TROIKA MEDIA GROUP, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are not statements of historical fact are forward-looking statements. Words such as "expects," "anticipates," "believes," "estimates," "may," "will," "should," "could," "potential," "continue," "intends," "plans," and similar words and terms used in the discussion of future operating and financial performance and plans identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results, or events and involve risks and uncertainties, and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to: those discussed in Part I, Item 1A of this Form 10-K/T under the heading "Risk Factors."
Introduction
This MD&A is provided as a supplement to, and should be read in conjunction with, the audited consolidated financial statements and footnotes thereto included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10-K/T to help provide an understanding of our financial condition, changes in financial condition, results of operations, and cash flows.
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.
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Results of Operations. This section provides an analysis of our results of
operations for the six months ended
Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, as well as an analysis of our cash flows for the six months endedDecember 31, 2022 and 2021, and for fiscal years endedJune 30, 2022 and 2021. The discussion of our financial condition and liquidity includes summaries of our primary sources of liquidity, our contractual obligations, and off balance sheet arrangements that may have existed atDecember 31, 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 statements included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10-K/T. Change in fiscal year As previously mentioned, we have changed our fiscal year end toDecember 31 fromJune 30 , effectiveJanuary 1, 2023 . This transition report is for the six-month transition period ofJuly 1, 2022 throughDecember 31, 2022 . References in this report to "fiscal year" refer to years endingJune 30 . References to this report to "transition period" refer to the six month period endingDecember 31, 2022 . Business Overview Description of our Business Converge Acquisition OnMarch 22, 2022 (the "Closing Date"), the Company through its wholly owned subsidiaryCD Acquisition Corp , consummated the transactions contemplated by a Membership Interest Purchase Agreement dated as ofNovember 22, 2021 (as amended, the "MIPA") for the acquisition of all the equity ofConverge Direct, LLC and its affiliates ("Converge") and 40% of the equity ofConverge Marketing Services, LLC , an affiliated entity, for a notional aggregate purchase price of$125.0 million valued for accounting purposes at approximately$114.9 million . The MIPA identifies the seller parties as the Converge Sellers. The cash portion of the purchase price consisted of$65.9 million paid on the date of the acquisition,$29.1 million held in escrow (the "Converge Holdback") payable upon satisfaction of certain conditions, and another$5.0 million payable twelve 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 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 accounting 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, an aggregate of$2.5 million (10%) or 1,250,000 shares of the common stock issued to the Converge 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. On the Closing Date, the Company entered into an Escrow Agreement with Blue Torch, a representative of theConverge Sellers and Alter Domus (US) LLC acting as Escrow Agent. The Escrow Agreement provided for the escrow of the Converge Holdback totaling$29.1 million of the$76.5 million proceeds, under the Credit Facility to be released to the Converge Sellers upon delivery to Blue Torch of the audited financial statements ofConverge Direct LLC and affiliates for the years endedDecember 31, 2020 and 2019. Delivery of such financial statements was completed during the Company's quarter endedJune 30, 2022 ; however, Blue Torch has not consented to the release of the escrowed funds, which is required under the terms of the Escrow Agreement for the release of the Converge Holdback. Revenue
The Company has two material revenue streams:
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Managed Services
The Company's Managed Services are typically orientated around the management of a customer's marketing, data, and/or creative program. The Company's deliverables relate to the planning, designing, and activating of a solution program or set of work products. The Company executes this revenue stream by leveraging internal and external creative, technical or media-based resources, third party AdTech solutions, proprietary business intelligence systems, data delivery systems, and other key services required under the terms of a scope of work with a client. Our fees to our clients are billed in a variety of ways, which can consist of a percentage of a customer's total budget, media spend, or retainer. Performance Solutions The Company's Performance Services are typically orientated around the delivery of a predetermined event or outcome to a client. Typically, the revenue associated with the event (as agreed upon in a scope of work) is based on a click, lead, call, appointment, qualified event, case, sale, or other defined business metric. The Company engages in a myriad of consumer engagement tactics, ecosystems, and methods to generate and collect a consumer's interest in a particular service or good. Our fees associated with these clients are billed based on the occurrence of a click, lead, call, appointment, qualified event, case, sale, or other defined business metric.
Revenue Categories
A key focus of our revenue architecture and growth is how we generate from two Product Lines across all of our revenue streams. Our approach to growth has been to expand our Internal Brand and Data capabilities, which allow us to provide broader consumer outreach for all our clients and optimize of the cost of the customer engagement expense. Our sectors are curated to have consumer linkages that promote our ability to introduce consumers within our engagement ecosystems to our client programs for secondary benefit to us and our clients using the first-party data that we generate.
Client-Brand
Under the Client Brand product line, revenues are earned from the fees we charge to our customers when we advertise directly for them. In servicing our clients under this reportable segment, the consumer interacts directly with our client and does not interface with the Company at any point during the transaction process.
Internal-Brand and Data
Under the Internal-Brand product line, we earn revenues from the fees we charge to our customers when we engage with consumers under our internally owned and operated brand names. The end consumer interfaces directly with our brand and may be redirected to our customer based on information obtained during the transaction process or whose details may be passed on to a client for future engagement with a particular consumer. We generate rich first party data within this product line that can be monetized across a mix of customer acquisition campaigns and incremental revenue streams. Our innovative internal brands are capable of being utilized for an array of customer awareness and acquisition programs. Costs of Revenue Cost of revenues consists of the payments made to third parties, such as media costs and administrative fees (Invoca , LiveRamp, etc.), production expenses (printing, logistics, etc.), data costs, and other third-party expenses that Company incurs on behalf of a client that is needed to deliver the services.
General and Administrative Expenses
The Company's selling, general, and administrative expenses primarily consist of administrative costs, including employee compensation and benefits, professional fees, sales and marketing costs, and facilities and office overhead.
Income Taxes
See Note 17 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10-K/T for more information on income taxes.
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Table of Content s RESULTS OF OPERATIONS
Comparison of the Six Months Ended
The table below sets forth, for the periods presented, our consolidated results of operations for the periods indicated.
Six Months Ended Change
December 31, 2022 December 31, 2021 Amount Percentage
(unaudited)
Revenue $ 187,910,491 $ 15,343,000 $ 172,567,491 1125 %
Cost of revenue 162,250,051 8,420,000 153,830,051 1827 %
Gross margin 25,660,440 6,923,000 18,737,440 271 %
Operating expenses:
Selling, general and administrative
expenses 22,658,206 14,097,000 8,561,206 61 %
Depreciation and amortization 4,423,831 401,000 4,022,831 1003 %
Restructuring and other related charges 6,868,066 - 6,868,066 100 %
Impairment and other losses (gains),
net 11,066,341 - 11,066,341 100 %
Total operating expenses $ 45,016,444 $ 14,498,000 $ 30,518,444 211 %
Operating loss $ (19,356,004) $ (7,575,000) $ (11,781,004) 156 %
Other income (expense):
Loss contingency on equity issuance (3,385,000) - (3,385,000) 100 %
Interest expense (6,174,849) (47,000) (6,127,849) 13038 %
Foreign exchange loss (944,417) (26,000) (918,417) 3532 %
Gain on change in fair value of
derivative liabilities 20,004,367 12,000 19,992,367 166603 %
Net gain on sale of subsidiary 82,894 - 82,894 100 %
Other income, net 212,386 1,444,000 (1,231,614) (85) %
Total other income (expense) $ 9,795,381 $ 1,383,000 $ 8,412,381 608 %
Loss from operations before income
taxes (9,560,623) (6,192,000) (3,368,623) 54 %
Income tax expense (19,122) (57,000) 37,878 (66) %
Net loss $ (9,579,745) $ (6,249,000) $ (3,330,745) 53 %
The results of operations for the six months ended December 31, 2022 , have been
significantly impacted by the Converge Acquisition and the company-wide
restructuring program. All financial results herein for the six months ended
December 31, 2022 , include the results of operations of Converge, which was
acquired on March 22, 2022 . See Note 3 Business Combinations and Dispositions to
the consolidated financial statements included in Item 8. Financial Statements
and Supplementary Data of this Transition Report on Form 10-K/T for more
information on the Converge Acquisition.
Revenue
Revenue for the six months endedDecember 31, 2022 increased$172.6 million , or 1125%, to$187.9 million , as compared with the prior period. The breakdown by revenue stream was the following: Managed Services revenue$ 104,644,907 Performance Solutions revenue 75,652,075 Other revenue 7,613,509$ 187,910,491 30
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The increases in Managed Services revenue and Performance Solutions revenue were directly attributable to the Converge Acquisition. The Converge Acquisition contributed$180.3 million , or 95.9% of the Company's total revenue for the six month period. Other revenue decreased$7.7 million , or 50.4%, to$7.6 million , primarily attributable to the company-wide restructuring program. The Company has shifted towards scalable performance-based revenues and business consulting engagements and away from project-based unscalable revenues.
Cost of revenue
For the six months endedDecember 31, 2022 , cost of revenue increased by$153.8 million , or 1827%, to$162.3 million , as compared with the prior period. The increase is primarily attributable to the direct correlation with the increase in revenue as well as the increase in customer acquisition and retention costs. Gross margin For the six months endedDecember 31, 2022 , gross margin increased$18.7 million , or 271%, to$25.7 million , as compared with the prior year period. This increase was primarily due to the increase in revenues partially offset by the increase in cost of revenues related to the Converge Acquisition as discussed above. For the six months endedDecember 31, 2022 , gross margin as a percentage of revenues decreased from 45% to 14% as compared to the prior year period. The Troika and Mission entities had a higher gross margin percentage as compared to Converge. As a result, the gross margin as a percentage of revenues has declined.
Selling, general, and administrative expenses
Selling, general, and administrative expenses for the six months endedDecember 31, 2022 , increased$8.6 million , or 61%, to$22.7 million , as compared with the prior year period. This$8.6 million increase is primarily attributable to an increase in employee related costs of approximately$5.3 million , an increase in office and occupancy costs of approximately$1.5 million , an increase in professional fees of approximately$1.4 million , an increase in travel and entertainment costs of approximately$0.2 million , and an increase in miscellaneous costs of approximately$0.2 million . Employee related costs increased due to the addition of the 80 plus headcount acquired with Converge, which added$5.8 million . This increase was offset by the reduction in salaries and other employee related costs as a result of the discontinuation of certain subsidiary operations as part of the Company's restructuring efforts. The combined employee related costs from non-Converge entities totaled$10.4 million during the six months endedDecember 31, 2022 , which was a 5% decrease compared to the prior year period. The severance costs relating to the termination of employees is recorded in restructuring and other related charges. The increased professional fees were largely driven by the accounting and audit fees incurred during the transition period. Due to the change in year end date, the Company incurred higher audit fees than in a normal six month period. Additional professional fees, mainly legal fees, were incurred from newly engaged firms to help the Company with various debt and equity financing matters.
Depreciation and amortization
Depreciation and amortization expenses for the six months endedDecember 31, 2022 increased approximately$4.0 million , or 1003%, to$4.4 million , as compared to the prior year period. The increase is primarily attributable to the amortization of intangible assets acquired as a result of the Converge Acquisition.
Restructuring and other related charges
For the six months endedDecember 31, 2022 , the Company recorded$6.9 million of restructuring charges related to the discontinuation of certain subsidiary operations. These restructuring charges were comprised of approximately$3.0 million related to excess facilities,$1.5 million of professional fees,$1.2 million of employee severance and other related benefit costs,$0.9 million of other exit costs (related to balance sheet write-offs), and$0.4 million related to the sale ofMission-Media Holdings Ltd. There were no such amounts recorded in the prior year. See Note 5 - Restructuring. to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10-K/T for more information. 31
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Impairments and other losses (gains), net
For the six months endedDecember 31, 2022 , the Company recorded approximately$11.1 million in net impairment losses. The charges comprised of goodwill impairments totaling$9.8 million , and impairment of intangible assets of approximately$1.2 million . The goodwill impairment consisted of$6.9 million of goodwill impairment charges related to the discontinuation ofMission Culture LLC (Delaware ) and$2.9 million of goodwill impairment charges related to the discontinuation ofTroika Design Group, Inc. (California ). See Note 3 - Business Combinations and Dispositions. and Note 10 - Intangible Assets &Goodwill . to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10-K/T for more information.
There were no impairment charges recorded for the six months ended
Loss contingency on equity issuance
For the six months endedDecember 31, 2022 , the Company recorded$3.4 million of loss contingency expenses per the Registration Rights Agreement related to partial liquidated damages as a result of not having the registration statement declared effective by theSEC by the time required under the Registration Rights Agreement. During the six months endedDecember 31, 2022 , the Company had paid an aggregate of$3.6 million of partially liquidated damages, which was recognized in the Statement of Operations for the year endedJune 30, 2022 .
Interest expense
Interest expense for the six months endedDecember 31, 2022 of$6.2 million was primarily related to the Company's Senior Secured credit facility, which was entered into inMarch 2022 to finance the Converge Acquisition (see "Liquidity and Capital Resources - Financing Agreements"). During the six months endedDecember 31, 2022 , the Company incurred an additional 2% of penalty interest per month beginning onOctober 3, 2022 , as a result of the Company's covenant default. See Note 13 - Credit Facilities to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10-K/T for more information on the Company's Credit Facility. Foreign exchange loss For the six months endedDecember 31, 2022 , there was a foreign exchange loss of$0.9 million compared to a foreign exchange loss of$26 thousand in the comparable prior year period. The foreign exchange loss was primarily driven by the sale of a foreign subsidiary,Mission-Media Holdings Ltd. Prior to the sale, the Company had previously accounted for foreign currency translation in accumulated other comprehensive income, and subsequent to the sale this was reclassified to the Statement of Operations.
Gain on change in fair value of derivative liabilities
For the six months endedDecember 31, 2022 and 2021, the Company recorded$20.0 million and$12 thousand , respectively, of gain on the change in fair value of derivative liabilities and warrants. The financing warrants are associated with the equity financing related to the Converge Acquisition and were issued to the institutional investors who received Series E Preferred Stock and warrants. See Note 9 - Fair Value Measurements and Note 15 - Stockholders' Equity to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10-K/T for more information on the derivative liabilities.
Net gain on sale of subsidiary
For the six months endedDecember 31, 2022 , there was a net gain recorded relating toMission-Media Holdings Ltd. , of approximately$0.1 million . This gain on the sale of a subsidiary was driven by the difference between theMission-Media Holdings Ltd. net book value, the purchase price received by the Company, and a working capital payment made by the Company to the subsidiary. This gain was offset by the outstanding intercompany balances betweenMission-Media Holdings Ltd. and the consolidated TMG entities. 32
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Table of Content s Other income, net Other income for the six months endedDecember 31, 2022 , decreased$1.2 million , or 85%, to$0.2 million . The decrease in other income, net was primarily driven by a reduction in income from legal settlements of approximately$1.0 million and a reduction in rental income of approximately$0.1 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 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) share based
compensation expense, (v) restructuring charges or credits, (vi) gains or losses
on dispositions of business and associated settlements, and (vii) certain other
non-recurring or non-cash items.
Management believes that the exclusion of share 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 revenue and Adjusted EBITDA measure as its most important
indicators of its business performance, and evaluates management's 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 following table is a reconciliation of net income (loss), a GAAP measure, to
Adjusted EBITDA:
Six Months Ended
December 31, Change
2022 2021 Amount Percentage
Net Loss $ (9,579,745) $ (6,249,000) $ (3,330,745) 53 %
Interest expense 6,174,849 47,000 $ 6,127,849 13038 %
Income tax expense 19,122 57,000 $ (37,878) (66) %
Depreciation and amortization 4,423,831 401,000 $ 4,022,831 1003 %
EBITDA 1,038,057 (5,744,000) $ 6,782,057 (118) %
Impairment and other losses (gains),
net 11,066,341 (1,448,000) $ 12,514,341 (864) %
Business Acquisition Costs included in
SG&A - 517,000 $ (517,000) (100) %
Restructuring and other related charges 6,868,066 - $ 6,868,066 100 %
Share based compensation 2,680,081 2,100,000 $ 580,081 28 %
Loss contingency on equity issuance 3,385,000 - $ 3,385,000 100 %
Net gain on sale of subsidiary (82,894) - $ (82,894) 100 %
(Gain) loss on derivative liabilities (20,004,367) (12,000) $ (19,992,367) 166603 %
Adjusted EBITDA $ 4,950,284 $ (4,587,000) $ 9,537,284 (208) %
Adjusted EBITDA for the six months ended December 31, 2022 , increased $9.5
million to $5.0 million as compared with the prior year period. The increase was
primarily driven by the increase in revenues and gross margin attributable to
the managed services and performance solutions revenue streams associated with
the Converge Acquisition (as discussed previously).
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Comparison of the Year EndedJune 30, 2022 versus the Year EndedJune 30, 2022 Year Ended June 30, Change 2022 2021 Amount Percentage Revenue$ 116,409,703 $ 16,192,000 $ 100,217,703 619 % Cost of revenue 88,127,498 7,504,000 80,623,498 1074 % Gross margin 28,282,205 8,688,000 19,594,205 226 % Operating expenses: Selling, general and administrative expenses 45,271,857 25,372,000 19,899,857 78 % Depreciation and amortization 3,097,780 2,299,000 798,780 35 % Restructuring and other related charges 5,590,932 - 5,590,932 100 % Impairment and other losses (gains), net 7,708,677 (3,142,000) 10,850,677 (345) % Total operating expenses 61,669,246 24,529,000 37,140,246 151 % Operating loss (33,387,041) (15,841,000) (17,546,041) 111 % Other income (expense): Amortization expense of note payable discount - (409,000) 409,000 (100) % Loss contingency on equity issuance (3,615,000) - (3,615,000) 100 % Interest expense (2,943,367) (7,000) (2,936,367) 41948 % Foreign exchange loss (30,215) (48,000) 17,785 (37) % Gain on change in fair value of derivative liabilities 638,622 72,000 566,622 787 % Other income, net 679,920 452,000 227,920 50 % Total other income (expense) (5,270,040) 60,000 (5,330,040) (8883) % Loss from operations before income taxes (38,657,081) (15,781,000) (22,876,081) 145 % Income tax expense (35,925) (216,000) 180,075 (83) % Net loss (38,693,006) (15,997,000) (22,696,006) 142 % The results of operations for the year endedJune 30, 2022 , have been significantly impacted by the Converge Acquisition. All financial results herein for the fiscal year endedJune 30, 2022 , include the results of operations of the Converge companies which are reflective of the periodMarch 22, 2022 (the Acquisition closing date), thoughJune 30, 2022 . See Note 3 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10-K/T for more information on the Converge Acquisition. Revenue
Revenue for the year ended
Increase in managed services revenue$ 51,101,818 Increase in performance solutions revenue 40,178,973 Other net increases 8,936,912$ 100,217,703 The increase in Managed Services revenue and Performance Solutions revenues is directly attributable to the Converge Acquisition and is reflective of the periodMarch 22, 2022 (the date of the Converge Acquisition closing), throughJune 30, 2022 . The Converge Acquisition contributed approximately$90.3 million in revenue during that 101 day period, which is representative of 78% of the Company's total revenue for fiscal year 2022. 34
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The increase in other revenue of approximately$8.9 million was primarily driven by the gradual return to more normal business activities as a result of the lifting of government restrictions that were in place in the prior year period due to COVID-19. Cost of Revenue For the year endedJune 30, 2022 , cost of revenue increased$80.6 million , or 1074%, to$88.1 million as compared with the prior year period. The increase is primarily attributable to incremental costs of approximately$77.8 million resulting from the addition of the Converge business.
Gross Margin
For the year endedJune 30, 2022 , gross margin increased$19.6 million , or 226%, to$28.3 million , or 24% of revenue, as compared with the prior year period, primarily due to the increase in revenue partially offset by the increase cost of revenue related to the Converge Acquisition as discussed above.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the year endedJune 30, 2022 , increased$19.9 million , or 78%, to$45.3 million as compared with the prior year period. The increase is primarily attributable to an increase in employee related costs of approximately$13.3 million , an increase in professional fees of approximately$4.2 million , an increase in miscellaneous costs of approximately$1.5 million , an increase in travel and entertainment costs of approximately$0.6 million , and an increase in office and occupancy costs of approximately$0.3 million . The increase in employee related costs of approximately$13.3 million is primarily due to an increase in stock-based compensation of$8.7 million , increases in salaries and other related costs of approximately$1.7 million (exclusive of employees acquired with the Converge Acquisition), employee related costs of approximately$3.3 million directly attributable to the Converge Acquisition, and an increase in professional fees due to one-time costs incurred for legal, accounting, and other services performed related to the Converge Acquisition. These increases were partially offset by a decrease in consulting fees of approximately$3.5 million .
Depreciation and Amortization
Depreciation and amortization expenses for the year ended
Restructuring and Other Related Charges
For the year endedJune 30, 2022 , the Company recorded$5.6 million of restructuring charges related to employee severance and other employee related benefits. During the fourth quarter of 2022, the Company shut down Redeeem operations, as well as consolidated the operations for certain Troika entities. This has resulted in the departure of key executives as well as certain additional reductions in workforce in order to align with management's new strategic direction. There were no such amounts recorded in the prior year.
Impairments and Other (Gains) Losses, Net
For the year endedJune 30, 2022 , impairments and other losses$10.9 million , or 345%, to$7.7 million compared to the prior year. The increase is comprised of impairments of goodwill totaling approximately$8.8 million , the absence of a$3.1 million gain in the prior year period, and impairments of net intangible assets totaling$0.4 million . These increases were partially offset by gains in the current year period totaling$1.4 million . For the year endedJune 30, 2022 , impairment charges of$8.8 million included of goodwill impairments of$6.7 million related to MissionUK as a result of the Sale agreement entered into onAugust 1, 2022 , and goodwill impairment of$2.0 million and intangible assets impairments of$0.4 million related to the discontinuation of operations for the Redeeem subsidiary. See Note 3 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10K/T for more information. 35
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The above increases were offset by$1.0 million gain on legal settlements, which was related to the Stephensons' settlement, (See Note 12 to the Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data of this Transition Report on Form 10K/T for more information on the legal matters). The remaining increase included an approximate$0.3 million gain on government grant forgiven related to SBA-backed Paycheck Protection Program grants received due to the ongoing COVID-19 pandemic and a$0.2 million gain on rent abatement. For the year endedJune 30, 2021 , the Company recognized approximately$3.1 million of income from government grants.
There were no impairment charges recorded during the year ended
Loss Contingency on Equity Issuance
For the year endedJune 30, 2022 , the Company recorded$3.6 million of loss contingency expenses per the Registration Rights Agreement related to partial liquidated damages as a result of not filing the registration statement by the effective date. Interest Expense Interest expense for the year endedJune 30, 2022 , is related to the Company's Senior Secured credit facility, which was entered into inMarch 2022 to finance the Converge Acquisition (see "Liquidity and Capital Resources - Financing Agreements"). See Note 13. Credit Facilities to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Transition Report on Form 10-K/T for more information on the Company's Credit Facility.
Gain on Change in Fair Value of Derivative Liabilities
For the year endedJune 30, 2022 , gain on change in fair value of derivative liabilities increased by$0.6 million , or 787%, to$0.6 million compared to the prior year. The derivative liabilities are associated with the debt and equity financing related to the Converge acquisition. There were no derivative liabilities related to the Converge acquisition recorded in the prior fiscal year period.
Adjusted earnings before interest, tax, depreciation, and amortization ("Adjusted EBITDA")
(refer to discussion within Comparison of the Six Months EndedDecember 31, 2022 versus the Six Months EndedDecember 31, 2021 for definition of Adjusted EBITDA) Year Ended June 30, Change 2022 2021 Amount Percentage Net Loss$ (38,693,006) $ (15,997,000) $ (22,696,006) 142 % Interest expense 2,943,367 7,000 2,936,367 41948 % Income tax expense 35,925 216,000 (180,075) (83) % Depreciation and amortization 3,097,780 2,299,000 798,780 35 % EBITDA (32,615,934) (13,475,000) (19,140,934) 142 % Impairment and other losses (gains), net 7,708,677 (3,142,000) 10,850,677 (345) % Business Acquisition Costs included in SG&A 2,200,000 - 2,200,000 100 % Restructuring and other related charges 5,590,932 - 5,590,932 100 % Share based compensation 13,292,534 4,419,000 8,873,534 201 % Loss contingency on equity issuance 3,615,000 - 3,615,000 100 % Net gain on sale of subsidiary - - - 100 % (Gain) loss on derivative liabilities (638,622) (72,000) (566,622) 787 % Adjusted EBITDA$ (847,413) $ (12,270,000) $ 11,422,587 (93) % Adjusted EBITDA for the year endedJune 30, 2022 , increased$11.4 million to$(0.8) million as compared with the prior year period. The increase was primarily driven by the increase in revenues and gross margin attributable to the managed services and performance solutions revenue streams associated with the Converge Acquisition (as discussed previously). 36
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Table of Content s LIQUIDITY & CAPITAL RESOURCES Overview Our primary sources of liquidity are cash, cash equivalents, and cash flows from the operations of our businesses. Our principal uses of cash include working capital-related items (including funding our operations), debt service, investments, and related loans and advances that we may fund from time to time, and liabilities from prior acquisitions. Our decisions as to the use of our available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the timing of cash flow generation. To the extent that we desire to access alternative sources of funding through the capital and credit markets, challengingU.S. and global economic and market conditions could adversely impact our ability to do so at that time. We regularly monitor and assess our ability to meet our net funding and investing requirements. We believe we have sufficient liquidity from cash and cash equivalents and future cash flows from operations to fund our operations and service the credit facilities for the foreseeable future. See Note 13 - Credit Facilities to the consolidated financial statements included in Item 8 of this Transition Report on Form 10-K/T for discussion of the Credit Facility. Financing Agreements OnMarch 21, 2022 ,Troika Media Group Inc. , and each subsidiary ofTroika Media Group Inc. as guarantors, entered into a Financing Agreement withBlue Torch Finance LLC ("Blue Torch") to act as Administrative Agent and Collateral Agent. As part of this Financing Agreement, we entered into a$76.5 million First Lien Senior Secured Term Loan (the "Credit Facility") with Blue Torch which formed the majority of the purchase price of the Converge Acquisition, as well as for working capital and general corporate purposes. The Credit Facility provides for: (i) a Term Loan in the amount of$76.5 million ; (ii) an interest rate of the LIBOR Rate Loan of three (3) months; (iii) a four-year maturity, amortized 5.0% per year, payable quarterly; (iv) a one (1.0%) percent commitment fee and an upfront fee of two (2.0%) percent of the Credit Facility paid at closing, plus an administrative agency fee of$250,000 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 fifty (50%) percent of excess cash flow and 100% of proceeds from various transactions; (viii) customary affirmative, negative and financial covenants; (ix) delivery of audited financial statements of Converge; and (x) customary closing conditions. The Company agreed to customary restrictive financial and non-financial covenants in the Credit Facility including, but not limited to, a debt leverage ratio, fixed charge coverage ratio, and maintaining liquidity of at least$6.0 million at all times. Additionally, the Company agreed that ifSid Toama orThomas 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 andJune 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 Company and each of its subsidiary Guarantors entered into a Pledge and Security Agreement (the "Security Agreement") dated as ofMarch 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. OnMarch 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
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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 the note using the effective interest rate method. During the six months endedDecember 31, 2022 , the Company recorded$1.2 million in amortization expense and made principal payments of$1.9 million . At any time on or afterMarch 21, 2022 , and on or prior toMarch 21, 2026 , the lender has the right to subscribe for and purchase fromTroika Media Group, Inc. , up to 1,929,439 shares of Common Stock, subject to adjustment. The number was adjusted to 5,429,439 of common shares effectiveDecember 9, 2022 . The exercise price per share of Common Stock under this Warrant shall be$.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".
The Company is in negotiations with its Senior Secured Lender to revise the terms of its Financing Agreement relating to the Credit Facility.
Series E Private Placement OnMarch 16, 2022 , the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain institutional investors (the "Purchasers"), pursuant to which the Company agreed to issue and sell, in a private offering (the "March 2022 Private Placement"), an aggregate of$50.0 million of securities, consisting of shares of Series E convertible preferred stock of the Company, par value$.01 per share (the "Series E Preferred Stock") and warrants to purchase (100% coverage) shares of common stock (the "Warrants") (collectively, the Series E Preferred Stock and Warrants are referred to as the "Securities"). 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 (the "Conversion Shares"). Each share of the Series E Preferred Stock has a stated value of$100 per share and was originally convertible, at any time, into shares of common stock at a conversion price of$1.50 per share (the "Conversion Price"), subject to adjustment. The Company sold the Securities for gross proceeds of$50,000,000 . The shares of Series E Preferred Stock were originally convertible at$1.50 per share, or an aggregate of approximately 33,333,333 shares of common stock, subject to adjustment, for reverse and forward stock splits, stock dividends, stock combinations and other such transactions. In addition, the Conversion Price will be downwardly adjusted the greater of (i) eighty (80%) percent of the average of the ten (10) lowest daily VWAPs during the forty (40) trading day period beginning on and including the Trading Day immediately follow the Effective Date of the initial Registration Statement, and (ii) the Floor Price of$0.25 per share unless a holder elects to shorten the adjustment period to all or a portion of the Series E Preferred Stock held by such person to between ten (10) and thirty-nine (39) trading days (the "Registration Reset Price"). The shares of Series E Preferred Stock and Warrants and the shares of Common Stock issuable upon conversion of the Series E Preferred Stock and the exercise of the Warrants issued inMarch 2022 were not initially registered under the Securities Act of 1933, as amended. Pursuant to a Registration Rights Agreement with the Purchasers datedMarch 16, 2022 (the "Registration Rights Agreement"), the Company committed to file with theSEC an initial Registration Statement concerning the Securities within ten (10) business days of theMarch 21, 2022 , closing date, which initial Registration Statement was 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 theSEC ". While the Company filed a Registration Statement on Form S-1 (the "Form S-1") concerning the Securities to satisfy the requirements of the Registration Rights Agreement, the Form S-1 was not declared effective and was ultimately withdrawn. As a result, the Company is required under the terms of the Registration Rights Agreement to pay to the Purchasers a partial liquidated damages penalty for failure to meeting the effectiveness date requirement, which is equal to 14% of the subscription amount. OnSeptember 26, 2022 , we entered into the Exchange Agreement with the Purchasers, pursuant to which (i) each Purchaser exchanged its Warrants for the New Warrants and (ii) each Purchaser consented to the New PIPE Terms, including an amendment and restatement of the terms of our Series E Preferred Stock. In consideration for the issuance of the New Warrants and the other New PIPE Terms, we filed the amended and restated Certificate of Designation with the Secretary of State of theState of Nevada to effect certain changes contemplated by the Exchange Agreement. 38
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The New PIPE Terms effect the following changes, among others, to the rights Series E Holders:
New Warrant Exercise Price: The New Warrant exercise price per share of common stock was$0.55 , provided that if all shares of Series E Preferred Stock issued pursuant to the Certificate of Designation were not repurchased by the Company on or prior toNovember 26, 2022 , on such date, the exercise price per share of the New Warrants reverted 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 .Pursuant to such terms, the exercise price is currently fixed at$0.25 per share. Series E Conversion Price: The conversion price for the Series E Preferred Stock was initially equal$0.40 per share, and so long as the arithmetic average of the daily volume-weighted average prices of the Common Stock for the calendar week prior to each of the following respective dates is lower than the Conversion Price at that time, the Conversion Price shall be downwardly adjusted by$0.01 on each ofOctober 24, 2022 ,October 31, 2022 ,November 7, 2022 ,November 14, 2022 andNovember 21, 2022 . The conversion prices were subject to further adjust 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 . The conversion price was subsequently adjusted to$0.25 per share. Standstill Period: The Purchasers agreed to the 60-day Standstill Period, during which each Series E Holder agreed not to convert more than 50% of the Series E Preferred Stock held by such holder at the beginning of the Standstill Period. Series E Buyout: During the Standstill Period the Company was required to 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. No such funds were raised.
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
Liquidated Damages: The Company agreed to pay to the Purchasers all liquidated
damages owed through
As ofDecember 31, 2022 , the Company had paid an aggregate of$3.6 million as partial liquidated damages as a result of not filing the registration statement byJuly 5, 2022 . As such, as ofDecember 31, 2022 , the Company has recorded a contingent liability in the amount of$3.4 million . OnFebruary 17, 2023 the Company filed a request with theSEC to withdraw the registration statements previously filed onApril 4, 2022 andMay 6, 2022 . See Note 12 - Commitments and Contingencies to the consolidated financial statements included in Item 8 of this Transition Report on Form 10-K/T for further discussion. The Company utilized the full amount of proceeds raised in the Series E offering to pay a portion of the cash payment forConverge Direct, LLC and its subsidiaries. Contractual Obligations Payments Due by Period Year 1 Years 2-3 Years 4-5 >5 Years Total
Operating lease obligations (a)
$ 2,571,000 $ 2,354,000 $ 10,278,000 Debt repayment (b) 1,912,500 7,650,000 64,068,750 -$ 73,631,250 Restructuring liabilities (c) 698,683 163,669 35,507 587,371 -$ 897,859
Acquisition liabilities (d) 9,293,402 - - -$ 9,293,402 Total$ 13,853,585 $ 11,217,669 $ 66,675,257 $ 2,354,000 $ 94,100,511 (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 - Business Combinations and Dispositions. 39
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Cash Flow Discussion
Six Months Ended Year Ended
December 31, June 30,
2022 2021 2022 2021
(unaudited)
Net cash provided by (used in)
operating activities $ 2,136,544 $ (5,978,000) $ (7,103,274) $ (6,838,000)
Net cash used in investing activities $ (809,048) $ (93,000) $ (82,893,824) $ (1,534,000)
Net cash provided by (used in)
financing activities $ (5,597,500) $ (50,000) $ 112,620,310 $ 19,157,000
Operating Activities
Net cash provided by operating activities for the six months ended December 31,
2022 increased $8.1 million , or 136%, to $2.1 million as compared to the prior
year period. The net increase in the working capital deficit was primarily due
to higher revenue and gross margin for the six months ended December 31, 2022 ,
which is reflective of the Converge Acquisition.
Net cash used in operating activities for the year ended June 30, 2022 increased
approximately $0.3 million to $7.1 million , as compared to the prior year
period. The increase is primarily due to a net increase in working capital which
is reflective of the Converge Acquisition.
Investing Activities
Net cash used in investing activities for the six months endedDecember 31, 2022 increased$0.7 million , or 770%, to$0.8 million . The increase was primarily driven by$0.6 million paid for the sale ofMission-Media Holdings Ltd. and$0.2 million paid for property and equipment. Net cash used in investing activities for the year endedJune 30, 2022 increased by approximately$81.4 million to$82.9 million , as compared to the prior year period, related to the net cash paid for the Converge Acquisition.
Financing Activities
Net cash used in financing activities for the six months endedDecember 31, 2022 increased$5.6 million , or 11095%, to$5.6 million . The increase was the result of approximately$3.6 million of cash paid as partial liquidated damages as a result of not filing the registration statement byJuly 5, 2022 , coupled with approximately$1.9 million in principal payments on the Credit Facility, and$0.1 million of cash paid related to related party notes payable. Net cash provided by financing activities for the year endedJune 30, 2022 increased by approximately$93.5 million to$112.6 million . The increase was the result of approximately$69.7 million in net proceeds from the Credit Facility coupled with approximately$44.4 million of net proceeds related to the issuance of the Series E Convertible Preferred Stock private placement, partially offset by the absence of$20.7 million in net proceeds from the initial public offering during the year endedJune 30, 2021 . Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Estimates
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 2 to the consolidated financial statements included in Item 8 of this Transition Report on Form 10-K/T for information regarding recently issued accounting pronouncements not yet adopted.
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Critical Accounting Policies
The preparation of the Company's consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amount of revenues and expenses. Management believes its use of estimates in the consolidated financial statements to be reasonable. See Note 2 to the consolidated financial statements included in Item 8 of this Transition Report on Form 10-K/T for more information regarding the Company's use of estimates. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: Revenue Recognition The Company recognizes revenue in accordance with theFinancial Accounting Standards Board's ("FASB"), Accounting Standards Codification ("ASC")ASC 606, Revenue from Contracts with Customers ("ASC 606"). Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five (5) steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business.Goodwill is tested annually for impairment. The annual qualitative or quantitative assessments involve determining an estimate of the fair value of reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill exists. A qualitative assessment evaluates whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two-step quantitative goodwill impairment test. The first step of a quantitative goodwill impairment test compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss may be recognized. The amount of impairment loss is determined by comparing the implied fair value of the reporting unit's goodwill with the carrying amount. If the carrying amount exceeds the implied fair value then an impairment loss is recognized equal to that excess. The Company has adopted the provisions of ASU 2017-04-Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 requires goodwill impairments to be measured on the basis of the fair value of a reporting unit relative to the reporting unit's carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. Thus, ASU 2017-04 permits an entity to record a goodwill impairment that is entirely or partly due to a decline in the fair value of other assets that, under existing GAAP, would not be impaired or have a reduced carrying amount. Furthermore, the ASU removes "the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test." Instead, all reporting units, even those with a zero or negative carrying amount will apply the same impairment test. Accordingly, the goodwill of reporting unit or entity with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit/entity may indicate that goodwill is impaired. We test our goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. As a result of the change in our fiscal year, our annual measurement date for testing goodwill impairment isOctober 31 . None of the goodwill prior to the Converge Acquisition is deductible for income tax purposes. The goodwill associated with the Converge Acquisition is deductible for income tax purposes on a straight-line basis over fifteen (15) years. 41
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Intangible Assets Intangible assets with finite useful lives consist of trade names, non-compete agreements, acquired workforce and customer relationships and are amortized on a straight-line basis over their estimated useful lives, which range from three to ten years. The estimated useful lives associated with finite-lived intangible assets are consistent with the estimated lives of the associated products and may be modified when circumstances warrant. Such assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset. Stock-Based Compensation The Company recognizes stock-based compensation in accordance with ASC Topic 718 "Stock Compensation", which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values. For non-employee stock-based compensation, the Company has adopted ASC 2018-07, Improvements to Nonemployee Share-Based Payment Accounting which expands on the scope of ASC 718 to include share-based payment transactions for acquiring services from non-employees and requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or the fair value of the services at the grant date, whichever is more readily determinable in accordance with ASC Topic 718. Foreign Currency Translation: The consolidated financial statements of the Company are presented inUnited States Dollars ("USD"). The functional currency for the Company is USD for all entities other thanMission-Media Limited whose operations are based in theUnited Kingdom and their functional currency is British Pound Sterling ("GBP"). Transactions in currencies other than the functional currencies are recorded using the appropriate exchange rate at the time of the transaction. All assets and liabilities are translated into USD at balance sheet date, stockholders' equity is translated at historical rates, and revenue and expense accounts are translated at the average exchange rate for the year or the reporting period. The translation adjustments are reported as a separate component of stockholders' equity, captioned as accumulated other comprehensive (loss) income. Transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of operations. The relevant translation rates are as follows: at the date of theMission-Media Holdings Ltd. transaction (August 1, 2022 ), the Company used a closing rate of$1.217670 US$:GBP, and a yearly average rate of$1.285833 US$:GBP; for the year endedJune 30, 2022 , closing rate at$1.219050 US$:GBP, yearly average rate at$1.330358 US$:GBP, for the year endedJune 30, 2021 , closing rate at$1.382800 US$:GBP, yearly average rate at$1.346692 US$:GBP.
At the period-end date of
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