is subject is pending, and no such material proceeding is known by management of the Company to be contemplated.
19. Subsequent Events
DePalo Related Entity Litigation:
On February 23, 2016, Brookville, Veritas and Allied ("Plaintiffs") filed suit in separate actions in the federal District Court for the Southern District of New York against SPHC, M2 Communications and M2 nGage ("Defendants") seeking foreclosure on the secured loans with the Defendants and the imposition of a temporary restraining order.
On April 7, 2016, the Company and Brookville et al. settled the litigation as follows. The Company, in order to forebear the current foreclosures with its secured lenders, entered into a Restructuring, Omnibus Pledge, Security and Intercreditor Agreement (the "Omnibus Agreement"). The Omnibus Agreement is among the Company, SPHC, a wholly-owned subsidiary of the Company, M2 Communications, a wholly-owned subsidiary of SPHC, and M2 nGage, a wholly-owned subsidiary of SPHC. SPHC, M2 Communications and M2 nGage are collectively referred to as the "Debtors." Brookville, Veritas and Allied are collectively referred to as the "Secured Parties," and collectively with the Debtors, referred to as the "Parties."
In exchange for the forbearance of the foreclosure on the assets of the Debtors, the Company agreed to transfer the subsidiaries of SPHC (specifically, M2 Communications and M2 nGage) with the exception of SignalShare LLC and SPHC to "NEWCO," a new subsidiary of the Company, so that the subsidiaries of SPHC will become subsidiaries of NEWCO. The Debtors granted the Secured Parties a lien on the assets of the Debtors and pledged the securities of NEWCO, M2 Communications and M2 nGage to the Secured Parties (collectively, the "Collateral").
The Parties: (i) reaffirmed the priorities of the Secured Parties in the Collateral; (ii) agreed that the Secured Parties' subordinated security interest in the assets of Signal Share LLC shall be governed by the terms of the Intercreditor, Modification and Settlement Agreement dated as of November 13, 2015 by and among SPHC, Signal Share, the Secured Parties and NFS Leasing, Inc. ("NFS") in which agreement NFS acknowledged that it never has, nor will it ever have any security interest in the SPHC Excluded Entities which included a) M2 Communications, b) SPC, c) M2 nGage, d) the Company, e) Signal Point Infrastructure, Inc. and their respective Affiliates and (iii) agreed the Secured Parties and SPTC shall notice EBF Lending to the transactions contemplated by the Omnibus Agreement, since EBF has filed liens on SPTC redated to an accounts receivable line of financing to which the Secured Parties have consented and any payments or amounts owed EBF will continue as is as was from either NEWCO or other applicable entity.
The Parties agreed to representations, warranties and covenants consistent with the prior Loan Documents. Upon an event of default, the Secured Parties shall have all remedies confirmed in the Loan Documents at law and equity, and all rights and remedies of a secured party under the UCC. Any deficiency upon a disposition of the Collateral will bear interest at 15% per annum plus reasonable attorneys' fees.
Please refer to Item 13 "Certain Relationships and Related Transactions and Director Independence" - for a description of the relationship of the Plaintiffs to Mr. DePalo.
TIG
The Company received a letter from Technology Integration Group ("TIG") demanding payment of approximately $2,430,000 with respect to inventory and services that the Company purchased from TIG. TIG subsequently filed an action in California State Court (Case No. 37-2012-00046436-CU-BC-NC (the "Action"). On September 23, 2014, the Company entered into a Settlement Agreement and Mutual General Release with TIG. The Settlement Agreement was conditioned on the SPHC merger taking place. On March 24, 2015, the Company, Michael S. Wasik, Anthony DiPaolo and SSI entered into the Settlement Agreement and Mutual General Release with PC Specialists Inc. (d/b/a TIG), replacing the agreement signed in the fourth quarter of 2014. As of March 23, 2015, the Company owed TIG $3,003,267, consisting of $2,064,223 for equipment purchased and stored, $879,998 of interest on such amount and $59,046 of attorneys' fees and costs. Under the Settlement Agreement, the Company agreed to pay a settlement amount of $1,919,239, of which $400,000 was paid by SPHC upon the closing of the SMA.balance being reduced substantially. As a result, the Company Wasik and DiPaolo were released fromhas determined that the Action and TIG consented to the transfer of rights and obligations under the Settlement Agreement to SSI with no recourse to the Company or SPHC. On April 5, 2016, counsel for TIG approached the Company regarding payment deficiencies under the settlement agreement and threatened further legal action. The parties are in discussions regarding becoming current and potential restructuring on the settlement agreement terms. On May 5, 2016, TIG defaulted SSI and sought to enforce its rights under the Settlement Agreement. As of December 31, 2015 the Company had the entire liability due TIG recorded in accounts payable. Subsequently, the Company completed the Foreclosure Sale of substantially all assets of SSI, and these amounts are included in the liabilities of discontinued operations.
IT Hospitality Solutions, LLC. v. SignalShare and Signal Point Telecommunications Corp.
On January 27, 2016, IT Hospitality Solutions, LLC. filed suit against Signal Point Telecommunications Corp. ("SPTC") and SignalShare, LLC. in the Superior Court of Irenell County, North Carolina alleging failure to pay certain amounts duegoodwill in the amount of $6.7 million should be fully impaired at June 30, 2022. Such amount is recorded in impairment and other (gains) losses, net in the consolidated statements of operations.
The carrying amounts of the assets and liabilities of the Mission UK line of business through June 30, 2022, are as follows:
| | | | | | | | |
| ASSETS | | |
| Current assets: | | |
| Cash | | $ | 1,418,480 | |
| Accounts receivable, net of allowances | | 246,717 | |
| Prepaid expenses and other current assets | | 967,794 | |
| Total current assets | | $ | 2,632,991 | |
| Noncurrent assets: | | |
| Operating lease right-of-use asset | | $ | 1,910,917 | |
| Property & equipment, net | | 59,332 | |
| Total noncurrent assets | | $ | 1,970,249 | |
| LIABILITIES | | |
| Current liabilities: | | |
| Accounts payable and accrued expenses | | $ | 764,499 | |
| Deferred revenue | | 2,203,744 | |
| Taxes payable | | 631,640 | |
| Due to related parties | | 12,027,978 | |
| Operating lease liability – short term portion | | 457,865 | |
| Total current liabilities | | $ | 16,085,726 | |
| Noncurrent liabilities: | | |
| Operating lease liability – long term portion | | $ | 1,315,380 | |
| Other liabilities | | 40,734 | |
| Total noncurrent liabilities | | $ | 1,356,114 | |
Revenues and losses from the Mission UK line of business for the year ended June 30, 2022 were approximately $453,850.01. On April 11, 2016, SPTC$8.4 million and SignalShare filed motions to dismiss for failure to state claims upon which relief can be granted.($700,000 USD), respectively. The companies intend to vigorously defend this case.
Cenfin Default
On September 30, 2015, Roomlinx and its subsidiary SSI received a notice of default under the Amended and Restricted Revolving Credit and Surety Agreement with Cenfin LLC dated March 24, 2014 (the "Credit Agreement"). SSI was unable to pay the amounts due to Cenfin, LLC and the partiesCompany agreed to allow Cenfinfund 500,000 GBP ($609,500 USD) to foreclose under Agreement. This relates to approximately $3,622,275 of indebtedness including approximately $308,772 of accrued interest incurred by SSI which holds Roomlinx's operations prior to the Company's March 27, 2015 acquisition of Signal Point Holdings Corp. On May 11, 2016, SSI completed the foreclosure sale of substantially all assets of SSI to a non-affiliated third party at a public auction pursuant to Article 9 of the Uniform Commercial Code, these amounts will now be includedMission UK as part of the discontinued operations. The auction took place at the offices of DLA Piper LLP, 203 N., LaSalle Street, Chicago, Illinois 60601. There was one bidder and the transaction closed on May 11, 2016 and all employees of SSI were terminated and the operations of the company ceased.sale transaction.
Cardinal Broadband, LLC. Sale:Series E Private Placement
On May 1, 2016 the Company sold Cardinal Broadband, LLC a subsidiary of SSI for approximately $375,000. In accordanceSeptember 26, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with applicable settlement agreement and lender documentation, the proceeds of the sale have been pledged to Cenfin, LLC, a senior debteach holder of SSI, without any offset. Accordingly, CBB has been classified as discontinued operations, see Note 6.
Shutdown of SignalShare:
During January 2016, the Company closed down the operations of SignalShare. This decision was made asour Series E Preferred Stock (each a result of a continuing decline in revenue and increasing costs. On July 5, 2016, SignalShare filed for voluntary bankruptcy“Series E Holder”), pursuant to Chapter 7 of the Bankruptcy Code. Accordingly, Signalshare has been classified as discontinued operations, see Note 6.
Shutdown of SSI:
On May 3, 2016 Cenfin, the senior secured lender of SSI, sold all right, title and interest in substantially all personal property of SSI to the highest qualified bidder at a public auction pursuant to Article 9 of the Uniform Commercial Code. There was one bidder and the transaction closed on May 11, 2016 and all employees of SSI were terminated and the operations of the company ceased. Accordingly, SSI has been classified as discontinued operations, see Note 6.
Issuance ofwhich (i) each Series B Preferred Stock
Subsequent to December 31, 2015 the company issued 2,495,000 shares of preferred series B stock for $2,495,000 to 17 shareholders. The stock carries an annual interest of 10% and is convertible into common stock of the company at $0.28 per share at the Company's option. In addition, for every Series B Preferred share purchased aE Holder will exchange its existing warrant to purchase three sharesour common stock, dated March 16, 2022 (the “Old Warrants”), for new warrants to purchase our
common stock (the “New Warrants”) and (ii) each Series E Holder consented to changes in the terms of the Company's common stock for $.40 was issued.
Amendments to Articles of Incorporation or Bylaw
Subsequent to December 31, 2015,private placement effected by the Company filedon March 16, 2022 (the “New PIPE Terms”), including an Amendment to Certificateamendment and restatement of Designation After Issuancethe terms of Class orour Series E convertible preferred stock, par value $0.01 per share (the "Amendment"“Series E Preferred Stock”).
In consideration for the issuance of the New Warrants and the other New PIPE Terms, we will file an amended and restated certificate of designation for the Series B ConvertibleE Preferred Stock ("Preferred Stock"(the “Certificate of Designation”) with the Secretary of State of the State of Nevada on March 25, 2016. to effect certain changes contemplated by the Exchange Agreement.
The Amendment increasedNew PIPE Terms effect the numberfollowing changes, among others, to the rights Series E Holders:
a.New Warrant Exercise Price: The New Warrant exercise price per share of common stock is $0.55, provided that if all shares of Series BE Preferred Stock from 2,000,000 shares authorizedissued pursuant to 3,000,000 shares authorized.
On July 28, 2016, Roomlinx, Inc., a Nevada corporation, amended its Articlesthe Certificate of IncorporationDesignation are not repurchased by the Company on or prior to change its nameNovember 26, 2022, on such date, theexercise price per share of the New Warrants will revert to M2 nGage Group, Inc. In addition, the Company's trading symbol$2.00, subject to further adjustment as set forth in the over-the-counter market has been changed to MTWO from RMLX.
New Warrant.Change in Officers
On July 7, 2016,b.Series E Conversion Price: The conversion price for the Board of directors appointed Aaron Dobrinsky presidentSeries E Preferred Stock shall initially equal $0.40 per share, and Christopher Broderick Treasurer of M2 Group. On May 5, 2016, Joseph Costanzo resigned all positions with M2 Group and its affiliated companies.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.None
ITEM 9A. CONTROLS AND PROCEDURES
Management's Evaluation of Disclosure Controls and Procedures
Underso long as the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, our principal executive officer and our principal financial officer concluded that, because our internal controls over financial reporting are not effective, as described below, our disclosure controls and procedures were not effective as of December 31, 2015.
Management's Report on Internal Control over Financial Reporting
Our Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404arithmetic average of the Sarbanes-Oxley Act of 2002 ("Section 404"). Management assessed the effectivenessdaily VWAPs of the Company's internal control over its financial reporting asCommon Stock for the calendar week prior to each of Decemberthe following respective dates is lower than the Conversion Price at that time, the Conversion Price shall be downwardly adjusted by $0.01 on each of October 24, 2022, October 31, 2015. In undertaking this assessment, management used2022, November 7, 2022, November 14, 2022, and November 21, 2022.
c.Standstill Period: The Series E Holders agreed to a 60-day standstill period ending on November 26, 2022 (the “Standstill Period”), during which each Series E Holder may convert not more than fifty (50%) percent of the criteria set forthSeries E Preferred Stock held by such holder at the beginning of the Standstill Period.
d.Series E Buyout. During the Standstill Period the Company will use commercially reasonable efforts to raise funds to repurchase all outstanding shares of Series E Preferred Stock held by the CommitteeSeries E Holders at a purchase price of $100 per share, subject to the provisions of the Sponsoring OrganizationsCertificate of Designation.
e.Limitation on Sales: During the Standstill Period, the Purchasers agreed not to sell shares of the Treadway Commission (COSO) in the Internal Control—Integrated Framework.Company’s common stock for a price less than $0.30 per share.
As of December 31, 2015, based on management's assessment as described above, we have determined that thef.Liquidated Damages: The Company did not maintain effective controls over financial reporting. Specifically, dueagreed to pay to the limited number of individuals within our accounting functions and department turn-over in the fourth quarter, we had a lack of segregation of duties and a lack of adequate resources, including headcount, to ensure timely identification, resolution and recording of accounting matters. Since these controls have a pervasive effect across the organization, management has determined that these circumstances constitute a significant deficiency in internal control over financial reporting. We did not effectively implement comprehensive entity-level internal controls and financial controls that were properly designed to meet the control objectives or addressPurchasers all risks of the processes or the applicable assertions of the significant accounts. Due to a significant deficiency identified at our entity level controls we did not test whether our financial activity level controls or our information technology general controls were operating sufficiently to identify a deficiency, or combination of deficiencies, that may result in a reasonable possibility that a material misstatement of the consolidated financial statements would not be prevented or detected on a timely basis. As of December 31, 2015, the Company has implemented certain internal control procedures related to the purchase order cycle and review procedures to address timely identification of accounting matters. We will continue to implement appropriate processes and measures to remediate this significant deficiency. A search for a permanent Chief Financial Officer is under way.liquidated damages owed through September 21, 2022 (including any pro-rated amounts).
In light of this significant dificiency, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended December 31, 2015 included in this Annual Report on Form 10-K were fairly stated in accordance with U.S. GAAP. Accordingly, management believes that despite our signficant deficiency, our consolidated financial statements for the year ended April Dedember 31, 2015 are fairly stated, in all material respects, in accordance with U.S. GAAP.
The Company has just discovered and confirmed that management's report was subject to attestation by the Company's registered public accounting firm pursuant to rules of the SEC, Sarbanes Oxley Act Section 404(b) on the effectiveness of the Company's internal control over financial reporting for incusion in this Annual Report on Form 10-K. The Company will engage a third party SOX consulting firm to assist the formal documentation of management's assessment of the Company's internal control over financial reporting. Also, the Company will engage its registered public accounting firm to conduct an audit on its internal control over financial reporting. The Company will amend its Form 10-K upon completion of the audit and will include an attestation report of its registered public accounting firm in its amendment to Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our fiscal quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION:None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND COROPORATE GOVERNANCE
As set forth above under "Item 1. Business - Subsidiary Merger Agreement ("SMA")," all officers and directors of the Company resigned on March 27, 2015, pursuant to the terms and conditions of the SMA. Set forth below is certain background and biographical information concerning our directors:
Name | | | Age | | | Position | |
| | | | | | | |
Aaron Dobrinsky | | | 52 | | | Chairman of the Board and President. | |
| | | | | | | |
Christopher Broderick | | | 54 | | | Chief Operating Officer, Treasurer, Interim Chief Financial Officer and Director. | |
The following table sets forth the names, positions and ages of our executive officers and directors as of this report; directors serve until the next annual meeting of stockholders or until their successors are elected and qualify. Officers are elected by the board of directors and their terms of offices are, except to the extent governed by employment contracts, at the discretion of the board of directors. There is no family relationship between any director, executive officer or person nominated or chosen by the Company to become a director or executive officer.
Aaron Dobrinsky was elected Chairman of the Board and a Director of the Company on March 27, 2015 and President on July 7, 2016. He served as Chief Executive Officer of the Company from March 27, 2015 until January 4, 2016. He had been the President of SPHC from December 12, 2012 until January 4, 2016. Prior to that he served as Chief Executive Officer of Wave2Wave from September 2010 to July 2012. Since January 2006, Mr. Dobrinsky has served as President of Dobrinsky Management, Inc. (DMI), a management consulting and advisory firm providing strategic, operational and financial guidance to startup and mid-stage companies. Mr. Dobrinsky also served as interim-chief executive officer of KSR, an online national specialty supermarket from June 2009evaluated subsequent events through September 2010. Mr. Dobrinsky was an executive member of28, 2022, the board of directors of Roomlinx, Inc. from June 2004 through November 2005, where he also served as chief executive officer from June 2004 through November 2005. Mr. Dobrinsky founded GoAmerica (now Purple Communications) in 1996, and from 1996 to June 2008, he served as the chairman of its board of directors. He also served as president of GoAmerica until November 2000 and chief executive officer until January 2003. Mr. Dobrinsky served as chairman of the board of directors of Purple Communications from 2003 through 2009 and rejoined the board of directors in March 2010 as a director. He also served as a strategic advisor to the board of directors of Purple Communications. Mr. Dobrinsky has served as a board advisor and board member for several private companies and non-profit organizations. Mr. Dobrinsky received his BA in Economics and Finance from Yeshiva University and he attended New York University School of Business where he studied Marketing and Finance. The Company determined that Mr. Dobrinsky is qualified to serve on the Board of Directors based on his prior service to the Company, as well as his particular knowledge and extensive experience in the telecommunications industry, including that with SPHC.
Christopher Broderick was elected Chief Operating Officer and a Director of the Company on March 27, 2015. He was named Interim Chief Financial Officer in January 2016 and Treasurer on July 7, 2016. He has served as Chief Operating Officer of SPHC since October 17, 2012. Mr. Broderick has 30 years of experience in the telecommunications industry and is responsible for the Company's domestic network operations of wired and wireless topologies, supporting voice, data, internet products and services. He is also the operational leader for the development and build-out of SPHC's continued network expansion. Prior to joining SPHC Mr. Broderick served as Senior Director of Business Client Services for FairPoint Communications from 2008 to 2011. Mr. Broderick was responsible for Retail Business segment, outside sales support, billing, and SMB sales across Northern New England. Previously, Mr. Broderick served as Chief Operating Officer and Vice President of Operations at IntelliSpace and Wave2Wave from February 2000 to January 2008. Mr. Broderick was responsible for the design, implementation and day-to-day U.S. and U.K. operations of the company.
Mr. Broderick spent the majority of his career at New York Telephone, NYNEX, and Bell Atlantic where he was highly successful in the management of all facets of the telephone company's Field Operations, Central Offices and outside plant facilities in New York City business districts. He also led sales and support "mega" call-center operations, for complex business accounts. In addition to his technical background, Mr. Broderick has an extensive education in quality process management, systems efficiency and design. He has utilized his extensive background to help build SPHC into one of the most reliable "Converged Networks" in the USA. The Company determined that Mr. Broderick's 30 years of particular knowledge and experience in the telecommunications industry, and his position with SPHC, strengthens the Board's collective qualifications, skills and experience.
Set forth below is certain background and biographical information concerning our officers and key employees as of December 31, 2015.
Name | | Age | | Position |
| | | | |
Aaron Dobrinsky | | 52 | | Chairman and President |
| | | | |
Christopher Broderick | | 53 | | Chief Operating Officer and Director |
| | | | |
Steven Vella | | 51 | | Chief Financial Officer |
| | | | |
Andrew Bressman | | 51 | | Managing Director and Head of Business Development |
| | | | |
Joseph Costanzo | | 46 | | Chief Technology Officer |
| | | | |
Michael S. Wasik | | 45 | | President SignalShare Infrastructure |
| | | | |
Chris Barnes | | 49 | | Executive Vice President Strategic Relations |
| | | | |
Peter Walsh | | 57 | | Vice President - Sports & Entertainment
|
| | | | |
Steve Tran | | 43 | | Senior Vice President - Mobile Products
|
Aaron Dobrinsky - see biography above under Board of Directors.
Christopher Broderick – see biography above under Board of Directors.
Steve Vella, - joined SPHC as Chief Financial Officer in June 2014 and was Chief Financial Officer of the Company from August 1, 2015 to January 22, 2016. Mr. Vella was responsible fordate which the financial operations for the SPHC, and will be instrumental in the development, implementation, and measurementstatements were issued.
Andrew Bressman, was elected Managing Director and Head of Business Development of the Company on March 27, 2015. He was Managing Director and Head of Business Development of Wave2Wave from November 1999 and has continued in that position with SPHC since October 2012. Mr. Bressman participates with the Company's executive team in overseeing the day-to-day operations and management of the Company; locates and develops new strategic opportunities; generates business and strategic relationships; and interfaces with technology partners and vendors. Mr. Bressman was one of Wave2Wave's original founders and was one of its key employees from that company's founding in November 1999 until November 2003 and from June 2005 until October 2012 when he assumed those positions with SPHC.
Mr. Bressman is a member of SAB Management LLC, which acts as consultant to SPHC, and is employed as Managing Director of SPHC. See "Employment and Consulting Agreements" below.
The SAB Management LLC Consulting Agreement and Andrew Bressman's Employment Agreement have been filed as exhibits to the Company's Form 8-K for March 27, 2015 and are available at the SEC's website, www.sec.gov.
You may want to consider the background history and past proceedings against Mr. Bressman and others:
Prior to joining Wave2Wave, Mr. Bressman spent five and a half years, from January 1990 until July 1996, working on Wall Street. From January 1990 through August 1992, Mr. Bressman was a registered representative at D.H. Blair & Co., Inc., a registered broker-dealer. In August 1992, Mr. Bressman left D.H. Blair to become a registered representative and president of A.R. Baron & Co., Inc., which was also a registered broker-dealer. In February 1993, Mr. Bressman became a registered principal at A.R. Baron and in September 1993 he began serving as its chief executive officer. Mr. Bressman's employment with A.R. Baron ended in July 1996 when the company was placed into liquidation pursuant to the Securities Investors Protection Act.
The SEC alleged that, during his association with D.H. Blair and A.R. Baron, Mr. Bressman and others engaged in a scheme to manipulate the market for the common stock of several public companies marketed by D.H. Blair and A.R. Baron and engaged in certain abusive sales practices. In November 1999, Mr. Bressman entered into a consent decree with the SEC which resolved all SEC allegations without Mr. Bressman admitting or denying them. As part of the settlement, Mr. Bressman agreed to the entry of an injunction enjoining him from committing future violations of the U.S. securities laws, including the antifraud provisions set forth in Section 17(a) of the Securities Act of 1933, as amended, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Mr. Bressman also agreed to a permanent bar from associating with any securities broker or dealer. In addition, Mr. Bressman agreed to and paid monetary penalties and disgorgement of profits over a five-year period. Bear Stearns Securities Corp., A.R. Baron's clearing house, agreed to contribute $30 million to a restitution fund for A.R. Baron's investors and the Securities Investors Protection Company recovered sufficient money to permit it to reimburse the majority of A.R. Baron's customers for their full out-of-pocket losses.
In December 1997, Mr. Bressman pled guilty to New York State charges of enterprise corruption and grand larceny based on some of the same conduct while employed at A.R. Baron for which he settled with the SEC. Mr. Bressman served 18 months of confinement in a New York State prison for these offenses commencing in November 2003, after which he was released to a work release program for the next 18 months; his term of parole supervision was terminated early.
Joseph Costanzo, Chief Technology Officer of the Company is a technology leader and visionary with deep expertise in business intelligence and analytics, having worked with companies ranging from Fortune 100 to the U.S. Department of Defense, to devise and implement business intelligence strategies. Mr. Costanzo joined SignalShare in 2013 upon its acquisition of SPHC and served until May 5, 2016. Mr. Costanzo has extensive technical knowledge in the areas of data warehouse architecture and design, customer relationship management (CRM) and analytics. He is also an experienced trainer and international speaker, with expertise in serving the retail, telecommunications, media, entertainment and financial industries. Mr. Costanzo attended the Citadel and the University of North Carolina at Wilmington, studying Business Economics and receiving his B.S. in Management Information Systems.
Michael S. Wasik, was elected President and Chief Executive Officer of SignalShare Infrastructure, Inc. on March 27, 2015 and served until May 13, 2016. Prior thereto, he served as the Company's Chief Executive Officer and member of the Board from November 2, 2005. Mr. Wasik joined the Roomlinx Executive Management team in August of 2005 after executing the merger of his company, SuiteSpeed, with Roomlinx. During Mr. Wasik's first three years as CEO, he successfully restructured Roomlinx' balance sheet, eliminating debt and raising just under ten million dollars in debt and equity financing. He also took Roomlinx from a non-reporting, pink sheet company to a fully reporting company with the SEC currently trading on the OTC exchange. .
Prior to joining Roomlinx, Mr. Wasik was the CEO/Founder of SuiteSpeed Inc. a wireless Internet provider within the hospitality market. Having launched SuiteSpeed in late 2002, Mr. Wasik was responsible for defining technology architecture, market direction, and the overall vision for this fast growing WiFi company. Mr. Wasik expanded the company's geographical coverage from its Denver backyard to serving hotel chains and independents across the U.S. Under his direction, SuiteSpeed was on Mercury's top 100 fastest growing companies list for 2003 and 2004.
Mr. Wasik was also the Founder and Chairman of the Board of TRG Inc., an IT consulting company. Having launched TRG in late 1997 with no outside funding, Mr. Wasik was responsible for the overall sales and marketing effort, and defined TRG's overall vision. Under his leadership, the company achieved average growth of 300% per year, over the first four years with positive EBITDA. Mr. Wasik expanded the company's billable resources from 6 consultants in 1997 to 60 consultants in 2000 serving Fortune 500 corporations across the U.S. Mr. Wasik has managed over 60 people in 4 offices throughout the United States. Mr. Wasik was nominated for the 2005 Ernst and Young Entrepreneur of the Year award.
Christopher Barnes, Executive Vice President - Strategic Relations of the Company until February 2015, is a seasoned business development and sales executive with extensive experience developing technology and service businesses across industries. Mr. Barnes has been vetted at every level of operations and sales, from management through executive. He has built national sales organizations from the bottom up and has played a key role in company successes, including his first startup IPO effort, which carried a market cap in excess of $1.2 Billion. Prior to SignalShare's acquisition by SPHC in January 2013, Mr. Barnes was employed by Zencos Consulting LLC, where he managed global customers and the U.S. roll-out of European and Asian data systems. He has also held positions at National Data Corp, CAIS Internet, and Matrics Technology, as well as spent time in commercial real estate. Barnes has a B.A. in Marketing from Morehouse College.
Peter Walsh, Vice President of Sports and Entertainment of the Company, is to accelerate deployment of Live-Fi™ technology in major stadiums and arenas to enrich the live event experience. Previously, Mr. Walsh was principal architect for the Sports & Entertainment division at AT&T, where he provided technical vision and guidance to major sports and entertainment venues globally for their new builds and retro-fits. Prior to AT&T, Mr. Walsh was head of technology for the Dallas Cowboys, where he designed and developed the information strategic plan and headed up the technology implementation for the Cowboys' new AT&T Stadium. Mr. Walsh has four decades of senior management level technology and business experience at companies including Nokia, Rockwell International, United Space Alliance and Lockheed Martin. Mr. Walsh holds a Bachelor of Arts degree in Business Administration – Finance concentration from California State University, Fullerton and is a member of the Advisory Council for the School of Business at the University of Texas at Arlington.
Steve Tran, Senior Vice President of Mobile Products, has over 20 years of experience in products, finance and entrepreneurship. He was most recently founder and CEO of Incubite, a developer of mobile messaging apps acquired by SPHC in December 2014. Prior to founding Incubite, he was VP of Strategy and BD at Nuance Communications. He was Co-founder of BeVocal, one of the world's largest providers of cloud based speech-enabled call automation which was acquired by Nuance in 2007. Previously, he held positions in business development at Cadence Design Systems, investment banking at Petrie Parkman (acquired by Merrill Lynch) and engineering at Compaq Computer. He holds a BSEE from Rice University and an MBA from the Tuck School at Dartmouth College.
Committees
The Company does not currently have any independent directors and the entire Board of Directors is performing all duties of the Audit, Nominating and Corporate Governance and Compensation Committees.
Code of Ethics
We have adopted a written code of ethics that applies to our directors, officers and employees, including principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our Code of Ethics is filed with the SEC as an exhibit and is also available without charge upon written request directed to M2 nGage Group, Inc., Attention: Secretary, Continental Plaza, 6th Floor, 433 Hackensack Avenue, Hackensack, New Jersey 07601.
Subsequent Events
DePalo Related Entity Litigation:
On February 23, 2016, Brookville, Veritas and Allied ("Plaintiffs") filed suit in separate actions in the federal District Court for the Southern District of New York against SPHC, M2 Communications and M2 nGage ("Defendants") seeking foreclosure on the secured loans with the Defendants and the imposition of a temporary restraining order.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, named executive officers and persons holding more than 10% of a registered class of the equity securities of the Company to file with the SEC and to provide us with initial reports of ownership, reports of changes in ownership and annual reports of ownership of Common Stock and other equity securities of the Company. Based solely on a review of the reports furnished to us, or written representations from reporting persons that all reportable transaction were reported, we believe that during the fiscal year ended December 31, 2015, our officers, directors and greater than ten percent owners timely filed all reports they were required to file under Section 16(a).
ITEM 11. EXECUTIVE COMPENSATIONEXECUTIVE OFFICERS AND DIRECTOR COMPENSATION
Summary Compensation Table
The following table sets forth the cash and non-cash compensation for awarded to or earned by (i) each individual serving as our principal executive officer and principal financial officer during the fiscal years ended December 31, 2015 and 2014, and (ii) each other individual that served as an executive officer at the conclusion of the fiscal years ended December 31, 2015 and 2014, and who received in excess of $100,000 in the form of salary and bonus during such fiscal year (collectively, the "named executive officers").
Name and
Principle Position | | Year | | Salary | | Bonus | | Stock
Awards | | Stock Based Comp | | Non-Equity Incentive Plan Comp | | Non-qualified Deferred Comp Earnings | | All Other Comp | | Total |
| | | | | | | | | | | | | | | | | | | |
Aaron Dobrinsky, PEO and President of SHC (1) | | 2015
2014 | | $330,534 $264,583 | | $47,496 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Michael S. Wasik, | | 2015 | | $245,773 | | $188,317 | | | | | | | | | | | | $434,090 |
| PEO and interim CFO (2) | | 2014 | | $200,000 | | | | | | | | | | | | | | $200,000 |
| | | | | | | | | | | | | | | | | | | |
| Steve Vella, PFO (3) | | 2015 | | $225,559 | | | | | | | | | | | | | | $225,559 |
| | | | | | | | | | | | | | | | | | | |
| Alan Fine, | | 2014 | | $73,000 | | | | | | | | | | | | | | $73,000 |
| interim PFO (4) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Chris Broderick, COO of SPHC (5) | | 2015 2014 | | $265,170 $235,493 | | $35,000 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Andrew Bressman, Managing Director and Head of Business Development (6) | | 2015 2014 | | | | $425,000 $790,625 | | | | | | | | | | | | $580,271 $882,499 |
| | | | | | | | | | | | | | | | | | | |
Joseph J. Costanzo, CTO of SPHC (8) | | 2015 2014 | | $298,294 $250,000 | | $60,417 $226,324 | | | | | | | | | | | | $358,711 $476,324 |
| | | | | | | | | | | | | | | | | | | |
Christopher Barnes, EVP Strategic Relations of SPHC (9) | | 2015 2014 | | $332,653 $250,000 | | $60,417 $225,539 | | | | | | | | | | | | $393,071 $475,539 |
(1) Mr. Dobrinsky resigned as Chief Executive Officer of the Company as of January 3, 2016.
(2) Mr. Wasik resigned as Chief Executive Officer of the Company as of March 27, 2015 upon the completion of the Subsidiary Merger.
(3) Mr. Vella resigned as Chief Financial Officer of the Company on January 29, 2016.
(4) Alan Fine resigned from M2 nGage Group, Inc. on July 3, 2014.
(5) Mr. Broderick was elected Chief Operating Officer of M2 nGage Group, Inc. as of March 27, 2015.
(6) Mr. Bressman was the Managing Director and Head of Business Development for SPHC in 2014 and holds the same positions with the Company.
(7) Substantially all of this amount was paid to SAB Management LLC ("SAB"), of which Mr. Bressman is a member, under the Consulting Agreement with SPHC. On March 27, 2015, the Company entered into a new five-year Consulting Agreement with SAB.
(8) Includes $205,620 of commissions paid under Mr. Costanzo's employment agreement.
(9) Includes $205,051 of commissions paid under Mr. Barnes' Employment Agreement.
Compensation Discussion and Analysis
The primary objectives of the Board of Directors with respect to executive compensation will be to attract and retain the best possible executive talent, to motivate our executive officers to enhance our growth and profitability and increase stockholder value and to reward superior performance and contributions to the achievement of corporate objectives. Upon the completion of this Offering, the Company expects to enter into employment and/or consulting agreements with key management of the companies.
We expect that the focus of our executive pay strategy will be to tie short- and long-term cash and equity incentives to the achievement of measurable corporate and individual performance objectives, and to align executives' incentives with stockholder value creation. To achieve these objectives, the Company will develop and maintain a compensation plan that ties a substantial portion of executives' overall compensation to the Company's sales, operational, and regulatory performance. Because we believe that the performance of every employee is important to our success, we will be mindful of the effect our executive compensation and incentive program has on all of our employees.
Our compensation plan will be designed to attract and retain the best possible talent, and we recognize that different elements of compensation are more or less valuable depending on the individual. For this reason, we will offer a broad range of compensation elements. We intend to offer our executive team salaries that are competitive with the market, executive bonuses that are in line with our corporate goals, and dependent on measurable results, plus stock option plans designed to retain talent, promote a sense of company ownership, and tie corporate success to monetary rewards. Specifically, all management employed by the Company or one of its subsidiaries will be entitled to participate in an equity incentive plan that will compensate management if certain financial performance and milestones are met. The Company reserves the right to increase the size of the plan as it deems necessary, at its sole discretion.
We expect that base salaries for our executive officers will be determined based on the scope of their job responsibilities, prior experience, and uniqueness of industry skills, education, and training. Compensation paid by industry competitors for similar positions, as well as market demand will also take into account. Base salaries will be reviewed annually as part of our performance management program, whereby merit or equity adjustments may be made. Merit adjustments will be based on the level of success in which individual and corporate performance goals have been met or exceeded. Equity adjustments may be made to ensure base salaries are competitive with the market and will be determined using benchmark survey data.
Our compensation structure will be primarily comprised of base salary, annual performance bonus and stock options. In setting executive compensation, the Board of Directors will consider the aggregate compensation payable to an executive officer and the form of the compensation. The Board will seek to achieve an appropriate balance between immediate cash rewards and long-term financial incentives for the achievement of both annual and long-term financial and non-financial objectives.
Options - 2015 Plan
On April 15, 2013, the SPHC board of directors and stockholders adopted the 2015 Employees, Directors and Consultants Equity Incentive Plan (the "2015 Plan"). The purpose of the 2015 Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship, and to stimulate an active interest of these persons in our development and financial success. Under the 2015 Plan, we are authorized to issue up to 12,000,000 shares of Common Stock, including incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2015 Plan will be administered by our board of directors until authority has been delegated to a committee of the Board of Directors.
The 2014 Stock Appreciation Rights Agreements
The Board of Directors of SPHC authorized the Company to enter into a Stock Appreciation Rights agreement (the "Agreement") by and between the Company and four current officers and a consultant for the Company (the "Recipients"). The Agreement granted stock appreciation rights ("SARs") as an inducement for the Recipients to promote the best interests of the Company and its stockholders. The spread between the then fair market value of the Company's common stock, par value $0.001 per share ("Common Stock") and the then fair market value of the stock on the date of exercise shall be payable to the Recipients, less applicable tax withholdings.
The SARs will be granted upon the consummation by the Company of any transaction or series of transactions (the "Transaction" that results in (i) shares of the Common Stock being registered under Section 12 of the Exchange Act; or (ii) shares of Common Stock being exchanged for equity interests of an entity that is listed or authorized for trading on a national securities exchange, or the OTC Electronic Bulletin Board, or is an entity with a class of securities registered under Section 12 of the Exchange Act. To the extent that there are changes in the number or kind of Common Stock outstanding as a result of a business transaction (e.g., merger, reorganization or any extraordinary or unusual event), the number of SARs granted to the Recipients will be appropriately adjusted to reflect any increase or decrease in the number of shares related to that business transaction. The SARs are subject to graded vesting provisions and may only be exercised when the Recipients SARs have vested. The SARs granted prior to the SMA vest 50% on January 10, 2015 and 50% on January 10, 2016 and the SARs may only be exercised in the year in which they vest. The SARs granted as of March 27, 2015 will vest 100% on January 10, 2017. Vested SARs that remain unexercised at the end of a vesting year will expire at that time. Any unvested SARs will be immediately forfeited and canceled in the event that a Recipient's employment or other service with the Company is terminated for any reasons.
Set forth below is information with regard to the individuals, number of shares and exercise price of the SARs:
● Aaron Dobrinsky, Chief Executive Officer, or an entity of his choosing, SARs were authorized for an aggregate of 5,250,000 shares (1,750,000 of which were forfeited for non-exercise) of Common Stock for $.50 per share, provided Mr. Dobrinsky remains employed by the Company.
● Christopher Broderick, Chief Operating Officer, or an entity of his choosing, SARs were authorized for an aggregate of 5,250,000 shares (1,750,000 of which were forfeited for non-exercise) of Common Stock for $.50 per share, provided Mr. Broderick remains employed by the Company.
● SAB Management LLC, an entity owned by Andrew Bressman, Managing Director, and his wife, SARS were authorized for an aggregate of 12,750,000 shares (4,250,000 of which were forfeited for non-exercise) of Common Stock for $.10 per share, provided Mr. Bressman remains employed by the Company.
● Christopher Barnes, Executive Vice President of Strategic Alliances & Business Development of Signal Share, SARs were authorized for 1,000,000 shares of Common Stock for $1.80 per share, provided Mr. Barnes remains employed by the Company.
● Joseph Costanzo, Chief Technology Officer of SignalShare, SARs were authorized for 1,000,000 shares (all of which were forfeited in 2016) of Common Stock for $1.80 per share, provided Mr. Costanzo remains employed by the Company.
Employment Agreements
Mr. Dobrinsky received a salary of $325,000 and is eligible to earn annual variable compensation at the sole discretion of the Compensation Committee based upon SPHC's achievement of stated goals, as established by the Compensation Committee. Since January 4, 2016, Mr. Dobrinsky has been compensated at the rate of $225,000 with the balance accrued by the Company. Mr. Dobrinsky was awarded SARS for 3,500,000 shares of Common Stock, which can be exchanged for an equal number of shares of the Company's Common Stock. One half (50%) of the SARS vested on January 10, 2015 (which was forfeited) and the remaining 50% of such shares shall vest on January 10, 2016. Mr. Dobrinsky was awarded, on March 27, 2015, an additional SARS agreement for 1,750,000 shares of Common Stock, 100% of which will vest on January 10, 2017. The Base Price of each SAR is $0.50. The exercise price of SARS shall be payable in cash or on a cashless basis. Vested SARS may only be exercised during the calendar year in which SARS vest. All unvested SARS shall be immediately forfeited and cancelled in the event the recipient's employment or other service with the Company is terminated prior to the applicable vesting date. A form of such SARS agreement has been filed as an exhibit to the Company's Form 8-K for March 27, 2015.
The employment agreement is terminable for Cause (as defined) or the employee terminates his employment without Good Reason (as defined) in which case the employee shall not be entitled to any compensation other than accrued benefits. In the event the employment agreement is terminated other than for Cause or by the employee with Good Reason, the employee shall be entitled to receive severance equals to 12 months of his base salary.
Excluding the Merger with the Company, in the event of a Change of Control (as defined) 100% of the Employee's unvested SARS, options or shares shall immediately vest, and if the employee is no longer employed by the Company he shall be entitled to receive 12 months' severance. Any benefits to be received by employee in the event of a Change of Control that would constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code (the "Code") will be reduced to the extent necessary so that no excise tax is due. To the extent any payment under the employment agreement constitutes an amount payable under a "Non-Qualified Deferred Compensation Plan (as defined in Section 409A of the Code), such payment could not be made to the employee earlier than the date that is six months from termination of employee's separation from service.
The Employment Agreement contains a restricted period of nine (9) months from any termination date during which the employee cannot directly or indirectly compete with SPHC, nor solicit the services of any employee of SPHC on the termination date, or solicit or provide services to any customer of SPHC on the termination date or who was a customer during the one-year period preceding the termination date.
SPHC entered into an Executive Employment Agreement with Christopher Broderick as Chief Operating Officer and a Director, on the same terms as that with Mr. Dobrinsky, except as noted herein. Mr. Broderick is entitled to receive a Base Salary of $250,000 per annum. Since February 2016, Mr. Broderick has been compensated at the rate of $250,000 with the balance accrued by the Company. He was granted SARS for 3,500,000 and 1,750,000 shares, respectively, on the same terms as Mr. Dobrinsky.
SPHC entered into an Executive Employment Agreement with Andrew Bressman, as Managing Director on the same terms as Mr. Dobrinsky, except as noted herein, Mr. Bressman is entitled to receive a Base Salary of $125,000 per annum. Since February 2016, he has been compensated at the rate of $125,000, with the balance accrued by the Company.
Consulting Agreement with SAB Management LLC
On March 27, 2015, SPHC entered into a five (5)-year Consulting Agreement with SAB Management LLC ("Consultant"), of which Andrew Bressman is a Member. Consultant shall render consulting services to SPHC relating to strategic planning, product development and general business and financial matters. Consultant shall not be required to devote more than 2,000 hours per year to SPHC. Consultant is being paid at the rate of $425,000 per year. SAB was granted SARS for 8,500,000 and 4,250,000 shares, respectively, with a base price of $0.10 per share, but otherwise, on the same terms as Mr. Dobrinsky. Upon voluntary termination, the Consultant shall only receive consulting fees earned, but yet paid. If the consultant is terminated for Cause (as defined), it shall be entitled to consulting fees earned but not yet paid. In the event of any litigation, investigation or other matter naming Andrew Bressman or SAB Management LLC, the Company will pay 100% of legal fees to a lawyer of their choice. Consultant is subject to a 12 month non-solicitation restriction from the end of the term.
Outstanding Equity Awards At Fiscal Year-End (Fiscal Year-End December 31, 2015
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | Option Exercise Price ($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#)(1) | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |
| | | | | | | | | | | | | | | | | | | | |
| Aaron Dobrinsky (2) | | 3,500,000 (2) | | 1,750,000 | | 1,750,000 | | $0.50 | | 12/31/17 | | 1,750,000 | | - | | - | | - | |
| | | | | | | | | | | | | | | | | | | | |
| Christopher Broderick (2) | | 3,500,000 | | 1,750,000 | | 1,750,000 | | $0.50 | | 12/31/17 | | 1,750,000 | | - | | - | | - | |
| | | | | | | | | | | | | | | | | | | | |
| S&B Management LLC (3) | | 8,500,000(3 | | 4,250,000 | | 4,250,000 | | $0.10 | | 12/31/17 | | 4,250,000 | | - | | - | | - | |
(1) The closing price of the Company's common stock on December 31, 2015 was $0.21 per share.
(2) Does not include 1,750,000 shares of common stock forfeited as of December 31, 2015 for non-exercise of Stock Appreciation Rights.
(3) Does not include 4,250,000 shares of common stock forfeited as of December 31, 2015 for non-exercise of Stock Appreciation Rights.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following tables set forth certain information regarding the beneficial ownership of our common stock and preferred stock as of August 18, 2016, by (i) each person who is known by us to be the beneficial owner of more than 5% of our outstanding common stock or preferred stock (reflecting the effect of the Reverse Stock Split and Stock Dividend); (ii) each of our directors and executive officers; and (iii) all of our directors and executive officers as a group. Beneficial Ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission and generally include voting or warrant power with respect to the securities. In determining the number and percentage of shares beneficially owned by each person, shares that may be acquired by such person under options or warrants exercisable within 60 days of this report are deemed beneficially owned by such person and are deemed outstanding for purposes of determining the total number of outstanding shares for such person and are not deemed outstanding for such purpose for all other stockholders.
Name and Address (1) | | Number of Shares of Common Stock Beneficially Owned (2 ) | | Percent of Common Stock Beneficially Owned |
| | | | | |
| Aaron Dobrinsky (3) | | 1,750,000 | (4) | 1.29% |
| | | | | |
| Christopher Broderick (3) | | 1,750,000 | (4) | 1.29% |
| | | | | |
| All executive officers and directors (2 persons) | | 3,500,000 | | 2.57% |
| | | | | |
| Matthew Hulsizer (5) | | 9,996,070 | | 7.35% |
| Jennifer Just | | | | |
| c/o Roomlinx, Inc. | | | | |
11101 W. 120th Avenue | | | | |
| Broomfield, CO 80021 | | | | |
| | | | | |
| Robert DePalo (6) | | 43,260,969 | | 31.81% |
| 570 Lexington Avenue, | | | | |
22nd Floor | | | | |
| New York, NY 10022 | | | | |
| | | | | |
| George S. Mennen Trust (7) | | 10,000,000 | | 7.35% |
| FBO John H. Mennen U/A/D 11/25/1970, Kevin M. Kilcullen Trustee | | | | |
| c/o Steven A. Kilcullen, LLC | | | | |
| 325 Columbia Turnpike | | | | |
| Suite 110, P.O. Box 992 | | | | |
| Florham Park, NJ 07932-0992 | | | | |
| | | | | |
| Andrew Bressman | | 4,250,000 | (8) | 3.12% |
| Signal Point Communications, Inc. | | | | |
Continental Plaza, 6th Floor | | | | |
| 433 Hackensack Avenue | | | | |
| Hackensack, NJ 07601 | | | | |
| | | | | |
| Joshua Gladtke | | 9,500,000 | | 6.98% |
| 180 Long Pond Road | | | | |
| Hewitt, NJ 07421 | | | | |
| | | | | |
| Cenfin, LLC (9) | | 7,899,344 | | 5.81% |
| 141 W. Jackson Blvd., Suite 500 | | | | |
| Chicago, IL 60604 | | | | |
1 | Unless otherwise indicated, the address of each beneficial owner listed below is c/o M2 nGage Group, Inc., 433 Hackensack Avenue, Hackensack, New Jersey 07601. |
2 | Based on 136,019,348 shares of common stock issued and outstanding as of August 18, 2016. There were 720,000 shares of Series A Preferred Stock and 2,945,000 shares of Series B Preferred Stock convertible into approximately 12,798,814 shares of common stock at $0.28 per share. No officer and director held any shares of preferred stock and no person was entitled to 5% or more of the Company's common stock on an as converted basis. |
3 | This person was elected an executive officer of the Registrant on March 27, 2015, in connection with the Subsidiary Merger. These shares are issuable upon exercise of Stock Appreciation Rights ("SARs") granted by Signal Point Holdings Corp. on October 30, 2014, and assumed by the Registrant as of March 27, 2015, which vested and became exercisable on January 10, 2016 and will terminate on December 31, 2016. The shareholdings in the table do not include: an additional 1,750,000 SARs granted on March 27, 2015 which will vest on January 10, 2017, if employment is not terminated prior to the vesting date and will terminate on December 31, 2017. |
4 | These shares are issuable upon exercise of SARs, which vested and became exercisable on January 1, 2016 and will terminate on December 31, 2016. Shareholdings do not include 1,750,000 SARs granted on March 27, 2015, which will vest on January 1, 2017 if employment is not terminated prior to vesting and will terminate on December 31, 2017. |
5 | Includes (i) 1,928,998 shares of Common Stock jointly owned by Matthew Hulsizer and Jennifer Just, JT TEN (ii) 83,864 shares of Common Stock owned by the Hulsizer Descendant Trust, (iii) 7,899,344 shares of Common Stock owned by Cenfin LLC, an affiliate of Jennifer Just; and (iv) 83,864 shares of common stock owned by the Just Descendant Trust |
6 | Shares of common stock owned or controlled by Mr. DePalo, who resigned from all positions with SPHC as of March 27, 2015 upon the Subsidiary Merger. |
7 | Kevin M. Kilcullen, Trustee, has the power to vote and dispose of these shares. |
8 | These shares are held by SAB Management LLC, of which Andrew Bressman, Managing Director of the Company is a member. These shares are issuable upon exercise of SARs which vested and became exercisable on January 1, 2016 and will terminate on December 31, 2016. Shareholdings do not include an additional 4,250,000 SARs granted on March 27, 2015, which will vest on January 10, 2017 if employment is not terminated prior to vesting and will terminate on December 31, 2017. |
9 | Matthew Hulsizer has the power to vote and dispose of these shares. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company or one of our subsidiaries may occasionally enter into transactions with certain "related persons." Related persons include our executive officers, directors, nominees for directors, a beneficial owner of 5% or more of our common stock and immediate family members of these persons. We refer to transactions in which the amount involved exceeded or is expected to exceed the lesser of $120,000 or one percent of the average of the Company's total assets at year-end for the last two completed fiscal years and in which the related person has a direct or indirect material interest as "related person transactions".
Subsidiary Merger Agreement
On February 10, 2015, the Company and SPHC terminated their Agreement and Plan of Merger dated March 14, 2014, due to unexpected delays in meeting the closing conditions by the then extended termination date almost one year after the original agreement was entered into. Robert DePalo was then the principal shareholder of SPHC and became the principal shareholder of the Company. On March 27, 2015, the Company and SPHC agreed upon new terms for the transaction and simultaneously signed and completed the Subsidiary Merger Agreement (the "SMA"). The SMA was negotiated based upon, among other things, significantly revised settlement agreements with the Company's major creditors. These included, among other things, Cenfin LLC, the Company's secured lender, obtaining 5% of the approximately 15% of the issued and outstanding Fully Diluted common stock following the Subsidiary Merger retained by existing Roomlinx shareholders.
Upon the Closing, the Company assumed certain obligations of SPHC and transferred substantially all of the assets and liabilities (other than assets consisting of contracts for which no consent to assignment has been obtained) into SignalShare Infrastructure, Inc. ("SSI"), a newly-formed Nevada corporation wholly owned by the Company. As a result of the foregoing, SSI and SPHC and their respective subsidiaries were the principal operating subsidiaries of the Company.
Pursuant to the terms of the SMA, the Company made a $750,000 cash payment to Cenfin, reducing the amount of the Revolving Loan with Cenfin to $3,962,000, bearing interest at approximately 5% per annum, and Cenfin received 7,061,295 shares of Common Stock. This revolving loan is secured by the assets of SSI, but not those of the parent Company (except to the extent not assigned to SSI) and not by any assets of SPHC. Pursuant to the SMA, SPHC agreed to make a $600,000 cash contribution available to the Company for ongoing operations, of which $400,000 was paid directly by SPHC to Technology Integration Group, a principal vendor to the Company, pursuant to the terms and conditions of a Settlement Agreement and Mutual General Release, a copy of which has been filed with the SEC. As a condition to the SPHC cash contribution, the Company was required to demonstrate and successfully demonstrated that its cash, accounts receivable and leasehold/lease receivables were equal to or greater than current accounts payable and that the Company had between $350,000 and $500,000 in cash prior to Closing and the $600,000 cash contribution by SPHC.
Pursuant to the terms and conditions of the SMA, the Board of Directors of the Company declared a dividend of 12,590,317 shares of Common Stock to existing stockholders who held 107,007 shares of Common Stock or an aggregate of 12,697,324 shares (9.4% of the Fully Diluted Shares). Cenfin was issued 7,061,295 (5.23%) shares and the SPHC shareholders were issued 115,282,137 (85.39% of Fully Diluted Shares) of a total of 135,040,756 shares issued and outstanding exclusive of 4,160,000 option shares and 25,250,000 stock appreciation rights. All of the dividend shares and Cenfin Shares were subject to a nine (9) month lock-up agreement, subject to certain registration rights.
The foregoing summary of the terms and conditions of the SMA does not purport to be complete, and is qualified in its entirety by reference to the full text of the SMA, which was filed as an exhibit to the Company's Form 8-K for March 27, 2015 and is available at the SEC website, www.sec.gov.
Pursuant to the terms and condition of the SMA, all officers and directors of the Company resigned as of March 27, 2015. As set forth under Item 10 "Directors, Executive Officers and Corporate Governance. Aaron Dobrinsky was elected Chairman of the Board, Chief Executive Officer (he resigned as of January 4, 2016) and a Director and Christopher Broderick was elected Chief Operating Officer and a Director. These two persons constitute the entire Board of Directors of the Company. Messrs. Dobrinsky and Broderick also became the initial officers and directors of SSI, together with Michael S. Wasik, formerly President and Chief Executive Officer of the Company, who became President and Chief Operating Officer of SSI.
There are no arrangements, known to the Company, including any pledge by any person of any securities of the Company or any of its parents, the operation of which may, at a subsequent date, result in a change in control of the Company.
On June 5, 2009 we entered into a Revolving Credit, Security and Warrant Purchase Agreement (the "Credit Agreement") with Cenfin LLC, an entity principally owned by significant shareholders of the Company. The Credit Agreement permits us to borrow up to $25 million until June 5, 2017. On May 3, 2013, the Company and Cenfin executed a fourth amendment to the Credit Agreement which provided Cenfin sole and absolute discretion related to funding any advance requested by Roomlinx. Advances must be repaid at the earlier of 5 years from the date of borrowing or at the expiration of the Credit Agreement. The principal balance may be repaid at any time without penalty. Borrowings accrue interest, payable quarterly on the unpaid principal and interest at a rate equal to the Federal Funds Rate at July 15 of each year plus 5% (approximately 5.09% at December 31, 2014). The Credit Agreement is collateralized by substantially all of our assets, and requires we maintain a total outstanding indebtedness to total assets ratio of less than 3 to 1.
During the year ended December 31, 2014, the Company made interest payments of $258,038 and principal payments of $464,000 to Cenfin.
Pursuant to the terms of the SMA, the Company made a $750,000 cash payment to Cenfin, reducing the amount of the Revolving Loan with Cenfin to $3,962,000, bearing interest at approximately 5% per annum, and Cenfin received 7,061,295 shares of Common Stock. This revolving loan is secured by the assets of SSI, but not those of the parent Company (except to the extent not assigned to SSI) and not by any assets of SPHC.
Principal Stockholder Agreements with Robert DePalo
The following is a description of material transactions engaged in by Robert DePalo and affiliated entities, either with SPHC or its predecessors. Mr. DePalo is a principal stockholder of the Company as a result of the Merger. See "Recent Events Concerning Our Principal Shareholder, Robert DePalo," for information concerning an indictment and SEC proceedings brought against Mr. DePalo, unrelated to the Company's business and the Company's actions regarding these material agreements.
Consulting Agreement
On January 9, 2014, SPHC entered into a Consulting Agreement with Robert DePalo, which was assumed by the Company on March 27, 2015. The agreement is for a seven (7) year term (the "Term") commencing on March 1, 2014 and ending on February 28, 2021, subject to earlier termination. Pursuant to a Board of Directors vote, the Company is accruing all payments to Mr. DePalo under this agreement. Mr. DePalo is not involved in the day-to-day management or operations of the Company and its subsidiaries and is not providing consulting services to the Company. Mr. DePalo was to render consulting services related to strategic planning, product development and general business and financial matters. He was not required to devote more than 100 hours per year under the agreement. Mr. DePalo was to be paid $210,000 per year during the Term of the Agreement. In addition, pursuant to the terms of the Agreement, in the event of any litigation involving Robert DePalo, the Company will pay 100% of legal fees to a lawyer of Mr. DePalo choice. Mr. DePalo can terminate the contract on 30 days' prior written notice if he voluntarily terminates his consulting or if terminated for Cause (as defined). Upon termination, Mr. DePalo shall only be entitled to earned, but unpaid, consulting fees. Mr. DePalo agreed to a one-year non-solicitation provision from the date of termination of employment.
Preferred Stock Cancellation and Debt Modification
On October 26, 2015, the Company, SPHC and all of SPHC's subsidiaries (the "Subsidiaries") entered into the following transactions with certain preferred stock holders of SPHC and senior secured debt holders of the Company and SPHC in order to reduce the overall financial exposure of the Company and to give the Company the maximum flexibility in management and for raising additional capital, while eliminating the preferences and certain controls of the Preferred Stock holders.
On October 26, 2015, Mr. DePalo, the holder of the Series B Preferred Stock of SPHC, agreed to the cancellation of the Series B Preferred Stock. In connection with the cancellation of the SPHC Series B Preferred Stock, the Company agreed that (subject to shareholder approval and the applicable laws and regulations) it would amend its charter and enter into other applicable agreements to provide for the following:
(a) the Company will not approve any reverse stock splits without the affirmative vote of the holders of at least fifty one percent (51%) of the issued and outstanding common stock;Exhibits
(b) for a period of two (2) years the Company will not issue any class of stock with supermajority voting rights;
(c) DePalo will have the right to appoint one member to the Board of Directors of the Company, subject to such person not being a relative of DePalo and independent of DePalo; and
(d) Until the expiration of the Consulting Agreement between the Company and DePalo, DePalo will be entitled to a monthly payment of $17,500 which payment shall accrue, until the Company and DePalo agree otherwise, or the Company obtains at least $8,000,000 in funding at which time DePalo will be paid all accrued and unpaid monthly payments and regular payments will begin and continue on a monthly basis for the term of the Consulting Agreement.
Brookville Special Purpose Fund, LLC
On March 24, 2011, Wave2Wave entered into a senior secured loan and security agreement with Brookville in the amount of $11.2 million (the "Brookville Loan"). Robert DePalo is the Managing Member of Brookville and acted as the agent for Brookville. The Brookville Loan has a maturity date of November 15, 2015 and has an annual interest rate of 14%. A portion of the Brookville Loan was converted into equity as of March 31, 2014 at an exchange rate of $1.50 per share. The Brookville Loan was secured by a senior security interest (subordinated to the DIP Lender defined below) in and lien against substantially all assets of the Wave2Wave and each of its wholly-owned subsidiaries: (i) RNK, Inc. ("RNK"); (ii) RNK VA, LLC; (iii) Wave2Wave VOIP Communications, LLC; (iv) Wave2Wave Data Communications, LLC; and (v) Wave2Wave Communications Midwest Region, LLC (collectively, the "Subsidiaries"). The Subsidiaries were co-guarantors of the Brookville Loan and pledged their assets as collateral for the Brookville Loan. In addition, Wave2Wave and RNK executed a Patent Security Agreement and Trademark Security Agreement in favor of Brookville, further collateralizing the Brookville Loan with all of the Wave2Wave's right, title and interest in and to their patents, applications, registrations and recordings, as well as Wave2Wave's right, title and interest in and to any trademarks, trade names, tradestyles and service marks.
On February 24, 2016, Brookville Special Purpose Fund, et al. commenced a Strict Foreclosure Action against Signal Point Holdings Corp. et al. calling the Notes that were in default and had matured. The Parties however, agreed to modify the Loan Documents and reached a settlement, together with mutual releases.
On April 7, 2016, the Company and Brookville et al. settled the litigation as follows. The Company in order to forebear the current foreclosures with its secured lenders, entered into a Restructuring, Omnibus Pledge, Security and Intercreditor Agreement (the "Omnibus Agreement"). The Omnibus Agreement is among the Company, SPHC, a wholly-owned subsidiary of the Company, M2 Communications, a wholly-owned subsidiary of SPHC, and M2 Communications, a wholly-owned subsidiary of SPHC. SPHC, M2 Communications and M2 nGage are collectively referred to as the "Debtors." Brookville, Veritas and Allied are collectively referred to as the "Secured Parties," and collectively with the Debtors, referred to as the "Parties."
In exchange for the forbearance of the foreclosure on the assets of the Debtors, the Company agreed to transfer the subsidiaries of SPHC (specifically, M2 Communications and M2 nGage), with the exception of SignalShare LLC and SPC, to "NEWCO," a new subsidiary of the Company, so that the subsidiaries of SPHC will become subsidiaries of NEWCO. The Debtors granted the Secured Parties a lien on the assets of the Debtors and pledged the securities of NEWCO, M2 Communications and M2 nGage to the Secured Parties (collectively, the "Collateral").
The Parties: (i) reaffirmed the priorities of the Secured Parties in the Collateral; (ii) agreed that the Secured Parties' subordinated security interest in the assets of Signal Share LLC shall be governed by the terms of the Intercreditor, Modification and Settlement Agreement dated as of November 13, 2015 by and among SPHC, Signal Share, the Secured Parties and NFS Leasing, Inc. ("NFS") in which agreement NFS acknowledged that it never has, nor will it ever have any security interest in the SPHC Excluded Entities which included a) M2 Communications b) SPC c) M2 nGage d) the Company e) Signal Point Infrastructure, Inc. and their respective Affiliates and (iii) agreed the Secured Parties and M2 Communications shall notice EBF Lending to the transactions contemplated by the Omnibus Agreement, since EBF has filed liens on M2 Communications related to an accounts receivable line of financing to which the Secured Parties have consented and any payments or amounts owed EBF will continue as is as was from either NEWCO or other applicable entity.
The Parties agreed to representations, warranties and covenants consistent with the prior Loan Documents. Upon an event of default, the Secured Parties shall have all remedies confirmed in the Loan Documents at law and equity, and all rights and remedies of a secured party under the UCC. Any deficiency upon a disposition of the Collateral will bear interest at 15% per annum plus reasonable attorneys' fees.
As of December 31, 2015, an aggregate of $2,102,496 of principal indebtedness was outstanding to Brookville.
As of August 9, 2016, an aggregate of $2,471,845 with interest accrued at 14% per annum was outstanding to Brookville.
Veritas High Yield Fund LLC
From August 25, 2011 through November 30, 2011, RNK and Wave2Wave entered into a subordinated senior secured loan and security agreement, whereby RNK and Wave2Wave obtained through a series of transactions from Veritas High Yield Fund LLC ("Veritas") a $4,750,000 loan (the "Veritas Loan"). Robert DePalo is Managing Member of Veritas. A portion of the Veritas Loan has a maturity date of March 5, 2016 and has an annual interest rate of 14%. A portion of the Veritas Loan was converted into equity as of March 31, 2014, at an exchange rate of $1.50 per share. The Veritas Loan was secured by a senior subordinated security interest in and lien against substantially all assets of the Wave2Wave and its subsidiaries, subordinated only to the DIP Lender (see below). The Subsidiaries were co-guarantors of the Veritas Loan and have pledged their assets as collateral for the Veritas Loan. In addition, Wave2Wave and RNK executed a Patent Security Agreement and Trademark Security Agreement in favor of Veritas, further collateralizing the Veritas Loan with all of Wave2Wave's rights, title and interest in and to their patents, applications, registrations and recording, as well as Wave2Wave's right, title and interest in and to any trademarks, trade names,, trade styles and service marks.
As of December 31, 2015, an aggregate of $385,508 of principal indebtedness was outstanding to Veritas. As of August 9, 2016, an aggregate of $518,790, with interest accrued at 14% per annum was outstanding to Veritas.
Allied International Fund, Inc.
See Item 3 Legal Proceedings - DePalo Related Entity Litigation" for information concerning legal proceedings involving Allied International Fund, Inc. ("Allied") an entity controlled by Rosemarie DePalo, Robert DePalo's wife, of which entity Mr. DePalo disclaims beneficial ownership.
Robert DePalo Special Opportunity Fund, LLC
On March 19, 2012, the Robert DePalo Special Opportunity Fund, LLC (the "DIP Lender") entered into a financing agreement to provide Wave2Wave debtor in possession financing in the amount of $3,600,000 for Wave2Wave pursuant to approval from the U.S. Bankruptcy Court in New Jersey (the "Bankruptcy Court"), provided additional funding to Wave2Wave totaling $3,500,000 (the "DIP Financing"). Robert DePalo is Managing Member of the DIP Lender. The DIP Financing had a maturity date of September 13, 2012. The DIP Financing was extended until the prior merger agreement with Roomlinx was signed in March 2014 and the loan was converted into equity at an exchange rate of $1.50 per share. The DIP Financing was secured by a super priority security interest and lien on all of the assets of Wave2Wave and RNK, as approved by the Bankruptcy Court. The DIP Financing provided that debt payments would continue to be made to Brookville and Veritas in accordance with the terms of the Veritas Loan and the Brookville Loan.
Restructuring, Omnibus Pledge, Security and Intercreditor Agreement
On February 24, 2016, Brookville Special Purpose Fund, et al. commenced a Strict Foreclosure Action against Signal Point Holdings Corp. et al. calling the Notes that were in default and had matured. The Parties however, agreed to modify the Loan Documents and reached a settlement, together with mutual releases.
On April 7, 2016, the Company and Brookville et al. settled the litigation as follows. The Company in order to forebear the current foreclosures with its secured lenders, entered into a Restructuring, Omnibus Pledge, Security and Intercreditor Agreement (the "Omnibus Agreement"). The Omnibus Agreement is among the Company, SPHC, a wholly-owned subsidiary of the Company, M2 Communications, a wholly-owned subsidiary of SPHC, and M2 Communications, a wholly-owned subsidiary of SPHC. SPHC, M2 Communications and M2 nGage are collectively referred to as the "Debtors." Brookville, Veritas and Allied are collectively referred to as the "Secured Parties," and collectively with the Debtors, referred to as the "Parties."
In exchange for the forbearance of the foreclosure on the assets of the Debtors, the Company agreed to transfer the subsidiaries of SPHC (specifically, M2 Communications and M2 nGage), with the exception of SignalShare LLC and SPC, to "NEWCO," a new subsidiary of the Company, so that the subsidiaries of SPHC will become subsidiaries of NEWCO. The Debtors granted the Secured Parties a lien on the assets of the Debtors and pledged the securities of NEWCO, M2 Communications and M2 nGage to the Secured Parties (collectively, the "Collateral").
The Parties: (i) reaffirmed the priorities of the Secured Parties in the Collateral; (ii) agreed that the Secured Parties' subordinated security interest in the assets of Signal Share LLC shall be governed by the terms of the Intercreditor, Modification and Settlement Agreement dated as of November 13, 2015 by and among SPHC, Signal Share, the Secured Parties and NFS Leasing, Inc. ("NFS") in which agreement NFS acknowledged that it never has, nor will it ever have any security interest in the SPHC Excluded Entities which included a) M2 Communications b) SPC c) M2 nGage d) the Company e) Signal Point Infrastructure, Inc. and their respective Affiliates and (iii) agreed the Secured Parties and M2 Communications shall notice EBF Lending to the transactions contemplated by the Omnibus Agreement, since EBF has filed liens on M2 Communications related to an accounts receivable line of financing to which the Secured Parties have consented and any payments or amounts owed EBF will continue as is as was from either NEWCO or other applicable entity.
The Parties agreed to representations, warranties and covenants consistent with the prior Loan Documents. Upon an event of default, the Secured Parties shall have all remedies confirmed in the Loan Documents at law and equity, and all rights and remedies of a secured party under the UCC. Any deficiency upon a disposition of the Collateral will bear interest at 15% per annum plus reasonable attorneys' fees.
See Item 11 "Executive Compensation" for information concerning employment agreements and consulting agreements with Management and Principal Shareholders.
Other than as set forth above, there were no related party transactions in 2015 and none are currently contemplated.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.AUDIT AND RELATED FEES, TAX FEES AND ALL OTHER FEES
On June 24, 2015, the Company dismissed KMJ Corbin & Company ("KMJ") as the Company's independent registered public accounting firm and appointed RBSM LLP ("RBSM") as our independent registered public accounting firm for the year ended December 31, 2015. RBSM provided accounting and audit services to SPHC in 2014. SPHC was subsequently acquired by the Company on March 27, 2015. RBSM has audited our consolidated financial statements for the year ended December 31, 2015.
On February 24, 2015, the Company dismissed GHP Horwath, PC ("GHP") as our independent registered public accounting firm and appointed KMJ as our independent registered public accounting firm for the year ended December 31, 2014. KMJ has audited our consolidated financial statements for the year ended December 31, 2014.
The following table sets forth the fees billed by our principal independent accountants, RBSM LLP, for professional services rendered for the years ended December 31, 2015 and 2014. These fees are for work performed in the years indicated and billed by RBSM LLP.
| | | Years Ended December 31, | |
| Category | | 2015 | | | 2014 | |
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| Audit Fees | | $ | 175,000 | | | $ | 75,000 | |
| Audit Related Fees | | $ | 25,000 | | | $ | 0 | |
| Tax Fees | | $ | 0 | | | $ | 20,000 | |
| All Other Fees | | $ | 0 | | | $ | 0 | |
Audit fees. Consists of fees billed for the audit of our annual consolidated financial statements, review of our Form 10-K, review of our interim financial statements included in our Form 10-Q and services that are normally provided by the accountant in connection with year-end statutory and regulatory filings or engagements.
Audit-related fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under "Audit Fees", review of our Forms 8-K filings and services that are normally provided by the accountant in connection with non-year-end statutory and regulatory filings or engagements.
Tax fees. Consists of professional services rendered by a company aligned with our principal accountant for tax compliance, tax advice and tax planning.
Other fees. The services provided by our accountants within this category consisted of advice and other services relating to SEC matters, registration statement review, accounting issues and client conferences.
BOARD OF DIRECTORS ADMINISTRATION OF THE ENGAGEMENT
Before RBSM LLP and KMJ Corbin & Company LLP were each engaged by the Company for the 2015 and 2014 audits, respectively, RBSM's and KMJ's engagement and engagement letter were approved by the Company's Board of Directors.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) The following Exhibits are filed with this reportReport on Form 10-K or incorporated by reference:
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2.2 | | Termination and Release |
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2.3 | | Stock |
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3.3 | | Certificate of Correction to Articles of Incorporation of Roomlinx dated March 26, 2015 is incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on April 2, 2015. |
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3.4 | | Certificate of Designation of the Rights, Preferences, Privileges and Restrictions of Series B Convertible Preferred Stock is incorporated by reference to the Registrant's Current Report on Form 8-K filed on February 8, 2016. |
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3.5 | | Amendment to Certificate of Designation of Series B Preferred Stock is incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on March 30, 2016. |
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4.1 | | Form of Revolving Credit Note issued to Cenfin LLC, included as Exhibit A to the Revolving Credit, Security and Warrant Purchase Agreement attached as Exhibit 10.1 to the registrant'sRegistrant’s Current Report on Form 8-K filed on June 11, 2009.20, 2017 (11) |
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4.2 | | Incentive Stock Option |
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| 10.1 | | Roomlinx, Inc. Long Term Incentive Plan is incorporated by reference to Annex A to the definitive proxy statement filed by the registrant with the SEC on January 30, 2009. |
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10.2 | | Revolving Credit, Security and Warrant Purchase Agreement, dated June 5, 2009, between Roomlinx, Inc. and Cenfin LLC, incorporated by reference to Exhibit 10.1 of the registrant's Current Report on Form 8-K filed on June 11, 2009. |
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10.3 | | First Amendment to Revolving Credit, Security and Warrant Purchase Agreement, dated March 10, 2010, between Roomlinx, Inc. and Cenfin LLC, incorporated by reference to Exhibit 10.1 of the registrant's Current Report on Form 8-K filed on March 11, 2010. |
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10.4 | | Form of Director Indemnification Agreement, dated July 30, 2010, between Roomlinx, Inc. and each of its directors and officers, incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K filed on August 19, 2010. |
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10.5 | | Third Amendment to Revolving Credit, Security and Warrant Purchase Agreement, dated December 21, 2011, between Roomlinx, Inc. and Cenfin LLC, incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on December 23, 2011. |
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10.6 | | Master Services and Equipment Purchase Agreement, dated March 12, 2012, by and between Hyatt Corporation and Roomlinx, Inc., incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q/A filed on July 27, 2012. |
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10.7 | | Fourth Amendment to Revolving Credit, Security and Warrant Purchase Agreement, dated as of May 3, 2013, between Roomlinx, Inc. and Cenfin LLC, incorporated by reference to Exhibit 10.1 of the Registrant'sRegistrant’s Current Report on Form 8-K filed on May 13, 2013.25, 2021.(10) |
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10.8 | | Form of Indemnification |
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10.9 | | Executive Employment Agreement dated as of March 20, 2015 by and between Signal Point Holdingsamong Redeeem Acquisition Corp., Troika Media Group, Inc., the members of Redeeem LLC and Andrew Bressmantheir designees and Davidoff Hutcher & Citron LLC is incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on April 2, 2015. |
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10.10 | | Executive Employment Agreement dated as of March 20, 2015 by and between Signal Point Holdings Corp. and Aaron Dobrinsky is incorporated by reference to Exhibit 10.3 of the Registrant's Current Report on Form 8-K filed on April 2, 2015. |
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10.11 | | Executive Employment Agreement dated as of March 20, 2015 by and between Signal Point Holdings Corp. and Christopher Broderick .is incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K filed on April 2, 2015. |
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10.12 | | Consulting Agreement dated as of March 24, 2015 by and between Signal Point Holdings Corp. and SAB Management LLC is incorporated by reference to Exhibit 10.5 of the Registrant's Current Report on Form 8-K filed on April 2, 2015. |
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10.13 | | Consulting Agreement dated as of January 9, 2014 by and between Signal Point Holdings Corp. and Robert P. DePalo, Sr. is incorporated by reference to Exhibit 10.6 of the Registrant's Current Report on Form 8-K filed on April 2, 2015. |
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10.14 | | Form of Stock Appreciation Right Agreement is incorporated by reference to Exhibit 10.7 of the Registrant's Current Report on Form 8-K filed on April 2, 2015. |
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10.15 | | Settlement Agreement and Mutual General Release dated as of March 27, 2015 by and among PC Specialists, Inc. (d/b/a Technology Integration Group) and Roomlinx Inc., Michael S. Wasik, Anthony DiPaolo and SignalShare Infrastructure Inc. is incorporated by reference to Exhibit 10.8 of the Registrant's Current Report on Form 8-K filed on April 2, 2015. |
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10.16 | | Amended and Restated Revolving Credit and Security Agreement dated as of March 24, 2015 by and between SignalShare Infrastructure, Inc. and Cenfin LLC is incorporated by reference to Exhibit 10.36 of the Registrant's Annual Report on Form 10-K filed on May 18, 2015. |
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10.17 | | Employment Agreement dated March 27, 2015, by and between Michael S. Wasik and SignalShare Infrastructure, Inc is incorporated by reference to Exhibit 10.37 of the Registrant's Annual Report on Form 10-K filed on May 18, 2015. |
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10.18 | | First Amendment to Amended and Restated and Revolving Credit Agreement, dated as of June 30, 2015, by and between the Registrant, SSI and Cenfin, incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on July 6, 2015. |
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10.19 | | Second Amendment to Amended and Restated Revolving Credit and Security Agreement dated as of October 7, 2015 by and between the Registrant, SSI and Cenfin, incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on October 14, 2015. |
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10.20 | | Lease Termination and Loan Agreement, by and between SignalShare and NFS Leasing, incorporated by reference to the Registrant's Report on Form 8-K filed on October 14, 2015. |
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10.21 | | Lease Termination and Loan Security Agreement, by and between SignalShare and NFS herein is incorporated by reference to Exhibit 10.1 of the Registrant's Report on Form 8-K filed on August 6, 2015. |
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10.22 | | Security Agreement by and between SPHC and NFS, incorporated by reference to Exhibit 10.2 of the Registrant's Report on Form 8-K filed on August 6, 2015.
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10.23 | | Promissory Note, issued by SignalShare to NFS in the principal amount of $4,946,212, incorporated by reference to Exhibit 10.3 of the Registrant's Report on Form 8-K filed on August 6, 2015. |
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10.24 | | Corporate Guaranty Agreement, by and between SPHC and NFS, incorporated by reference to Exhibit 10.4 of the Registrant's Report on Form 8-K filed on August 6, 2015. |
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10.25 | | First Amendment to the Security Agreement, by and between SignalShare and NFS, incorporated by reference to Exhibit 10.5 of the Registrant's Report on Form 8-K filed on August 6, 2015. |
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10.26 | | Warrant to purchase 1,111,111 shares of Common Stock issued by the Company to NFS, incorporated by reference to Exhibit 10.6 of the Registrant's Report on Form 8-K filed on August 6, 2015. |
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10.27 | | Series A Preferred Termination, Loan and General Release Agreement, by and among SPHC, the Subsidiaries, Allied and the Company, incorporated by reference to Exhibit 10.1 of the Registrant's Report on Form 8-K, filed on October 30, 2015; |
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10.28 | | Series B Preferred Termination, Consulting Agreement Modification and Settlement Agreement, by and among the Company, SPHC, the Subsidiaries and DePalo, incorporated by reference to Exhibit 10.2 of the Registrant's Report on Form 8-K, filed on October 30, 2015. |
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10.29 | | Secured Promissory Note, issued by SPHC to Allied, incorporated by reference to Exhibit 10.3 of the Registrant's Report on Form 8-K, filed on October 30, 2015. |
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10.30 | | First Allonge and Amendment to the Promissory Note issued by SPHC to Allied, dated October 27, 2015, incorporated by reference to Exhibit 10.4 of the Registrant's Report on Form 8-K, filed on October 30, 2015. |
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10.31 | | Modification Letter Agreement, by and among the Company, SPHC and Allied, dated as of October 27, 2015 is incorporated by reference to Exhibit 10.5 of the Registrant's Report on Form 8-K filed on October 30, 2015. |
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10.32 | | Modification Letter Agreement, by and among the Company, SPHC and Brookville, dated as of October 27, 2015, incorporated by reference to Exhibit 10.6 the Registrant's Report on Form 8-K, filed on October 30, 2015. |
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10.33 | | Settlement, Mutual Release and Indemnification Agreement by and between Signal Share, Infrastructure, Inc. and Hyatt Corporation incorporated by reference to Exhibit No.10.1 of the Registrant's Current Report on Form 8-K filed on November 20, 2015 |
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10.34 | | Pledge and Security Agreement dated May 6, 2016, by and between Digital Media Acquisition Group Corp., SignalShare Software Development Corp., to Brookville Special Purpose Fund, LLC, Veritas High Yield Fund, LLC and Allied Investment Fund, Inc. incorporated by reference to Exhibit 10.1 of the Registrant'sRegistrant’s Current Report on Form 8-K filed on May 12, 2016.25, 2021. |
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10.35 | | |
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14.1 | | |
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16.1 | | Letter re: change in certifying accountant, is incorporated |
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16.2 | | Letter re: change in certifying accountant is incorporated |
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21.1 | | |
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31.1 | | |
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32.1 | | |
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| 101 | | The following materials from Troika’s Form 10-K Report for the year ended June 30, 2022, formatted in Inline XBRL: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders' Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements. |
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| 104 | | Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101. |
_____________
*Filed herewith
** Filed with this report.(1)Incorporated by reference to the Registrant’s Draft Registration Statement No. 333-254889 filed on March 19, 2021
(2)Incorporated by reference to the Registrant’s Draft Registration Statement No. 333-254889 filed on August 1, 2019
(3)Incorporated by reference to the Registrant’s Registration Statement No. 333-254889 filed on March 31, 2021, as amended on April 8, 2021
(4)Incorporated by reference to the Registrant’s Registration Statement on Form 8-K filed on March 22, 2022
(5)Incorporated by reference to the Registrant’s Schedule 14C Information Statement filed on January 6, 2022
(6)Incorporated by reference to the Registrant’s Form 8-K filed on February 24, 2022
(7)Incorporated by reference to the Registrant’s Form 8 K filed on March 18, 2022
(8)Incorporated by reference to the Registrant’s Form 8 K filed on April 27, 2022
(9)Incorporated by reference to the Registrant’s Form 8 K filed on May 25, 2022
(10)Incorporated by reference to the Registrant’s Form 8 K filed on June 13, 2022
(11)Incorporated by reference to the Registrant’s Form 8 K filed on April 20, 2022
(b)Financial Statement Schedules
Financial Statement Schedules are omitted because the information is included in our financial statements or notes to those financial statements.
Item 16. Form 10-K Summary.
None
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 29, 2016.
authorized.
| | M2 nGage Group, Inc. | | | | | | |
| | TROIKA MEDIA GROUP, INC. |
| | |
| By: | /s/ Erica Naidrich |
| Name: | Erica Naidrich |
| Title: | |
| By: | /s/ Christopher Broderick |
| | Christopher Broderick |
| | Chief OperatingFinancial Officer and Director (Interim Principal Executive Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
August 29, 2016 | By: | /s/ Aaron Dobrinsky | | | | | | | | | | | | |
| Signature | | Aaron DobrinskyTitle | | Date |
| | | | |
| /s/ Sid Toama | | | | |
| Sid Toama | | President and Chief Executive Officer | | September 28, 2022 |
| | (Principal Executive Officer) | | |
| | | | |
| /s/ Erica Naidrich | | | | |
| Erica Naidrich | | Chief Financial Officer | | September 28, 2022 |
| | (Principal Financial and Accounting Officer) | | |
| | | | |
| /s/ Randall Miles | | | | |
| Randall Miles | | Chairman of the Board | | September 28, 2022 |
| | | | |
| /s/ Thomas Ochocki | | | | |
| Thomas Ochocki | | Director | | September 28, 2022 |
| | | | |
August 29, 2016/s/ Sabrina Yang | By: | /s/ Christopher Broderick | | |
| Sabrina Yang | | Christopher BroderickDirector | | September 28, 2022 |
| | Chief Operating Officer and Director | | |
| /s/ Wendy Parker | | (Interim Principal Executive Officer) | | |
| Wendy Parker | | (Interim Principal Accounting Officer)Director | | September 28, 2022 |
| | | | |
| /s/ Martin Pompadur | | | | |
| Martin Pompadur | | Director | | September 28, 2022 |
