NOTES TO 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”, “our” or “we”), incorporated in Nevada in 2003, is a professional services company that architects and builds enterprise value in consumer brands to generate scalable performance driven revenue growth through customer acquisition. The Company delivers on three solutions' pillars that CREATE brands and experiences and CONNECT consumers through emerging technology products and ecosystems to deliver PERFORMANCE-based measurable business outcomes.
On March 22, 2022, the Company, through its wholly owned subsidiary CD Acquisition Corp, executed a Membership Interest Purchase Agreement (“MIPA”) for the acquisition of all the equity of Converge Direct, LLC and its affiliates (“Converge”) and 40% of the equity of Converge Marketing Services, LLC, an affiliated entity, for an aggregate purchase price of $125.0 million valued at $114.9 million (the "Converge Acquisition"). The MIPA identifies the seller parties as the Converge Sellers.
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 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 Annual Report on Form 10-K for the year ended June 30, 2022. The financial statements as of September 30, 2022 and for the three months ended September 30, 2022 and 2021 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 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 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 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 consolidated financial statements to be reasonable.
Recently Adopted Accounting Pronouncements
In August 2020, FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other and Derivatives and Hedging—Contracts in Entity’s Own Equity: Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” which simplifies the accounting for convertible instruments by removing the separation models for convertible debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the 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. The Company has adopted the guidance effective July 1, 2021.
In December 2019, the FASB issued amended guidance in the form of ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects 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 all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company has adopted the guidance effective July 1, 2021.
Recently Issued Accounting Pronouncements Not Yet Adopted
On June 16, 2016, 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 model for the impairment of financial assets measured at amortized cost basis. This ASU replaces the probable, incurred loss model for those assets. On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022, for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company is currently evaluating the impacts of this pronouncement and does not expect it to have a material impact on the financial statements.
NOTE 3. 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 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 invoice the customer, resulting in an amount recorded to contract assets. Once the Company has an unconditional right to consideration under these contracts, the contract assets are reclassified to accounts receivable.
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, |
| | 2022 | | 2022 |
Accounts receivable | $ | 37,282,536 | | | $ | 9,421,497 | |
Contract assets | 328,936 | | | 23,586,036 | |
Deferred revenue | 9,132,043 | | | 11,321,159 | |
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 and $552,000 as of September 30, 2022 and June 30, 2022, respectively.
The amount of revenue recognized during the three months ended September 30, 2022, relating to the deferred revenue recorded as of June 30, 2022, was $8.4 million.
NOTE 4. Property and Equipment
Property and equipment consist of the following as of September 30, 2022 and June 30, 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 | |
During the three months ended September 30, 2022 and 2021, depreciation expense was $52 thousand and $30 thousand, respectively.
Note 5. Amortizable Intangible Assets
The Company's intangible assets subject to amortization are as follows:
| | | | | | | | | | | |
| September 30, 2022 | | June 30, 2022 |
Customer relationship | $ | 58,559,755 | | | $ | 58,559,995 | |
Non-core customer relationships | 760,000 | | | 760,010 | |
Non-compete agreements | 1,430,000 | | | 1,430,000 | |
Technology | 10,400,000 | | | 10,920,000 | |
Tradename | 7,510,000 | | | 7,570,000 | |
Workforce acquired | 2,125,000 | | | 2,125,000 | |
Total intangible assets | 80,784,755 | | | 81,365,005 | |
Less: accumulated impairment expense | — | | | (446,000) | |
Less: accumulated amortization | (12,657,000) | | | (10,613,000) | |
Total Amortizable intangible assets, net | $ | 68,127,755 | | | $ | 70,306,005 | |
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, 2022 and 2021, amortization expense was $2,178,250 and $172,000, respectively.
Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the rate of amortization is accelerated and the remaining carrying value is amortized over the new shorter useful life. For the three months ended September 30, 2022 and 2021, the Company had no impairments.
Note 6. Debt
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; (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 $6,000,000 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.
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 for the three months ended September 30, 2022, and made principal payments totaling approximately $1.0 million.
At September 30, 2022, 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 | |
At any time on or after March 21, 2022 and on or prior to March 21, 2026, the lender has the right to subscribe for and purchase from Troika Media Group, Inc., up to 1,929,439 shares of Common Stock, subject to adjustment. The exercise price per share of Common Stock under this Warrant shall be $.01 per share. If at any time when this Warrant becomes exercisable and the Registration Statement is not in effect, this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise”.
Using the Black-Scholes model, the fair market value was determined to be $31.2 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. 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 million and $0.3 million for the three months ended September 30, 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 |
Weighted-average discount rate for operating leases | 5.50% |
Weighted-average remaining operating lease term in years | 3.2 years |
| |
As of September 30, 2022, the maturities of the Company's operating lease liabilities are as follows: | |
| |
Remainder of fiscal year ending June 30, 2023 | $ | 1,658,000 |
2024 | 1,998,000 |
2025 | 1,706,000 |
2026 | 1,436,000 |
2027 | 1,378,000 |
Thereafter | 2,463,152 | |
Total undiscounted operating lease payments | 10,639,152 |
Less: Imputed interest | (1,591,000) |
Total operating lease liabilities | 9,048,152 |
Less: current portion of operating lease liabilities | 1,440,080 |
Non-current operating lease liabilities | $ | 7,608,072 |
Note 8 – Commitments and Contingencies
Commitments
As discussed in our 2022 Annual Report, we have guaranteed certain obligations relating principally to operating leases, and lines of credit. As of September 30, 2022 and June 30, 2022, the amount of Company guarantees on lease obligations was approximately $10.6 million and $13.9 million, respectively, the amount of Company guarantees relating to credit facility obligations was approximately $74.6 million and $75.5 million, respectively.
See Note 6 for the principal repayments required under the Company's Credit Facility. See Note 7 for the minimum lease payments required to be made by the Company.
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 Entity
On March 22, 2022, the Company acquired 40% of the equity of Converge Marketing Services, LLC ("CMS"), an affiliate of Converge, which is accounted for under the equity method 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.
Note 10. Equity
Stock Compensation
See Note 14 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 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 and $979,000 for the three months ended September 30, 2022 and 2021, respectively.
Non-Qualified Stock Options (“NQSOs”) Award Activity
The following table summarizes activity relating to holders of the Company’s NQSOs for the three months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | — | |
Restricted Share Units Award Activity
The following table summarizes activity relating to holders of the Company’s RSUs for the three months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | |
| | Number of: |
| | 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 | |
Granted | | 100,000 | | | | | 0.74 |
Exercised | | — | | | | — |
Outstanding award balance as of September 30, 2022 | | 1,200,000 | | | | | $ | 1.00 | |
Vested | | 450,000 | | | | | 1.07 |
Unvested | | 750,000 | | | | | 1.17 |
Earnings per share
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and dilutive potential common shares outstanding during the period.
The following is a reconciliation of the number of shares used in the calculation of basic earnings per share and diluted earnings per share for the three months ended September 30, 2022, and September 30, 2021:
| | | | | | | | | | | | | | |
| | 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 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 o f Designation are not repurchased by the Company on or prior to November 26, 2022, on such date, the exercise price per share of the New Warrants will revert to $2.00, subject to further adjustment as set forth in the New Warrant.
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 ("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. The Company accrued an additional $301 thousand at September 30, 2022 which is recorded in loss contingency on equity issuance on the statements of operations and comprehensive income (loss).
Note 11. Related Party
Related Party Transactions
During third quarter fiscal year 2022, in connection with the Converge Acquisition, the Company incurred amounts due to the Converge Sellers totaling $9.2 million. The Converge Sellers include Sadiq "Sid" Toama, CEO of Troika, Tom Marianacci, Head of Acquisition and Performance, of the Converge subsidiaries, wholly owned subsidiaries of Troika and Mike Carrano, Executive Director, Acquisition and Performance are all party to the amounts due. As of September 30, 2022 and June 30, 2022, $9.2 million is outstanding and included on the balance sheet under acquisition liabilities.
Business Dispositions
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 of Union Investments Management Limited, UVL’s parent. Subsequent to the sale date, the Company and Mission UK may continue to operate with some shared services. As such, transactions between the Company and Mission UK will no longer be eliminated in consolidation and will be treated as related party transactions.
Per the Purchase Agreement, Buyer purchased from Seller, all of Seller’s right, title, and interest 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") 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 on 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 seller 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.
Note 15. Income Taxes
On September 30, 2022, and September 30, 2021, the accompanying consolidated Balance Sheet includes a tax liability of $0.2 million and $0.7 million, respectively. The Company recorded income tax expense of $0.2 million for the three months ended September 30, 2022. There was no expense recorded for the three months ended September 30, 2021.
The effective income tax rates for the three-month periods ended September 30, 2022 and 2021, were 11.3% and 0%, respectively. In addition to state income taxes, nondeductible loss on change in fair value of derivatives, and nondeductible stock-based compensation increased the rate. The Company's utilization of its NOL is expected to be limited to 80% of taxable income.
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.
Note 16. Subsequent Events
Limited Waiver under Financing Agreement
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, 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 expired was set to expire on October 28, 2022. On October 28, 2022, Blue Torch and the Company entered into a further Limited Waiver, which will expire on November 11, 2022, if not terminated earlier by Blue Torch (“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.
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 end is December 31, 2023. Consequently, the Company will file a transitional annual report on Form 10-K for the six-month period starting on July 1, 2022, and ending December 31, 2022, to cover such transition period.
Separation with Andrew Bressman
On October 26, 2022, Andrew Bressman (“Bressman”), 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 into 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, 2023. The Company and Bressman exchanged mutual releases and waivers of claims against each other. The above separation terms are independent of the Separation Agreement between the Company and SAB Management, LLC and Bressman as entered into on February 28, 2021.