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| UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 | OMB APPROVAL |
| OMB Number: 3235-0070
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FORM 10-Q
(Mark One)
| | | | | |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022March 31, 2023
or
| | | | | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to_________
Commission File Number: 001-40329
| | |
| Troika Media Group, Inc. |
| (Exact name of registrant as specified in its charter) |
| | | | | | | | | | | | | | |
| Nevada | | 83-0401552 | |
| (State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) | |
| | | | |
| 25 West 39th Street, 6th Floor, New York, NY | | 10018 | |
| (Address of principal executive offices) | | (Zip Code) | |
(212) 213-0111
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Shares, $0.001 par value | TRKA | The Nasdaq Capital Market |
| Redeemable warrants to acquire common stock | TRKAW | The Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated Filer | x | Smaller reporting company | x |
| | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
| | | | | | | | |
| Class | | Outstanding at November 11, 2022May 12, 2023 |
| Common Stock, $.001 par value | | 67,831,116413,121,171 |
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q (the “Form 10-Q”) that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q the words “believe,” “anticipate,” “expect,” “may,” “will,” “assume,” “should,” “predict,” “could,” ���would,” “intend,” “targets,” “estimates,” “projects,” “plans,” and “potential,” and other similar words and expressions of the future, are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking, including statements about the Company’s future financial and operating results and the Company’s plans, objectives, and intentions. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to differ materially from any results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, including, but not limited to:
•the success of our transformational reorganization of strategy, governance and management following our acquisition of Converge Direct, LLC and its affiliates;
•our ability to adapt to a rapidly changing industry and new business model;
•our reliance on clients to make investments in our services;
•our ability to retain major clients;
•our lack of long-term agreements with our clients;
•the ability of our clients to work with our competitors;
•our reliance on our management team and other key employees;
•the impact of litigation on our management team, business, financial position and results of operations;
•the impact of seasonality on the business needs and investments of our clients;
•our ability to compete effectively against other digital and offline marketing alternatives or meet metrics required by our clients
•the market for offline customer acquisition services;
•our reliance on third-party digital and offline media sources, including strategic partners;
•revisions to digital algorithms and consumer engagement ecosystems;
•potential liability for the information we communicate to consumers;
•our ability to detect click-through or other fraud on advertisements;
•our long sales cycles and customer concentration;
•our ability to develop new offerings, achieve increased consumer adoption of those offerings or penetrate new markets
•online data privacy and security risks and our ability to maintain adequate safeguards to protect the security, confidentiality and integrity of personally identifiable information;
•our ability to protect our intellectual property; and
•general competitive, economic, political, and market conditions, including economic conditions in the markets where we operate.
Other factors not identified above, including those described under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended June 30, 2022, our quarterly reports on Form 10-Q, and current reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website at http://www.sec.gov, may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us. We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.
Troika Media Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| ASSETS | (Unaudited) | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 24,898,162 | | | $ | 28,403,797 | |
| Accounts receivable, net | 25,142,495 | | | 10,801,299 | |
| Prepaid expenses and other current assets | 1,628,734 | | | 1,388,084 | |
| | | |
| Total current assets | 51,669,391 | | | 40,593,180 | |
| | | |
| Other assets | 702,750 | | | 702,750 | |
| Property and equipment, net | 306,760 | | | 618,699 | |
| Right-of-use lease assets | 2,863,235 | | | 3,029,785 | |
| Amortizable intangible assets, net | 62,723,611 | | | 64,761,111 | |
| Goodwill | 45,518,505 | | | 45,518,505 | |
| Total assets | $ | 163,784,252 | | | $ | 155,224,030 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 20,979,020 | | | $ | 14,270,063 | |
| Accrued and other current liabilities | 7,066,809 | | | 8,390,196 | |
| Accrued billable expenses | 15,862,371 | | | 7,810,126 | |
| Deferred revenue | 9,159,035 | | | 6,209,442 | |
| Current portion of long term debt, net of deferred financing costs | 1,581,328 | | | 1,551,211 | |
| Convertible note payable | 60,006 | | | 60,006 | |
| Note payable - related party, current | — | | | 30,000 | |
| Operating lease liabilities, current | 1,561,697 | | | 1,506,534 | |
| | | |
| Acquisition liabilities | 9,346,504 | | | 9,293,402 | |
| Contingent liability | 939,224 | | | 3,385,000 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Total current liabilities | 66,555,994 | | | 52,505,980 | |
| Long-term liabilities: | | | |
| Long-term debt, net of deferred financing costs | 64,427,219 | | | 64,833,844 | |
| Operating lease liabilities, non-current | 6,789,684 | | | 7,192,662 | |
| | | |
| | | |
| Other long-term liabilities | 212,600 | | | 212,432 | |
| | | |
| Total liabilities | 137,985,497 | | | 124,744,918 | |
| Commitments and Contingencies (Note 10) | | | |
| Stockholders’ equity: | | | |
| Preferred stock, $0.01 par value: 25,000,000 shares authorized | — | | | — | |
| | | |
| | | |
| | | |
| | | |
| Series E Preferred Stock ($0.01 par value: 500,000 shares authorized, 5,955 and 310,793 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively); redemption amount and liquidation preference $0.6 million and $31.1 million , as of March 31, 2023 and December 31, 2022, respectively | 59 | | | 3,107 | |
| Common stock, ($0.001 par value: 800,000,000 shares authorized; 402,389,013 and 139,302,225 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively) | 413,081 | | | 139,302 | |
| Additional paid-in-capital | 268,622,888 | | | 265,673,246 | |
| | | |
| Accumulated deficit | (243,237,273) | | | (235,336,543) | |
| | | |
| Total stockholders’ equity | 25,798,755 | | | 30,479,112 | |
| Total liabilities and stockholders’ equity | $ | 163,784,252 | | | $ | 155,224,030 | |
Troika Media Group, Inc. and Subsidiaries
Condensed Consolidated Balance SheetsStatements of Operations and Comprehensive Income (Loss)
| | | | | | | | | | | |
| September 30,
2022 | | June 30,
2022 |
| ASSETS | (Unaudited) | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 32,666,843 | | | $ | 32,673,801 | |
| Accounts receivable, net | 37,282,536 | | | 9,421,497 | |
| Prepaid expenses and other current assets | 2,303,838 | | | 1,289,183 | |
| Contract assets | 328,936 | | | 23,586,036 | |
| Total current assets | 72,582,153 | | | 66,970,517 | |
| | | |
| Other assets -long term portion | 2,613,957 | | | 2,124,832 | |
| Property and equipment, net | 649,026 | | | 589,205 | |
| Right-of-use lease assets | 6,158,667 | | | 8,965,426 | |
| Amortizable intangible assets, net | 68,127,755 | | | 70,306,005 | |
| Goodwill | 55,349,535 | | | 55,349,535 | |
| Total assets | $ | 205,481,093 | | | $ | 204,305,520 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 24,995,046 | | | $ | 15,298,068 | |
| Accrued and other current liabilities | 4,611,429 | | | 5,478,868 | |
| Accrued billable expenses | 20,546,169 | | | 23,170,680 | |
| Acquisition liabilities | 9,233,902 | | | 9,108,504 | |
| Current portion of long term debt, net of deferred financing costs | 1,521,095 | | | 1,538,220 | |
| Convertible note payable | 60,006 | | | 50,000 | |
| Note payable - related party - short term portion | 60,000 | | | 100,000 | |
| | | |
| Deferred revenue | 9,132,043 | | | 11,321,159 | |
| Operating lease liability - short term portion | 1,440,080 | | | 2,682,457 | |
| Taxes payable, net | 220,610 | | | 689,882 | |
| Derivative liabilities- financing warrants | 31,157,612 | | | 30,215,221 | |
| Preferred stock liability | 15,720,227 | | | 15,996,537 | |
| Contingent liability | 301,350 | | | 3,615,000 | |
| Total current liabilities | 118,999,569 | | | 119,264,596 | |
| Long term liabilities: | | | |
| Long-term debt, net of deferred financing costs | 65,233,435 | | | 65,581,203 | |
| Operating lease liability - long term portion | 7,608,072 | | | 8,994,073 | |
| | | |
| | | |
| Other long-term liabilities | 226,947 | | | 74,909 | |
| | | |
| Total liabilities | 192,068,023 | | | 193,914,781 | |
| | | |
| Stockholders’ equity: | | | |
| Preferred stock, $0.01 par value: 25,000,000 shares authorized | — | | | — | |
| Series A Preferred Stock ($0.01 par value: 5,000,000 shares authorized, none outstanding as of September 30, 2022 and June 30, 2022) | — | | | — | |
| Series B Preferred Stock ($0.01 par value: 3,000,000 shares authorized, none outstanding as of September 30, 2022 and June 30, 2022) | — | | | — | |
| Series C Preferred Stock ($0.01 par value: 1,200,000 shares authorized, none outstanding as of September 30, 2022 and June 30, 2022) | — | | | — | |
| Series D Preferred Stock ($0.01 par value: 2,500,000 shares authorized, none outstanding as of September 30, 2022 and June 30, 2022) | — | | | — | |
| Series E Preferred Stock ($0.01 par value: 500,000 shares authorized, 491,114 and 500,000 shares issued and outstanding as of September 30, 2022 and June 30, 2022, respectively) | 7,914 | | | 8,000 | |
| Common stock, ($0.001 par value: 800,000,000 shares authorized; 66,368,616 and 64,209,616 shares issued and outstanding as of September 30, 2022 and June 30, 2022, respectively) | 45,819 | | | 43,660 | |
| Additional paid-in-capital | 237,667,560 | | | 236,876,523 | |
| Accumulated deficit | (224,308,223) | | | (225,582,006) | |
| Accumulated other comprehensive loss | — | | | (955,438) | |
| Total stockholders’ equity | 13,413,070 | | | 10,390,739 | |
| Total liabilities and stockholders’ equity | $ | 205,481,093 | | | $ | 204,305,520 | |
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
| | | | | | | |
| Revenue | | | | | $ | 59,038,338 | | | $ | 15,685,000 | |
| Cost of revenue | | | | | 50,283,718 | | | 11,738,000 | |
| Gross profit | | | | | 8,754,620 | | | 3,947,000 | |
| | | | | | | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative expenses | | | | | 11,163,317 | | | 17,183,000 | |
| | | | | | | |
| Depreciation and amortization | | | | | 2,063,295 | | | 429,000 | |
| | | | | | | |
| | | | | | | |
| Total operating expenses | | | | | 13,226,612 | | | 17,612,000 | |
| Operating loss | | | | | (4,471,992) | | | (13,665,000) | |
| | | | | | | |
| Other income (expense): | | | | | | | |
| | | | | | | |
| | | | | | | |
| Interest expense | | | | | (3,440,656) | | | (100,000) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Miscellaneous income (expense) | | | | | 47,888 | | | (590,000) | |
| Total other expense | | | | | (3,392,768) | | | (690,000) | |
| Loss from operations before income taxes | | | | | (7,864,760) | | | (14,355,000) | |
| Income tax expense | | | | | (35,970) | | | (33,000) | |
| Net loss | | | | | $ | (7,900,730) | | | (14,388,000) | |
| Foreign currency translation adjustment | | | | | — | | | 36,000 | |
| Comprehensive loss | | | | | $ | (7,900,730) | | | $ | (14,352,000) | |
| | | | | | | |
| Loss per share: | | | | | | | |
| Basic | | | | | $ | (0.03) | | | $ | (0.30) | |
| Diluted | | | | | $ | (0.03) | | | $ | (0.30) | |
| | | | | | | |
| Weighted average number of shares outstanding: | | | | | | | |
| Basic | | | | | 248,757,121 | | | 48,051,751 | |
| Diluted | | | | | 248,757,121 | | | 48,051,751 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Troika Media Group, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, |
| | | | | | 2022 | | 2021 |
| | | | | | | |
| Revenues | | | | | $ | 119,809,958 | | | $ | 8,349,000 | |
| Cost of revenues | | | | | 101,055,664 | | | 4,837,000 | |
| Gross margin | | | | | 18,754,294 | | | 3,512,000 | |
| | | | | | | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative expenses | | | | | 9,305,955 | | | 6,803,000 | |
| | | | | | | |
| Depreciation and amortization | | | | | 2,232,509 | | | 202,000 | |
| Restructuring and other related charges | | | | | 934,147 | | | — | |
| | | | | | | |
| Total operating expenses | | | | | 12,472,611 | | | 7,005,000 | |
| Operating income (loss) | | | | | 6,281,683 | | | (3,493,000) | |
| | | | | | | |
| Other income (expense): | | | | | | | |
| | | | | | | |
| | | | | | | |
| Interest expense | | | | | (2,835,588) | | | (13,000) | |
| Loss contingency on equity issuance | | | | | (301,350) | | | — | |
| Net gain on sale of subsidiary | | | | | 82,894 | | | — | |
| Foreign exchange loss | | | | | (944,416) | | | (16,000) | |
| (Loss) gain on change in fair value of derivative liabilities | | | | | (942,390) | | | 12,000 | |
| Miscellaneous income | | | | | 95,318 | | | 1,371,000 | |
| Total other (expense) income | | | | | (4,845,532) | | | 1,354,000 | |
| Income (loss) from operations before income taxes | | | | | 1,436,151 | | | (2,139,000) | |
| Income tax expense | | | | | (162,368) | | | — | |
| Net income (loss) | | | | | $ | 1,273,783 | | | (2,139,000) | |
| Foreign currency translation adjustment | | | | | — | | | 31,000 | |
| Comprehensive income (loss) | | | | | $ | 1,273,783 | | | $ | (2,108,000) | |
| | | | | | | |
| Earnings (loss) per share: | | | | | | | |
| Basic | | | | | $ | 0.02 | | | $ | (0.05) | |
| Diluted | | | | | $ | 0.01 | | | $ | (0.05) | |
| | | | | | | |
| Weighted average number of shares outstanding: | | | | | | | |
| Basic | | | | | 65,289,116 | | | 41,422,781 | |
| Diluted | | | | | 203,017,186 | | | 41,422,781 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Troika Media Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Equity
For the Three Months Ending September 30,Ended March 31, 2023 and 2022 and 2021
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock Series A | | | | | | | | Preferred Stock Series E | | Common Stock | | Additional Paid In Capital | | | | Accumulated Deficit | | Comprehensive Income (Loss) | | Stockholders’ Equity |
| | Amount | | | | | | | | Amount | | Amount | | | | | |
| Balance - December 31, 2022 | | $ | — | | | | | | | | | $ | 3,107 | | | $ | 139,302 | | | $ | 265,673,246 | | | | | $ | (235,336,543) | | | $ | — | | | $ | 30,479,112 | |
| Stock-based compensation expense | | — | | | | | | | | | — | | | — | | | 547,197 | | | | | — | | | — | | | 547,197 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Cashless exercise of warrants for common shares | | — | | | | | | | | | — | | | 141,151 | | | (141,151) | | | | | — | | | — | | | — | |
| Conversion of Preferred Series E shares to common shares | | — | | | | | | | | | (3,048) | | | 121,935 | | | (118,887) | | | | | — | | | — | | | — | |
| Partial liquidated damages settled in common shares | | — | | | | | | | | | — | | | 10,693 | | | 2,662,483 | | | | | — | | | — | | | 2,673,176 | |
| Net loss | | — | | | | | | | | | — | | | — | | | — | | | | | (7,900,730) | | | — | | | (7,900,730) | |
| Balance - March 31, 2023 | | $ | — | | | | | | | | | $ | 59 | | | $ | 413,081 | | | $ | 268,622,888 | | | | | $ | (243,237,273) | | | $ | — | | | $ | 25,798,755 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock Series A | | | | | | | | Preferred Stock Series E | | Common Stock | | Additional Paid In Capital | | Stock Payable | | Accumulated Deficit | | Comprehensive Income (Loss) | | Stockholders’ Equity |
| | | Amount | | | | | | | | Amount | | Amount | | | | | |
| Balance - June 30, 2021 | | $ | 7,000 | | | | | | | | | $ | — | | | $ | 40,000 | | | $ | 204,788,000 | | | $ | 1,210,000 | | | $ | (186,889,000) | | | $ | (418,000) | | | $ | 18,738,000 | |
| Net Loss | | — | | | | | | | | | — | | | — | | | — | | | — | | | (2,139,000) | | | — | | | (2,139,000) | |
| Common stock issued related to Redeeem acquisition | | — | | | | | | | | | — | | | — | | | 1,210,000 | | | (1,210,000) | | | — | | | — | | | — | |
| Record vested deferred compensation relating to Redeeem employees | | — | | | | | | | | | — | | | 4,000 | | | 801,000 | | | — | | | — | | | — | | | 805,000 | |
| Stock-based compensation | | — | | | | | | | | | — | | | — | | | 174,000 | | | — | | | — | | | — | | | 174,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation reclassification | | — | | | | | | | | | — | | | — | | | — | | | — | | | — | | | 31,000 | | | 31,000 | |
| Balance- September 30, 2021 | | $ | 7,000 | | | | | | | | | $ | — | | | $ | 44,000 | | | $ | 206,973,000 | | | $ | — | | | $ | (189,028,000) | | | $ | (387,000) | | | $ | 17,609,000 | |
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| | Preferred Stock Series A | | | | | | | | Preferred Stock Series E | | Common Stock | | Additional Paid In Capital | | Stock Payable | | Accumulated Deficit | | Comprehensive Income (Loss) | | Stockholders’ Equity |
| | Amount | | | | | | | | Amount | | Amount | | | | | |
| Balance - June 30, 2022 | | $ | — | | | | | | | | | $ | 8,000 | | | $ | 43,660 | | | $ | 236,876,523 | | | $ | — | | | $ | (225,582,006) | | | $ | (955,438) | | | $ | 10,390,739 | |
| Net income | | — | | | | | | | | | — | | | — | | | — | | | — | | | 1,273,783 | | | — | | | 1,273,783 | |
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| Stock-based compensation expense | | — | | | | | | | | | — | | | — | | | 516,800 | | | — | | | — | | | — | | | 516,800 | |
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| Conversion of preferred stock | | — | | | | | | | | | (86) | | | 2,159 | | | 274,237 | | | — | | | — | | | — | | | 276,310 | |
| Reclassification of foreign currency translation loss | | — | | | | | | | | | — | | | — | | | — | | | — | | | — | | | 955,438 | | | 955,438 | |
| Balance- September 30, 2022 | | $ | — | | | | | | | | | $ | 7,914 | | | $ | 45,819 | | | $ | 237,667,560 | | | $ | — | | | $ | (224,308,223) | | | $ | — | | | $ | 13,413,070 | |
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| | | Preferred Stock Series A | | | | | | | | Preferred Stock Series E | | Common Stock | | Additional Paid In Capital | | | | Accumulated Deficit | | Comprehensive Income (Loss) | | Stockholders’ Equity |
| | | Amount | | | | | | | | Amount | | Amount | | | | | |
| Balance - December 31, 2021 | | $ | 7,000 | | | | | | | | | $ | — | | | $ | 44,000 | | | $ | 208,085,000 | | | | | $ | (193,138,000) | | | $ | (386,000) | | | $ | 14,612,000 | |
| Record vested deferred compensation relating to Redeeem employees | | — | | | | | | | | | — | | | — | | | 805,000 | | | | | — | | | — | | | 805,000 | |
| Issuance of common stock related to Converge acquisition | | — | | | | | | | | | — | | | 12,000 | | | 14,863,000 | | | | | — | | | — | | | 14,875,000 | |
| Record preferred stock issued to PIPE | | — | | | | | | | | | 5,000 | | | — | | | (5,000) | | | | | — | | | — | | | — | |
| Stock-based compensation | | — | | | | | | | | | — | | | 8,000 | | | 9,088,000 | | | | | — | | | — | | | 9,096,000 | |
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| Foreign currency translation reclassification | | — | | | | | | | | | — | | | — | | | — | | | | | — | | | 36,000 | | | 36,000 | |
| Net loss | | $ | — | | | | | | | | | $ | — | | | $ | — | | | $ | — | | | | | $ | (14,388,000) | | | $ | — | | | (14,388,000) | |
| Balance - March 31, 2022 | | $ | 7,000 | | | | | | | | | $ | 5,000 | | | $ | 64,000 | | | $ | 232,836,000 | | | | | $ | (207,526,000) | | | $ | (350,000) | | | $ | 25,036,000 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Troika Media Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | Three Months Ended
September 30, | | Three Months Ended
March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income (loss) | $ | 1,273,783 | | | $ | (2,139,000) | | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | |
| Net loss | | Net loss | $ | (7,900,730) | | | $ | (14,388,000) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
| Depreciation and amortization | Depreciation and amortization | 2,232,509 | | | 202,000 | | Depreciation and amortization | 2,063,295 | | | 429,000 | |
| Amortization of right-of-use assets | Amortization of right-of-use assets | 521,774 | | | — | | Amortization of right-of-use assets | 166,550 | | | 471,000 | |
| Amortization of deferred financing costs | Amortization of deferred financing costs | 591,357 | | | — | | Amortization of deferred financing costs | 579,742 | | | — | |
| | Stock-based compensation expense | 516,800 | | | 979,000 | | |
| Stock-based compensation | | Stock-based compensation | 547,197 | | | 9,893,000 | |
| | Accretion of fair value liability | 125,398 | | | — | | |
| Accretion of interest on acquisition liabilities | | Accretion of interest on acquisition liabilities | 53,102 | | | — | |
| | Net gain on sale of subsidiary | (82,894) | | | |
| Imputed interest for note payable | 10,006 | | | |
| Loss contingency on equity issuance | 301,350 | | | |
| Loss on early termination of operating lease | 202,150 | | | 3,000 | | |
| Loss (gain) on derivative liabilities | 942,390 | | | (12,000) | | |
| | Gain on derivative liabilities | | Gain on derivative liabilities | — | | | (213,000) | |
| Tax provision on income | Tax provision on income | 162,368 | | | 0 | Tax provision on income | — | | | — | |
| Provision (reversal) for bad debt | 61,671 | | | (69,000) | | |
| Provision for bad debt | | Provision for bad debt | 61,413 | | | 41,000 | |
| Partial liquidated damages expense | | Partial liquidated damages expense | 227,400 | | | — | |
| Change in operating assets and liabilities: | Change in operating assets and liabilities: | | | | Change in operating assets and liabilities: | | | |
| Accounts receivable | Accounts receivable | (5,614,459) | | | (580,000) | | Accounts receivable | (14,402,609) | | | (9,915,000) | |
| Contract assets | (85,282) | | | — | | |
| | Prepaid expenses | Prepaid expenses | (1,112,772) | | | 45,000 | | Prepaid expenses | (240,650) | | | 179,000 | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | 6,837,288 | | | (969,000) | | Accounts payable and accrued expenses | 13,729,456 | | | 5,689,000 | |
| | Deferred expenses | | Deferred expenses | — | | | (279,000) | |
| Other assets | Other assets | (787,900) | | | (68,000) | | Other assets | — | | | (62,000) | |
| | Operating lease liability | Operating lease liability | (583,058) | | | (222,000) | | Operating lease liability | (347,815) | | | (225,000) | |
| | Due to related parties | — | | | (34,000) | | |
| Contract liabilities | (267,420) | | | 771,000 | | |
| Other long term liabilities | 177,271 | | | (168,000) | | |
| Net cash provided by (used in) operating activities | 5,422,330 | | | (2,261,000) | | |
| | Deferred revenue | | Deferred revenue | 2,949,593 | | | 14,383,000 | |
| Other long-term liabilities | | Other long-term liabilities | 168 | | | 37,000 | |
| | Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | (2,513,888) | | | 6,040,000 | |
| | CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| | Net cash paid for acquisition of Converge | | Net cash paid for acquisition of Converge | — | | | (82,730,000) | |
| | Net cash received for sale of Mission UK | (1,185) | | | — | | |
| Purchase of property and equipment | Purchase of property and equipment | (170,851) | | | (68,000) | | Purchase of property and equipment | (5,497) | | | (65,000) | |
| Net cash used in investing activities | Net cash used in investing activities | (172,036) | | | (68,000) | | Net cash used in investing activities | (5,497) | | | (82,795,000) | |
| | CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Proceeds from the issuance of preferred stock, net of offering costs | | Proceeds from the issuance of preferred stock, net of offering costs | — | | | 44,405,000 | |
| | Repayment of other long-term liabilities | | Repayment of other long-term liabilities | — | | | (147,000) | |
| | Payment of stimulus loan programs | | Payment of stimulus loan programs | — | | | (435,000) | |
| | Payments made for loss contingency on equity issuance | (3,615,000) | | | — | | |
| Principal payments made for bank loan | Principal payments made for bank loan | (956,250) | | | — | | Principal payments made for bank loan | (956,250) | | | — | |
| Payments for note payable to related party | Payments for note payable to related party | (40,000) | | | (20,000) | | Payments for note payable to related party | (30,000) | | | (30,000) | |
| Proceeds from bank loan, net of debt issuance cost | | Proceeds from bank loan, net of debt issuance cost | — | | | 69,718,000 | |
| | Net cash used in financing activities | (4,611,250) | | | (20,000) | | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (986,250) | | | 113,511,000 | |
| | Effect of exchange rate on cash | Effect of exchange rate on cash | (646,002) | | | 35,000 | | Effect of exchange rate on cash | — | | | (2,015,411) | |
| | NET DECREASE IN CASH AND CASH EQUIVALENTS | $ | (6,958) | | | $ | (2,314,000) | | |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | $ | (3,505,635) | | | $ | 34,740,589 | |
| CASH AND CASH EQUIVALENTS — beginning of period | CASH AND CASH EQUIVALENTS — beginning of period | 32,673,801 | | | 12,066,000 | | CASH AND CASH EQUIVALENTS — beginning of period | 28,403,797 | | | 12,066,000 | |
| CASH AND CASH EQUIVALENTS — end of period | CASH AND CASH EQUIVALENTS — end of period | $ | 32,666,843 | | | $ | 9,752,000 | | CASH AND CASH EQUIVALENTS — end of period | $ | 24,898,162 | | | $ | 46,806,589 | |
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| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | |
| Cash paid during the period for: | Cash paid during the period for: | | | | Cash paid during the period for: | | | |
| | Interest expense | Interest expense | $ | 2,077,285 | | | $ | 3,000 | | Interest expense | $ | 2,834,660 | | | $ | 3,000 | |
Noncash investing and financing activities: | Noncash investing and financing activities: | | | | Noncash investing and financing activities: | | | |
| Conversion of Series E Preferred shares to common shares | | Conversion of Series E Preferred shares to common shares | $ | 30,484,000 | | | $ | — | |
| Cashless exercise of warrants for common shares | | Cashless exercise of warrants for common shares | $ | 34,690,000 | | | $ | — | |
| | Settlement of contingent liability in common shares | | Settlement of contingent liability in common shares | $ | 2,673,176 | | | $ | — | |
| Write-off of property and equipment included in liabilities | | Write-off of property and equipment included in liabilities | $ | 291,641 | | | $ | — | |
| Fair value of common stock issued relating to the Converge Acquisition | | Fair value of common stock issued relating to the Converge Acquisition | $ | — | | | $ | 14,875,000 | |
| | Warrants issued relating to debt financing | | Warrants issued relating to debt financing | $ | — | | | $ | 2,232,000 | |
| Warrants issued relating to equity financing | | Warrants issued relating to equity financing | $ | — | | | $ | 28,407,000 | |
| Record acquisition liability relating to Converge Acquisition | | Record acquisition liability relating to Converge Acquisition | $ | — | | | $ | 5,000,000 | |
| Capitalized fee on initial term loan | | Capitalized fee on initial term loan | $ | — | | | $ | 1,500,000 | |
| Original issue discount on amount held in escrow | | Original issue discount on amount held in escrow | $ | — | | | $ | 900,000 | |
| | Issuance of common stock related to stock payable | | Issuance of common stock related to stock payable | $ | — | | | $ | 104,000 | |
| Issuance of common stock to contractors for services | | Issuance of common stock to contractors for services | $ | — | | | $ | 40,000 | |
| | Right-of-use assets acquired through adoption of ASC 842 | Right-of-use assets acquired through adoption of ASC 842 | $ | — | | | $ | 467,000 | | Right-of-use assets acquired through adoption of ASC 842 | $ | — | | | $ | 467,000 | |
| Conversion of Series E Preferred shares to common stock | $ | 274,237 | | | $ | — | | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TROIKA MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. Description of Business and Basis of Presentation
Description of Business
Troika Media Group, Inc. (together with its subsidiaries, the “Company”(“Company”, “our” or “we”), incorporated in Nevada in 2003, is a professional services company that architects and builds enterprise value in consumer facing brands to generate scalable performance driven revenue growth through customer acquisition.growth. The Company delivers on three solutions'solutions pillars that CREATE brands and experiences and CONNECT consumers through emerging technology products and ecosystems to deliver PERFORMANCE-basedPERFORMANCE based measurable business outcomes.
On March 22, 2022 (the “Closing Date”), the Company, through its wholly owned subsidiary CD Acquisition Corp, executed a Membership Interest Purchase Agreement (“MIPA”("MIPA") for the acquisition of all the equity of Converge Direct, LLC and its affiliates (“Converge”("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 "Converge Acquisition").million. The MIPA identifies the seller parties as the Converge Sellers. See Note 3 – Converge Direct Acquisition to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more discussion on the Converge Acquisition.
On August 1, 2022 the Company sold the equity of Mission Media Limited and Mission Media Holdings Limited (collectively, Mission UK).
The Company operates and reports financial information in one segment. Substantially all revenues and assets of the Company are attributed to or located in the United States and are primarily concentrated in the New York City metropolitan area.
Unaudited Interim Financial Statements
The accompanying interim condensed consolidated unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company’s AnnualTransition Report on Form 10-K10-K/T (as amended by Form 10-KT/A) for the yearsix month transition period ended June 30,December 31, 2022. The financial statements as of September 30, 2022March 31, 2023 and for the three months ended September 30, 2022 and 2021March 31, 2023 presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management such financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2022, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year.
NOTE 2. Accounting Policies
Principles of Consolidation
The condensed 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.
Use of Estimates
The preparation of the accompanying condensed 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. Such estimates include the valuation of accounts receivable and the determination of the allowance for doubtful accounts, the valuation and useful life of capitalized equipment costs and long-lived assets, valuation of warrants and options, the determination of the useful lives and any potential impairment of long-lived assets such as intangible assets and goodwill, the allocation of purchase consideration to assets and liabilities due to the Converge Acquisition, stock-based
compensation, and deferred tax assets. Management believes its use of estimates in the condensed consolidated financial statements to be reasonable.
Recently Adopted Accounting Pronouncements
In August 2020,October 2021, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other and Derivatives and Hedging—Contracts in Entity’s Own Equity:2021-08, "Business Combinations (Subtopic 805), Accounting for Convertible InstrumentsContract Assets and Contract Liabilities from Contracts in an Entity’s Own Equity”with Customers” ("ASU 2021-08”), which simplifiesis intended to improve the accounting for convertible instrumentsacquired revenue contracts with customers in a business combination by removing the separation models for convertible debt with a cash conversion featureaddressing diversity in practice 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 treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020.
inconsistency. The Company has adopted the guidance effective JulyJanuary 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 clarifying certain aspects2023. The adoption of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt allpronouncement did not have a material impact on 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.financial statements when adopted.
Recently Issued Accounting Pronouncements Not Yet Adopted
Not Applicable.
NOTE 3 – Converge Direct Acquisition
On June 16, 2016,March 22, 2022 (the “Closing Date”), the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss modelCompany through its wholly owned subsidiary CD Acquisition Corp, executed a Membership Interest Purchase Agreement ("MIPA") for the impairmentacquisition of financial assets measuredall the equity of Converge Direct, LLC and its affiliates ("Converge") and 40% of the equity of Converge Marketing Services, LLC an affiliated entity, for a notional aggregate purchase price of $125.0 million valued for accounting purposes at amortized cost basis. This ASU replacesapproximately $114.9 million. The MIPA identifies the probable, incurred loss model for those assets. On November 15, 2019,seller parties as the FASB delayedConverge Sellers.
Purchase Price
The cash portion of the effectivepurchase price consisted of $65.9 million paid on the date of FASB ASC Topic 326the acquisition, $29.1 million held in escrow payable upon satisfaction of certain conditions, and another $5.0 million payable 12 months after the acquisition date contingent on the Company satisfying its bank covenants and at the option of the payee payment will be in the form of cash or common stock of the Company valued at $2.00 per share. 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 for certain small public companies and other private companies. Asaccounting purposes was valued at $1.19 per share for $14.9 million. All 12.5 million shares were 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 effective datecommon stock issued to the Sellers are held in escrow to secure against claims for indemnification. The escrowed shares will 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 326805 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 March 22, 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 delayed until fiscal years beginning after December 15, 2022, for SEC filers that are eligible to be smaller reporting companies underrepaid within 120 days of closing. As of March 31, 2023, a total of $9.3 million is included within acquisition liabilities on the SEC’s definition,condensed 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 was appointed as wellPresident of the Converge entities.
On February 10, 2023, the Company and Mr. Toama entered into a letter agreement (the "Toama Letter Agreement") amending certain terms of Mr. Toama’s employment agreement, including by appointing him Chief Executive Officer of the Company. See the Company’s Current Report on Form 8-K filed with the SEC on February 16, 2023, the contents of which are incorporated by reference herein, and the Toama Letter Agreement filed as private companies and not-for-profit entities. Exhibit 10.2 hereto.
Purchase Price Allocation
The Company is currently evaluatingnegotiated the impacts of this pronouncement and does not expect it to have a material impactpurchase price based on the financial statements.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). The estimated useful lives are based on the Company’s experience and expectations as to the duration 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 related valuation methodology are as follows:
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| 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.
NOTE 3.4. 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
The 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 services 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 (iii) a predetermined commission percentage based on the total media spend executed by the 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 Solutions (“Pay Per Event”)
The 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 Solutions 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 they are 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 us for expenses relating to the out-of-pocket costs associated with the provision of Managed 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. In accordance with ASC 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. Accruals for costs incurred but not yet billed by third parties are recorded in accrued billable expenses on the condensed consolidated balance sheets.
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. For certain types of contracts with customers, the Company may recognize revenue in advance of the contractual right to invoicewhen the customer is issued the invoice, resulting in an amount recorded to contract assets. Once the Company has an unconditional right to consideration under these contracts, the contract assets are reclassifiedrecorded to accounts receivable.receivable on the condensed consolidated balance sheets.
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.
The following table provides information about current contract balances from contracts with customers:
| | | September 30, | | June 30, | | March 31, | | December 31, |
| | 2022 | | 2022 | | 2023 | | 2022 |
| Accounts receivable | Accounts receivable | $ | 37,282,536 | | | $ | 9,421,497 | | Accounts receivable | $ | 25,142,495 | | | $ | 10,801,299 | |
| Contract assets | 328,936 | | | 23,586,036 | | |
| | Deferred revenue | Deferred revenue | 9,132,043 | | | 11,321,159 | | Deferred revenue | $ | 9,159,035 | | | $ | 6,209,442 | |
Accounts receivable is presented net of allowance for doubtful accounts. The Company analyzes receivables aging, customer specific risks, and other factors to estimate its allowance. The Company’s allowance for doubtful accounts was $449,000$1.1 million and $552,000$1.0 million as of September 30, 2022March 31, 2023 and June 30,December 31, 2022, respectively.
The amount of revenue recognized during the three months ended September 30, 2022,March 31, 2023, relating to the deferred revenue recorded as of June 30,December 31, 2022, was $8.4$0.1 million.
NOTE 4.5. Property and Equipment
Property and equipment consist of the following as of September 30, 2022March 31, 2023, and June 30,December 31, 2022:
| | | | | | | | | | | |
| | September 30,
2022 | | June 30,
2022 |
| Computer equipment | $ | 803,026 | | | $ | 841,205 | |
| Website design | 6,000 | | | 6,000 | |
| Office machine & equipment | 109,000 | | | 91,000 | |
| Furniture & fixtures | 337,000 | | | 413,000 | |
| Leasehold improvements | 428,000 | | | 379,000 | |
| | | |
| Total Property and equipment | 1,683,026 | | | 1,730,205 | |
| Less: accumulated depreciation | (1,034,000) | | | (1,141,000) | |
| Property and equipment, net | $ | 649,026 | | | $ | 589,205 | |
| | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| Computer equipment | $ | 277,582 | | | $ | 820,000 | |
| Website design | — | | | 6,000 | |
| Office machine & equipment | — | | | 109,000 | |
| Furniture & fixtures | 18,611 | | | 338,000 | |
| Leasehold improvements | 150,425 | | | 436,000 | |
| | | |
| Total Property and equipment | 446,618 | | | 1,709,000 | |
| Less: accumulated depreciation | (139,858) | | | (1,090,000) | |
| Property and equipment, net | $ | 306,760 | | | $ | 619,000 | |
During the three months ended September 30,March 31, 2023 and 2022, and 2021, depreciation expense was $52$26 thousand and $30$33 thousand, respectively.
As of March 31, 2023, the Company wrote-off approximately $0.3 million of property and equipment related to the legacy Troika and Mission entities. The write-off of the property and equipment was recorded against the restructuring liabilities.
Note 5.NOTE 6. Amortizable Intangible Assets
The Company's intangible assets subject to amortization are as follows:
| | | | September 30,
2022 | | June 30,
2022 | | March 31,
2023 | | December 31,
2022 |
| Customer relationship | Customer relationship | $ | 58,559,755 | | | $ | 58,559,995 | | Customer relationship | $ | 53,600,000 | | | $ | 53,600,000 | |
| Non-core customer relationships | 760,000 | | | 760,010 | | |
| Non-compete agreements | 1,430,000 | | | 1,430,000 | | |
| | Technology | Technology | 10,400,000 | | | 10,920,000 | | Technology | 10,400,000 | | | 10,400,000 | |
| Tradename | Tradename | 7,510,000 | | | 7,570,000 | | Tradename | 7,100,000 | | | 7,100,000 | |
| Workforce acquired | 2,125,000 | | | 2,125,000 | | |
| | Total intangible assets | Total intangible assets | 80,784,755 | | | 81,365,005 | | Total intangible assets | 71,100,000 | | | 71,100,000 | |
| Less: accumulated impairment expense | — | | | (446,000) | | |
| | Less: accumulated amortization | Less: accumulated amortization | (12,657,000) | | | (10,613,000) | | Less: accumulated amortization | (8,376,389) | | | (6,339,000) | |
| Total Amortizable intangible assets, net | $ | 68,127,755 | | | $ | 70,306,005 | | |
| Total amortizable intangible assets, net | | Total amortizable intangible assets, net | $ | 62,723,611 | | | $ | 64,761,000 | |
Purchased intangible assets with finite useful lives are amortized over their respective estimated useful lives (using an accelerated 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 ten 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.
During the three months ended September 30,March 31, 2023 and 2022, and 2021, amortization expense was $2,178,250$2.0 million and $172,000,$0.4 million, respectively.
As of March 31, 2023, estimated amortization expense related to the Company's intangible assets is as follows:
| | | | | | | | |
| Fiscal year ending December 31: | | |
| Remaining 2023 | | $ | 6,112,500 | |
| 2024 | | 8,150,000 | |
| 2025 | | 8,150,000 | |
| 2026 | | 8,150,000 | |
| 2027 | | 6,532,222 | |
| Thereafter | | 25,628,889 | |
| Total | | $ | 62,723,611 | |
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. The Company completed its quarterly triggering events assessments for the three months ended March 31, 2023 and 2022, and determined the Company had no impairments during either period.
NOTE 7. Restructuring
Initiated in the fourth quarter of the fiscal year ended June 30, 2022, the Company underwent organizational changes to further streamline operations. This restructuring program includes workforce reductions, closure of excess facilities, and other charges. The restructuring program resulted in costs incurred primarily for (1) workforce reduction of 113 employees across certain business functions and operating units, (2) abandoned or excess facilities relating to lease terminations and non-cancelable lease costs and (3) other charges, which include but are not limited to legal fees, regulatory/compliance expenses, and contractual obligations. For the three months ended September 30,March 31, 2023 these costs are primarily recorded within selling, general and administrative costs, unless otherwise specified, within the condensed consolidated statements of operations
Certain legacy Troika subsidiaries were dissolved and consolidated within the remaining subsidiaries as part of the restructuring program. Company management performed an analysis of the certain Troika, Mission, and Redeeem companies to determine whether discontinued operation classification was appropriate. In the evaluation, the Company considered ASC 205 Presentation of Financial Statements and specifically ASC 205-20 Discontinued Operations. Under that guidance, a disposal shall be reported in discontinued operations if the disposal represents a strategic shift that will have a major impact on an entity’s operations and financial results. The Troika, Mission, and Redeeem subsidiaries did not have a major impact on the Company's operations, and management did not consider them to be separate segments or geographic areas in our reported results. The subsidiaries were consolidated, operated within the same geographical areas, and provided similar professional services as the Converge business, which are marketing and advertising consultative services. Therefore, the Company does not believe this represented a strategic shift in business operations but a strategic overall in cost reduction, operating efficiencies and establishing a stable baseline for future scalable growth. Further, the Company considered if the abandonment of these subsidiaries had a major effect on the entities’ operations and financial results. We noted that the guidance does not provide any “bright lines” when evaluating the quantitative factors that would represent a strategic shift. The Company does believe that these changes will deliver significant future cost savings to the consolidated entity in the form of selling, general and administrative costs as a result of the workforce reductions and excess facilities costs.
Based on the quantitative analysis of the six months ended December 31, 2022 results, the Company noted that the total revenues from these certain subsidiaries only constituted three point six percent (3.6%) of total consolidated revenues and 2021,one percent (1%) of the total consolidated assets. Based on this analysis the Company determined there was not a
significant impact on the Company’s operations and financial results. Therefore, discontinued operations reporting was not required.
For the three months ended March 31, 2023, our restructuring activities totaling approximately $0.7 million included employee severance and certain professional fees associated with restructuring activities and support.
The components of the restructuring charges are listed below.
| | | | | | | |
| Three months ended March 31, |
| 2023 | | |
| | | |
| Severance and termination costs | $ | 392,946 | | | |
| | | |
| Other exit costs | 299,258 | | | |
| Total restructuring charges | $ | 692,203 | | | |
There were no restructuring costs recorded during the three months ended March 31, 2022.
The following is a summary of the components of the restructuring reserve liability:
| | | | | |
| March 31, 2023 |
| Severance and termination costs | $ | 753,631 | |
| Other exit costs | 104,996 | |
| Total restructuring liabilities | $ | 858,627 | |
The change in the restructuring reserve liability for the three months ended March 31, 2023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Category | | Balance as of December 31, 2022 | | Charges | Payments | Adjustments | | Balance as of March 31, 2023 |
| Severance and termination costs | | $ | 496,599 | | | 327,000 | | (69,968) | | — | | | $ | 753,631 | |
| Other exit costs | | $ | 401,260 | | | — | | — | | (296,264) | | | $ | 104,996 | |
| Total | | $ | 897,859 | | | 327,000 | | (69,968) | | (296,264) | | | $ | 858,627 | |
As of December 31, 2022, the Company had no impairments.accrued restructuring liabilities of approximately $0.9 million, of which $0.5 million was related to severance and termination costs, and $0.4 million was related to other exit costs. During the three months ended March 31, 2023, the restructuring liability decreased by approximately $39 thousand, resulting in a balance of approximately $0.9 million as of March 31, 2023. The changes in the liability from the restructuring program include (1) approximately $0.3 million in severance costs incurred, (2) a cash payment of approximately $0.1 million for severance and termination, and (3) adjustments of approximately $0.3 million to write-off property and equipment. Approximately $0.5 million of restructuring expenses incurred during the quarter were expensed as incurred to selling, general, and administrative expenses and did not have a restructuring reserve. See Note 5 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information.
NOTE 8. Credit Facilities
Debt related to the Senior Secured Credit Facility, Convertible Note 6. DebtPayable, and Related Party Note Payable consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Effective Interest Rate | | March 31, 2023 | | December 31, 2022 |
| Senior Note due 2026 (less unamortized discount and issuance costs of $6.7 million and $7.2 million, respectively) | | 15.2 | % | | $ | 66,008,547 | | | $ | 66,385,055 | |
| Convertible Note | | | | 60,006 | | | 60,006 | |
| Related Party Note | | | | — | | | 30,000 | |
| Total debt | | | | 66,068,553 | | | 66,475,061 | |
| Less: current portion | | | | 1,641,334 | | | 1,641,217 | |
| Long-term debt, excluding current portion | | | | $ | 64,427,219 | | | $ | 64,833,844 | |
Senior Secured Credit Facility
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 Credit Facility provides for: (i) a Term Loan in the amount of $76,500,000;$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 1.0% commitment fee and an upfront fee of 2.0% ($1.5 million) of the Credit Facility paid at closing, plus an administrative agency fee of $250,000 per year; (v) a first priority perfected lien on all 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 customary restrictive covenants in the Credit Facility and leverage ratios, fixed charge coverage ratios, and maintaining liquidity of at least $6,000,000$6.0 million at all times.
As of September 30, 2022, the Company was in default on the Financing Agreement due to the Company’s failure to satisfy certain financial and non-financial covenants under the Financing Agreement. The Company currently is and has been addressing these items and is working in good faith with Blue Torch on an amendment to the loan. On October 14, 2022, Blue Torch and the Company entered into a Limited Waiver of all events of default that are continuing under the Financing Agreement dated March 21, 2022.
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 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, 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 held until the audited financial statements of Converge Direct LLC and affiliates for the years ended December 31, 2020 and 2019, are delivered to Blue Torch Finance LLC, which were delivered during fourth quarter of fiscal year 2022. As of March 31, 2023, Blue Torch Finance LLC has not authorized the release of the funds in escrow.
Although the Company believes that the Converge Sellers’ recourse is solely to the escrow account, it is possible that the Converge Sellers could make claims against the Company for the deferred amount. In the event that the Converge Sellers were to make and be successful in such claims, the Company believes that a court would likely order Blue Torch to release the escrowed funds to satisfy such claims
On October 14, 2022, Blue Torch and the Company entered into a Limited Waiver of events of default under the Financing Agreement that related to the Company’s failure to satisfy certain financial and non-financial covenants. The Limited Waiver was scheduled to expire on October 28, 2022, if not terminated earlier by Blue Torch (“Waiver Period”), but was subsequently extended by the First Amendment to Limited Waiver to Financing Agreement dated as of October 28, 2022, the Second Amendment to the Limited Waiver to Financing Agreement dated as of November 11, 2022, the Third Amendment to the Limited Waiver to Financing Agreement dated as of November 25, 2022, the Fourth Amendment to the Limited Waiver to Financing Agreement dated as of December 9, 2022, the Fifth Amendment to the Limited Waiver to Financing Agreement dated as of December 23, 2022, the Sixth Amendment to the Limited Waiver to Financing Agreement dated as of January 13, 2023, and the Seventh Amendment to the Limited Waiver to the Financing Agreement dated January 31, 2023.
On February 10, 2023, Blue Torch and the Company entered into an Amended and Restated Limited Waiver (the “A&R Limited Waiver”) of certain events of default (such events of default, the “Specified Events of Default”) under the Financing Agreement, which amended and restated the prior Limited Wavier, as amended. The A&R Limited Waiver provides that, among other things, during the A&R Waiver Period (defined below), the Company will comply with certain sale and refinancing milestones and refrain from engaging in any “Permitted Acquisition” under the Financing Agreement or making certain post-closing payments to the sellers of the Converge business under the MIPA.
The A&R Limited Waiver would have expired on the earliest of (x) the occurrence of an Event of Default under the Financing Agreement that is not a Specified Event of Default, (y) a failure by the Company to comply with certain sale and refinancing milestones set forth in a side letter agreed by the Company and the Lenders and (z) June 30, 2023, subject to potential extension of up to 60 days to obtain regulatory and/or shareholder approval in the event the Company is pursuing a sale transaction (the “A&R Waiver Period”, and the date such period expires, the “Outside Date”).
On April 14, 2023 and April 28, 2023, Blue Torch and the Company entered into letter agreements (the “Extension Letters”, collectively with the A&R Limited Waiver and associated side letter, the “Prior Waiver Documents”) that extended the Applicable Milestones described below.
The “Applicable Milestones” include (i) the date for which potential acquirers (collectively, “bidders” and each a “bidder”) would be required to submit binding bids to acquire the Company, (ii) the date by which the Company would be required to select a winning bidder, and (iii) the date by which the winning bidder and the Company would be required to enter into definitive documentation providing for an acquisition of the Company or a refinancing of its indebtedness with Blue Torch, in each case subject to the terms and conditions of the Extension Letters and the A&R Limited Waiver.
On May 8, 2023, the Company and Blue Torch entered into a first amendment to the A&R Limited Waiver (the “Amended A&R Limited Waiver”) and an amended and restated letter agreement that, in each case, supersede the Prior Waiver Documents, and pursuant to which the Company affirmed its commitment to work in good faith to consummate a sale of the Company’s business or assets and/or a refinancing transaction by the Outside Date, and Blue Torch agreed to remove the Applicable Milestones and to extend the End Date from June 30, 2023 to July 14, 2023, subject to a potential extension if a definitive written agreement is delivered on or prior to July 14, 2023 that provides for cash repayment in full of all obligations owed to Blue Torch or which is otherwise acceptable to Blue Torch. In addition, under the Amended A&R Limited Waiver, the Company agreed to pay Blue Torch an “exit fee” equal to 5% of the aggregate outstanding principal balance of the Company’s indebtedness with Blue Torch as of the date of the Amended A&R Limited Waiver, plus accrued interest, subject to reduction or waiver if such Blue Torch indebtedness is repaid in full in cash by the dates specified therein. The foregoing summary does not purport to be complete and is subject to, and qualified in its entirety by, the Amended A&R Limited Waiver attached as Exhibit 10.6 to this Quarterly Report on Form 10-Q, which is incorporated by reference herein.
In connection with the aforementioned note, the Company recorded debt discount and issuance costs totaling $9.2 million. As of September 30, 2022, the debt issuance costs was approximately $7.8 million, consisting of the current portion of approximately $2.3 million and the long-term portion of approximately $5.5 million. The discount and issuance costs will be amortized over the life of the note using the effective interest rate method. The company recognized approximately $0.6 million in amortization of debt discount forFor the three months ended September 30, 2022,March 31, 2023, amortization of deferred financing costs was approximately $0.6 million, and the Company made principal payments totaling approximately $1.0 million. For the three months ended March 31, 2022, the Company did not record amortization of deferred financing costs and made no principal payments.
At September 30, 2022,March 31, 2023, the principal payments required under the Term Loan Facility are as follows:
| | | | | |
Remainder of fiscal year ending June 30, 2023 | $ | 2,868,750 | |
Fiscal year ending June 30, 2024 | 3,825,000 | |
Fiscal year ending June 30, 2025 | 3,825,000 | |
Fiscal year ending June 30, 2026 | 64,068,750 | |
| |
Total | $ | 74,587,500 | |
| | | | | |
| |
| Fiscal year ending December 31: | |
| Remaining 2023 | $ | 2,868,750 | |
| 2024 | 3,825,000 | |
| 2025 | 3,825,000 | |
| 2026 | 62,156,250 | |
| |
| Total maturities | $ | 72,675,000 | |
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 initially 1,929,439 shares of Common Stock, subject to adjustment. During the six months ended December 31, 2022 the number of shares increased to 4,429,439. The exercise price per share of Common Stock under this Warrant shall be $.01$0.01 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”.
Using the Black-Scholes model,As ofMarch 31, 2023, the fair market value was determinedof long-term debt is considered to be $31.2approximate its stated value of $72.7 million and $30.2 million on September 30, 2022 and June 30, 2022, respectively, as a warrant liability and a $0.9 million loss on derivative liabilities as recorded in the three months ending September 30, 2022..
Convertible Note Payable
As of September 30, 2022 and June 30, 2022, there was a total of $60 thousand and $50 thousand, respectively, in convertible notes payable outstanding. The Company recorded $10 thousand and $1 thousand in interest expense relating to convertible note payables during the three months ended September 30, 2022 and 2021, respectively.
Note Payable
As of September 30, 2022 and June 30, 2022, the Company owed the founder and former CEO of Troika Design Group, Inc., Dan Pappalardo, approximately $60 thousand and $100 thousand, respectively. During the three months ending September 30, 2022 and 2021, the Company made payments of $40 thousand and $20 thousand in principal, respectively.
Note 7.NOTE 9. Leases
The Company has various operating leases for office space. Some leases include options to extend the lease term, generally at the Company's discretion. 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 uses its incremental borrowing rate as of the lease commencement date to determine the present value of future lease payments. Upon the adoption of ASC Topic 842, Leases, the Company used the incremental borrowing rate on July 1, 2019 for all operating leases that commenced prior to that date.
Lease costs were approximately $0.7$0.3 million and $0.3$0.5 million for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively.
In September 2022, the Company terminated the lease of one of their office facilities in Englewood Cliffs, NJ. As part of company-wide restructuring, the Company made the decision to cease using this space as of September, 2022, and has no foreseeable plans to occupy it in the future. As of September 30, 2022 the company has made a $100 thousand payment and accrued an additional $100 thousand, which was paid on October 28, 2022. Further, the company derecognized the associated right of use asset, and lease liability, and recorded a loss on the early termination of the lease, which is recognized on the Statement of Operations on the line restructuring charges.
The following table summarizes the weighted-average remaining lease term and discount rate for operating leases:
| | | | Undiscounted Cash Flows | | Undiscounted Cash Flows |
| Weighted-average discount rate for operating leases | 5.50% | |
| Weighted-average remaining operating lease term in years | 3.2 years | |
| Weighted average remaining lease term in years | | Weighted average remaining lease term in years | 5.80 years |
| Weighted average discount rate | | Weighted average discount rate | 5.50% |
| | As of September 30, 2022, the maturities of the Company's operating lease liabilities are as follows: | | |
| As of March 31, 2023, the maturities of the Company's operating lease liabilities are as follows: | | As of March 31, 2023, the maturities of the Company's operating lease liabilities are as follows: | |
| | | |
| Remainder of fiscal year ending June 30, 2023 | $ | 1,658,000 | |
| | | |
| Remainder of fiscal year ending December 31, 2023 | | Remainder of fiscal year ending December 31, 2023 | $ | 1,482,702 |
| 2024 | 2024 | 1,998,000 | 2024 | 1,954,575 |
| 2025 | 2025 | 1,706,000 | 2025 | 1,449,060 |
| 2026 | 2026 | 1,436,000 | 2026 | 1,453,734 |
| 2027 | 2027 | 1,378,000 | 2027 | 1,117,060 |
| Thereafter | Thereafter | 2,463,152 | | Thereafter | 2,354,471 | |
| Total undiscounted operating lease payments | Total undiscounted operating lease payments | 10,639,152 | Total undiscounted operating lease payments | 9,811,602 |
| Less: Imputed interest | Less: Imputed interest | (1,591,000) | Less: Imputed interest | (1,460,221) |
| Total operating lease liabilities | Total operating lease liabilities | 9,048,152 | Total operating lease liabilities | 8,351,381 |
| Less: current portion of operating lease liabilities | Less: current portion of operating lease liabilities | 1,440,080 | Less: current portion of operating lease liabilities | 1,561,697 |
| Non-current operating lease liabilities | Non-current operating lease liabilities | $ | 7,608,072 | Non-current operating lease liabilities | $ | 6,789,684 |
Note 8NOTE 10 – Commitments and Contingencies
Commitments
As discussedof March 31, 2023, commitments of the Company in our 2022 Annual Report, we have guaranteed certain obligations relating principallythe 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) | 1,482,702 | | | 3,403,635 | | | 2,570,794 | | | 2,354,471 | | | $ | 9,811,602 | |
Debt repayment (b) | 2,868,750 | | | 7,650,000 | | | 62,156,250 | | | — | | | $ | 72,675,000 | |
Restructuring liabilities (c) | $ | 858,627 | | | — | | | — | | | — | | | $ | 858,627 | |
Acquisition liabilities (d) | 9,346,504 | | | — | | | — | | | — | | | $ | 9,346,504 | |
| Total | $ | 14,556,583 | | | $ | 11,053,635 | | | $ | 64,727,044 | | | $ | 2,354,471 | | | $ | 92,691,733 | |
| | | | | | | | | |
(a) Operating lease obligations primarily represent future minimum rental payments on various long-term noncancellable leases for office space. Lease obligations related to excess facilities associated with the Company wide restructuring plan are included within the operating lease obligations line. |
(b) Debt repayments consists of principal repayments required under the Company's Credit Facility. |
'(c) Restructuring liabilities relate primarily to future severance payments and other exit costs |
| (d) Acquisition liabilities recorded on the balance sheet consist of the Company's obligations to the Converge Sellers arising from the Converge Acquisition. See Note 3 - Converge Direct Acquisition |
Contingencies
In the ordinary course of business, the Company is subject to operating leases,loss contingencies that cover a range of matters. An estimated loss from a loss contingency, such as a legal proceeding or claim, is accrued if it is probable that a liability has been incurred and lines of credit. As of September 30, 2022 and June 30, 2022, the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, the Company guarantees on lease obligations was approximately $10.6 millionevaluates, among other factors, the degree of probability and $13.9 million, respectively,the ability to reasonably estimate the amount of any such loss.
Partial Liquidated Damages
The Company guarantees relatingagreed to credit facility obligationspay to the Purchasers all liquidated damages owed through September 21, 2022 (including any pro-rated amounts), which totaled approximately $3.6 million, all of which has been paid. As of December 31, 2022, the Company had recorded $3.4 million related to the partial liquidated damages, which is presented within the line contingent liability on the condensed consolidated balance sheets.
The Company provided each holder of its Series E Preferred Stock the same opportunity to enter into settlement agreements on substantially identical terms. However, certain holders of our Series E Preferred Stock elected not to enter into settlement agreements with the Company (the “Non-Purchasers”), notwithstanding the effective termination of the Series E Purchase Documents (other than the Surviving Registration Rights, to which the Purchasers and the Non-Purchasers continue to be equally entitled and who were offered the same opportunity to be included as selling stockholders under the Resale Registration Statement). As of March 31, 2023, the Company recorded approximately $0.9 million related to the Purchasers who did not execute a Settlement Agreement within the contingent liability line on the condensed consolidated balance sheets. The maximum liquidated damages before interest was approximately $74.6 million and $75.5 million, respectively.
capped at $7.0 million. See Note 611 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for more information related to the partial liquidated damages.
401KLiability
In the calendar year 2022, the Company discovered that it had not made the safe harbor non-elective employer contributions to the Troika Design 401k plan in 2017 pursuant to its 3% formula under plan terms, and the Company corrected that contribution for the principal repayments required underaffected participants, with earnings, in 2022.
The Company also discovered that it did not make the Company's Credit Facility. See Note 73% safe harbor non elective employer contributions to the 401k plan for plan years 2018 through 2022. When the minimum lease payments requirederror was discovered in 2022, the Company attempted to be madecorrect the error by
performing the Company.applicable non-discrimination tests and by making qualified non-elective contributions (QNECs) to affected participant accounts. However, as the administration of the 401k plan did not conform to the plan terms with respect to the 3% employer contribution, additional correction is required. Although the Company is evaluating the appropriate corrective approach, the Company has accrued approximately $1.7 million related to the safe harbor 2018 – 2022 contributions, as of March 31, 2023.
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 upon our financial condition, results of operations or cash flows.
Note 9. Fair Value Measurements
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use when pricing the asset or liability. Unobservable inputs are inputs for which market data is not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.
The fair value hierarchy consists of the following three levels:
•Level I — Quoted prices for identical instruments in active markets.
•Level II — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level III — Instruments whose significant value drivers are unobservable.
The following table presents for each of these hierarchy levels, the Company’s liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Liabilities | | | | | | | |
| Warrant liability | $ | — | | | $ | — | | | $ | 31,157,612 | | | $ | 31,157,612 | |
The estimated fair value of the warrant liability at September 30, 2022 was determined using Level 3 inputs. Inherent in a Black-Scholes options pricing model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate, dividend yield. The Company estimates the volatility of its ordinary shares based on projected volatility of comparable public companies that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero.
The following table provides quantitative information regarding Level 3 fair value measurements as of September 30, 2022 and June 30, 2022:
| | | | | | | | | | | |
| As of September 30, 2022 | | As of June 30, 2022 |
| Exercise price | $0.37 | | $0.76 |
| Unit price | $0.55 | | $2.00 |
| Volatility | 70.00 | % | | 63.60 | % |
| Expected life | 4.5 years | | 5.0 years |
| Risk-free rate | 4.06 | % | | 2.42 | % |
| Dividend yield | — | % | | — | % |
The change in the fair value of the derivative warrant liabilities for the three months ended September 30, 2022 is summarized as follows:
| | | | | |
| |
Warrant liability at June 30, 2022 | $ | 30,215,221 | |
Change in fair value of warrant liabilities | 942,390 | |
Warrant liabilities at September 30, 2022 | $ | 31,157,611 | |
Investment in Nonconsolidated EntityMachinist Litigation
On March 22, 2022,February 7, 2023, Robert Machinist, the former Chief Executive Officer and Chairman of the Board of the Company, acquired 40%filed a Complaint against the Company in the Supreme Court of the equityState of Converge Marketing Services, LLC ("CMS")New York in a case styled Robert Machinist v. Troika Media Group, Inc., No. 650728/2023. Mr. Machinist alleges the Company breached a Separation Agreement between Mr. Machinist and the Company, dated May 19, 2022, by not paying certain severance and other benefits. The Complaint seeks damages with interest, a declaration that Mr. Machinist is entitled the payments sought by the Complaint (and an affiliateinjunction compelling the Company to pay them), and an award of Converge, which is accounted for underMr. Machinist’s costs incurred in connection with the equity methodlitigation. Although the Company believes that it has meritorious defenses, at this time, the Company cannot predict the outcome of accounting. The Company’s investment in CMS does not have a readily determinable fair value. As of September 30, 2022 and June 30, 2022, the Company's carrying amount of the investment was insignificant.this matter.
Note 10.NOTE 11. Equity
Stock Compensation
See Note 1415 to the consolidated financial statements included in the Company’s AnnualTransition Report on Form 10-K10-KT for the yearsix months ended June 30,December 31, 2022 for more information regarding (i) 2021 Employee, Director & Consultant Equity Incentive Plan (the “2021 Plan”), and (ii) Troika Media Group, Inc. 2015 Employee, Director and Consultant Equity Incentive Plan, as amended (the “2017 Equity Plan”). Share-based compensation expense, presented within selling, general and administrative expenses and direct operating expenses, was $516,800$0.5 million and $979,000$9.9 million for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively.
Non-Qualified Stock Options (“NQSOs”) Award Activity
-15-Under the Equity Incentive Plan the Company grants options to purchase shares of the Company's common stock to employees and affiliates of the Company. These options are time based and vest over the contractual term. The options granted are approved by the Company's Compensation Committee.
The following table summarizes activity relating to holders of the Company’s NQSOs for the three months ended September 30, 2022:March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of: |
| | Nonperformance based vesting NQSO's | | | Weighted average exercise price | | Weighted Average remaining contractual term (in years) | | Aggregate Intrinsic value |
| Balance: | | | | | | | | | |
| June 30, 2022 | | 3,657,833 | | | | $ | 1.04 | | | 0.6 | | $ | 1,824,232 | |
| September 30, 2022 | | 5,848,387 | | | | $ | 1.17 | | | 1.33 | | $ | — | |
| Exercisable at: | | | | | | | | | |
| June 30, 2022 | | 2,997,972 | | | | $ | 1.04 | | | 0.14 | | $ | 1,806,539 | |
| September 30, 2022 | | 3,261,681 | | | | $ | 1.07 | | | 0.29 | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of: |
| | Nonperformance based vesting NQSO's | | Weighted average exercise price | | Weighted Average remaining contractual term (in years) | | Aggregate Intrinsic value |
| Balance: | | | | | | | | |
| December 31, 2022 | | 4,971,223 | | | $ | 0.93 | | | 1.40 | | $ | — | |
| March 31, 2023 | | 4,971,223 | | | $ | 0.93 | | | 1.02 | | $ | — | |
| Exercisable at: | | | | | | | | |
| December 31, 2022 | | 3,175,320 | | | $ | 0.97 | | | 0.30 | | $ | — | |
| March 31, 2023 | | $ | 3,342,984 | | | $ | 0.96 | | | 0.31 | | $ | — | |
For the three months ended March 31, 2023 and 2022 the Company recognized stock compensation expense for options of $0.1 million and $0.3 million, respectively. As of March 31, 2023, total unrecognized share-based compensation related to
unvested restricted stock units was approximately $0.4 million, and the weighted-average remaining vesting period for these awards was approximately one year and one month.
Restricted Share Units Award Activity
Pursuant to the Company’s 2021 Plan the Company issues RSUs in consideration for employee and consultant services. RSUs issued under the Plan may be exercised in accordance with the applicable grant notice. The Company has also issued RSUs outside of the Plan in accordance with the Converge transaction to certain Converge Sellers, these RSUs may also be exercised in accordance with the applicable grant notice.
The following table summarizes activity relating to holders of the Company’s RSUs for the three months ended September 30, 2022:March 31, 2023:
| | | Number of: | | Number of: |
| | Nonperformance based vesting RSU's | | | | Weighted-Average
Fair Value Per Share
At Date of Grant | | Nonperformance based vesting RSU's | | | Weighted-Average
Fair Value Per Share
At Date of Grant |
| Outstanding award balance as of June 30, 2022 | | 1,100,000 | | | | | $ | 1.02 | | |
| Outstanding award balance at December 31, 2022 | | Outstanding award balance at December 31, 2022 | | 1,050,000 | | | | $ | 0.95 | |
| Granted | Granted | | 100,000 | | | | | 0.74 | Granted | | — | | | | — | |
| Exercised | Exercised | | — | | | | — | Exercised | | — | | | | — | |
| Outstanding award balance as of September 30, 2022 | | 1,200,000 | | | | | $ | 1.00 | | |
| Forfeited | | Forfeited | | — | | | | — | |
| Outstanding award balance at March 31, 2023 | | Outstanding award balance at March 31, 2023 | | 1,050,000 | | | | $ | 0.95 | |
| Vested | Vested | | 450,000 | | | | | 1.07 | Vested | | 750,000 | | | | $ | 0.97 | |
| Unvested | Unvested | | 750,000 | | | | | 1.17 | Unvested | | 300,000 | | | | $ | 0.91 | |
During the three months ended March 31, 2023 and 2022 the Company recognized stock compensation expense related to restricted stock units of $0.3 million and $8.1 million, respectively. Further, during the three months ended March 31, 2023, certain executives of Converge vested 1,166,667 restricted stock units that were issued outside of the 2021 Equity Incentive Plan. As of March 31, 2023, there was 2,333,333 unvested restricted stock units associated with the Converge executives who were issued restricted stock units outside of the 2021 Equity Incentive Plan. As of March 31, 2023, total unrecognized share-based compensation related to unvested restricted stock units was approximately $2.5 million, and the weighted-average remaining vesting period for the awards is approximately one year and four months.
Earnings per shareShare
Net income (loss) per common share is calculated in accordance with ASC Topic: 260 Earnings per Share. Basic earningsincome (loss) per share is computed by dividing net income (loss) by the weighted-averageweighted average number of shares of common sharesstock outstanding during the period. Diluted earningsThe computation of diluted net loss per share is computed by dividing net income bydoes not include dilutive common stock equivalents in the weighted-average number of common shares and dilutive potential commonweighted average shares outstanding duringas they would be anti-dilutive. In periods where the period.Company has a net loss, all dilutive securities are excluded.
The following is a reconciliationare dilutive common stock equivalents as of the number of shares usedMarch 31, 2023 and 2022, which were not included in the calculation of basic earningsloss per share, since the Company had a net loss from continuing operations and diluted earnings per shara net loss:
e for the three months ended September 30, 2022, and September 30, 2021:
| | | | | | | | | | | |
| March 31, 2023 | | March 31, 2022 |
| Convertible preferred stock | 2,382,000 | | | 42,048,000 | |
| Stock options | 3,585,000 | | | 3,080,016 | |
| Stock warrants | 4,080,000 | | | 58,538,006 | |
| Financing warrants | 115,000 | | | — | |
| Restricted stock units | 2,633,000 | | | — | |
| Total | 12,795,000 | | | 103,666,022 | |
| | | | | | | | | | | | | | |
| | For the three months ended September 30, |
| | 2022 | | 2021 |
| Net income (loss) | | $ | 1,273,783 | | | $ | (2,139,000) | |
| | | | |
| Weighted-average number of common shares outstanding at 9/30/2022 | | 65,289,116 | | | 41,422,781 | |
| Warrants to purchase common stock (Blue Torch) | | 3,475,611 | | | — | |
| Convertible preferred stock | | 134,252,459 | | | — | |
| Diluted weighted-average number of common shares outstanding at 9/30/2022 | | 203,017,186 | | | 41,422,781 | |
| | | | |
| Net earnings (loss) per share: | | | | |
| Basic | | $ | 0.02 | | | $ | (0.05) | |
| Diluted | | $ | 0.01 | | | $ | (0.05) | |
Series E Private Placement
On March 16, 2022, the Company entered into a Securities Purchase Agreement with certain institutional investors to issue and sell 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 $0.01 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 of the closing of the aforementioned Securities Purchase Agreement, using the Black-Scholes model, the Company recorded a fair value of approximately $28.4 million on the balance sheet within derivative liabilities - financing warrants. At June 30, 2022, the fair 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. At December 9, 2022, the date of the mark to market revaluation, the fair value of such warrants was $10.2 million and a resultant gain on change in fair value of derivative liabilities was recorded for approximately $20.0 million.
The Series E Preferred Stock and Warrants include certain reset and anti-dilution provisions that could reduce the conversion prices and exercise prices thereof down to $0.25 (the “Floor Price”) which was a significant discount to the then 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 conversion price to the Floor Price.
In addition, the Majority Stockholders approved the amendment to Article Three of the Articles of Incorporation to reflect an increase in the 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 $0.01 per share.
On September 26, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with each holder of our Series E Preferred Stock (each a “Series E Holder”), pursuant to which (i) each Series E Holder will exchangeexchanged its existing warrant to purchase our 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 private investment in public equity (“PIPE”) placement effected by the Company on March 16, 2022 (the “New PIPE Terms”), including 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”).
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 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:
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 E Preferred Stock issued pursuant to the Certificate o fof Designation are not repurchased by the Company on or prior to November 26, 2022, on such date, theexercise price per share of the New Warrants will revert to $2.00, subject to further adjustment as set forth in the New Warrant. In general, such further adjustments provide that, subject to acceleration by the holder thereof, after the Subsequent Adjustment Period, the exercise price is adjusted to the lesser of the exercise price then in effect or the greater of (i) the average of the ten (10) lowest daily VWAPs during the Subsequent Adjustment Period and (ii) $0.25.
b.Series E Conversion Price: The conversion price for the Series E Preferred Stock shall initially equal $0.40 per share, andso long as the arithmetic average of the daily volume-weighted average prices ("VWAPs") 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. The conversion price is subject to further adjustments upon conclusion of the Subsequent Adjustment Period, subject to acceleration by the holder thereof, to the lesser of the conversion price then in effect or the greater of (i) the average of the ten (10) lowest daily VWAPs during the Subsequent Adjustment Period and (ii) $0.25.
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 Series 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 Series E Holders at a purchase price of $100 per share, subject to the provisions of the Certificate of Designation.
e.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.
f.Liquidated Damages: The Company agreed to pay to the Purchasers all liquidated damages owed through September 21, 2022 (including any pro-rated amounts), which totaled approximately $3.6 million, all of which was paid during the three months ended September 30, 2022. The Company accrued an additional $301 thousand$0.2 million at September 30, 2022March 31, 2023 which is recorded in loss contingency on equity issuancemiscellaneous income (expense) on the statements of operations and comprehensive income (loss). Effective March 31, 2023, the Company entered into Settlement Agreements (the “Settlement Agreements”) with certain current and former holders of its Series E Convertible Preferred Stock (the “Purchasers”) under which, in exchange for Purchasers’ agreement to terminate and release any and all claims for such liquidated damages, the Company issued to each Purchaser a number of shares of common stock equal to the dollar amount of liquidated damages purportedly owed to each such Purchaser multiplied by four (4). See “Partial Liquidated Damages” below for additional detail on the terms of the Settlement Agreements.
Preferred shares
As of March 31, 2023, no shares of Series A Preferred Stock were issued and outstanding; no shares of Series B Preferred Stock were issued and outstanding; no shares of Series C Preferred Stock were issued and outstanding; no shares of Series D Preferred Stock were issued and outstanding; and 5,955 shares of Series E Preferred Stock were issued and outstanding. For the three months ended March 31, 2023, 304,838 shares of Series E Preferred Stock were converted into approximately 121.9 million shares of common stock, at a conversion price of $0.25. As of March 31, 2023 5,955 shares of Series E Preferred Stock were issued and outstanding.
Partial Liquidated Damages
The Company agreed to pay to the Purchasers all liquidated damages owed through September 21, 2022 (including any pro-rated amounts), which totaled approximately $3.6 million, all of which has been paid.
On March 31, 2023, the Company and certain current and former holders of its Series E Convertible Stock ("the Purchasers") entered into Settlement Agreements (the "Settlement Agreements"). The Company and Purchasers are party to (i) that certain Securities Purchase Agreement, dated as of March 16, 2022, pursuant to which the original purchasers of the Series E Preferred Stock (the “Original Purchasers”) acquired shares of Series E Preferred Stock and accompanying warrants (the “Warrants”), subject to the terms and conditions contained therein, and (ii) that certain Registration Rights Agreement, dated as of March 16, 2022 (the “Registration Rights Agreement”), pursuant to which the Company and the Original Purchasers agreed to certain requirements and conditions covering the resale by the Original Purchasers of the
shares of Contents
Company common stock (the “Common Stock”) into which the Series E Preferred Stock are convertible (the “Conversion Shares”) and the Warrants are exercisable (the “Warrant Shares”).
Under the terms of the Registration Rights Agreement, the Company, upon acquiring Converge Direct LLC in March 2022, was required to file a registration statement within ten (10) business days of such closing and for such registration statement to be declared effective by the U.S. Securities and Exchange Commission (the “SEC”) no later than forty five (45) business days thereafter (the “Registration Requirements”). The persons entitled to liquidated damages pursuant to the Registration Rights Agreement have alleged that the Company did not fulfill the Registration Requirements.
The Purchasers (i) are the registered or beneficial owners of more than 50.1% of the Registrable Securities under, and defined in, the Registration Rights Agreement, and (ii) constitute the purchasers of more than 50.1% of the Series E Preferred Stock originally purchased under the Securities Purchase Agreement. As such, in accordance with the terms of the Registration Rights Agreement and the Securities Purchase Agreement, as applicable, as of March 31, 2023 (the “Effective Date”), each such agreement and all rights and obligations thereunder are deemed terminated and of no further force and effect as of such date. In addition, effective as of the Effective Date, the Settlement Agreements contain a release of any and all claims against the Company and its subsidiaries that such Purchaser (or its affiliates) may have purported to have against the Company or its subsidiaries under such agreements; provided, however, that the Purchasers will maintain their respective “Piggy-Back Registration Rights” under Section 6(d) of the Registration Rights Agreement.
In exchange for the release by the Purchasers of any and all claims for liquidated damages under the Registration Rights Agreement, the Company agreed to deliver to each Purchaser a number of shares of common stock equal to the dollar amount of liquidated damages purportedly owed to each such Party multiplied by four (4). The Company has agreed to prepare and file with the SEC a resale registration statement covering such Common Stock (the “Resale Registration Statement”) which may be subject to certain other customary registration rights.
On May 12, 2023, the Company filed the Resale Registration Statement. As of the date of this filing, the Resale Registration Statement has not been declared effective by the SEC. See “Item 2 Unregistered Sale of Equity Securities and Use of Proceeds” for additional detail on the Resale Registration Statement and the Settlement Agreements, and “Item 1A Risk Factors” for additional detail on certain risks associated with the Settlement Agreements and the Resale Registration Statement filed in connection therewith.
The Company accrued an additional $0.2 million of interest related to the liquidated damages during the three months ended March 31, 2023. As of March 31, 2023, the Company had settled with the Purchasers and issued common shares. The Company recorded the $2.7 million share settlement as equity within its condensed consolidated balance sheets.
The number of Common Stock shares issued to the Purchasers related to the Settlement Agreements is approximately 10.7 million shares.
Note 11.NOTE 12. Related Party
Related Party TransactionsConverge Sellers
During thirdthe quarter fiscal yearended March 31, 2022, in connection with the Converge Acquisition, the Company incurred amounts due to the Converge Sellers totaling $9.2$9.3 million. The Converge Sellers include Sadiq "Sid" Toama, CEO of Troika Media Group, Tom Marianacci, Head of Acquisition and Performance,Demand Solutions of the Converge subsidiaries, and Mike Carrano, Head of Supply Solutions of the Converge subsidiaries, all are party to the amounts due. The Converge subsidiaries are wholly owned subsidiaries of Troika and Mike Carrano, Executive Director, Acquisition and Performance are all party to the amounts due.Media Group. As of September 30,March 31, 2023 and December 31, 2022, $9.3 million and June 30, 2022, $9.2$9.3 million, isrespectively, was outstanding and included on the balance sheet under acquisition liabilities.
Business Dispositions
Media Resource Group
Mr. Tom Marianacci, who is the Head of Demand Solutions of the Company and one of the Converge Sellers, currently holds more than 5% of the Company’s equity. Mr. Marianacci serves as an owner and executive director of Media Resource Group (“MRG”) company that entered into a service agreement with the Company, dated January 1st, 1997, under which MRG agreed to provide certain media services to the Company. The Company incurred approximately $0.4 million for services performed by MRG for the three months ended March 31, 2023, and incurred an amount not considered material to the Company's financial statements during the period between March 21, 2022 and March 31, 2022, the ten day post-acquisition period. Additionally, as of March 31, 2023, and December 31, 2022, the Company recorded
$0.2 million and $0.2 million, respectively, as the amount due to MRG within the accounts payable line on its condensed consolidated balance sheets.
Converge Marketing Services ("CMS")
The Company has an Exclusive Services Agreement with CMS, a 40% owned entity, to provide advertising and related services. For the three months ended March 31, 2023, the Company generated revenue of $12.7 million from the CMS agreement. For the three months ended March 31, 2022, the Company generated revenue of $0.2 million from CMS during the period between March 21, 2022 and March 31, 2022, the ten day post-acquisition period. As of March 31, 2023, and December 31, 2022, the Company recorded $4.2 million and $3.7 million, respectively, as the amount due from CMS within the accounts receivable line on its condensed consolidated balance sheets.
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”). Thomas Ochocki (a Troika Director), and Daniel Jankowski (a former Troika Director), are affiliated with Buyer through their ownership ofKingdom. UVL is a company owned by Union Investments Management Limited UVL’s parent. Subsequent to the sale date,which is shareholder and affiliated with Daniel Jankowski, a former director of the Company, and Mission UK may continue to operate with some shared services. As such, transactions betweenThomas Ochocki, a current Director of the Company and Mission UK will no longer be eliminated in consolidation and will be treated as related party transactions.
Company. Per the Purchase Agreement, Buyeragreement, UVH purchased from Seller,TMH, all of Seller’sthe right, title, and interest in and to the equity of Mission UK, 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 and a wholly-owned subsidiary of Seller ("Mission UK"). As consideration for $1,000 USD. The Company recognized a net gain on sale of approximately $0.1 million, which is recorded within net gain on sale of subsidiary onall the Consolidated Statements of Operations and Comprehensive Income (Loss). For further discussion see Note 13 Restructuring.
Note 12. Concentrations of Credit Risk
As of September 30, 2022 and June 30, 2022 three (3) customers made up 60.1% and 75.9%, respectively, of the net receivable balance. For the three months ended September 30, 2022 and 2021, five (5) customers accounted for 78.5% and 59.65%, of our net revenues, respectively. The Company believes there is minimal risk; however, it will continue to monitor.
Note 13. Restructuring
Restructuring actions were initiated in the fourth quarter of 2022, as disclosed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022. The Company has implemented a cost reduction program, as known as restructuring actions, to lower its operating expenses and to accelerate the transformation of the business in accordance with managements new strategic direction. The Company has incurred certain professional and business expenses as part of ongoing restructuring efforts to streamline business functions and operations, leases, debt and equity commitments.
For the three months ended September 30, 2022, our restructuring activities totaling approximately $0.9 million, included an early lease termination for our New Jersey location, employee severance and other related benefit costs associated with the sale of our Mission UK subsidiary (See Note 14 for further discussion), certain professional fees associated with restructuring activities and support. Such costs are recorded in restructuring and other related charges on the Consolidated Statements of Operations and Comprehensive Loss.
The Company will report restructuring costs when it incurs one-time or infrequent expenses in the process of reorganizing its operations to improve its long-term profitability and efficiency. Restructuring costs are reported as operating charges and aren’t expected to recur in the future. The Company expects to complete its restructuring activities during the three months ended December 31, 2022.
The components of the restructuring charges related to restructuring are listed below.
| | | | | | | |
| Three months ended September 30, |
| 2022 | | |
Loss on early termination of operating lease | $ | 202,000 | | | |
Severance and termination costs | 136,000 | | | |
Professional fees | 356,000 | | | |
MUK restructuring costs | 240,000 | | | |
| $ | 934,000 | | | |
There were no such amounts recorded for the three months ended September 30, 2021.
Note 14. Mission Media Ltd Equity Purchase Agreement
On August 1, 2022 Troika Mission Holdings (seller) entered into an equity purchase agreement with Union Ventures Limited (buyer). The buyer purchased from seller, all of the seller's right, title, and interest in and to sellers respective Mission UK shares, including any and all liabilities and assets on as is basis. The buyer shall pay the sellerShares, UVL paid TMH an aggregate purchase price of $1,000. At the closing the seller shall cause a nonrefundable infusion of no less than 500,000 GBP ($609,000 USD) to the buyer for working capital.
The Company sold 100% of its Mission UK subsidiary business to Union Ventures Limited a UK limited liability company formed under the laws of England and Wales (registered no. 14169163) for $1,000 and deconsolidated its investment . The net gain on the deconsolidation was approximately $0.1 million as reported gain on sale of subsidiary in the Statement of Operations in the company's financial statements.
USD.
Note 15.
NOTE 13. Income Taxes
On September 30,March 31, 2023, and December 31, 2022, and September 30, 2021, the accompanying condensed consolidated Balance Sheet includesbalance sheets include a tax liability of $0.2$0.1 million and $0.7$0.1 million, respectively.respectively, included on the condensed consolidated balance sheets within accrued expenses. The Company recorded income tax expense of $0.2 million$36 thousand and $33 thousand for the three months ended September 30, 2022. There was no expense recorded for the three months ended September 30, 2021.March 31, 2023 and 2022, respectively.
The effective income tax rates for the three-month periods ended September 30,March 31, 2023 and 2022, were (0.51)% and 2021, were 11.3% and 0%(0.23)%, respectively. In additionThe Company's tax rate differs from the statutory rate of 21.0% due to the effects of state income taxes, effects of permanent nondeductible loss on change in fair value of derivatives,expense, and nondeductible stock-based compensation increased the rate.valuation allowance. The Company's utilization of its NOL generated post December 31, 2017 is expected to be limited to 80% of taxable income.
See Note 1517 to the consolidated financial statements for the yeartransition period ended June 30,December 31, 2022, included in Item 8. Financial Statements and Supplementary Data of the AnnualCompany’s Transition Report on Form 10-K for more information on income taxes.10-KT.
Note 16.NOTE 14. Subsequent Events
S-3 Filing
The Company filed a shelf registration statement on Form S-3 (Registration No. 333-271189) (the “Registration Statement”) with the Securities and Exchange Commission (“SEC”) on April 7, 2023. The Company filed the Registration Statement to provide additional alternatives in connection with the process to optimize its balance sheet, address its legacy capital structure, and to explore strategic alternatives. As of the date of this filing, the Registration Statement has not been declared effective by the SEC. The Company may not sell securities pursuant to the Registration Statement until it is declared effective by the SEC, and there can be no assurance as to whether or when such event will occur.
Blue Torch Amended and Restated Limited Waiver under Financing Agreement
On OctoberApril 14, 2022,2023 and April 28, 2023, Blue Torch and the Company entered into aletter agreements (the “Extension Letters”, collectively with the A&R Limited Waiver of all events of defaultand associated side letter, the “Prior Waiver Documents”) that are continuing underextended the Financing Agreement dated March 21, 2022, byApplicable Milestones described below.
The “Applicable Milestones” include (i) the date for which potential acquirers (collectively, “bidders” and amongeach a “bidder”) would be required to submit binding bids to acquire the Company, (ii) the lenders from timedate by which the Company would be required to time party thereto (the "Lenders"),select a winning bidder, and (iii) the date by which the winning bidder and the Company would be required to enter into
definitive documentation providing for an acquisition of the Company or a refinancing of its indebtedness with Blue Torch, in each case subject to the terms and conditions of the Extension Letters and the A&R Limited Waiver.
On May 8, 2023, the Company and Blue Torch as collateral agent and administrative agent for the Lenders (the “Financing Agreement”). The Limited Waiver expired was set to expire on October 28, 2022. On October 28, 2022, Blue Torch and the Company entered into a furtherfirst amendment to the A&R Limited Waiver (the “Amended A&R Limited Waiver”) and an amended and restated letter agreement that, in each case, supersede the Prior Waiver Documents, and pursuant to which will expire on November 11, 2022, if not terminated earlier by Blue Torch (“Waiver Period”).
The Limited Waiver concerns events of default that relatethe Company affirmed its commitment to the Company’s failure to satisfy certain financial and non-financial covenants under the Financing Agreement. The Company is currently engagedwork in good faith negotiationsto consummate a sale of the Company’s business or assets and/or a refinancing transaction by the Outside Date, and Blue Torch agreed to remove the Applicable Milestones and to extend the End Date from June 30, 2023 to July 14, 2023, subject to a potential extension if a definitive written agreement is delivered on or prior to July 14, 2023 that provides for cash repayment in full of all obligations owed to Blue Torch or which is otherwise acceptable to Blue Torch. In addition, under the Amended A&R Limited Waiver, the Company agreed to pay Blue Torch an “exit fee” equal to up to 5% of the aggregate outstanding principal balance of the Company’s indebtedness with Blue Torch as agent for the Lenders, to amend the Financing Agreement and cure the events of default, although we cannot assure you that we will be successful in doing so. If the Company is unsuccessful in renegotiating the Financing
Agreement and curing the continuing events of default by the expiration of the Waiver Period, the Company intends to seek further Limited Waivers with Blue Torch, although we cannot assure you that Blue Torch would be willing to grant additional waivers.
Election to change the Company's fiscal year end
On October 20, 2022, the Board of Directors of the Company, approved a change in fiscal year end of the Company from June 30th to December 31st. The Board’s decision to change the fiscal year end is to align with that of its wholly owned subsidiary, Converge Direct, LLC, and its affiliates, which has a December 31st fiscal year end.
Following such change, the date of the Company’s next fiscal year endAmended A&R Limited Waiver, plus accrued interest, subject to reduction or waiver if such Blue Torch indebtedness is December 31, 2023. Consequently,repaid in full in cash by the Company will file a transitional annual reportdates specified therein. The foregoing summary does not purport to be complete and is subject to, and qualified in its entirety by, the Amended A&R Limited Waiver attached as Exhibit 10.6 to this Quarterly Report on Form 10-K10-Q, which is incorporated by reference herein. See “Finance Arrangements” for additional detail on the six-month period starting on July 1, 2022,Amended and ending December 31, 2022, to cover such transition period.Restated Limited Waiver and the related letters and amendments thereto.
Separation with Andrew BressmanResale Registration Statement
On October 26, 2022, Andrew Bressman (“Bressman”Statement”), former strategic advisor to the former CEO of TMG, Robert Machinist, entered into a separation agreement with the Company with respect to his employment agreement dated and entered intoSEC on March 16, 2022 (effective from January 1, 2022). As part of Bressman’s employment agreement, he was entitled to severance equal to thirty-six (36) months at his current salary and certain other benefits which were incorporated into a severance agreement on a substantially discounted basis.In lieu of the cash severance payments, Bressman agreed to take 800,000 RSUs in complete satisfaction of the severance obligations under his employment agreement and payments of $51,500 by way of payroll wages and $45,319 by way of accrued paid time off. Mr. Bressman also agreed that he would not trade any converted RSUs until April 21, 2023.The Company also agreed to pay for Mr. Bressman’s healthcare coverage until December 31,May 12, 2023. The Company and Bressman exchanged mutual releases and waiversfiled the Resale Registration Statement to register for resale the shares of claims against each other. The above separation terms are independentcommon stock issued to the Purchasers under the Settlement Agreements. As of the Separation Agreement betweendate of this filing, the CompanyResale Registration Statement has not been declared effective by the SEC. No securities may be sold under the Resale Registration Statement until it is declared effective by the SEC, and SAB Management, LLCthere can be no assurance as to whether or when such event will occur. See “Item 2 Unregistered Sale of Equity Securities and Bressman as entered intoUse of Proceeds” for additional detail on February 28, 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’s discussion and analysis should be read in conjunction with the Company’s historicalcondensed consolidated financial statements and the related notes thereto included in our audited financial statements for the year ended June 30, 2022, and the notes thereto (the “Form 10-K”).this Quarterly Report on Form 10-Q. The management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. See "Cautionary Statement Regarding Forward-Looking Statements" above. Please read Part II, Item 1A. “Risk Factors"You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of this report for a discussionthe date they are made. These forward-looking statements can be identified by the use of factorsterminology such as “anticipate,” “believe," "estimate," "expect," "intend," "project," "will," or the negative thereof or other variations thereon or comparable terminology. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our expectations.actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in this and our other Quarterly Reports on Form 10-Q, as well as the disclosures made in the Company's Transition Report on Form 10-KT for the transition period ended December 31, 2022 filed on March 7, 2023 ("2022 Form 10-KT") including without limitation, those discussed in Item 1A. "Risk Factors." in part I. of the 2022 Form 10-KT, and other filings we make with the Securities and Exchange Commission (the "SEC"). We do not undertake any obligation to update forward-looking statements, except as required by law. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
IntroductionFactors Affecting Results of Operations
MD&ASeasonality
The revenue in our three months ended March 31, 2023, is providedreflective of the seasonality in the business which is driven by our sector and revenue stream mix where we see lower customer acquisition investments (in relative terms) by our clients in Q1 and Q4. We are well positioned to take advantage of the work that has been done over the past year as we enter into our strongest revenue generating quarters which are the key drivers for our business.
Restructuring Programs
During the year ended June 30, 2022 the Company initiated an intensive what was expected to be a supplementyear long organizational restructuring program in order to fully optimize the consolidated operations of the post-Acquisition consolidated company. The restructuring program resulted in costs not expected to recur that were incurred primarily for (1) workforce reductions of over 100 employees across multiple business functions and should be read in conjunction with,subsidiaries, (2) abandoned or excess facilities relating to lease terminations and non-cancelable lease costs and (3) other charges, which include but are not limited to legal fees, regulatory/compliance expenses, and contractual obligations. See Note 7 to the unauditedcondensed consolidated financial statements and notes thereto included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q as well as our Annualfor discussions on restructuring charges.
During the three months ended March 31, 2023 the Company leveraged the previously completed restructuring effort to begin the latter phases of its organizational restructuring which included various efforts related to the recapitalization of its Balance Sheet. On February 22, 2023 the Company announced that it retained leading Investment Banking firm Jefferies LLC to assist in optimizing its capital structure and to explore strategic alternatives. The Company has recently announced an Amended and Restated Limited Waiver with Blue Torch Capital, the Company's senior secured lender, which will provide the Company with time to explore different avenues and opportunities to enhance shareholder value. See Note 8 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-K10-Q for discussions on the year ended June 30, 2022 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.Blue Torch financing.
ResultsAdditionally, on March 31, 2023, the Company and certain current and former holders of Operations. This section provides an analysisits Series E Convertible Stock ("the Purchasers") entered into Settlement Agreements (the "Settlement Agreements"). The Company and Purchasers are party to (i) that certain Securities Purchase Agreement, dated as of our unaudited consolidated resultsMarch 16, 2022, pursuant to which the original purchasers of operations for the three months ended September 30, 2022, as compared with the three months ended September 30, 2021.
LiquiditySeries E Preferred Stock (the “Original Purchasers”) acquired shares of Series E Preferred Stock and Capital Resources. This section provides a discussion of our financial condition and liquidity, as well as an analysis of our cash flows for the three months ended September 30, 2022, as compared with the three months ended September 30, 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 existed at September 30, 2022.
Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies. This section cross-references a discussion of accounting policies considered 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 notes to our consolidated and combined financial statement included in our Annual Report on Form 10-K for the year ended June 30, 2022, under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies — Critical Accounting Policies” and in the notesaccompanying warrants (the “Warrants”), subject to the consolidated financial statements included therein.
Business Overview
Descriptionterms and conditions contained therein, and (ii) that certain Registration Rights Agreement, dated as of our Business
Converge Acquisition
On March 22,16, 2022 (the “Closing Date”“Registration Rights Agreement”), pursuant to which the Company through its wholly owned subsidiary CD Acquisition Corp, executed a Membership Interest Purchase Agreement (“MIPA”) forand the acquisition of allOriginal Purchasers agreed to certain requirements and conditions covering the equity of Converge Direct, LLC and its affiliates (“Converge”) and 40% ofresale by 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 MIPA identifies the seller parties as the Converge Sellers.
RevenuePurchasers of the shares of Company common stock (the “Common Stock”) into which the Series E Preferred Stock are convertible (the “Conversion Shares”) and the Warrants are exercisable (the “Warrant Shares”).Under the terms of the Settlement Agreements, the parties thereto agreed to terminate the Registration Rights Agreement and the Securities Purchase Agreement and all rights respectively thereunder (other than the piggy-back rights set forth in Section 6(d) thereof) and to release any and all claims for liquidated damages under the Registration Rights Agreement, in exchange for the Company’s delivery to each such party of a number of shares of Company common Stock equal to the dollar amount of liquidated damages purportedly owed to each such Purchaser multiplied by four (4). The termination of the restrictions under the Registration Rights Agreement and the Securities Purchase Agreement will allow the Company to pursue additional opportunities. See “Item 1A Risk Factors” above for additional detail on certain risks associated with the Settlement Agreements and the Resale Registration Statement filed in connection therewith.
The Corporate restructuring program, the Blue Torch financing matters, and the Series E Equity matters have contributed to additional expenses for 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,such as costs for professional fees, legal 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,financial experts, special board committee members and other key services required undercosts that are not in the termsordinary course of a scope of work with a client. Our feesbusiness. These costs will continue 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 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, 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 optimization 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 withbe incurred until the Company at any point during theconcludes a suitable transaction process.
Internal-Brandto reduce its debt service 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 datastabilize its capital structure. These costs are primarily recorded 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, Meta, 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 the 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 consistcosts, unless otherwise specified, within the Condensed Consolidated Statements of administrative costs, including employee compensation and benefits, professional fees, as well as sales and marketing costs.Operations.
Income Taxes
See Note 15 to the consolidated financial statements for the year ended June 30, 2022, included in Item 8. Financial Statements and Supplementary Data of the Annual Report on Form 10-K for more information on income taxes.
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2022March 31, 2023 to the three months ended September 30, 2021.March 31, 2022.
The table below sets forth, for the periods presented, certain historical financial information. The three months ended March 31, 2022, includes ten (10) days of Converge activity from the acquisition date March 22, 2022 to March 31, 2022.
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
| | | |
| Revenues | $ | 119,809,958 | | | $ | 8,349,000 | |
| Cost of revenues | 101,055,664 | | | 4,837,000 | |
| Gross margin | 18,754,294 | | | 3,512,000 | |
| | | |
| Operating expenses: | | | |
| Selling, general and administrative expenses | 9,305,955 | | | 6,803,000 | |
| | | |
| Depreciation and amortization | 2,232,509 | | | 202,000 | |
| Restructuring and other related charges | 934,147 | | | — | |
| | | |
| Total operating expenses | 12,472,611 | | | 7,005,000 | |
| Operating income (loss) | 6,281,683 | | | (3,493,000) | |
| Other income (expense): | | | |
| | | |
| Interest expense | (2,835,588) | | | (13,000) | |
| Loss contingency on equity issuance | (301,350) | | | — | |
| Net gain on sale of subsidiary | 82,894 | | | — | |
| Foreign exchange loss | (944,416) | | | (16,000) | |
| (Loss) gain on change in fair value of derivative liabilities | (942,390) | | | 12,000 | |
| Miscellaneous income | 95,318 | | | 1,371,000 | |
| Total other (expense) income | (4,845,532) | | | 1,354,000 | |
| Income (loss) from operations before income taxes | 1,436,151 | | | (2,139,000) | |
| Income tax expense | (162,368) | | | — | |
| Net income (loss) | $ | 1,273,783 | | | $ | (2,139,000) | |
Revenues
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
| Managed Services | | $ | 47,476,973 | | | $ | — | |
| Performance Solutions | | 63,441,990 | | | — | |
| Other | | 8,890,995 | | | 8,349,000 | |
| Total | | $ | 119,809,958 | | | $ | 8,349,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 | | Change ($) | | Change (%) |
| | | | | | | |
| Revenue | $ | 59,038,338 | | | $ | 15,685,000 | | | $ | 43,353,338 | | | 276 | % |
| Cost of revenue | 50,283,718 | | | 11,738,000 | | | 38,545,718 | | | 328 | % |
| Gross profit | 8,754,620 | | | 3,947,000 | | | 4,807,620 | | | 122 | % |
| | | | | | | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative expenses | 11,163,317 | | | 17,183,000 | | | (6,019,683) | | | (35) | % |
| | | | | | | |
| Depreciation and amortization | 2,063,295 | | | 429,000 | | | 1,634,295 | | | 381 | % |
| | | | | | | |
| | | | | | | |
| Total operating expenses | 13,226,612 | | | 17,612,000 | | | (4,385,388) | | | (25) | % |
| Operating loss | (4,471,992) | | | (13,665,000) | | | 9,193,008 | | | (67) | % |
| Other income (expense): | | | | | | | |
| | | | | | | |
| Interest expense | (3,440,656) | | | (100,000) | | | (3,340,656) | | | 3341 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Miscellaneous income (expense) | 47,888 | | | (590,000) | | | 637,888 | | | (108) | % |
| Total other expense | (3,392,768) | | | (690,000) | | | (2,702,768) | | | 392 | % |
| Loss from operations before income taxes | (7,864,760) | | | (14,355,000) | | | 6,490,240 | | | (45) | % |
| Income tax expense | (35,970) | | | (33,000) | | | (2,970) | | | 9 | % |
| Net loss | $ | (7,900,730) | | | $ | (14,388,000) | | | $ | 6,487,270 | | | (45) | % |
Revenue
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| Managed Services | | $ | 35,263,518 | | | $ | 6,231,000 | |
| Performance Solutions | | 23,774,821 | | | 3,822,500 | |
| Other | | — | | | 5,631,500 | |
| Total | | $ | 59,038,339 | | | $ | 15,685,000 | |
Revenues for the three months ended September 30,March 31, 2023 and 2022, and 2021, were approximately $119.8$59.0 million and $8.3$15.7 million, respectively, an increase of approximately $111.5$43.4 million, or 1,335%276%. The increase was primarily attributable to significant increases in the Managed Services managed services and Performance Solutionsperformance solutions revenue streamsstreams. These increases were driven by the full quarter performance in the current year as a direct resultcompared to only ten (10) days in the prior year. The increase in the number of days was due to the timing of the Converge Acquisition. These revenues were driven by organic growth from existing clients, and substantial growth, most notably, in Performance Solutions revenues. The growthAcquisition on March 21, 2022 in the Performance Solutions streamprior year comparable period. This increase was ledslightly offset by the Internal-Brand product line, which is revenue generated from the fees we charge to our clients for consumer leads and sales generated through the Company’s owned and operated brands and intellectual property.
a decrease in other revenue.
The ConvergeCosts of revenue streams contributed approximately $110.9 million in revenue for
For the three months ended September 30, 2022, which is representative of 93.2% of the Company's total revenue
Costs of revenues
The costsMarch 31, 2023, cost of revenues exclusive of operating expenses, for the three months ended September 30, 2022 and 2021 were $101.1 million and $4.8 million, respectively, an increase of $96.2increased by $38.5 million, or 1,989%.328%, to $50.3 million, as compared to the prior period. The increase was primarily attributable to the additionalfull quarter activity from Converge, which was acquired during Q3 2022. Duringof the three months ended September 30, 2022, our cost of revenues were primarilymanaged services and performance solutions revenue streams driven by an increasethe timing of the Converge Acquisition in spending from existing clients and growth in Performance Solutions.the prior year comparable period.
Gross marginprofit
For the three months ended September 30, 2022,March 31, 2023, gross margin was approximately $18.8profit increased $4.8 million, or 122%, to $8.8 million, as compared to $3.5 million in the comparable prior year period. The increase is primarily due to the increase in revenues partially offset by the increase in cost of revenues related to the Converge Acquisition as discussed above. The $18.8 million gross margin as of September 30, 2022 was approximately 16% of revenues for the period.
Sales,
Selling, general, and administrative expenses
Sales,
For the three months ended March 31, 2023, selling, general, and administrative expenses for the three months ended September 30, 2022 and 2021 were approximately $9.3 million and $6.8 million respectively, an increase of $2.5decreased $6.0 million, or 37%. During35%, to $11.2 million, as compared to the three months ended September 30, 2022, the increaseprior period. The decrease in sales,selling, general, and administrative expenses was primarily driven by a decrease of $7.0 million in employee salaries and other employee-related costs (inclusive of stock-based compensation) and a decrease in travel and entertainment costs of approximately $0.1 million, partially offset by an increase in facilities costs of approximately $0.3 million, an increase in professional fees of approximately $0.2 million, an increase in restructuring and other related charges of approximately $0.2 million, an increase in $0.2 million related to various tax expenses, and an increase in board of directors fees of approximately $0.2 million.
The $7.0 million decrease in employees salaries and other employee-related costs was primarily driven by a decrease in employee stock-based compensation of $9.4 million in the current year period, partially offset by an increase in accrued bonuses of $1.0 million, the absence of a prior year adjustment of $0.9 million and an increase in employee salaries and benefits of $0.5 million.
The increase in facilities cost of approximately $0.3 million was primarily driven by the additional facilities acquired as part of the Converge Acquisition. This increase was offset by the removal of legacy facilities and leases as the Company continues its efforts to optimize the Company's balance sheet.
The increase in professional fees of approximately $0.2 million in the current year period was primarily related to the Company's Restructuring program, Blue Torch financing matters and Series E financing matters totaling approximately $2.4 million, partially offset by the absence of $2.6 million in acquisition costs incurred related to the Converge Acquisition which resultedduring the prior year comparable period. See Note 8 to the condensed consolidated financial statements included in increased overhead costs including salaries, payroll taxes, professional fees“Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions on the Blue Torch financing. Additionally, see Note 10 and rent expense.Note 11 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions on the Series E financing matters.
The increase in restructuring charges of approximately $0.2 million was primarily driven by severance payments and capital restructuring as part of the Company's efforts to address its legacy capital structure. See Note 7 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions on the restructuring program.
Depreciation and amortization
Depreciation and amortization expenses for
For the three months ended September 30, 2022,March 31, 2023, depreciation and amortization expense increased $1.6 million, or 381%, to approximately $2.2$2.1 million, from $0.2 million inas compared to the prior year quarter.period. The increase of $2.0 million was primarily attributable to amortization of intangible assets and fixed assets acquired in March 2022 as a part of the Converge Acquisition.
Restructuring and Other Related ChargesInterest expense
For the three months ended September 30, 2022, the Company recorded approximately $0.9March 31, 2023, interest expense increased $3.3 million, of restructuring charges relatedor 3341%, to employee severance and other employee related benefits, the disposal of Mission UK, and the professional costs incurred related$3.4 million, as compared to restructuring matters. There were no such amounts recorded in the prior year quarter.
Net gain on sale of subsidiary
For the three months ended September 30, 2022, there was a net gain on the sale of a subsidiary, Mission UK, of approximately $0.1 million. During the three months ended September 30, 2022, the gain on sale of subsidiary was driven by the difference between the Mission UK net book value, the purchase price received by the Company, and a working capital payment made by the Company to Mission UK. This gain was offset by the outstanding intercompany balances between Mission UK and the other consolidated TMG entities.
Interest expense
Interest expense of approximately $2.8 million for the three months ended September 30, 2022, was an increase of approximately $2.8 million from the prior year quarter.period. This increase is primarily related to the Company'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 128 – Credit Facilities to the condensed consolidated financial statements included in “Part I — Item 8.1. Financial Statements and Supplementary DataStatements” of the Annualthis Quarterly Report as of June 30, 2022, on Form 10-K10-Q for more information on the Company's Credit Facility.
Foreign exchange lossMiscellaneous income (loss)
For the three months ended September 30, 2022, there was a foreign exchange loss of approximately $0.9March 31, 2023, miscellaneous income increased $0.6 million, or 108%, to $47.9 thousand, as compared to a foreign exchange loss of $0.02 millionthe prior period. The increase in the comparable prior year period. During the three months ended September 30, 2022, the foreign exchange loss was primarily driven by the sale of a foreign subsidiary, Mission UK, which resulted in the foreign currency translation loss previously accounted for in accumulated other comprehensive income being reclassified to the Statement of Operations.
Loss on Change in Fair Value of Derivative Liabilities
For the three months ended September 30, 2022, the Company recognized a loss of approximately $0.9 million 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 during Q3 2022. There were no such amounts recorded for the three months ended September 30, 2021.
Miscellaneous income (loss)
For the three months ended September 30, 2022 and 2021, the Company recognized approximately $0.1 million of miscellaneous income and $1.4 million of miscellaneous income, respectively. The decrease during the three months ended September 30, 2022,March 31, 2023, was primarily related
to the absence of legal settlements totaling $0.9approximately $0.8 million and income from government grantsin business acquisition cost, offset by the absence of $0.3 million recorded in the prior year period.a gain on derivative liabilities, which accounted for approximately $0.2 million.
Adjusted Earnings Before Interest, Tax, Depreciation, and Amortization (“Adjusted EBITDA”)
The Company evaluates its performance based on several factors, of which the key financial measure is Adjusted Earnings Before Interest Taxes Depreciation & Amortization ("Adjusted EBITDA"). Adjusted EBITDA is defined as our net income (loss) before (i) interest expense, net (ii) income tax expense, (iii) depreciation, amortization, and impairments of property and equipment, goodwill and other intangible assets, (iv) stock-based compensation expense or benefit, (v) restructuring charges or credits, (vi) gains or losses on dispositions of businesses and associated settlements, and (vii) certain other non-recurring or non-cash items.
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 in 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 revenues and Adjusted EBITDA measures as its 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 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 table sets forth the reconciliation of Net Income/(Loss), a GAAP measure, to Adjusted EBITDA:
| | | | | | | | | | | |
| Three months ended September 30, |
| 2022 | | 2021 |
| Net income (loss) | $ | 1,273,783 | | | $ | (2,139,000) | |
| Interest expense | 2,835,588 | | | 13,000 | |
| Income tax expense | 162,368 | | | — | |
| Depreciation and amortization | 2,232,509 | | | 202,000 | |
| EBITDA | 6,504,248 | | | (1,924,000) | |
| | | |
| Net gain on sale of subsidiary | (82,894) | | | — | |
| Restructuring and other related charges | 934,147 | | | — | |
| Stock-based compensation expense | 516,800 | | | 979,000 | |
| Loss contingency on equity issuance | 301,350 | | | — | |
| Loss (gain) on derivative liability | 942,390 | | | (12,000) | |
| Foreign exchange loss | 944,416 | | | 16,000 | |
| Adjusted EBITDA | $ | 10,060,457 | | | $ | (941,000) | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Net loss | $ | (7,900,730) | | | $ | (14,388,000) | |
| Interest expense | 3,440,656 | | | 100,000 | |
| Income tax expense | 35,970 | | | — | |
| Depreciation and amortization | 2,063,295 | | | 429,000 | |
| EBITDA | (2,360,809) | | | (13,859,000) | |
| Stock-based compensation expense | 547,197 | | | 9,901,000 | |
Non-recurring expenses related to financing matters (2) | 2,282,451 | | | — | |
Restructuring and other related charges (1) | 692,203 | | | — | |
Non-recurring financing expenses (3) | 309,671 | | | — | |
| Related acquisition & related professional costs | — | | | 2,658,000 | |
| Bad debt expense - one time | — | | | 85,000 | |
| Legal settlement - one time | — | | | 59,000 | |
| Adjusted EBITDA | 1,470,713 | | | (1,156,000) | |
| | | | | | | | | | | | | | |
| 1) | Approximately $0.5 million of restructuring expenses incurred during the quarter were expensed as incurred to selling, general, and administrative expenses and did not have a restructuring reserve. |
| 2) | Costs primarily relate to Blue Torch financing matters. Costs are recorded in selling, general, and administration expenses. |
| 3) | Costs primarily relate to the Preferred Series E equity matters. The total includes $0.2 million of partial liquidated damages expense. |
Adjusted EBITDA for the three months ended September 30, 2022,March 31, 2023, increased by approximately $11.0$2.6 million, or 227%, to $10.1$1.5 million, as compared with the prior year period,period. The increase of $2.6 million is primarily due to (as discussed previously)improved EBITDA of $11.5 million offset by decreases in non-cash stock-based compensation expense of $9.4 million and business acquisition costs of $2.7 million in the increase in revenues due to the Converge Acquisition, combined with the offsetting ofprior year comparable period, partially offset by several non-recurring costs incurred as a resultduring the current period including $2.3 million of the ongoingnon-recurring Blue Torch financing related matters, $0.7 million of restructuring charges, and transformational efforts by management as well as non-cash charges$0.3 million of non-recurring Series E equity related costs incurred during the period. These items are
partially offset by the increases cost of sales and selling, general and administrative expenses (excluding stock-based compensation expense) all largely as a result of the Converge Acquisition.
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. The Company’s use of its available liquidity will be based upon the ongoing review of the funding needs of the business, its view of a favorable allocation of cash resources, and the timing of cash flow generation.
We believe we have sufficient liquidity, including approximately $32.7$24.9 million in cash and cash equivalents, as of September 30, 2022,March 31, 2023, and anticipated future operating cash flows, to fund our business operations, and service the credit facility (see “Financing Agreements” below) during the next twelve months and foreseeable future. See Note 12, Credit Facilities8 to the condensed consolidated financial statements included in Item 81 of the Annual Reportthis quarterly report on Form 10-K10-Q for a discussion of the Credit Facility.
Cash Flow Discussion
| | | | | | | | | | | |
| Three Months Ended |
| March 31, |
| 2023 | | 2022 |
| (unaudited) | | (unaudited) |
| Net cash (used in) provided by operating activities | $ | (2,513,888) | | | $ | 6,040,000 | |
| Net cash used in investing activities | $ | (5,497) | | | $ | (82,795,000) | |
| Net cash (used in) provided by financing activities | $ | (986,250) | | | $ | 113,511,000 | |
Operating Activities
Net cash used in operating activities for the three months ended March 31, 2023, decreased $8.6 million to $2.5 million. The decrease is largely attributable to fluctuations in working capital including amounts payable to vendors, decreased deferred and an increase in payments for professional services related to exploring strategic alternatives partially offset by a decrease increase net loss of $6.5 million. .
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2023, decreased by approximately 82.8 million to $5 thousand as compared with the prior period. The decrease in cash used in investing activities is primarily related to the cash paid for the Converge acquisition in the prior period.
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2023, was $1.0 million and net cash provided by financing activities was $113.5 million for the prior period. The change of $114.5 million in cash used in financing activities in the current period was primarily due to a decrease in cash received from preferred stock of $44.4 million, a decrease in cash received from bank loan of $69.7 million, which was mainly offset by approximately $1.0 million in principal payments made for our 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”), 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 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 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% of the Credit Facility paid at closing, plus an administrative agency fee of $250,000 per year; (v) a first priority perfected lien on all 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 customary restrictive covenants in the Credit Facility and leverage ratios, fixed charge coverage ratios, and maintaining liquidity of at 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 the Company, replacements reasonably suitable to Blue Torch shall be appointed within thirty (30) days.
The Company received an extension of the limited waiver due to noncompliance with certain covenants of the agreement. The amended limited waiver will expire on the earliest of the occurrence of an event of default under the financing agreement, a failure by the Company to comply with certain sale and refinancing milestones set forth in a side letter agreed by the Company and the Lenders and July 14, 2023, subject to potential extension if a definitive agreement that provides for repayment in full in cash of all indebtedness owing to Blue Torch or which is otherwise acceptable to Blue Torch. See “Subsequent Events” for additional detail on the Amendment to the A&R Limited Waiver.
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. See "Business Overview- Description of our Business- Converge Acquisition."
The Company has made principal repayments aggregating to $1.9approximately $3.8 million through September 30, 2022,March 31, 2023, under the Credit Agreement. The Term Loan Facility amortized quarterly in accordance with its terms. As of September 30, 2022,March 31, 2023, there was $74.6approximately $72.7 million outstanding under the Term Loan Facility.
As
In connection with the aforementioned 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 September 30,the note using the effective interest rate method. During the three months ended March 31, 2023, the Company recorded approximately $0.6 million in amortization expense and made principal payments totaling approximately $1.0 million. During the three months ended March 31, 2022, the Company was in default on the Financing Agreement duedid not recognize amortization expense related to the Company’s failure to satisfy certain financialnote payable and non-financial covenants under the Financing Agreement. The Company currently is and has been addressing these items and is working in good faith with Blue Torch on an amendment to the loan. did not make any principal payments.
On October 14, 2022, Blue Torch and the Company entered into a Limited Waiver of all events of default that are continuing under the Financing Agreement that related to the Company’s failure to satisfy certain financial and non-financial covenants. The Limited Waiver was scheduled to expire on October 28, 2022, if not terminated earlier by Blue Torch (“Waiver Period”), but was subsequently extended by the First Amendment to Limited Waiver to Financing Agreement dated as of October 28, 2022, the Second Amendment to the Limited Waiver to Financing Agreement dated as of November 11, 2022, the Third Amendment to the Limited Waiver to Financing Agreement dated as of November 25, 2022, the Fourth Amendment to the Limited Waiver to Financing Agreement dated as of December 9, 2022, the Fifth Amendment to the Limited Waiver to Financing Agreement dated as of December 23, 2022, the Sixth Amendment to the Limited Waiver to Financing Agreement dated as of January 13, 2023, and the Seventh Amendment to the Limited Waiver to the Financing Agreement dated January 31, 2023.
On February 10, 2023, Blue Torch and the Company entered into an Amended and Restated Limited Waiver (the “A&R Limited Waiver”) of certain events of default (such events of default, the “Specified Events of Default”) under the Financing Agreement, which amended and restated the prior Limited Wavier, as amended. The A&R Limited Waiver provides that, among other things, during the A&R Waiver Period (defined below), the Company will comply with certain
sale and refinancing milestones and refrain from engaging in any “Permitted Acquisition” under the Financing Agreement or making certain post-closing payments to the sellers of the Converge business under the MIPA.
The A&R Limited Waiver would have expired on the earliest of (x) the occurrence of an Event of Default under the Financing Agreement that is not a Specified Event of Default, (y) a failure by the Company to comply with certain sale and refinancing milestones set forth in a side letter agreed by the Company and the Lenders and (z) June 30, 2023, subject to potential extension of up to 60 days to obtain regulatory and/or shareholder approval in the event the Company is pursuing a sale transaction (the “A&R Waiver Period”, and the date such period expires, the “Outside Date”). See “Subsequent Events” for additional detail on the Amendment to the A&R Limited Waiver.
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 number was adjusted to 4,429,439 of common shares effective December 9, 2022. 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”.
See Note 67 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information on the Credit Agreement.
Series E Private Placement
On September 26, 2022, we entered into an Exchange Agreement (the “Exchange Agreement”) with each holder of our Series E Preferred Stock (each a “Series E Holder”), pursuant to which (i) each Series E Holder will exchange its existing warrant to purchase our 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 private investment in public equity (“PIPE”) placement effected by the Company on March 16, 2022 (the “New PIPE Terms”), including 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”).
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 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:
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 E Preferred Stock issued pursuant to the Certificate of Designation are not repurchased by the Company on or prior to November 26, 2022, on such date, theexercise price per share of the New Warrants will revert to $2.00, subject to further adjustment as set forth in the New Warrant.
b.Series E Conversion Price: The conversion price for the Series E Preferred Stock shall initially equal $0.40 per share, andso long as the arithmetic average of the daily volume-weighted average prices ("VWAPs") 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.
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 Series 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 Series E Holders at a purchase price of $100 per share, subject to the provisions of the Certificate of Designation.
e.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.
f.Liquidated Damages: The Company agreed to pay to the Purchasers all liquidated damages owed through September 21, 2022 (including any pro-rated amounts), which totaled approximately $3.6 million, all of which was paid during the three months ended September 30, 2022.
Contractual Obligations
Refer to Note 11As of March 31, 2023, we had non-cancelable operating lease commitments of $8.4 million, long-term debt with a $72.7 million principal balance, acquisition liabilities related to the consolidated financial statements included inConverge sellers of $9.3 million, liquidation damages related to the Company’s Annual Report on Form 10-K forPreferred Series-E holders of $0.9 million, and restructuring liabilities of $0.9 million. For the yearthree months ended June 30, 2022,March 31, 2023, the Company’s contractual obligations not reflected on the consolidated balance sheet.Company funded its operations using available cash.
In addition, see Notes 67. Credit Facilities and 78. Leases to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for the principal repayments required under the Company’s Term Loan Facility and maturities of the Company's operating lease liabilities, respectively.
Cash Flow Discussion
Operating Activities
Net cash provided by operating activities for the three months ended September 30, 2022, increased by approximately $7.7 million to $5.4 million as compared with the prior year period. The increase in cash provided was primarily the result of an increase in operating income of approximately $9.8 million, partially offset by a net change in working capital of approximately $1.4 million and foreign exchange loss of approximately $0.9 million.
Net cash used in operating activities for the three months ended September 30, 2021, increased by $1.1 million to $2.3 million as compared with the prior year period. The increase was the result of an decrease in working capital and payments for contract liabilities relating to government grants.
Investing Activities
Net cash used in investing activities for the three months ended September 30, 2022, increased by 0.1 million to $0.2 million as compared with the prior year period primarily related to payments for the purchase of fixed assets.
Net cash used in investing activities for the three months ended September 30, 2021, increased by $61 thousand to $68 thousand as compared with the prior year period primarily related to payments for the purchase of fixed assets.
Financing Activities
Net cash used in financing activities for the three months ended September 30, 2022, increased by approximately $4.6 million to $4.6 million as compared with the prior year period primarily due to payments made totaling of approximately $3.6 million related to partially liquidated damages in connection with our series E private placement , for more information on the series E private placement see above in addition to an approximately $1.0 million in principal payments made for our credit facility.
Net cash used financing activities for the three months ended September 30, 2021, were approximately $20 thousand. This was a decrease from cash provided by of approximately $715 thousand in the prior year as a result of the absence of approximately $565 thousand in proceeds from stimulus loan programs and approximately $150 thousand in proceeds from convertible note payables in the comparable prior year period.
Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 2 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements not yet adopted.
Critical Accounting Policy & Estimates
There have been no material changes to the Company’s critical accounting policies from those set forth in our AnnualTransition Report on Form 10-K10-K/T for the year ended June 30,December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Issuer is not required to provide the information called for in this item due to its status as a Smaller Reporting Company.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosures, controls and procedures were not effective.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting or in any other factors that could significantly affect these controls during the three months ended September 30, 2022,March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management has takencontinued to take steps to improve its controls and procedures, including but not limited to, consolidating its bank accounts into one institution, implementing a consolidated general ledger system, formalizing policies and procedures, and employing additional qualifiedenhancing month-end close processes and competent accounting staff which will improve segregation of duties and technical accounting knowledge.account reconciliations. Upon their implementation, these internal controls will dramatically improve in the near future our ability to prevent and detect mistakes, noncompliance and potential fraud.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company may become involved in legal proceedings or may be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors. To estimate whether a loss contingency should be accrued by a charge to income, we evaluate, among other factors, the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. We do not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated The Company is not a party to any material pending legal proceedings or a proceeding being contemplated by a governmental authority nor is any of the Company’s property the subject of any pending legal proceedings or a proceeding being contemplated by a governmental authority except as set forth in our AnnualTransition Report on Form 10-K10-K/T for the fiscal yeartransition period ended June 30,December 31, 2022, from which there have been no material changes.
Item 1A. Risk Factors.
Except asOur business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth below, therein our 2022 Form 10-KT, the occurrence of any one of which could have a material adverse effect on our actual results. There have been no material changes to the risk factors described in the sections captioned “RiskRisk Factors” previously disclosed in our Annual Report on2022 Form 10-K for the year ended June 30, 2022. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the sections “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2022, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report on Form 10-K for the year ended June 30, 2022 and in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition, and/or operating results.10-KT.
The exerciseCertain holders of our outstanding Convertible Series E Preferred stock and warrants will depress our stock price and dramatically dilute shareholders. Delay and failureStock may assert a claim that the Company is in breach of the Company to register up to 400,000,000 million common shares pursuant to the Convertible Series E Preferred will incur financial penalties.terms of certain agreements that have been terminated.
As previously disclosed, onOn March 22, 2022, the Company issued31, 2023, we entered into Settlement Agreements (the “Settlement Agreements”) with certain current and sold 500,000 sharesformer holders of our Series E Convertible Preferred Stock $0.01 par value, with a stated value of $100 per share or an aggregate of $50.0 million(the “Series E Preferred Stock”) (such holders, the “Purchasers”), pursuant to which, in exchange for the terms of a Securities Purchase Agreement, dated March 16, 2022 (the “Purchase Agreement”), byPurchasers agreeing to terminate any and among the Companyall rights 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 Purchase 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 ofobligations under the Series E Preferred StockPurchase Documents (defined below) (other than with respect to the “Piggy-Back Registration Rights” described below) and the exercise of the Warrants (collectively, the “Securities”) were not initially registeredrelease any and all claims for liquidated damages under the Securities Act of 1933, as amended. Pursuant to athat certain Registration Rights Agreement, with the Purchasers dated as of March 16, 2022 (the “Registration Rights Agreement”), the Company committedagreed to file withissue to each Purchaser a number of shares of common stock equal to the Securities and Exchange Commissiondollar amount of liquidated damages purportedly owed to each such Purchaser multiplied by four (4) (the “SEC”“Settlement Shares”) 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”.
WhileAs of March 31, 2023, the Company has filedPurchasers (i) were the registered or beneficial owners of more than 50.1% of the Registrable Securities under, and as defined in, the Registration Rights Agreement, and (ii) constituted the purchasers of more than 50.1% of the Series E Preferred Stock originally purchased under the Securities Purchase Agreement dated March 16, 2022 (the “Securities Purchase Agreement”, together with the SEC a Registration Statement on Form S-1 (the “Form S-1”) concerningRights Agreement, the Securities to satisfy“Series E Purchase Documents”). Therefore, in accordance with the requirementsterms of Series E Purchase Documents, as of March 31, 2023, each Series E Purchase Document and all rights and obligations thereunder were terminated and of no further force and effect. Notwithstanding the foregoing, under the terms of the Settlement Agreements, the “Piggy-Back Registration Rights” under Section 6(d) of the Registration Rights Agreement continue in effect (such piggy-back rights, the Form S-1 has not been declared effective“Surviving Registration Rights”). The Settlement Agreements provide that the Surviving Registration Rights may be satisfied by the SEC asCompany
filing a separate registration statement with respect to the resale of September 28, 2022, and within the period requiredSettlement Shares. On May 12, 2023, in satisfaction of its obligations under the terms of the Registration Rights Agreement. As a result,Settlement Agreements, the Company is requiredfiled a registration statement on Form S-3 intended to register for resale the Settlement Shares (the “Resale Registration Statement”).No securities may be sold under the terms of theResale 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 PurchasersStatement 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-1it is declared effective by the SEC, resulting in upand there can be no assurance as 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:
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 E Preferred Stock are not repurchased by the Company onwhether or prior to November 26, 2022, onwhen such date, the exercise price per share of the New Warrantsevent will adjust to $2.00, subject to further adjustment as set forth in the New Warrant.occur.
b.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 was downwardly adjusted by $0.01 on each of October 24, 2022, October 31, 2022, November 7, 2022 and November 14, 2022, and shall be further downwardly adjusted by $0.01 on November 21, 2022.
c.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.
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 Purchasers at a purchase price of $100 per share, subject to the provisions of the Certificate of Designation (the “Series E Buyout”).
e.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.
f.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 termsprovided each holder of its Financing Agreement relatingSeries E Preferred Stock the same opportunity to enter into settlement agreements on substantially identical terms. However, certain holders of our Series E Preferred Stock elected not to enter into settlement agreements with the Credit Facility.
The Company’s shareholders are subject to dilution of their common stock givenCompany (the “Non-Purchasers”), notwithstanding the prospecteffective termination of the Series E PreferredPurchase Documents (other than the Surviving Registration Rights, to which the Purchasers and the Non-Purchasers continue to be equally entitled and who were offered the same opportunity to be included as selling stockholders under the Resale Registration Statement). Such Non-Purchasers may allege that the Series E Purchase Documents remain in full force and effect with respect to such parties and that, as a result, the possibilityNon-Purchasers are expected to assert claims that the Company is in breach of the registration of 400,000,000 shares. The Company’s shares outstanding as of November 11, 2022, was 67,831,116 and shareholders face the risk of substantial dilution. The costs of and occasionedterms thereof, including by the delayfailing to include in the effectivenessRegistration Statement or the Resale Registration Statement the shares of common stock into which such Non-Purchasers’ Series E Preferred Stock converted or are convertible. The Non-Purchasers could seek to pursue payment of their respective portion of the registration statement will impactunpaid liquidated damages purportedly owed to them and/or other remedies which could have a material adverse effect on the Company’sCompany and its financial performance and creates substantial financial risk.
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 default.
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:condition.
•The foregoing summaries of the Settlement Agreements, the Securities Purchase Agreement and the Registration Rights Agreement do not purport to be complete and are qualified in their entirety by reference to (i) in the case of the Settlement Agreements, the Form of Settlement Agreement filed as Exhibit 10.4 hereto and (ii) in respect of the Registration Rights Agreement and the Securities Purchase Agreement, as applicable, Exhibits Incur indebtedness;
•4.2Grant liens on its assets;• and Make certain investments;
•4.3Incur certain expenses and limits;•Engage in mergers or acquisitions;
•Dispose of assets;
•Enter certain transactions; and
•Make certain restricted payments.
The Financing Agreement contains certain affirmative covenants and customary eventsthe Company’s Form 8-K March 18, 2022, each of default provisions, including, subject to thresholds and grace periods, among others, payment default, covenant default, and judgment default. Each of these limitations are subject to various conditions.
In addition, the Financing 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 pursue 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 take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
On September 29, 2022, we failed to meet certain financial and non-financial covenants under the Financing Agreement and received a limited waiver of default from our lender in order to avoid an event of default. If we fail to meet any covenant in the future, we may not be able to obtain a waiver from our lender, which has total discretion in deciding whether to grant a waiver, and we may incur an event of default.
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 that are acceptable to us 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.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
On September 26, 2022, weEffective March 31, 2023, the “Company entered into an Exchange AgreementSettlement Agreements (the “Exchange Agreement”“Settlement Agreements”) with each holdercertain current and former holders of ourits Series E Convertible Preferred Stock (each a(the “Purchasers”) (the “Series E Holder”Preferred Stock”), pursuant to which (i) each Series E Holder will exchange its existing warrant to purchase our 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. Under the terms of the private placement effectedSettlement Agreements, the parties thereto agreed to terminate the Registration Rights Agreement and the Securities Purchase Agreement and all rights respectively thereunder (other than the piggy-back rights set forth in Section 6(d) thereof) and to release any and all claims for liquidated damages under the Registration Rights Agreement, in exchange for the Company’s delivery to each such party of a number of shares of Company common Stock equal to the dollar amount of liquidated damages purportedly owed to each such Purchaser multiplied by four (4). The foregoing summary does not purport to be complete and is subject to, and qualified in its entirety by, the CompanyForm of Settlement Agreement and Release of Claims, which is incorporated herein by reference to Exhibit 10.4 hereto. See Item 1A above for additional detail on March 16, 2022 (the “New PIPE Terms”), including an amendmentcertain risks associated with the Settlement Agreements and restatement of the terms of our Series E Preferred Stock.
At the closing of the exchange agreement, we issued an aggregate of 33,333,333 New Warrants to the Series E Holders. The issuance of New Warrants was exempt from registration under the Securities Act pursuant to Section 3(a)(9) thereof.Resale Registration Statement filed in connection therewith.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosure
Not Applicable.
Item 5. Other Information
Board Size Increase and Director Appointments
On November 8, 2022, our board of directors (the “Board”), based on the recommendation of our Nominating and Governance Committee, approved increasing the size of the Board from six (6) to eight (8) directors and appointing each of Jeffrey Stein and Grant Lyon to the Board to fill the vacancies created thereby.
a.Mr. Stein is Founder and Managing Partner of Stein Advisors LLC, a financial advisory firm that provides consulting services to public and private companies and institutional investors. Previously, Mr. Stein was a Co-Founder and Principal of Durham Asset Management LLC, a global event driven distressed debt and special situations equity asset management firm. From January 2003 through December 2009, Mr. Stein served as Co-Director of Research at Durham responsible for the identification, evaluation, and management of investments for the various Durham portfolios. Mr. Stein was a member of the Executive and Investment Committees at Durham responsible for oversight of the management company and investment funds, development and execution of the investment strategy, portfolio composition and risk management. Launched in 2003 with $50.0 million in assetsNot Applicable.
under management Durham successfully grew to $1.5 billion in total assets under management across its core hedge fund and collateralized loan obligation strategies. Mr. Stein is 53 years old.
b.Mr. Lyon has over thirty (30) years of experience in corporate restructuring, expert testimony and corporate governance. Mr. Lyon has served as Co-founder and managing partner of Arete Capital Partners, LLC, a special situation advisory firm, since July 2020. He previously served as founder and managing director of Atera Capital, LLC, a Fiduciary and Financial Advisory Firm, from June 2017 to June 2020. Mr. Lyon also served as managing director of KRyS Global USA, a restructuring advisory and distressed investment consulting firm, from 2014 to June, 2017. Mr. Lyon has served as the financial advisor to the Government of the Commonwealth of the Bahamas. Mr. Lyon has served numerous times as a Chapter 11 Trustee, state-court receiver, chief executive officer, chief financial officer and chief restructuring officer. Mr. Lyon has testified many times in numerous jurisdictions, including bankruptcy court, federal district court and state court. Mr. Lyon has a Masters of Business Administration degree and a Bachelor of Science degree in Accounting from Brigham Young University. Mr. Lyon is 59 years old.
Messrs. Stein and Lyon will each stand for election to the Board at the Company’s upcoming annual meeting of stockholders. The Board has determined that Messrs. Stein and Lyon are independent under applicable Nasdaq rules. Messrs. Stein and Lyon will receive $40,000 per month (pro-rated for November) for their service on the Board and the Special Committee (defined below), and a $5,000 per diem for testimony or similar activity in connection with litigation. The Company anticipates entering into customary indemnification agreements with Messrs. Stein and Lyon in connection with their appointments to the Board and Special Committee.
There is currently no arrangement or understanding between the Company or any other person and either of Messrs. Stein or Lyon pursuant to which either of Messrs. Stein or Lyon was appointed to the Board, and the Company is unaware of any transaction involving Messrs. Stein or Lyon that would be reportable under Item 404(a) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended.
Special Committee
On November 8, 2022, the Board approved establishing a special committee of directors (the “Special Committee”) authorized to, among other things, oversee negotiations with the lender under our credit facility and the holders of our Series E Preferred Stock. The Special Committee will be comprised of Randall Miles, Jeffrey Stein and Grant Lyon, each of whom has been determined to be disinterested and independent from any conflicted directors, significant stockholders and/or management. The Company does not intend to comment on or disclose further developments regarding the Special Committee’s work unless and until it deems further disclosure is appropriate or required.
Amendment No. 2 to Limited Waiver
On November 11, 2022, Blue Torch Finance LLC (“Blue Torch”) and the Company entered into a Second Amendment to the Limited Waiver to Financing Agreement (the “Limited Waiver”) extending the waiver of all events of default that are continuing under the Financing Agreement dated March 21, 2022, by and among the Company, the lenders from time to time party thereto (the “Lenders”), and Blue Torch as collateral agent and administrative agent for the Lenders (the “Financing Agreement”). The Limited Waiver will expire on November 25, 2022, if not terminated earlier by Blue Torch (the “Waiver Period”).
The Limited Waiver concerns events of default that relate to the Company’s failure to satisfy certain financial and non-financial covenants under the Financing Agreement. The Company is currently engaged in good faith negotiations with Blue Torch, as agent for the Lenders, to amend the Financing Agreement and cure the events of default, although we cannot assure you that we will be successful in doing so. If the Company is unsuccessful in renegotiating the Financing Agreement and curing the continuing events of default by the expiration of the Waiver Period, the Company intends to seek further Limited Waivers with Blue Torch, although we cannot assure you that Blue Torch would be willing to grant additional waivers. For further information on the terms of the Financing Agreement please refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed with the SEC on September 28, 2022.
Item 6. Exhibits
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| 101.INS* | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
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| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. |
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| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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| 101.LAB* | | Inline XBRL Taxonomy Extension Labels Linkbase Document. |
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| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
*Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Troika Media Group, Inc. |
| (Registrant) |
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| | /s/ Erica Naidrich |
| | (Signature) |
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Date: November 14, 2022May 15, 2023 | Name: | Erica Naidrich |
| Title: | Chief Financial Officer |
| | (Principal Financial Officer) |