| UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 | ||||||||
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2023
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _________ to_________
Commission File Number: 001-40329
| (Exact name of registrant as specified in its charter) | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(212 ) 213-0111
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
The | ||||||||
| Redeemable warrants to acquire Common Stock | TRKAW | The Nasdaq Capital Market | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. oYes xNo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). oYes xNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o | ||||||||
| x | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
| Class | Outstanding at December 21, 2023 | |||||||
| Common Stock, $.001 par value | ||||||||
TABLE OF CONTENTS
-2-
CAUTIONARY STATEMENT
On December 7, 2023, the Company and certain of its subsidiaries (collectively, the “Debtors”) each filed a voluntary petition for relief (the “Bankruptcy Petitions”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the Southern District of New York (such court, the “Court” and such cases, the “Chapter 11 Cases”). On December 7, 2023, prior to the filing of the Bankruptcy Petitions, the Company and Blue Torch Finance, LLC (“Blue Torch”) agreed to the terms of a form of “stalking horse” asset purchase agreement (the “Stalking Horse Asset Purchase Agreement”) under which an affiliate of Blue Torch and the Debtors would agree to sell substantially all of the assets of the Company (the “Purchased Assets”) for consideration consisting of (1) a credit bid equal to (x) an amount up to all outstanding obligations under the DIP Credit Facility (as defined below) but not less than $11,000,000, and (y) up to the full amount of the outstanding obligations under the Financing Agreement (as defined below), but not less than $40,000,000, plus (2) the assumption by Blue Torch of the Assumed Liabilities (as defined in the Stalking Horse Asset Purchase Agreement) (the “Sale Transaction”). The Sale Transaction is part of a sale process under section 363 of the Bankruptcy Code that will be subject to approval by the Court and compliance with agreed upon and Court-approved bidding procedures allowing for the submission of higher or otherwise better offers, and other agreed-upon conditions (the “363 Sale Process”). In accordance with the 363 Sale Process, notice of the proposed sale to Blue Torch will be given to third parties and competing bids will be solicited by Jefferies. The Company will manage the bidding process and evaluate the bids, in consultation with its advisors and as overseen by the Court. The Company and Blue Torch also agreed to the terms of a form of Superpriority Secured Debtor-in-Possession Financing Agreement (the “DIP Financing Agreement”) to be entered into by and among the Company, as borrower, certain of the Company’s subsidiaries from time to time party thereto as guarantors, the lenders from time to time party thereto (the “DIP Lenders”) and Blue Torch, as administrative agent and collateral agent, pursuant to which the DIP Lenders would provide the Debtors with a senior secured, superpriority debtor-in-possession term loan facility in the maximum aggregate amount of $11,000,000 (the “DIP Credit Facility”), which, subject to the satisfaction of certain conditions precedent to drawing as set forth in the DIP Financing Agreement, will be made available to the Debtors in multiple drawings as follows: (i) up to $7,800,000 will be made available for drawing upon entry by the Court of an interim order authorizing and approving the DIP Credit Facility on an interim basis (the “Interim DIP Order”) and (ii) up to $3,200,000 will be made available for drawing upon entry of the Court of a final order authorizing and approving the DIP Credit Facility on a final basis (the “Final DIP Order” and together with the Interim DIP Order, the “DIP Orders”). In addition, on December 7, 2023, the Company and Blue Torch entered into a restructuring support agreement (the “Restructuring Support Agreement”) setting out certain milestones and conditions of the Company relating to the 363 Sale Process, subject to the terms and conditions contained therein. The foregoing descriptions of the Stalking Horse Asset Purchase Agreement, the DIP Financing Agreement and the Restructuring Support Agreement do not purport to be complete and each is qualified in its entirety by reference to the applicable agreement, copies of which are filed as exhibits to this Quarterly Report on Form 10-Q and each of which is incorporated by reference herein.
As part of the Chapter 11 Cases, the Debtors have obtained Court approval for the joint administration of the Chapter 11 Cases under the caption In re Troika Media Group, Inc., et al. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. The Company has engaged Jefferies LLC (“Jefferies”) to advise on its strategic options, including the process to sell its assets in connection with the Chapter 11 Cases. To ensure their ability to continue operating in the ordinary course of business, the Debtors filed with the Bankruptcy Court certain motions seeking a variety of customary “first day” relief, including authority to pay employee wages and benefits, to pay vendors and suppliers for goods and services, and to continue honoring insurance and tax obligations as they come due. In addition, the Company filed with the Bankruptcy Court (a) a motion seeking approval of the DIP Financing, and (b) a motion seeking approval of certain procedures relating to the 363 Sale Process of the Company’s assets. At the Debtors’ “first day hearing” on December 8, 2023, the Bankruptcy Court approved all first day relief from the bench, pending entry of the revised forms of order. The Company filed the revised forms of order to the Bankruptcy Court immediately following the first day hearing, and the Company expects that the Bankruptcy Court will enter the orders approving the first day relief in the immediate term. Bankruptcy Court filings and information related to the Chapter 11 Cases are available at: https://cases.ra.kroll.com/troika/.
Substantial doubt about the Company’s ability to continue as a going concern exists in light of its Chapter 11 Cases. The Company’s ability to continue as a going concern is contingent upon, among other things, its ability to, subject to the approval by the Bankruptcy Court, successfully consummate the Sale Transaction, successfully emerge from the Chapter 11 Cases and generate sufficient liquidity following the Sale Transaction to meet its obligations and operating needs.
-3-
There are a number of risks and uncertainties associated with the Company’s bankruptcy, including, among others that: (a) the Sale Transaction may never be approved or be consummated, (b) the Bankruptcy Court may grant or deny motions in a manner that is adverse to the Company and its subsidiaries, and (c) the Chapter 11 Cases may be converted into cases under chapter 7 of the Bankruptcy Code.
The Sale Transaction, Stalking Horse Asset Purchase Agreement, Restructuring Support Agreement and the DIP Financing Agreement are subject to approval by the Bankruptcy Court, among other conditions. Accordingly, no assurance can be given that the transactions described therein will be consummated on the expected terms, if at all. As a result, the Company has concluded that management’s plans at this stage do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
The Company’s security holders are cautioned that trading in the Company’s securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. Trading prices for the Company’s securities may bear little or no relationship to the actual recovery, if any, by holders thereof in the Chapter 11 Cases. The Company currently does not expect that holders of the Company’s common stock or other equity securities will receive any payment or other distribution on account of those securities in the Chapter 11 Cases given the expected sales proceeds (which currently consist of a credit bid and the assumption of certain liabilities of the Debtors) and the amount of the Debtors’ liabilities to more senior creditors. Additionally, the Company expects that its securities will be suspended from trading at the opening of business on December 18, 2023 and delisted from Nasdaq after the completion of Nasdaq’s filing of Form 25-NSE with the Securities and Exchange Commission (the “SEC”). Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies.
Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:
•our ability to fund our planned operations for the next twelve months and our ability to continue as a going concern;
•the adverse impact of the Chapter 11 Cases on our business, financial condition, and results of operations;
•our ability to successfully consummate the Sale Transaction and emerge from the Chapter 11 Cases, including by satisfying the conditions and milestones in the Restructuring Support Agreement;
•our ability to improve our liquidity and long-term capital structure and to address our debt service obligations through the Sale Transaction;
•our ability to make the required payments under the agreements governing our debt obligations;
•our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of the Sale Transaction and the Chapter 11 Cases;
•risks and uncertainties associated with the Sale Transaction, including our ability to receive approvals for debtor-in-possession financing, under the Chapter 11 Cases and successfully consummate the Sale Transaction;
•our ability to receive any required approvals of the Sale Transaction and the responses of our security holders, other stakeholders and customers;
•our ability to monetize certain assets;
•general competitive, economic, industry, market, political and regulatory conditions, including continued impacts of inflation or other pricing environment factors on our costs, liquidity and our ability to pass on price increases to our customers, including as a result of inflationary and deflationary pressures, a decline in consumer spending or deterioration in consumer financial position, whether due to inflation or other factors, as well as other factors specific to the markets in which we operate;
•our ability to manage expenses, our liquidity and our investments in working capital;
•changes in future exchange or interest rates or credit ratings, changes in tax laws, regulations, rates and policies;
•the impact of our common stock being delisted from Nasdaq; and
•other risks and uncertainties described from time to time in our filings with the SEC.
-4-
We undertake no obligation to update or revise the forward-looking statements included in this report, whether as a result of new information, future events or otherwise, after the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results” included herein and in our Transition Report on Form 10-K/T (as amended by Form 10-KT/A) for the six month transition period ended December 31, 2022, and in “Part II - Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.
-5-
Troika Media Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Other assets | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use lease assets | |||||||||||
| Amortizable intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued and other current liabilities | |||||||||||
| Accrued billable expenses | |||||||||||
| Deferred revenue | |||||||||||
| Current portion of long term debt, net of deferred financing costs | |||||||||||
| Convertible note payable | |||||||||||
| Note payable - related party, current | |||||||||||
| Operating lease liabilities, current | |||||||||||
| Acquisition liabilities | |||||||||||
| Contingent liability | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Long-term debt, net of deferred financing costs | |||||||||||
| Operating lease liabilities, non-current | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (Note 10) | |||||||||||
| Stockholders’ equity (deficit): | |||||||||||
Series E Preferred Stock ($ | |||||||||||
Common stock, ($ | |||||||||||
| Additional paid-in-capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity (deficit) | ( | ||||||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-6-
Troika Media Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Impairment and other losses, net | |||||||||||||||||||||||
| Restructuring and other related charges | ( | ( | |||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income (loss) | ( | ( | ( | ||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Miscellaneous (expense)/income | ( | ( | ( | ||||||||||||||||||||
| Total other expense | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) from operations before income taxes | ( | ( | ( | ||||||||||||||||||||
| Income tax expense | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) | ( | ( | ( | ||||||||||||||||||||
| Foreign currency translation adjustment | |||||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Basic | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-7-
Troika Media Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
For the Three and Nine Months Ended September 30, 2023 and 2022
(Unaudited)
| Preferred Stock Series A | Preferred Stock Series E | Common Stock | Additional Paid In Capital | Accumulated Deficit | Accumulated Comprehensive Income (Loss) | Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE — December 31, 2022 | $ | — | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Cashless exercise of warrants for common shares | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Conversion of Preferred Series E shares to common shares | — | ( | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Partial liquidated damages settled in common shares | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2023 | $ | — | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
| Rounding adjustment resulting from one (1) to twenty-five (25) reverse stock split | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Conversion of Preferred Series E shares to common shares | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock via At-the-Market offering, net | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2023 | $ | — | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Equity issuance fees in connection with the at-the-market offering, net | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2023 | $ | — | $ | $ | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||
| Balance — December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Record vested deferred compensation relating to Redeeem employees | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock related to Converge acquisition | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Record preferred stock issued to PIPE | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation reclassification | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Acquisition adjustments | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Redemption of Preferred Series A | ( | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation reclassification | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||
| Reclassification of foreign currency translation loss | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance- September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-8-
Troika Media Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net loss | $ | ( | ( | ||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of right-of-use assets | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Impairments and other losses, net | |||||||||||
| Stock-based compensation | |||||||||||
| Accretion of interest on acquisition liabilities | |||||||||||
| Net gain on sale of subsidiary | ( | ||||||||||
| Imputed interest for note payable | |||||||||||
| Loss on early termination of operating lease | |||||||||||
| Loss on derivative liabilities | |||||||||||
| Provision for bad debt | ( | ( | |||||||||
| Partial liquidated damages expense | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Prepaid expenses | ( | ( | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Other assets | ( | ( | |||||||||
| Operating lease liability | ( | ( | |||||||||
| Due to related parties | ( | ||||||||||
| Deferred revenue | |||||||||||
| Other long-term liabilities | ( | ( | |||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Net cash paid for acquisition of Converge | ( | ||||||||||
| Net cash paid for sale of Mission Media UK | ( | ||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Principal payments made for bank loan | ( | ( | |||||||||
| Proceeds from at-the-market offering, net | |||||||||||
| Payments for note payable to related party | ( | ( | |||||||||
| Proceeds from the issuance of preferred stock, net of offering costs | |||||||||||
| Proceeds from bank loan, net of debt issuance cost | |||||||||||
| Payments made for the redemption of Series A preferred stock | ( | ||||||||||
| Payment of stimulus loan programs | ( | ||||||||||
| Payments made for loss contingency on equity issuance | ( | ||||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rate on cash | |||||||||||
| NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | $ | ( | $ | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH — beginning of period | |||||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH — end of period | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Income taxes | $ | $ | |||||||||
| Interest expense | $ | $ | |||||||||
Noncash investing and financing activities: | |||||||||||
| Conversion of Series E Preferred shares to common shares | $ | $ | |||||||||
| Cashless exercise of warrants for common shares | $ | $ | |||||||||
| Settlement of contingent liability in common shares | $ | $ | |||||||||
| Write-off of property and equipment | $ | $ | |||||||||
| Fair value of common stock issued relating to the Converge Acquisition | $ | $ | |||||||||
| Warrants issued relating to debt financing | $ | $ | |||||||||
| Warrants issued relating to equity financing | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-9-
TROIKA MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. Description of Business and Basis of Presentation
Description of Business
Troika Media Group, Inc. (“Company”, “our” or “we”) is a professional services company that architects and builds enterprise value in consumer facing brands to generate scalable performance driven revenue growth. The Company delivers three solutions pillars that CREATE brands and experiences and CONNECT consumers through emerging technology products and ecosystems to deliver PERFORMANCE based measurable business outcomes.
Unaudited Interim Financial Statements
The accompanying interim condensed consolidated unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company’s Transition Report on Form 10-K/T (as amended by Form 10-KT/A) for the six month transition period ended December 31, 2022. The financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2023 presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management such financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2022, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year.
Reverse Stock Split
On June 1, 2023, we effected a reverse stock split (the "Reverse Split") of our Common stock, par value $.001 per share ("Common Stock") such that each stockholder received 1 share of Common Stock for every 25 shares owned by such stockholder before the Reverse Split. All historical share amounts disclosed in this quarterly report on Form 10-Q have been retroactively restated to reflect the Reverse Split and subsequent share exchange. No fractional shares were issued as a result of the Reverse Split, as fractional shares of Common Stock were rounded up to the nearest whole share.
Notice of Non-Compliance
On August 22, 2023, the Company received a delinquency notification letter from Nasdaq stating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) because it had not timely filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 (the “Q2 2023 Form 10-Q”). Nasdaq informed the Company that the Company must submit a plan of compliance (the “Plan”) within sixty (60) days (the "Plan Deadline") addressing how it intended to regain compliance with Nasdaq’s listing rules or otherwise file the Q2 2023 Form 10-Q before the expiration of such sixty (60) day period. The Company has filed the Quarterly Report on 10-Q for the quarter ended June 30, 2023 before the Plan Deadline, therefore the Company will not be required to submit a Plan to Nasdaq by the Plan Deadline.
See the section of this report entitled “Notices of Non-Compliance” in “Subsequent Events” below for additional information regarding the Company’s listing status, including in respect of Nasdaq’s determination to delist the Company’s securities effective December 18, 2023.
Departure of Chief Executive Officer and Chief Financial Officer and appointment of Interim Chief Executive Officer and Interim Chief Financial Officer
On August 14, 2023, the Company terminated the employment of Mr. Toama, its former Chief Executive Officer, for “Cause,” pursuant to the terms of his employment agreement. Mr. Toama was deemed to have resigned from the Board of Directors of the Company (the "Board') immediately upon his termination, pursuant to the terms of his employment agreement. The Company has also terminated the employment of Erica Naidrich, its former Chief Financial Officer, for “Cause,” pursuant to the terms of her employment agreement. The Board determined that “Cause” existed to terminate the employment of Mr. Toama and Ms. Naidrich pursuant to the terms of their respective employment agreements, including,
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among other things, for engaging in acts of gross misconduct that are materially injurious to the Company. Both Mr. Toama and Ms. Naidrich have disputed whether they were properly terminated for "Cause".
Effective August 14, 2023, the Company appointed Grant Lyon, a former member of the Board, as the Company’s Interim Chief Executive Officer and Eric Glover as the Company’s Interim Chief Financial Officer. The Company entered into an engagement letter (the “Areté Engagement Letter”) with Areté Capital Partners, LLC (“Areté”), a consulting firm founded and partially owned by Mr. Lyon pursuant to which Areté will make Messrs. Lyon and Glover available to serve as the Interim Chief Executive Officer and Interim Chief Financial Officer, respectively. The foregoing summary of the Areté Engagement Letter does not purport to be complete and is subject to, and qualified in its entirety by the Areté Engagement Letter filed with our Current Reports on Form 8-K filed with the SEC on August 15, 2023.
Going Concern
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with GAAP. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern, the Company has the responsibility to evaluate whether conditions or events raise substantial doubt about its ability to meet its obligations as they become due within one year from the date that financial statements are issued. In performing this evaluation as of the date of the filing of this 10-Q, the Company has determined there is substantial doubt that the Company will have sufficient liquidity under its cash flow forecasts to fund commitments for the twelve months following the date of the filing of this 10-Q.
The costs of and distractions caused by restructuring, pursuing a Potential Transaction, negotiating amendments to the Financing Agreement, and servicing the Blue Torch debt, have materially depleted liquidity and negatively impacted performance of the Company. Consequently, management has concluded that there is substantial doubt about the Company’s ability to fund ongoing operations and meet debt service obligations over the ensuing twelve month period. To preserve operating liquidity and maintain optionally, the Company chose not to make the principal and interest payment due to Blue Torch on September 30, 2023 and negotiated a waiver of that default and other specified events of default through October 20, 2023. The Company filed for Chapter 11 on December 7, 2023 and had extended the waivers through the date of as discussed below in "Subsequent Events".
As has been previously reported and as summarized below in Note 8. Credit Facilities, the Company agreed with its senior lender, Blue Torch Finance LLC ("Blue Torch"), to undertake a process with an investment banker to facilitate the repayment in full of Blue Torch debt either through an acquisition or disposition involving the Company, a refinancing, or some combination thereof (a “Potential Transaction”). As a result, in December 2022, the Company engaged Jefferies LLC (“Jefferies”), a leading global full-service investment banking and capital markets firm, and the Board formed a Special Committee to, among other things, oversee a Potential Transaction. In the absence of a Potential Transaction, the Company and Blue Torch have, in good faith, continued to negotiate to resolve ongoing issues. The Company filed for Chapter 11 on December 7, 2023 and in connection with such filing Blue Torch and the Company agreed to consummate a Potential Transaction in Chapter 11 whereby Blue Torch would acquire certain assets of the Company (subject to approval of the Bankruptcy Court). See "Subsequent Events" below for more information.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE 2. Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements of the Company include the accounts of Troika Media Group, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions
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Restricted cash
The Company defines restricted cash as cash that is legally restricted as to withdrawal or usage. Restricted cash of approximately $0.4 million as of September 30, 2023, consists of cash deposits received from the at-the-market ("ATM") and must be paid to Blue Torch in accordance with the terms of the Financing Agreement. There was no restricted cash balance as of December 31, 2022.
Recently Adopted Accounting Pronouncements
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Subtopic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” ("ASU 2021-08”), which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. The Company has adopted the guidance effective January 1, 2023. The adoption of the pronouncement did not have a material impact on the financial statements when adopted.
Recently Issued Accounting Pronouncements Not Yet Adopted
Not Applicable.
NOTE 3 – Converge Direct Acquisition
On March 22, 2022 (the "Closing Date"), the Company and CD Acquisition Corp. ("CD"), as purchasers, and Thomas Marianacci, Maarten Terry, Sadiq ("Sid") Toama and Michael Carrano, as sellers (the "Converge Sellers") closed on the acquisition of all the equity of Converge Direct LLC (together with its affiliates, "Converge") and 40 % of the equity of Converge Marketing Services, LLC ("CMS") an affiliated entity, for a notional aggregate purchase price of $125.0 million, valued for accounting purposes at approximately $114.9 million pursuant to the Membership Interest Purchase Agreement, dated November 22, 2021 (the "MIPA").
Purchase Price
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 payable upon satisfaction of certain conditions (the "Escrowed Cash"), and another $5.0 million payable 12 months after the acquisition date contingent on the Company satisfying its bank covenants and at the option of the payee payment will be in the form of cash or common stock of the Company valued at $2.00 per share. The remaining $25.0 million was paid in the form of 12.5 million shares of the Company’s restricted common stock at a price of $2.00 per share, which for 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 dated as of November 22, 2021, as amended, an aggregate of $2.5 million (10 %) or 1,250,000 shares of the Common Stock issued to the Sellers are held in escrow to secure against claims for indemnification (the "Escrowed Shares"). The Escrowed Shares will be held until the later of (a) one year from the Closing Date, or (b) the resolution of indemnification claims. The Company is accounting for the transaction under the purchase method of accounting in accordance with the provisions of ASC Topic 805 Business Combinations (ASC 805). On the Closing Date, Converge became a wholly-owned subsidiary.
At March 22, 2022 the Company recorded the $5.0 million payable due March 21, 2023, at its then net present value of $4.7 million. Further, pursuant to the MIPA, the Company recorded an additional liability totaling $4.3 million which represents the excess net working capital value received by the Company at the purchase date. Per the terms of the MIPA, this amount was to be repaid within 120 days of closing. As of September 30, 2023, a total of $9.3 million is included within acquisition liabilities on the condensed consolidated balance sheets.
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On March 21, 2022, the Company entered into employment agreements with Mr. Toama and Mr. Marianacci, two of the Converge Sellers. Mr. Toama was appointed President of TMG and Mr. Marianacci was appointed as President of the Converge entities.
On February 13, 2023, the Company and Mr. Toama entered into a letter agreement (the "Toama Letter Agreement") amending certain terms of Mr. Toama’s employment agreement, including by appointing him Chief Executive Officer of the Company. See the Company’s Current Report on Form 8-K filed with the United States Securities and Exchange Commission ("SEC") on February 16, 2023, the contents of which are incorporated by reference herein.
On May 26, 2023, the Company and Mr. Toama entered into a new employment agreement and a new restrictive covenant agreement (together, the “New Agreements”). The New Agreements supersede Mr. Toama’s prior Executive Employment Agreement with the Company effective March 21, 2022, as the same was amended by the Toama Letter Agreement. For a description of the material terms of the New Agreements, see the Company’s Current Report on Form 8-K filed with the SEC on June 2, 2023, the contents of which are incorporated by reference herein.
On August 14, 2023, the Company terminated the employment of Mr. Toama for “Cause,” pursuant to the terms of the New Agreements. See the Company’s Current Report on Form 8-K filed with the SEC on August 13, 2023, the contents of which are incorporated by reference herein. Mr. Marianacci resigned his employment with the Company on September 28, 2023.
On September 28, 2023, Thomas Marianacci submitted his resignation to the Company. Mr. Marianacci claims to have resigned with "Good Reason" under the terms of his employment agreement. The Company does not agree and views Mr. Marianacci's resignation as voluntary.
Purchase Price Allocation
The Company negotiated the purchase price based on the expected cash flows to be derived from their operations after integration into the Company’s existing distribution, production, and service networks. The acquisition purchase price is allocated based on the fair values of the assets acquired and liabilities assumed, which are based on management estimates and third-party appraisals. The Company engaged a valuation expert to provide guidance to management which was considered and in part relied upon in completing its purchase price allocation. The excess of the purchase price over the aggregate estimated fair value of net assets acquired was allocated to goodwill.
The following table summarizes the allocation of the purchase price of the assets acquired related to the acquisition as of the closing date:
| Current assets | $ | ||||
| Fixed assets | |||||
| Other non-current assets | |||||
| Intangible assets | |||||
| Goodwill | |||||
| Current liabilities | ( | ||||
| Other non-current liabilities | ( | ||||
| Consideration | $ | ||||
Intangible Assets
The estimated fair values of the identifiable intangible assets acquired were calculated using an income valuation approach which requires a forecast of expected future cash flows either through the use of relief-from-royalty method or multi-period excess earnings methods ("MPEEM"). The estimated useful lives are based on the Company’s experience and expectations as to the duration of the time the Company expects to realize benefits of the assets.
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The estimated fair values of the identifiable intangible assets acquired, estimated useful lives and related valuation methodology are as follows:
| Intangible Assets: | Preliminary Fair Value | Life in Years | Discount Rate | Valuation Method | |||||||||||||||||||
| Customer relationships | $ | Income (MPEEM) | |||||||||||||||||||||
| Technology | Income (Relief-from-Royalty) | ||||||||||||||||||||||
| Tradename | Income (Relief-from-Royalty) | ||||||||||||||||||||||
| $ | |||||||||||||||||||||||
The Company will amortize the intangible assets above on a straight line basis over their estimated useful lives.
UNAUDITED PRO FORMA OPERATING RESULTS
The following unaudited pro forma information presents the combined results of operations as if the acquisition of Converge had been completed on January 1, 2022.
| For the nine months ended | |||||
| September 30, 2022 | |||||
| Revenue | $ | ||||
| Cost of revenue | |||||
| Gross profit | |||||
| Operating expenses | ( | ||||
| Operating loss | ( | ||||
| Other expenses | ( | ||||
| Net loss | $ | ( | |||
NOTE 4. Revenue and Accounts Receivable
The Company generates revenues primarily by delivering both managed services and performance based marketing services to customers. The Company’s revenue recognition policies 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 managed and professional services (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 fixed fee 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.
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.
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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, view, call, or purchase. 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, 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 accounts receivable and accrued billable expenses on the condensed consolidated balance sheets.
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.
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 when the customer is issued the invoice. Once the Company has an unconditional right to consideration under these contracts, the contract assets are recorded to accounts receivable on the condensed consolidated balance sheets.
When consideration is received from a customer prior to transferring services to the customer under the terms of a contract, a contract liability (deferred revenue) is recorded. Deferred revenue is recognized as revenue when, or as, control of the services is transferred to the customer and all revenue recognition criteria have been met.
The Company’s customer base is highly concentrated. Revenue may significantly decline if the Company were to lose one or more of its significant customers, or if the Company were not able to obtain new customers. For the nine months ended September 30, 2023, and 2022, five (5) customers accounted for 82.1 % and 81.6 % of our revenues, respectively.
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The following table provides information about current contract balances from contracts with customers:
| September 30, | December 31, | |||||||||||||
| 2023 | 2022 | |||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Deferred revenue | $ | $ | ||||||||||||
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 approximately $0.9 million and $1.0 million as of September 30, 2023, and December 31, 2022, respectively.
The amount of revenue recognized during the nine months ended September 30, 2023, relating to the deferred revenue recorded as of December 31, 2022, was approximately $1.1 million.
NOTE 5. Property and Equipment
Property and equipment consist of the following as of September 30, 2023, and December 31, 2022:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Computer equipment | $ | $ | |||||||||
| Website design | |||||||||||
| Office machine & equipment | |||||||||||
| Furniture & fixtures | |||||||||||
| Leasehold improvements | |||||||||||
| Total Property and equipment | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
During the three months ended September 30, 2023, and 2022, depreciation expense was approximately $29 thousand and $54 thousand, respectively.
During the nine months ended September 30, 2023 and 2022, depreciation expense was approximately $83 thousand and $143 thousand, respectively.
During the nine months ended September 30, 2023, the Company wrote-off approximately $0.3 million of property and equipment related to the legacy Troika and Mission entities. The write-off of the property and equipment was recorded against the restructuring liabilities. There were no
NOTE 6. Amortizable Intangible Assets & Goodwill
The Company's intangible assets subject to amortization are as follows:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Customer relationship, net | $ | $ | |||||||||
| Technology | |||||||||||
| Tradename | |||||||||||
| Total intangible assets | |||||||||||
| Less: accumulated amortization | ( | ( | |||||||||
| Total amortizable intangible assets, net | $ | $ | |||||||||
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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 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, 2023 and 2022, amortization expense was approximately $2.0 million and $2.2 million, respectively.
During the nine months ended September 30, 2023 and 2022, amortization expense was approximately $6.1 million and $4.8 million, respectively.
As of September 30, 2023, estimated amortization expense related to the Company's intangible assets is as follows:
| Fiscal year ending December 31: | ||||||||
| Remaining 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
The Company reviews intangibles that have indefinite lives for impairment annually as of October 31, or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates and terminal growth rates, and other assumptions, to estimate the fair value of indefinite-lived intangible assets. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results.
Indefinite-lived intangible assets were recorded as a result of acquisitions and primarily consist of trade names, technology, and customer relationships. The estimated fair values of the identifiable intangible assets acquired were calculated using an income valuation approach which requires a forecast of expected future cash flows either through the use of relief-from-royalty method or multi-period excess earnings methods ("MPEEM"). The estimated useful lives are based on the Company’s experience and expectations as to the duration of the time the Company expects to realize benefits of the assets.
ASC 360 requires long-lived assets to be tested for impairment using a three-step impairment test. Step 1 of the test is giving consideration to whether indicators of impairment of long-lived assets are present. Given the sustained decline in the Company’s market capitalization and cash flows, indications were that an impairment may exist and the Company proceeded to Step 2 to determine whether an impairment loss should be recognized. As a part of Step 2, the Company performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the long-lived assets in question to their carrying amounts. Given that the undiscounted cash flows for the long-lived assets were below the carrying amounts, the Company proceeded to perform Step 3 of the test by measuring the amount of impairment to the long-lived assets. An impairment loss is measured by the excess of the carrying amount of the long-lived asset over its implied fair value.
During the three months ended September 30, 2023 and 2022, the Company recognized non-cash pre-tax impairment charge of its intangible assets of $26.2 million and $0.0 million , respectively. During the nine months ended September 30,
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2023 and 2022, the Company recognized non-cash pre-tax impairment charge of its intangible assets of $26.2 million and $7.2 million, respectively.
The Company will re-perform the impairment test at year-end. Future events or market conditions may further reduce the estimated fair value of these long-lived assets and as a result, the Company may need to adjust the carrying value of these long-lived assets in the period in which the reduction in the estimated fair value occurs and record further impairment charges.
As of September 30, 2023 and December 31, 2022, amortizable intangible assets, net, presented within our condensed consolidated balance sheets were $32.4 million and $64.8 million, respectively.
Goodwill
We evaluate the recoverability of goodwill by following a two step process. Step one of the goodwill impairment test involves comparing the carrying value of our reporting units to their estimated fair value. We determine the fair value of each reporting unit using accepted valuation methods, including the use of discounted cash flows supplemented by market-based assessments of fair value. The discounted cash flow valuations involve the use of certain key assumptions, including projected revenue growth, profitability, and working capital levels as well as market-based discount rates (a discount rate of 21.0% was used in the quarterly goodwill impairment test). In performing these valuations, we rely on our internal forecasts based on a combination of historical performance and our expectations for the future. As a result of step one of the quarterly goodwill impairment test, we determined that the carrying value exceeded the fair value for our reporting unit.
We perform step two of the goodwill impairment test for any reporting unit whose carrying value exceeds its fair value. Step two involves allocating the fair value of the reporting unit to its assets and liabilities, with the excess representing implied goodwill. An impairment loss is recognized if the recorded goodwill exceeds the implied goodwill. For the three and nine months ended September 30, 2023 the Company recorded impairment of goodwill totaling $23.9 no goodwill impairment charges and $2.0 million in goodwill impairment charges, respectively.
NOTE 7. Restructuring
Initiated in the fourth quarter of the fiscal year ended June 30, 2022, the Company underwent organizational changes to further streamline operations. This restructuring program includes workforce reductions, closure of excess facilities, and other charges. The restructuring program resulted in costs incurred primarily for (1) workforce reduction of 113 employees across certain business functions and operating units, (2) abandoned or excess facilities relating to lease terminations and non-cancelable lease costs and (3) other charges, which include but are not limited to legal fees, regulatory/compliance expenses, and contractual obligations.
Company management performed an analysis of the certain Troika, Mission, and Redeeem companies to determine whether discontinued operation classification was appropriate. In the evaluation, the Company considered ASC 205 Presentation of Financial Statements and specifically ASC 205-20 Discontinued Operations. Under that guidance, a disposal shall be reported in discontinued operations if the disposal represents a strategic shift that will have a major impact on an entity’s operations and financial results. The Troika, Mission, and Redeeem subsidiaries did not have a major impact on the Company's operations, and management did not consider them to be separate segments or geographic areas in our reported results. The subsidiaries were consolidated, operated within the same geographical areas, and provided similar professional services as the Converge business, which are marketing and advertising consultative services. Therefore, the Company does not believe this represented a strategic shift in business operations but a strategic overhaul in cost reduction, operating efficiencies and establishing a stable baseline for future scalable growth. Further, the Company considered if the abandonment of these subsidiaries had a major effect on the entities’ operations and financial results. We noted that the guidance does not provide any “bright lines” when evaluating the quantitative factors that would represent a strategic shift. The Company does believe that these changes will deliver significant future cost savings to the consolidated entity in the form of selling, general and administrative costs as a result of the workforce reductions and excess facilities costs.
Based on the quantitative analysis of the six months ended December 31, 2022 results, the Company noted that the total revenues from these certain subsidiaries only constituted three point six (3.6 %) percent of total consolidated revenues, one
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(1 %) percent of the total consolidated assets, and seven percent (7 %) of total consolidated liabilities. Based on this analysis the Company determined there was not a significant impact on the Company’s operations and financial results. Therefore, discontinued operations reporting was not required.
For the three months ended September 30, 2023 and 2022, the Company recorded an insignificant amount of net restructuring credits and $0.9 million in costs, respectively.
For the nine months ended September 30, 2023 and 2022, the Company recorded approximately $0.1 million of net restructuring credits and $6.5 million in costs, respectively. Net restructuring credits for the nine months ended September 30, 2023 primarily consisted of approximately $0.7 million in credits related to favorable settlements of executive and employee severance and benefit payments. These credits were partially offset by associated legal fees of approximately $0.6 million, which did not have a restructuring reserve liability. In the comparable period, restructuring costs primarily consisted of approximately $5.7 million of severance and termination costs, approximately $0.4 million in professional fees, approximately $0.2 million associated with the sale of Mission Media UK, and approximately $0.2 million of losses associated with the early termination of a lease.
The restructuring reserve liability is presented within the accrued and other current liabilities line within the consolidated balance sheets. The change in the restructuring reserve liability for the three and nine months ended September 30, 2023 was as follows:
| Severance and termination costs | Other exit costs | Total | ||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | |||||||||||||||||
| Charges | ||||||||||||||||||||
| Payments | ( | ( | ||||||||||||||||||
| Credits | ( | ( | ( | |||||||||||||||||
| Balance as of June 30, 2023 | ||||||||||||||||||||
| Charges | ||||||||||||||||||||
| Payments | ( | ( | ||||||||||||||||||
| Credits | ( | ( | ||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | |||||||||||||||||
There was no restructuring reserve as of September 30, 2022.
NOTE 8. Credit Facilities
Debt related to the Senior Secured Credit Facility, Convertible Note Payable, and Related Party Note Payable consisted of the following:
| Effective Interest Rate | September 30, 2023 | December 31, 2022 | ||||||||||||||||||
Senior Note due 2026 (1) | % | $ | $ | |||||||||||||||||
| Convertible Note | ||||||||||||||||||||
| Related Party Note | ||||||||||||||||||||
| Total debt | ||||||||||||||||||||
| Less: current portion | ||||||||||||||||||||
| Long-term debt, excluding current portion | $ | $ | ||||||||||||||||||
(1) Includes unamortized discount and issuance costs of approximately $ | ||||||||||||||||||||
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Senior Secured Credit Facility
On March 21, 2022, the Company entered into the Financing Agreement with Blue Torch in connection with the Converge Acquisition. This $76.5 million First Lien Senior Secured Term Loan (the “Credit Facility”) was used in part to fund 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 ($1.5 million) of the Credit Facility paid at closing, plus an administrative agency fee of $250,000 per year; (v) a first priority perfected lien on all property and assets including all outstanding equity of the Company’s subsidiaries; (vi) one point five (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 covenants in the Credit Facility and leverage ratios, fixed charge coverage ratios, and maintaining liquidity of at least $6.0 million at all times.
On September 22, 2023, the Company and Blue Torch entered into the First Amendment to Financing Agreement by adding provisions for the use of secured overnight financing rate loans in place of LIBOR rate loans. See the Company’s Current Report on Form 8-K filed with the SEC on September 27, 2023, the contents of which are incorporated by reference herein.
The Company and each of its subsidiary Guarantors entered into a Pledge and Security Agreement (the “Security Agreement”) dated as of March 21, 2022, as a requirement with the Credit Facility. Each Guarantor pledged and assigned to the Collateral Agreement and granted the Collateral Agent with a continuing security interest in all personal property and fixtures of the Guarantors (the “Collateral”) and all proceeds of the Collateral. All equity of the Guarantors was pledged by the Borrower.
On March 21, 2022, each of the Company’s Subsidiaries, as Guarantors, entered into an Intercompany Subordination Agreement (the “ISA”) with the Collateral Agent. Under the ISA, each obligor agreed to the subordination of such indebtedness of each other obligor to such other obligations.
On March 21, 2022, the Company entered into an Escrow Agreement with Blue Torch and Alter Domus (US) LLC, as Escrow Agent. The Escrow Agreement provides for the escrow of $29.1 million of the $76.5 million proceeds, under the Credit Facility to be held until the audited financial statements of Converge Direct LLC and affiliates for the years ended December 31, 2020 and 2019, are delivered to Blue Torch, which were delivered during fourth quarter of fiscal year 2022. As of September 30, 2023, Blue Torch has not authorized the release of the funds in escrow.
Although the Company believes that the Converge Sellers’ recourse is solely to the escrow account, it is possible that the Converge Sellers could make claims against the Company for the deferred amount. In the event that the Converge Sellers were to make and be successful in such claims, the Company believes that a court would likely order Blue Torch to release the escrowed funds to satisfy such claims
In connection with the Credit Facility, the Company recorded debt discount and issuance costs totaling approximately $9.2 million. The discount and issuance costs will be amortized over the life of the note using the effective interest rate method. For the three and nine months ended September 30, 2023, amortization of deferred financing costs was approximately $0.6 million and $1.7 million, respectively. For the three and nine months ended September 30, 2022, amortization of deferred financing costs were approximately $0.6 million and $1.4 million, respectively.
For the three and nine months ended September 30, 2023 the Company made principal payments totaling approximately $0.0 million and $1.9 million, respectively. On October 4, 2023, the Company and Blue Torch entered into the Second A&R Limited Wavier to, among other things, temporarily waive the quarterly principal and interest payments due under the Financing Agreement due to be paid on or about September 30, 2023.
For the three and nine months ended September 30, 2022, the Company made principal payments totaling approximately $1.0 million and $1.9 million, respectively. For the three months ended
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At September 30, 2023, the principal payments required under the Term Loan Facility are as follows:
| Fiscal year ending December 31: | |||||
| Remaining 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Total maturities | $ | ||||
At any time on or after March 21, 2022, and on or prior to March 21, 2026, the Lenders have the right to subscribe for and purchase from the Company, up to initially 77,178 shares of Common Stock, subject to adjustment. During the six months ended December 31, 2022, the number of shares increased to 177,178 . The exercise price per share of Common Stock under this Warrant shall be $0.01 per share. If at any time when this Warrant becomes exercisable and a related Registration Statement is not in effect, the Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise”. The shares have been adjusted to reflect the one (1) for twenty-five (25) reverse stock split.
As of September 30, 2023, the fair value of long-term debt is considered to approximate its stated value of $71.7 million .
Blue Torch Extensions, Waivers, and Amendments
On October 14, 2022, Blue Torch and the Company entered into a Limited Waiver of events of default under the Financing Agreement that related to the Company’s failure to satisfy certain financial and non-financial covenants (as amended, the "Original Limited Waiver"). The Original Limited Waiver was initially scheduled to expire on October 28, 2022, if not terminated earlier by Blue Torch (“Original Waiver Period”), but the Original Waiver Period was subsequently extended through February 10, 2023 by the First Amendment to Limited Waiver to Financing Agreement dated as of October 28, 2022, the Second Amendment to the Limited Waiver to Financing Agreement dated as of November 11, 2022, the Third Amendment to the Limited Waiver to Financing Agreement dated as of November 25, 2022, the Fourth Amendment to the Limited Waiver to Financing Agreement dated as of December 9, 2022, the Fifth Amendment to the Limited Waiver to Financing Agreement dated as of December 23, 2022, the Sixth Amendment to the Limited Waiver to Financing Agreement dated as of January 13, 2023, and the Seventh Amendment to the Limited Waiver to the Financing Agreement dated January 31, 2023, and the Eight Amendment to the Limited Waiver to the Financing Agreement dated as of February 7, 2023.
On February 10, 2023, Blue Torch and the Company entered into an Amended and Restated Limited Waiver (the “First A&R Limited Waiver”) of certain events of default (such events of default, the “Specified Events of Default”) under the Financing Agreement, which amended and restated the Original Limited Wavier. The First A&R Limited Waiver provided that, among other things, during the First A&R Waiver Period (defined below), the Company would comply with certain sale and refinancing milestones and refrain from engaging in any “Permitted Acquisition” under the Financing Agreement or making certain post-closing payments to Converge Sellers. The First A&R Limited Waiver would have expired on the earliest of (x) the occurrence of an Event of Default under the Financing Agreement that is not a Specified Event of Default, (y) a failure by the Company to comply with certain sale and refinancing milestones set forth in a side letter agreed by the Company and the Lenders and (z) June 30, 2023, subject to potential extension of up to sixty (60) days to obtain regulatory and/or shareholder approval in the event the Company is pursuing a sale transaction (the “First A&R Waiver Period”, and the date referenced in subclause (z) above, the “Outside Date”).
On April 14, 2023 and April 28, 2023, Blue Torch and the Company entered into letter agreements (the “Extension Letters”, collectively with the First A&R Limited Waiver and associated side letter, the “Prior Waiver Documents”) that extended the Applicable Milestones (as defined below). The “Applicable Milestones” included (i) the date for which potential acquirers (collectively, “bidders” and each a “bidder”) would be required to submit binding bids to acquire the Company, (ii) the date by which the Company would be required to select a winning bidder, and (iii) the date by which the winning bidder and the Company would be required to enter into definitive documentation providing for an acquisition of the Company or a refinancing of its indebtedness with Blue Torch, in each case subject to the terms and conditions of the Extension Letters and the First A&R Limited Waiver.
On May 8, 2023, the Company and Blue Torch entered into a first amendment to the First A&R Limited Waiver (the “First Amendment to First A&R Limited Waiver”) and an amended and restated letter agreement that, in each case, superseded
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the Prior Waiver Documents, and pursuant to which the Company affirmed its commitment to work in good faith to consummate a sale of the Company’s business or assets or a refinancing transaction before the expiration of the First A&R Waiver Period, and Blue Torch agreed to remove the Applicable Milestones and to extend the Outside Date from June 30, 2023 to July 14, 2023, subject to a potential extension if a definitive written agreement is delivered on or prior to July 14, 2023 that provides for cash repayment in full of all obligations owed to Blue Torch or which is otherwise acceptable to Blue Torch. In addition, under the First Amendment to the First A&R Limited Waiver, the Company agreed to pay Blue Torch an “exit fee” equal to five (5 %) percent of the aggregate outstanding principal balance of the Company’s indebtedness with Blue Torch as of the date of the First Amendment to the First A&R Limited Waiver, plus accrued interest, subject to reduction or waiver if such Blue Torch indebtedness is repaid in full in cash by the dates specified therein. The foregoing summary does not purport to be complete and is subject to, and qualified in its entirety by, Amendment No. 1 to the A&R Limited Waiver attached as Exhibit 10.2 to this Quarterly Report on Form 10-Q.
On July 14, 2023, the Company and Blue Torch entered into a second amendment to the First A&R Limited Waiver (the “Second Amendment to First A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from July 14, 2023, to July 28, 2023, subject to potential extension if a definitive written agreement was delivered on or prior to July 28 2023 providing for cash repayment in full of all obligations owed to Blue Torch or which was otherwise acceptable to Blue Torch.
On July 28, 2023, the Company and Blue Torch entered into the third amendment to the First A&R Limited Wavier (the “Third Amendment to First A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from July 28, 2023, to August 28, 2023, subject to potential extension if a definitive written agreement was delivered on or prior to August 28, 2023 providing for cash repayment in full of all obligations owed to Blue Torch or which was otherwise acceptable to Blue Torch.
On August 22, 2023, the Company and Blue Torch entered into a fourth amendment to the First A&R Limited Waiver effective as of August 18, 2023 (the “Fourth Amendment to First A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from August 28, 2023 to September 29, 2023, subject to potential extension if a definitive written agreement is delivered on or prior to September 29, 2023 providing for cash repayment in full of all obligations owed to Blue Torch or which is otherwise acceptable to Blue Torch.
On September 22, 2023, the Company and Company Subsidiaries entered into the First Amendment to Financing Agreement (the "First Amendment to Financing Agreement”) with Blue Torch and the Lenders. The First Amendment to Financing Agreement amends the Financing Agreement by adding provisions for the use of secured overnight financing rate loans in place of LIBOR rate loans.
On September 29, 2023, Blue Torch and the Company entered into a Second Amended and Restated Limited Waiver (the “Second A&R Limited Waiver”) of certain Specified Events of Default under the Financing Agreement, as amended by the First Amendment. The Second A&R Limited Waiver amends and restates the First A&R Limited Waiver. The Company and Blue Torch entered into the Second A&R Limited Wavier to, among other things, (i) waive certain Specified Events of Default including any failure of the Company to make the quarterly principal and interest payments due to be paid on or about September 30, 2023 under the Financing Agreement; and (ii) extend the Outside Date. The Second A&R Limited Waiver will expire on the earliest of (x) the occurrence of an Event of Default under the Financing Agreement that is not a Specified Event of Default, (y) a failure by the Company to comply with certain sale and refinancing milestones set forth in a side letter agreed by the Company and the Lenders and (z) a revised Outside Date of October 13, 2023 (the "Current Waiver Period"). See also "Subsequent Events" for information regarding addition waivers and extensions of the Current Waiver Period.
The Second A&R Limited Waiver concerns events of default that relate to the Company’s existing and anticipated failures to satisfy certain financial and non-financial covenants under the Financing Agreement. If the Company is unsuccessful in curing the continuing events of default by the expiration of the Current Waiver Period, the Company intends to seek further extensions of the Current Waiver Period with Blue Torch and the Lenders, although we cannot assure you that Blue Torch and the Lenders would be willing to grant extensions. If the Company failed to obtain an extension, the Company would be in default under the Financing Agreement and the Lenders would be able to exercise remedies available to them under the Financing Agreement. Any such action would likely have a material adverse effect on the Company and its financial condition.
The foregoing summaries do not purport to be complete and is subject to, and qualified in its entirety by, the Second Amendment to First A&R Limited Waiver, the Third Amendment to First A&R Limited Waiver and Fourth Amendment to
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A&R Limited Waiver filed and with our Current Reports on Form 8-K filed with the SEC on July 17, 2023, July 28, 2023 and August 28, 2023, respectively, the First Amendment to Financing Agreement filed with our Current Reports on Form 8-K filed with the SEC on September 27, 2023, and the Second A&R Limited Waiver filed with our Current Reports on Form 8-K filed with the SEC on October 4, 2023.
See also "Subsequent Events" of this Quarterly Report on Form 10-Q for a description of Amendments One, Two, Three, Four, Five, Six, Seven, and Eight to the Second A&R Limited Waiver.
NOTE 9. Leases
The Company has various operating leases for office space. Some leases include options to extend the lease term, generally at the Company's discretion. The leases generally provide for fixed annual rentals plus certain other costs. The Company's lease agreements do not include any material residual value guarantees or material restrictive covenants. Since the Company's leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate as of the lease commencement date to determine the present value of future lease payments. Upon the adoption of ASC Topic 842, Leases, the Company used the incremental borrowing rate on July 1, 2019 for all operating leases that commenced prior to that date.
During the three months ended September 30, 2023, and 2022, lease expense was approximately $0.3 million and $0.7 million, respectively.
During the nine months ended September 30, 2023, and 2022, lease expense was were approximately $0.8 million and $1.2 million, respectively.
In September 2023, the Company terminated the lease of one of their office facilities in Bedford Hills, NY and has no foreseeable plans to occupy it in the future. As of September 30, 2023, the Company unrecognized the associated right of use asset and recorded an impairment charge of approximately $0.1 million, which is recognized on the Condensed Consolidated Statements of Operations and Comprehensive Loss on the line Impairment and other losses (gains), net.
The following table summarizes the weighted-average remaining lease term and discount rate for operating leases:
| Undiscounted Cash Flows | |||||
| Weighted average remaining lease term in years | |||||
| Weighted average discount rate | |||||
As of September 30, 2023, the maturities of the Company's operating lease liabilities are as follows:
| Remainder of fiscal year ending December 31, 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total undiscounted operating lease payments | |||||
| Less: Imputed interest | ( | ||||
| Total operating lease liabilities | |||||
| Less: current portion of operating lease liabilities | ( | ||||
| Non-current operating lease liabilities | $ | ||||
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NOTE 10 – Commitments and Contingencies
Commitments
As of September 30, 2023, commitments of the Company in the normal course of business in excess of one year are as follows:
| Payments Due by Period | |||||||||||||||||||||||||||||
| Remaining 2023 | Years 2-3 | Years 4-5 | >5 Years | Total | |||||||||||||||||||||||||
Debt repayment (a) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Acquisition liabilities (b) | |||||||||||||||||||||||||||||
Operating lease obligations (c) | |||||||||||||||||||||||||||||
Contingent liability (d) | |||||||||||||||||||||||||||||
Restructuring liabilities (e) | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(a) Debt repayments consists of principal repayments required under the Company's Credit Facility. | |||||||||||||||||||||||||||||
(b) Acquisition liabilities recorded on the balance sheet consist of the Company's obligations to the Converge Sellers arising from the Converge Acquisition. See Note 3 - Converge Direct Acquisition | |||||||||||||||||||||||||||||
(c) 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. | |||||||||||||||||||||||||||||
(d) Contingent liability relate to Series E Holders' claims for liquidated damages owed, if any, under the Series E Registration Rights Agreement | |||||||||||||||||||||||||||||
(e) Restructuring liabilities relate primarily to future severance payments and other exit costs | |||||||||||||||||||||||||||||
Contingencies
In the ordinary course of business, the Company is subject to loss contingencies that cover a range of matters. An estimated loss from a loss contingency, such as a legal proceeding or claim, is accrued if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, the Company evaluates, among other factors, the degree of probability and the ability to reasonably estimate the amount of any such loss.
Partial Liquidated Damages
For the three months ended September 30, 2022, approximately $3.6 million of partial liquidated damages charges were recorded and there were no such charges recorded for the three months ended September 30, 2023. For the nine months ended September 30, 2023 and September 30, 2022, the Company recorded approximately $0.2 million and $3.6 million, respectively, of partial liquidated damages expense which was recorded within miscellaneous expenses on the condensed consolidated statements of operations and comprehensive income (loss). As of September 30, 2023 and December 31, 2022, the Company had approximately $0.9 million and $3.4 million, respectively, related to the outstanding partial liquidated damages, which is presented within the line contingent liability on the condensed consolidated balance sheets. As of September 30, 2023, approximately $3.6 million of partial liquidated damages were paid in cash and approximately $2.7 million was settled in common shares.
On March 21, 2023, the Company disclosed on Form 8-K its intent to engage in negotiations with stockholders ("Series E Holders") of the Company's Series E Convertible Preferred Stock, par value $0.01
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interest was capped at $7.0 million. See Note 11 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for more information related to the partial liquidated damages.
401K Matters
In the calendar year 2022, the Company discovered that it had not made the safe harbor non-elective employer contributions to the Troika Design 401k plan in 2017 pursuant to its 3 % formula under plan terms, and the Company corrected that contribution for the affected participants, with earnings, in 2022.
The Company also discovered that it did not make the three (3 %) percent safe harbor non elective employer contributions to the 401k plan for plan years 2018 through 2022. When the error was discovered in 2022, the Company attempted to correct the error by performing the applicable non-discrimination tests and by making qualified non-elective contributions ("QNECs") to affected participant accounts. However, as the administration of the 401k plan did not conform to the plan terms with respect to the three (3 %) percent employer contribution, additional correction is required. Although the Company is evaluating the appropriate corrective approach, the Company has accrued approximately $1.2 million related to the safe harbor 2018 – 2022 contributions, as of September 30, 2023.
Legal Matters
We may become a party to litigation in the normal course of business. In the opinion of management, except as discussed below there are no legal matters involving us that would have a material adverse effect upon our financial condition, results of operations or cash flows.
Converge Sellers
On July 17, 2023, the Converge Sellers in their capacities as the sellers of Converge filed a complaint (the “Complaint”) under the caption Carrano et al. v. Troika Media Group, Inc. and CD Acquisition Corporation, Case No. 653449/2023 (the “Converge Seller Action”) in the Supreme Court of the State of New York, New York County against the Company and CD (together, the “Defendants”). On August 8, 2023, Mr. Toama, who was Chief Executive Officer of the Company, withdrew from the Converge Seller Action without prejudice. Mr. Toama recused himself from all deliberations by the Board concerning the Converge Seller Action. The Board also formed a Special Litigation Committee composed of Board members Randall Miles, Grant Lyon, Jeffrey Stein, and Wendy Parker with delegated full power to evaluate, investigate, review, and analyze the facts and circumstances surrounding the Converge Seller Action.
The Complaint generally alleges that the Defendants owe sums to the Converge Sellers under the MIPA. The Complaint seeks, among other things, a judgment that the Defendants breached the MIPA and damages relating to the purported breach.
Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that a negative final outcome of this matter could have a material adverse effect on its business, operating results, financial condition or cash flow. Nothing in this Quarterly Report on Form 10-Q shall be deemed an admission of liability in respect of the Converge Seller Action.
NOTE 11. Equity
Common Stock
The Company filed a shelf registration statement on Form S-3 (referred to herein as the “Shelf Registration Statement”) (file no. 333-271189) with the SEC on April 7, 2023 which was amended on April 28, 2023 and declared effective by the SEC on May 23, 2023. Under the Shelf Registration Statement, the Company may from time to time sell any combination of securities described therein in one or more offering up to a total dollar amount of $150 million.
The Company also filed a registration statement on Form S-3 (File no. 333-271889) with the SEC on May 12, 2023, which was declared effective on May 26, 2023, to register the resale of 427,708 shares of Common Stock issued to certain current and former Series E Holders under the Series E Settlement Agreements.
On May 24, 2023, the Company entered into an At Market Issuance Sales Agreement ("ATM Sales Agreement"), with B. Riley Securities, Inc. (the "ATM Agent"), to sell shares of our Common Stock, with aggregate gross proceeds of $70
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million through an "at-the-market" equity offering program under which the ATM Agent agreed to act as sales agent or principal from time to time. Under the ATM Sales Agreement, the ATM Agent may sell shares Common Stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. The ATM Agent will use commercially reasonable efforts to sell the shares of Common Stock from time to time, based upon instructions from the Company. Any shares of Common Stock sold under the ATM Sales Agreement will be issued pursuant to the Company’s Shelf Registration Statement (file no. 333-271189), as supplemented by the prospectus supplement dated May 24, 2023. A copy of the prospectus supplement may be obtained on the SEC’s website at www.sec.gov. The foregoing description of the material terms of the ATM Sales Agreement is qualified in its entirety by reference to the full ATM Sales Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and which is incorporated herein by reference.
For the period ended September 30, 2023, the Company sold a total of 120,628 shares of Common Stock under the ATM Sales Agreement for aggregate gross proceeds of approximately $0.5 million at an average selling price of $4.19 per share, resulting in net proceeds of approximately $0.0 million after deducting commissions and other transaction costs of approximately $0.5 million. The cash deposits received from the ATM issuance must be paid to Blue Torch in accordance with the terms of the Financing Agreement.
As a result of the Company's failure to timely file this report and the Quarterly Report on Form 10-Q for the second quarter of 2023, the Company will not be eligible to utilize Form S-3 to register its securities, including in respect of the ATM, for a period of 12 months from regaining compliance with the requirements of Form S-3.
Reverse stock split
On June 1, 2023, we effected the Reverse Split. All historical share amounts disclosed in this quarterly report on Form 10-Q have been retroactively restated to reflect the Reverse Split and subsequent share exchange. No fractional shares were issued as a result of the Reverse Split as fractional shares of Common Stock were rounded up to the nearest whole share. The number of authorized shares of Common Stock before the Reverse Split was 800,000,000 . After the Reverse Split, the number of authorized shares of common Stock was 32,000,000 . There was no change in par value as result of the Reverse Split.
Stock Compensation
See Note 15 to the consolidated financial statements included in the Company’s Transition Report on Form 10-KT (as amended by Form 10-KT/A) for the six months ended December 31, 2022 for more information regarding (i) 2021 Employee, Director & Consultant Equity Incentive Plan (the “2021 Plan”), and (ii) Troika Media Group, Inc. 2015 Employee, Director and Consultant Equity Incentive Plan, as amended (the “2017 Equity Plan” and together with the 2021 Plan, the "Equity Incentive Plan"). Share-based compensation expense, presented within selling, general and administrative expenses and direct operating expenses, was approximately $(0.2 ) million and $0.5 million for the three months ended September 30, and 2022 respectively. Share-based compensation expense was approximately $0.6 million and $13.8 million for the nine months ended September 30, 2023 and 2022, respectively.
On October 18, 2023 the Company approved the 2023 Incentive Plan, which is designed to provide financial and equity incentives to reward employees for performance that will be critical to build a profitable business and drive value to shareholders.
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Non-Qualified Stock Options (“NQSOs”) Award Activity
Under the Equity Incentive Plan the Company grants options to purchase shares of the Common Stock to employees and affiliates of the Company. These options are time based and vest over the contractual term. The options granted are approved by the Company's Compensation Committee. The Company accounts for forfeitures as they occur; therefore, stock-based compensation expense has been calculated based on actual forfeitures in the Company's consolidated statements of comprehensive loss.
The following table summarizes activity relating to holders of the Company’s NQSOs for the nine months ended September 30, 2023:
| Number of: | ||||||||||||||||||||||||||
| Nonperformance based vesting NQSO's | Weighted average exercise price | Weighted Average remaining contractual term (in years) | Aggregate Intrinsic value | |||||||||||||||||||||||
| Balance: | ||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | ||||||||||||||||||||||||
| September 30, 2023 | $ | $ | ||||||||||||||||||||||||
| Exercisable at: | ||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | ||||||||||||||||||||||||
| September 30, 2023 | $ | $ | ||||||||||||||||||||||||
For the three and nine months ended September 30, 2023 the Company recognized stock compensation expense for options of approximately $0.1 million and $0.1 million, respectively. For the three and nine months ended September 30, 2022 the Company recognized stock compensation expense for options of approximately $0.2 million and $0.7 million, respectively. For the three months ended September 30, 2023, approximately eighty thousand (80,000 ) options were forfeited.
As of September 30, 2023, total unrecognized share-based compensation related to unvested options was approximately $0.3 million, and the weighted-average remaining vesting period for these awards was approximately one year and six months.
Restricted Share Units Award Activity
Pursuant to the Company’s 2021 Plan the Company issues Restricted Share Units ("RSUs") in consideration for employee and consultant services. RSUs issued under the Plan may be exercised in accordance with the applicable grant notice. The Company records stock-based compensation based on the grant date fair value of the awards. The Company recognizes the fair value of restricted stock awards that do not contain a performance condition as expense using the straight-line method over the requisite service period of the award. The Company accounts for forfeitures as they occur; therefore, stock-based compensation expense has been calculated based on actual forfeitures in the Company's condensed consolidated statements of comprehensive loss.
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The following table summarizes activity relating to holders of the Company’s RSUs issued under the Plan for the nine months ended September 30, 2023. The table has been adjusted to include RSU activity related to Converge executives:
| Number of: | ||||||||||||||
| Nonperformance based vesting RSU's | Weighted-Average Fair Value Per Share At Date of Grant | |||||||||||||
| Outstanding award balance at December 31, 2022 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Vested | $ | |||||||||||||
| Forfeited | ( | $ | ||||||||||||
| Outstanding award balance at September 30, 2023 | $ | |||||||||||||
| Vested | $ | |||||||||||||
| Unvested | ||||||||||||||
During the three and nine months ended September 30, 2023 the Company recognized stock compensation expense related to restricted stock units of approximately $(0.3 ) million and $0.4 million, respectively. For the three and nine months ended September 30, 2022, the Company recognized stock compensation expense related to restricted stock units of approximately $0.3 million and $8.8 million, respectively. During the three months ended September 30, 2023, 99,333 restricted stock units were forfeited. As of September 30, 2023, there was no future share-based compensation expense for unvested restricted stock units and no remaining vesting periods.
Earnings per Share
Net income (loss) per common share is calculated in accordance with ASC Topic: 260 Earnings per Share. Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of Common Stock outstanding during the period. The computation of diluted net loss per share does not include dilutive Common Stock equivalents in the weighted average shares outstanding as they would be anti-dilutive. In periods where the Company has a net loss, all dilutive securities are excluded.
The following are dilutive Common Stock equivalents as of September 30, 2023 and 2022, which were not included in the calculation of loss per share, since the Company had a net loss from continuing operations and a net loss:
| September 30, 2023 | September 30, 2022 | ||||||||||
| Convertible preferred stock | |||||||||||
| Stock options | |||||||||||
| Stock warrants | |||||||||||
| Financing warrants | |||||||||||
| Restricted stock units | |||||||||||
| Total | |||||||||||
Series E Preferred Shares
On March 16, 2022, the Company entered into the Series E Purchase Agreement with certain institutional investors to issue and sell in a private offering an aggregate of $50.0 million of securities, consisting of shares of Series E Preferred Stock and warrants to purchase (100 % coverage) shares of Common Stock ("Series E Warrants"). Under the terms of the Series E Purchase Agreement, the Company agreed to sell 500,000 shares of its Series E Preferred Stock and Series E Warrants to purchase up to 1,333,333 shares of the Common Stock. Each share of the Series E Preferred Stock has a stated value of $100 per share and is convertible into shares of Common Stock at a conversion price of $37.5 per share subject to adjustment. The Series E Preferred Stock is perpetual and has no maturity date. The Series E Preferred Stock is not subject to any mandatory redemption or other similar provisions. All future shares of other Company preferred stock shall rank
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junior to the Series E Preferred Stock, except if at least a majority of the Series E Preferred Stock expressly consent, to the creation of the parity stock of senior preferred stock.
The Conversion Price of the Series E Preferred Stock and the exercise price of the Series E Warrants is subject to adjustment for: (a) stock dividends and stock distributions; (b) subsequent rights offerings; (c) pro rata distributions; and (d) certain fundamental transactions.
The Conversion Price is also subject to downward adjustment (the “Registration Reset Price”) to the greater of (i) eighty (80 %) percent of the average of the ten (10 ) lowest daily VWAPs during the forty (40 ) trading day period beginning on and including the Trading Day immediately follow the effective date of the initial Registration Statement in July 2022, and (ii) the Floor Price of $6.25 per share.
The Company issued accompanying Common Stock Purchase Warrants (the “Warrants”) exercisable for five (5 ) years at $50.0 per share, to purchase an aggregate of 1,333,333 shares of Common Stock. The exercise price is subject to the same Registration Reset Price, as described above. The Floor Price is $6.25 per share.
At the time of the closing of the Purchase Agreement, using the Black-Scholes model, the Company recorded a fair value of approximately $30.8 million on the balance sheet within derivative liabilities - financing warrants. At December 9, 2022, the date of the mark to market revaluation, the fair value of such warrants was approximately $10.2 million and a resultant gain on change in fair value of derivative liabilities was recorded for approximately $20.0 million.
The Series E Preferred Stock and Series E Warrants include certain reset and anti-dilution provisions that could reduce the conversion prices and exercise prices thereof down to $6.25 (the “Floor Price”) which was a significant discount to the then current market price. For purposes of complying with Rule 5635(d) of the Nasdaq Stock Market rules, the shareholders approved the issuance of more than 19.99 % of the current total issued and outstanding shares of Common Stock upon conversion of the Series E Preferred Stock and exercise of the Warrants, including, but not limited to, reducing the conversion price to the Floor Price.
In addition, as reported pursuant to the Information Statement field on Schedule 14C on March 14, 2022 with the SEC, the Majority Stockholders approved the amendment to Article Three of the Articles of Incorporation to reflect an increase in the number of authorized shares of all classes of stock which the Company shall have the authority to issue from 36,600,000 shares to 57,000,000 shares, such shares being designated as follows: (i) 32,000,000 shares of Common Stock, and (ii) 25,000,000 shares of preferred stock, par value $0.01 per share. The foregoing does reflect changes to the authorized and issued shares from the Reverse Stock Split which occurred on June 1, 2023.
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 exchanged 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 filed an amended and restated certificate of designation for the Series E Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Nevada on September 27, 2022 to effect certain changes contemplated by the Exchange Agreement.
The New PIPE Terms effected the following changes, among others, to the rights Series E Holders:
•New Warrant Exercise Price: The New Warrant exercise price per share of Common Stock is $13.75 , provided that if all shares of Series E Preferred Stock issued pursuant to the Certificate of Designation are not repurchased by the Company on or prior to November 26, 2022, on such date, the exercise price per share of the New Warrants will revert to $50.00 , 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 volume-weighted average prices ("VWAPs") during the Subsequent Adjustment Period and (ii) $6.25 .
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•Series E Conversion Price: The conversion price for the Series E Preferred Stock shall initially equal $10.00 per share, and so long as the arithmetic average of the daily 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 $6.25 10 ) lowest daily VWAPs during the Subsequent Adjustment Period and (ii) $6.25 .
•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.
•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.
•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 $7.50 per share.
•Liquidated Damages: The Company agreed to pay to the Purchasers all liquidated damages owed through September 21, 2022 (including any pro-rated amounts), which totaled approximately $3.6 million, all of which was paid during the three months ended September 30, 2022. The Company accrued an additional $0.2 million for the nine months ended September 30, 2023 which is recorded in miscellaneous income (expense) on the statements of operations and comprehensive income (loss). See below for additional detail.
On March 31, 2023, the Company entered into Settlement Agreements (the “Settlement Agreements”) with certain former holders of its Series E Preferred Stock (the “Purchasers”) who constituted the registered or beneficial owners of more than 50.1 % of the Registrable Securities under, and defined in, the Registration Rights Agreement, and more than 50.1 % of the Series E Preferred Stock originally purchased under the Purchase Agreement. As such, in accordance with the terms of the Registration Rights Agreement and the Purchase Agreement, as applicable, as of March 31, 2023 (the “Effective Date”), each such agreement and all rights and obligations thereunder were terminated and deemed of no further force and effect as of such date. In addition, effective as of the Effective Date, the Settlement Agreements contain a release of any and all claims against the Company and its subsidiaries that such Purchaser (or its affiliates) may have purported to have against the Company or its subsidiaries under such agreements; provided, however, that the Purchasers will maintain their respective “Piggy-Back Registration Rights” under Section 6(d) of the Registration Rights Agreement. In exchange for the release by the Purchasers of any and all claims for liquidated damages under the Registration Rights Agreement, the Company delivered to each Purchaser a number of shares of Common Stock equal to the dollar amount of liquidated damages purportedly owed to each such Purchaser multiplied by four (4). The Company agreed to prepare and file with the SEC a resale registration statement on Form S-3 covering such Common Stock (the “Resale Registration Statement”), which was declared effective on May 26, 2023 (file no. 333-271889).
As of September 30, 2023, the Company had settled with the Purchasers and issued common shares. The Company recorded the 2.7 million share settlement as equity within its condensed consolidated balance sheets. For the nine months ended September 30, 2023, 304,838 shares of Series E Preferred Stock were converted into approximately 4.9 million shares of Common Stock, at a conversion price of $6.25 . The foregoing reflects changes to the authorized and issued shares from the Reverse Stock Split which occurred on June 1, 2023.
Some Series E Holders have not settled with the Company and continue to advocate for payment of liquidated damages under the Registration Rights Agreement. As of September 30, 2023, fourteen (14 0.2 million of interest related to the liquidated damages during the nine months ended September 30, 2023 for Series E Holders who have not entered into a Settlement Agreement.
All Other Preferred shares
The only designated series of preferred stock is the Series E Preferred Stock.
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NOTE 12. Related Party
Converge Sellers
During the quarter ended September 30, 2022, in connection with the Converge Acquisition, the Company accrued certain amounts due to the Converge Sellers totaling $9.2 million. As of September 30, 2023, and December 31, 2022, $9.3
Media Resource Group ("MRG")
Mr. Marianacci, who was one of the Converge Sellers, serves as an owner and executive director of Media Resource Group (“MRG”) company that entered into a service agreement with the Company, dated January 1, 2007, under which MRG agreed to provide certain media services to the Company. The Company has ceased all future business with MRG.
For the three months ended September 30, 2023, and 2022, the Company incurred approximately $0.4 million and $0.6 million, respectively, for services performed by MRG. For the nine months ended September 30, 2023 and 2022 the Company incurred approximately $1.3 million and $1.1 million, respectively, for services performed by MRG.
Additionally, amounts due to MRG as of September 30, 2023, and December 31, 2022, were approximately $0.2 million and $0.2 million, respectively, and are reflected within the accounts payable line on its condensed consolidated balance sheets.
Converge Marketing Services ("CMS")
The Company has an Exclusive Services Agreement with CMS, a 40 % owned entity, to provide advertising and related services. CMS and the Company operate with a managed service relationship whereby the expenses incurred by the Company relating to the out-of-pocket costs associated with media campaigns are reimbursed by CMS and the Company receives management fee income.
The Company recognizes revenue on a gross basis as the principal since it controls the marketing services before delivery to the customer and is primarily responsible for fulfilling the promise to provide the services to the customer. According to ASC 606-10-55-37A, which explains the principal versus agent guidance for when another party is involved in providing goods or services to a customer, a principal obtains control when the right to a service to be performed by the other party (vendor), which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf. Given that the Company has discretion of how media spend is allocated and optimized and can direct a third party to provide media services, the Company is deemed to be the principal.
For the three months ended September 30, 2023, and 2022, the Company generated gross managed service revenue of approximately $5.1 million and $13.6 million, respectively, of which $0.7 million and $1.2 million was management fee revenue. For the nine months ended September 30, 2023 and 2022, the Company generated gross managed service revenue of approximately $26.5 million and $35.3 million, respectively, of which $2.9 million and $2.5 million was management fee revenue.
As of September 30, 2023, and December 31, 2022, the Company recorded approximately $1.5 million and $3.7 million, respectively, as amounts due from CMS within the accounts receivable line on its condensed consolidated balance sheets.
At the acquisition date and as of September 30, 2023, the Company's carrying amount of the investment was insignificant. The Company reflects its share of gains and losses of the investment in other income and expenses in the condensed consolidated statements of operations and comprehensive income (loss) using the most recently available earnings data at the end of the period.
Union Ventures Limited purchase of Mission-Media Holdings Limited
On August 1, 2022, Troika-Mission Holdings, Inc., ("TM Holdings”), a subsidiary of the Company, entered into an Equity Purchase Agreement with Union Ventures Limited, a company organized under the law of England and Wales ("UVL"). UVL is a company owned by Union Investments Management Limited, which is a stockholder of the Company and
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affiliated with Daniel Jankowski, a former director of the Company, and Thomas Ochocki, a current Director of the Company. UVL purchased from TM Holdings, all of TM Holdings' right, title, and interest in and to the shares (the "Mission UK Shares") of Mission-Media Holdings Limited, a private limited company incorporated under the laws of England and Wales ("Mission Holdings"), including Mission UK's subsidiary, Mission-Media Limited, a company organized under the laws of England and Wales ("Mission Media UK"). As consideration for all the Mission UK Shares, UVL paid TM Holdings an aggregate purchase price of $1,000 USD. Mr. Ochocki recused himself from the decision to sell the Mission UK Shares to UVL.
Union Eight Limited and Mission Media Limited
On July 1, 2021 Mission Media UK entered into a Consultancy Agreement with Service Company (the “U8L Consultancy Agreement”) with Union Eight Limited (“U8L”) in which U8L agreed to interface with investors and provide strategic advice related to Mission Media UK in exchange for a start-up fee of £150,000 and a monthly retainer of £25,000 . In 2022, the U8L Consultancy Agreement was terminated prior to the expiration of its 2-year term in exchange for a termination payment. U8L is a current stockholder of the Company and is affiliated with Thomas Ochocki, a current director of the Company and former director of Mission Media UK. Daniel Jankowski, a former director of the Company and Mission Media UK, is also affiliated with U8L. U8L was also granted Company Restricted Stock Units.
Ochocki Director Letter
In connection with the subscription for Company shares by Mr. Peter Coates, the Company executed an agreement with Mr. Coates dated May 5, 2017 agreeing that for so long as Mr. Coates (or any of his family members, trusts, or investment vehicles) or Mr. Ochocki owns any shares in the Company, Mr. Ochocki will serve as a director of the Company as Mr. Coates’ designee.
Areté Capital Partners, LLC
Effective August 14, 2023, the Company appointed Grant Lyon, a former member of the Board, as the Company’s Interim Chief Executive Officer and Eric Glover as the Company’s Interim Chief Financial Officer. The Company entered into an engagement letter (the “Areté Engagement Letter”) with Areté Capital Partners, LLC (“Areté”), a consulting firm founded and partially owned by Mr. Lyon pursuant to which Areté will make Messrs. Lyon and Glover available to serve as the Interim Chief Executive Officer and Interim Chief Financial Officer, respectively.
NOTE 13. Income Taxes
On each of September 30, 2023, and December 31, 2022, the accompanying condensed consolidated balance sheets include a tax liability of $0.1 0.1 million and $0.1 million for the three and nine months ended September 30, 2023, respectively. The Company recorded income tax expense of $0.2 million and $0.1 million for the three and nine months ended September 30, 2022, respectively.
The Company's tax rate differs from the statutory rate of 21.0% due to the effects of state taxes, effects of permanent nondeductible expense, and valuation allowance. The Company's utilization of its NOL generated post December 31, 2017 is expected to be limited to eighty (80%) percent of taxable income.
NOTE 14. Subsequent Events
Senior Secured Facility
On October 13, 2023, the Company and Blue Torch entered into the First Amendment to the Second A&R Limited Waiver effective as of October 13, 2023 (the “First Amendment to Second A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from October 13, 2023 to October 20, 2023.
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On October 20, 2023, the Company and Blue Torch entered into the Second Amendment to the Second A&R Limited Waiver (the “Second Amendment to Second A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from October 20, 2023 to October 27, 2023.
On October 27, 2023, the Company and Blue Torch entered into the Third Amendment to the Second A&R Limited Waiver (the “Third Amendment to Second A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from October 27, 2023 to November 3, 2023.
On November 3, 2023, the Company and Blue Torch entered into the Fourth Amendment to the Second A&R Limited Waiver (the “Fourth Amendment to Second A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from November 3, 2023 to November 10, 2023.
On November 10, 2023, the Company and Blue Torch entered into the Fifth Amendment to the Second A&R Limited Waiver (the “Fifth Amendment to Second A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from November 10, 2023 to November 17, 2023.
On November 17, 2023, the Company and Blue Torch entered into the Sixth Amendment to the Second A&R Limited Waiver (the “Sixth Amendment to Second A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from November 17, 2023 to November 29, 2023.
On November 29, 2023, the Company and Blue Torch entered into the Seventh Amendment to the Second A&R Limited Waiver (the “Seventh Amendment to Second A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from November 29, 2023 to December 4, 2023.
On December 4, 2023, the Company and Blue Torch entered into the Eighth Amendment to the Second A&R Limited Waiver (the “Eighth Amendment to Second A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from December 4, 2023 to December 6, 2023.
The Second A&R Limited Waiver concerns events of default that relate to the Company’s existing and anticipated failures to satisfy certain financial and non-financial covenants under the Financing Agreement. If the Company is unsuccessful in curing the continuing events of default by the expiration of the Current Waiver Period, the Company intends to seek further extensions of the Current Waiver Period with Blue Torch and the Lenders, although we cannot assure you that Blue Torch and the Lenders would be willing to grant extensions. If the Company failed to obtain an extension, the Company would be in default under the Financing Agreement and the Lenders would be able to exercise remedies available to them under the Financing Agreement. Any such action would likely have a material adverse effect on the Company and its financial condition.
The foregoing summaries do not purport to be complete and is subject to, and qualified in its entirety by, the First Amendment to Second A&R Limited Waiver, Second Amendment to Second A&R Limited Waiver, Third Amendment to Second A&R Limited Waiver, Fourth Amendment to Second A&R Limited Waiver, Fifth Amendment to Second A&R Limited Waiver, Sixth Amendment to the Second A&R Limited Waiver, Seventh Amendment to the Second A&R Limited waiver, and Eighth Amendment to the Second A&R limited waiver filed with our Current Reports on Form 8-K filed with the SEC on October 18, 2023, October 25, 2023, October 31, 2023, November 8, 2023, November 16, 2023, November 20, 2023, December 1, 2023, and December 5, 2023, respectively.
Notices of Noncompliance from Nasdaq
As discussed in Note 1 above, on August 22, 2023 the Company received a delinquency notification letter from Nasdaq stating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) because it had not timely filed its Q2 2023 Form 10-Q. According to the letter from Nasdaq, the Company must submit a plan of compliance Plan or file the Q2 2023 Form 10-Q before the expiration of the Plan Deadline. The Company filed the Q2 2023 Form 10-Q before the expiration of the Plan Deadline. As a result, on October 26, 2023, the Nasdaq notified the Company that the Company had regained compliance with Nasdaq Listing Rule 5250(c)(1). The Staff’s notification indicated that this matter is now closed.
On November 17, 2023, the Company received a delinquency notification letter from Nasdaq stating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) because it had not timely filed its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (the “3Q Form 10-Q”). According to the letter from Nasdaq, the Company must submit a plan of compliance within sixty (60) days addressing how it intends to regain compliance with Nasdaq’s listing
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rules or otherwise file the 3Q Form 10-Q before the expiration of such sixty (60) day period. With the filing of this Form 10-Q, it is expected that the Company will have met its obligations under the letter.
On December 7, 2023, the Company received a determination letter (“Determination Letter”) from Nasdaq notifying the Company that Nasdaq has determined that, in accordance with its authority under Nasdaq Listing Rules 5101, 5110(b), and IM-5101-1, the Company’s securities will be suspended from trading at the opening of business on December 18, 2023 and delisted from Nasdaq. Nasdaq based its determination upon concerns related to (i) the Company’s announcement that the Company had filed for protection under Chapter 11 of the United States Bankruptcy Code and associated public interest concerns raised by such filing, (ii) the residual equity interest of the existing listed securities holders, and (iii) the Company’s ability to sustain compliance with all requirements for continued listing on Nasdaq. Nasdaq also noted that, since the Company had failed to file 3Q From 10-Q as of the date of such letter, such failure serves as an additional and separate basis for delisting.
The Determination Letter also advises the Company of its right to request an appeal of the determination. However, the Company currently does not intend to file an appeal of the determination. Accordingly, the Company expects that its securities will be suspended from trading at the opening of business on December 18, 2023 and delisted from Nasdaq after the completion of Nasdaq’s filing of Form 25-NSE with the SEC.
Resignation of Grant Lyon
On October 25, 2023, Grant Lyon resigned as a member of the Board and the Boards of Directors of its corporate subsidiaries. Mr. Lyon will remain in his role as Interim Chief Executive Officer of the Company, and will continue to work closely with the Board and attend Board and Committee meetings as needed in his capacity as Interim Chief Executive Officer. Mr. Lyon’s resignation from the Board was not related to any disagreement on any matter related to the Company’s operations, policies, or practices.
Escrowed Shares
On November 15, 2023, the escrow agent for the Escrowed Shares delivered notice to the Company's transfer agent to release the Escrowed Shares to the Converge Sellers.
Thomas Marianacci Litigation Against Blue Torch
On November 27, 2023, Thomas Marianacci filed a lawsuit in the Supreme Court of the State of New County of New York against Blue Torch to release Mr. Marianacci's allocable portion of the Escrowed Cash in connection with the acquisition of Converge. The Company has not been named as a party in the lawsuit.
Voluntary Petitions for Bankruptcy
As discussed in the introductory note above, on December 7, 2023, the Company and certain of its subsidiaries (collectively, the “Debtors”) each filed a voluntary petition for relief (the “Bankruptcy Petitions”) under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the Southern District of New York (such court, the “Bankruptcy Court” and such cases, the “Bankruptcy Cases”). On December 7, 2023, prior to the filing of the Bankruptcy Petitions, the Company and Blue Torch Finance, LLC (“Blue Torch”) entered into a restructuring support agreement (the “Restructuring Support Agreement”), and agreed to the terms of a form of “stalking horse” asset purchase agreement (the “Stalking Horse Asset Purchase Agreement”) and a form of Superpriority Secured Debtor-in-Possession Financing Agreement (the “DIP Financing Agreement”). See the introductory note to this report under “Cautionary Statements” for a description of the Stalking Horse Asset Purchase Agreement, the DIP Financing Agreement and the Restructuring Support Agreement, which descriptions do not purport to be complete and are qualified in their entirety by reference to the applicable agreement, copies of which are filed as exhibits hereto and which are incorporated by reference herein.
As part of the Chapter 11 Cases, the Debtors have obtained Court approval for the joint administration of the Chapter 11 Cases under the caption In re Troika Media Group, Inc., et al. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Company has engaged Jefferies LLC (“Jefferies”) to advise on its strategic options, including the process to sell its assets in connection with the Chapter 11 Cases. To ensure their ability to continue operating in the ordinary course of business, the Debtors filed with the Bankruptcy Court certain motions seeking a variety of customary “first day” relief, including authority to pay employee wages and benefits, to pay
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vendors and suppliers for goods and services, and to continue honoring insurance and tax obligations as they come due. In addition, the Company filed with the Bankruptcy Court (a) a motion seeking approval of the DIP Financing, and (b) a motion seeking approval of certain procedures relating to the 363 Sale Process of the Company’s assets. At the Debtors’ “first day hearing” on December 8, 2023, the Bankruptcy Court approved all first day relief from the bench, pending entry of the revised forms of order. The Company filed the revised forms of order to the Bankruptcy Court immediately following the first day hearing, and the Company expects that the Bankruptcy Court will enter the orders approving the first day relief in the immediate term. Bankruptcy Court filings and information related to the Chapter 11 Cases are available at: https://cases.ra.kroll.com/troika/.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’s discussion and analysis should be read in conjunction with the Company’s condensed consolidated financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q. The management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made. These forward-looking statements can be identified by the use of terminology such as “anticipate,” “believe," "estimate," "expect," "intend," "project," "will," or the negative thereof or other variations thereon or comparable terminology. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in this and our other Quarterly Reports on Form 10-Q, as well as the disclosures made in the Company's Transition Report on Form 10-KT for the transition period ended December 31, 2022 filed on March 7, 2023 (as amended, the "2022 Form 10-KT") including without limitation, those discussed in Item 1A. "Risk Factors." in part I. of the 2022 Form 10-KT, and other filings we make with the SEC. We do not undertake any obligation to update forward-looking statements, except as required by law. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Factors Affecting Results of Operations
Seasonality
The revenue in our three and nine months ended September 30, 2023, is reflective of the seasonality in the business which is driven by our sector and revenue stream mix where we typically see lower customer acquisition investments (in relative terms) by our clients in Q1 and Q4.
Restructuring Programs
During the year ended June 30, 2022 the Company initiated an intensive, what was expected to be a year long organizational restructuring program in order to fully optimize the operations of the post-acquisition consolidated company. The restructuring program resulted in costs not expected to recur that were incurred primarily for (1) workforce reductions of over 100 employees across multiple business functions and subsidiaries, (2) abandoned or excess facilities relating to lease terminations and non-cancelable lease costs and (3) other charges, which include but are not limited to legal fees, regulatory/compliance expenses, and contractual obligations. See Note 7 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions on restructuring charges.
During the nine months ended September 30, 2023 the Company leveraged the previously completed restructuring effort to begin the latter phases of its organizational restructuring which included various efforts related to the recapitalization of its Balance Sheet. On February 22, 2023 the Company announced that it retained leading Investment Banking firm Jefferies to assist in optimizing its capital structure and to explore strategic alternatives. Last quarter, the Company announced that it had executed the First A&R Limited Waiver with Blue Torch to provide the Company with time to explore different avenues and opportunities to enhance stockholder value. We continue to explore our options with Blue Torch and have extended the waiver through December 6, 2023. See Note 8 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions on the Blue Torch financing.
Additionally, on March 31, 2023, the Company and certain former Series E Holders entered into the Series E Settlement Agreements. Under the terms of the Series E Settlement Agreements, the parties thereto agreed to terminate the Series E Registration Rights Agreement and the Series E Purchase Agreement and all rights respectively thereunder (other than certain rights surviving under the Series E Registration Rights Agreement, to which all Series E Holders continue to be equally entitled) and to release any and all claims for liquidated damages under the Series E Registration Rights Agreement, in exchange for shares of Common Stock in the amounts set forth in the Settlement Agreements. See “Item 1A Risk Factors” of the 2022 Form 10-KT for additional detail on certain risks associated with the Settlement Agreements and the Resale Registration Statement filed in connection therewith
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The Corporate restructuring program, the Blue Torch financing matters, and the Series E Equity matters have contributed to additional expenses for the Company such as costs for professional fees, legal and financial experts, special board committee members and other costs that are not in the ordinary course of business. These costs will continue to be incurred until the Company concludes a suitable transaction to reduce its debt service and stabilize its capital structure. These costs are primarily recorded within selling, general and administrative costs, unless otherwise specified, within the Condensed Consolidated Statements of Operations.
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RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2023, to the three months ended September 30, 2022
The table below sets forth, for the periods presented, certain historical financial information (in thousands):
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | Change ($) | Change (%) | ||||||||||||||||||||
| Revenue | $ | 54,239 | $ | 119,810 | $ | (65,571) | (55) | % | |||||||||||||||
| Cost of revenue | 45,470 | 101,056 | (55,586) | (55) | % | ||||||||||||||||||
| Gross profit | 8,769 | 18,754 | (9,985) | (53) | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | 8,927 | 9,306 | (379) | (4) | % | ||||||||||||||||||
| Depreciation and amortization | 2,067 | 2,233 | (166) | (7) | % | ||||||||||||||||||
| Restructuring and other related charges | (16) | 934 | (950) | (102) | % | ||||||||||||||||||
| Impairment and other losses, net | 50,217 | — | 50,217 | — | % | ||||||||||||||||||
| Total operating expenses | 61,195 | 12,473 | 48,722 | 391 | % | ||||||||||||||||||
| Operating income (loss) | (52,426) | 6,281 | (58,707) | (935) | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (3,473) | (2,836) | (637) | 22 | % | ||||||||||||||||||
| Miscellaneous income (expense) | 420 | (2,010) | 2,430 | (121) | % | ||||||||||||||||||
| Total other expense | (3,053) | (4,846) | 1,793 | (37) | % | ||||||||||||||||||
| Income (loss) from operations before income taxes | (55,479) | 1,435 | (56,914) | (3966) | % | ||||||||||||||||||
| Income tax expense | (69) | (162) | 93 | (58) | % | ||||||||||||||||||
| Net income (loss) | $ | (55,548) | $ | 1,273 | $ | (56,821) | (4465) | % | |||||||||||||||
Revenue
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | Change ($) | Change (%) | |||||||||||||||||||||||
| Managed Services | $ | 24,880,782 | $ | 47,476,973 | $ | (22,596,191) | (48) | % | ||||||||||||||||||
| Performance Solutions | 29,358,081 | 63,441,990 | (34,083,909) | (54) | % | |||||||||||||||||||||
| Other | — | 8,890,995 | (8,890,995) | (100) | % | |||||||||||||||||||||
| Total | $ | 54,238,863 | $ | 119,809,958 | $ | (65,571,095) | (55) | % | ||||||||||||||||||
Revenues for the three months ended September 30, 2023 were approximately $54.2 million, a decrease of approximately $65.6 million from the comparable prior year period. The decrease in the current year period was attributable to a decrease in the managed services and performance solutions revenue streams, and the absence of other revenue from legacy Troika and Mission subsidiaries.
The decrease in managed services revenue of approximately $22.6 million was primarily the result of decreased advertising spend by the Company’s insurance and telecom clients, due to an increase in their operating costs and consolidation of marketing spend. The decrease in performance solutions revenue of approximately $34.1 million was the result of a decline related to legal services clients of approximately $30.1 million and a net decrease in home services clients of approximately $4.0 million. The decrease in legal services clients was driven by an increase in competition to acquire leads and a decrease in demand for leads associated with certain tort campaigns as compared to the comparable period. As compared to the prior period, legal services clients experienced higher borrowing costs, which also led to a decline in their overall marketing
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spend. The decline related to home services clients was driven by a decline in response rates in media campaigns and an increase in market saturation as compared to the prior year period.
Cost of revenue
For the three months ended September 30, 2023, cost of revenues was approximately $45.5 million, a decrease of approximately $55.6 million, as compared to the comparable prior year period. The cost of revenues decline is related to decreases in spend from managed services revenue stream of approximately $21.2 million and decreases in spend from performance solutions revenue stream of approximately $30.3 million and the absence of approximately $4.1 million of other cost of revenues. The decrease in spend as it related to managed services and performance solutions is discussed above in the revenue discussion.
Gross profit
For the three months ended September 30, 2023, gross profit was approximately $8.8 million, a decrease of approximately $10.0 million as compared to the prior year period. Gross profit of approximately $8.8 million was comprised of approximately $2.1 million and $6.7 million, related to the managed services and performance solutions revenue streams, respectively. As performance solutions require spend commitments by the company with no guarantee on the amount of revenue generated, underperformance in a certain campaign or medium can cause a disproportionate decline to gross profit. Managed services gross profit is derived on a fixed fee and/or commission basis and does not have a direct correlation to decreases or increases in revenue
During the quarter the gross profit decline is primarily due to a decrease in revenue totaling approximately $34.1 million from the performance solutions revenue stream, specifically amongst legal and home services clients. The decrease in gross profit amongst legal clients was a result of increased competition to acquire leads, which increased our spend on a cost per lead basis and compressed margin as compared to the prior period. The decrease in gross profit related to home services clients was driven by a decline in response rates and market saturation, which were partially offset by our ability to diversify home services revenues with more stable margins as we diversify our marketing channels.
The decline in gross profit generated from the managed services revenue stream of approximately $2.1 million was primarily attributable to the decreased marketing spend by the insurance and telecom sector clients. Cost of revenues related to managed services clients move in tandem with revenues.
Selling, general, and administrative expenses
For the three months ended September 30, 2023, selling, general, and administrative expenses decreased approximately $0.4 million, to $8.9 million, as compared to the prior year period. The decrease in selling, general, and administrative expenses was primarily driven by a decrease in personnel costs of approximately $3.2 million, a decrease in facilities and occupancy costs of approximately $0.6 million, and a decrease in travel and entertainment costs of approximately $0.2 million. These decreases were offset by an increase in professional fees of approximately $3.3 million and an increase in public company costs of approximately $0.3 million.
Selling, general, and administrative expenses during the three months ended September 30, 2023, contained certain non-recurring, one-time costs associated with the Company's efforts in reducing its debt service and stabilizing its capital structure. These one-time costs included approximately $0.1 million related to bonuses, approximately $3.6 million related to legal and consulting fees, and approximately $0.2 million related to Board of Director fees for the Special Committee. These amounts were categorized as "Non-recurring expenses related to debt financing matters" in the adjusted EBITDA calculation below.
The decrease in personnel costs of approximately $3.2 million was primarily driven by a decrease in employee compensation and benefits of approximately $2.2 million, related to the decrease in headcount since the prior year, a decrease in non-recurring bonuses of approximately $0.2 million, and a decrease of approximately $0.8 million in stock-based compensation expense.
The increase in professional fees of approximately $3.3 million as compared with the prior period was primarily driven by an increase in legal and consulting fees of approximately $3.7 million that resulted from the Company's efforts in organizational restructuring, optimization of its capital structure, and exploration of strategic alternatives. This increase was
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offset by a decrease of approximately $0.4 million in audit and accounting fees as a result of higher audit and advisory fees in the prior year period.
Depreciation and amortization
For the three months ended September 30, 2023, depreciation and amortization expense decreased approximately $0.2 million, to approximately $2.1 million, as compared to the prior year period. The decrease was primarily attributable to the absence of depreciation and amortization expense of the Troika, Mission, and Redeeem entities as a result of the impairment of their intangible assets and write-off of fixed assets during the fiscal year ending June 30, 2022 and transition period ending December 31, 2022.
Restructuring and other related charges
For the three months ended September 30, 2023, the Company recorded credits of approximately $15.7 thousand, a decrease of approximately $0.9 million as compared to the prior year period. The decrease was primarily driven by the absence of severance related charges of approximately $0.1 million, the absence of a loss on early termination of an operating lease of approximately $0.2 million, the absence of exit costs associated with the sale of Mission Media UK of approximately $0.2 million, and the absence of professional fees associated with the restructuring program of approximately $0.4 million. The absence of expenses were partially offset by an inconsequential amount of credits to the restructuring line in the current period See Note 7 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions on the restructuring program.
Impairment and other (losses) gains, net
For the three months ended September 30, 2023, impairment and other (losses) gains, net of approximately $50.2 million were a result of impairment charges of approximately $50.2 million. The impairment losses included goodwill impairment of approximately $23.9 million from Converge, intangible asset impairment of approximately $26.2 million related to customer relationships, and impairment of a right-of-use asset of $0.1 million. See Note 6 – Intangible Assets & Goodwill to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information.
Interest expense
For the three months ended September 30, 2023, interest expense increased approximately $0.6 million to approximately $3.5 million, as compared to the prior year period. The increase during the three month period is related to rising interest rates of 16.0% compared to 14.1% for the three months ended September 30, 2023 and September 30, 2022, respectively. Beginning October 2022 the Company incurred the addition of a two percent (2%) default interest fee primarily related to the Company's Senior Secured credit facility, which was entered into in March 2022 to finance the Converge Acquisition (see "Liquidity and Capital Resources - Financing Agreements"). See Note 8 – Credit Facilities to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information on the Company's Credit Facility. The increase in interest expense directly related to the Senior Secured credit facility of approximately $0.8 million was partially offset by a combined decrease in debt issuance costs and the absence of accretion expense of approximately $0.2 million.
Miscellaneous income (expense)
For the three months ended September 30, 2023, miscellaneous expense decreased approximately $2.4 million to approximately $0.4 million of miscellaneous income, as compared to the prior year period. The decrease in expense during the three months ended was primarily related to the absence of approximately $0.3 million in liquidated damages expense, the absence of approximately $0.9 million related to the loss on the remeasurement of derivative liabilities, the absence of approximately $0.9 million related to foreign exchange loss, the absence of approximately $0.1 million of gain on sale of subsidiary, offset by an increase of approximately $0.4 million in other income and a gain from earnings of equity method investment of approximately $0.1 million.
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Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022
The table below sets forth, for the periods presented, certain historical financial information. The nine months ended September 30, 2022, includes Converge activity from the acquisition date March 22, 2022 to September 30, 2022 (in thousands):
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | Change ($) | Change (%) | ||||||||||||||||||||
| Revenue | $ | 171,966 | $ | 220,877 | $ | (48,911) | (22) | % | |||||||||||||||
| Cost of revenue | 148,700 | 180,763 | (32,063) | (18) | % | ||||||||||||||||||
| Gross profit | 23,266 | 40,114 | (16,848) | (42) | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative expenses | 31,979 | 40,481 | (8,502) | (21) | % | ||||||||||||||||||
| Depreciation and amortization | 6,196 | 4,929 | 1,267 | 26 | % | ||||||||||||||||||
| Restructuring and other related charges | (114) | 6,525 | (6,639) | (102) | % | ||||||||||||||||||
| Impairment and other losses, net | 50,217 | 8,938 | 41,279 | 462 | % | ||||||||||||||||||
| Total operating expenses | 88,278 | 60,873 | 27,405 | 45 | % | ||||||||||||||||||
| Operating income (loss) | (65,012) | (20,759) | (44,253) | 213 | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (10,362) | (5,732) | (4,630) | 81 | % | ||||||||||||||||||
| Miscellaneous income (expense) | (213) | (4,538) | 4,325 | (95) | % | ||||||||||||||||||
| Total other expense | (10,575) | (10,270) | (305) | 3 | % | ||||||||||||||||||
| Income (loss) from operations before income taxes | (75,587) | (31,029) | (44,558) | 144 | % | ||||||||||||||||||
| Income tax expense | (126) | (141) | 15 | (11) | % | ||||||||||||||||||
| Net loss | $ | (75,713) | $ | (31,170) | $ | (44,543) | 143 | % | |||||||||||||||
Revenue
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | Change ($) | Change (%) | |||||||||||||||||||||||
| Managed Services | $ | 89,113,561 | $ | 97,553,231 | $ | (8,439,670) | (9) | % | ||||||||||||||||||
| Performance Solutions | 82,852,787 | 103,620,964 | (20,768,177) | (20) | % | |||||||||||||||||||||
| Other | — | 19,702,466 | (19,702,466) | (100) | % | |||||||||||||||||||||
| Total | $ | 171,966,348 | $ | 220,876,661 | $ | (48,910,313) | (22) | % | ||||||||||||||||||
Revenues for the nine months ended September 30, 2023, were approximately $172.0 million, a decrease of approximately $48.9 million as compared to the prior year period. The total decrease in revenue was driven primarily by the decreases in managed services and performance solutions revenues, as well as the absence of other revenues of approximately $19.7 million as compared to the prior year period. The decrease in performance solutions revenues of approximately $20.8 million was primarily driven by a decrease in revenues from legal services clients of approximately $29.7 million due to a decrease in demand for leads and an increase in competition to acquire leads related to certain tort campaigns. The decrease in revenues from legal services clients was offset by an increase in revenues from home services clients of approximately $88.0 million. The decrease in revenues from manages services of approximately $8.4 million was primarily the result of decreased advertising spend by the Company’s insurance clients.
Cost of revenue
For the nine months ended September 30, 2023, cost of revenue decreased by approximately $32.1 million to approximately $148.7 million, as compared to the prior year period. The decrease was driven by lower marketing spend
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amongst our clients and a decrease in spend related to legal services clients for performance solutions. Further, the absence of the Troika and Mission subsidiaries contributed to the decrease.
Gross profit
For the nine months ended September 30, 2023, gross profit decreased approximately $16.8 million to approximately $23.3 million, as compared to the prior year period. The decrease is primarily due to margin compression as a result of lower response rates, higher customer acquisition costs and the absence of other revenue and cost of revenues as discussed above. The absence of gross profit on the legacy Troika subsidiaries also had an impact in the current year periods. The decrease in margin related to managed service was less impactful despite the significant decrease in managed services revenue during the three and nine month periods, due to the proportion of revenue generated that is largely reimbursable costs.
Selling, general, and administrative expenses
For the nine months ended September 30, 2023, selling, general, and administrative expenses decreased approximately $8.5 million, to approximately $32.0 million, as compared to the prior year period. The decrease in selling, general, and administrative expenses was primarily driven by decreases from the prior year period in personnel costs of approximately $13.4 million, in miscellaneous selling, general, and administrative costs of approximately $0.7 million, in facilities and occupancy costs of approximately $0.6 million, and in travel and entertainment costs of approximately $0.4 million. These decreases were offset by an increase from the prior period in professional fees of approximately $5.2 million, an increase in public company costs of approximately $1.2 million, and an increase in office expenses of approximately $0.2 million.
The decrease of approximately $13.4 million in personnel costs was primarily driven by an approximately $11.0 million decrease in stock-based compensation expense related to the Redeeem disposition and restricted stock units granted to executives during 2022. Also contributing to the decrease in personnel costs was a decrease of approximately $3.0 million in employee compensation, inclusive of employee-related benefits, taxes, and fees, related to the decrease in headcount from the prior year. These decreases were offset by an increase over the prior year period in non-recurring employee and executive retention bonuses granted during the current period of approximately $0.6 million.
The decrease in miscellaneous selling, general, and administrative expenses of approximately $0.7 million was primarily driven by a decrease of approximately $0.6 million in business acquisition costs and other miscellaneous costs related to the Converge Acquisition and a decrease of approximately $0.1 million in legal settlement expenses.
The increase in professional fees of approximately $5.2 million was driven by increases of approximately $4.2 million in consulting fees and approximately $2.4 million in legal fees, related primarily to the Company's efforts in organizational restructuring, optimization of its capital structure, and exploration of strategic alternatives. These increases were partially offset by a decrease of approximately $1.4 million in audit and accounting fees as a result of higher audit and advisory fees related to the Converge Acquisition in the prior year period.
The increase of approximately $1.2 million in public company costs was partially driven by the increase in Board of Director fees of approximately $0.6 million. The remaining increase in public company costs was driven by an increase in legal fees and other costs related to public company compliance matters of approximately $0.6 million.
Selling, general, and administrative expenses during the nine months ended September 30, 2023, contained certain non-recurring, one-time costs associated with the Company's efforts in reducing its debt service and stabilizing its capital structure. These one-time costs included approximately $2.8 million related to personnel costs, approximately $9.4 million related to legal and consulting fees, and approximately $0.7 million related to additional Board of Director fees for the Special Committee. These amounts were categorized as "Non-recurring expenses related to debt financing matters" in the adjusted EBITDA calculation below.
Depreciation and amortization
For the nine months ended September 30, 2023, depreciation and amortization expense increased approximately $1.3 million to approximately $6.2 million, as compared to the prior year period. The increase was primarily attributable to higher amortization expense in the current nine month period related to intangible assets purchased through the Converge Acquisition.
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Restructuring and other related charges
For the nine months ended September 30, 2023, the Company recorded restructuring credits of approximately $0.1 million, a decrease of approximately $6.6 million as compared to the prior year period. The decrease was primarily driven by decreases in severance related charges of approximately $5.7 million, the absence of a loss on early termination of an operating lease of approximately $0.2 million, the absence of exit costs associated with the sale of Mission Media UK of approximately $0.2 million, the absence of professional fees associated with the restructuring program of approximately $0.4 million, and the inclusion of approximately $0.1 million of credits to the restructuring line in the current period. See Note 7 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions on the restructuring program.
Impairment and other (losses) gains, net
For the nine months ended September 30, 2023, impairment and other (losses) gains, net increased approximately $41.3 million, to $50.2 million, as compared to the prior year period. The increase was primarily related to an increase in impairment loss on goodwill of approximately $21.9 million, an increase in impairment loss on intangible assets of approximately $19.1 million, and an increase in impairment of right-of-use asset of approximately $0.1 million. See Note 6 – Intangible Assets & Goodwill to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information.
Interest expense
For the nine months ended September 30, 2023, interest expense increased approximately $4.6 million to approximately $10.4 million, as compared to the prior period. The increase during the nine month period is related to rising interest rates of 16.0% compared to 14.1% for the nine months ended September 30, 2023 and September 30, 2022, respectively. Beginning October 2022 the Company incurred the addition of a two percent (2%) default interest fee primarily related to the Company's Senior Secured credit facility, which was entered into in March 2022 to finance the Converge Acquisition (see "Liquidity and Capital Resources - Financing Agreements"). See Note 8 – Credit Facilities to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information on the Company's Credit Facility. The increase was directly related to the Senior Secured credit facility interest charges of approximately $4.4 million, and amortization of debt issuance costs of approximately $0.3 million, and was partially offset by a decrease in accretion expense of approximately $0.1 million. Further, the current period consisted of an additional eighty (80) days of interest expense due to the timing of the Converge acquisition in the comparable period.
Miscellaneous expense
For the nine months ended September 30, 2023, miscellaneous expense decreased approximately $4.3 million to approximately $0.2 million, as compared to the prior period. The decrease in expense during the nine months ended September 30, 2023, was primarily related to a decrease of approximately $3.7 million in liquidated damages expenses, the absence of approximately $0.3 million of a loss on derivative liabilities, the absence of approximately $0.9 million of foreign exchange loss associated with the sale of Mission Media UK., the absence of approximately $0.1 million in gain on sale of subsidiary, and the absence of approximately $0.2 million of a gain on settlement of lease, partially offset by an increase in loss from equity method investment of approximately $0.3 million.
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Adjusted Earnings Before Interest, Tax, Depreciation, and Amortization (“Adjusted EBITDA”)
The Company evaluates its performance based on several factors, of which the key financial measure is Adjusted Earnings Before Interest Taxes Depreciation & Amortization ("Adjusted EBITDA"). Adjusted EBITDA is defined as our net income (loss) before (i) interest expense, net (ii) income tax expense, (iii) depreciation and amortization (iv) stock-based compensation expense or benefit, (v) restructuring charges or credits, (vi) gains or losses on dispositions of businesses and associated settlements, and (vii) certain other non-recurring or non-cash items.
Management believes that the exclusion of stock-based compensation expense or benefit allows investors to better track the performance of the Company's business without regard to the settlement of an obligation that is not expected to be made in cash. Adjusted EBITDA and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company's performance. The Company uses revenues and Adjusted EBITDA measures as its most important indicators of its business performance, and evaluates 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 Company has presented the components that reconcile net loss, the most directly comparable GAAP financial measure, to adjusting operating income (loss).
The following table sets forth the reconciliation of Net Income/(Loss), a GAAP measure, to Adjusted EBITDA:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income (loss) | $ | (55,549,027) | $ | 1,273,783 | $ | (75,711,712) | $ | (31,170,223) | |||||||||||||||
| Depreciation and amortization | 2,066,465 | 2,232,509 | 6,195,513 | 4,929,289 | |||||||||||||||||||
| Interest expense | 3,472,559 | 2,835,588 | 10,362,267 | 5,731,955 | |||||||||||||||||||
| Income tax expense (benefit) | 68,908 | 162,368 | 125,908 | 141,293 | |||||||||||||||||||
| EBITDA | (49,941,095) | 6,504,248 | (59,028,024) | (20,367,686) | |||||||||||||||||||
| Stock-based compensation expense | (238,443) | 516,800 | 639,334 | 13,817,814 | |||||||||||||||||||
Non-recurring expenses related to financing matters(1) | 3,885,493 | — | 13,434,949 | — | |||||||||||||||||||
Non-recurring financing expenses(2) | — | — | 405,159 | — | |||||||||||||||||||
| Reverse stock split fees | — | — | 53,744 | — | |||||||||||||||||||
| Restructuring and other related charges | (12,272) | 934,147 | (114,292) | 6,525,079 | |||||||||||||||||||
| Loss contingency on equity issuance | — | 301,350 | 227,400 | 3,916,350 | |||||||||||||||||||
| Impairments and other losses, net | 50,217,492 | — | 50,217,492 | 8,937,677 | |||||||||||||||||||
| Net gain on sale of subsidiary | — | (82,894) | — | (82,894) | |||||||||||||||||||
| Loss (gain) on derivative liability | — | 942,390 | — | 316,245 | |||||||||||||||||||
| Foreign exchange loss | — | 944,416 | — | 944,416 | |||||||||||||||||||
| Related acquisition & related professional costs | — | — | — | 1,683,000 | |||||||||||||||||||
| Adjusted EBITDA | $ | 3,911,175 | $ | 10,060,457 | $ | 5,835,762 | $ | 15,690,001 | |||||||||||||||
| 1) | Costs primarily relate to Blue Torch financing matters. Costs are recorded in selling, general, and administration expenses. | |||||||||||||
| 2) | Costs primarily relate to the Preferred Series E equity matters. | |||||||||||||
Adjusted EBITDA of approximately $3.9 million for the three months ended September 30, 2023, decreased by approximately $6.1 million as compared with the prior year period of approximately $10.1 million. The decrease of approximately $6.1 million is primarily attributable to the decrease in gross profit of approximately $10.0 million. The Company's operating income and net loss declined by approximately $58.7 million and $56.8 million, respectively, in the current period. These declines are primarily driven by impairment loss of intangible asset of approximately $26.2 million
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and impairment loss of goodwill of approximately $23.9 million and are offset by the absence of one-time charges related to restructuring activities, foreign exchange loss and remeasurement of derivative liabilities in the prior year period.
Adjusted EBITDA of approximately $5.8 million for the nine months ended September 30, 2023, decreased by approximately $9.9 million from approximately $15.7 million, in the prior year period. The decrease of approximately $9.9 million is primarily attributable to a decrease in gross profit of approximately $16.8 million. The Company's operating loss and net loss declined by approximately $44.3 million and $44.5 million, respectively, in the current period. These declines are primarily driven by the increase in impairment related losses from intangible assets and goodwill of approximately $19.1 million and $21.9 million, respectively.
LIQUIDITY & CAPITAL RESOURCES
Overview
Our primary sources of liquidity are cash, cash equivalents, and cash flows from the operations of our businesses. Our principal uses of cash include working capital-related items (including funding our operations), debt service, investments, and related loans and advances that we may fund from time to time, and liabilities from prior acquisitions. The Company’s use of its available liquidity will be based upon the ongoing review of the funding needs of the business, its view of a favorable allocation of cash resources, and the timing of cash flow generation.
At the present time, we do not have arrangements to raise additional capital, and we may need to identify potential investors and negotiate appropriate arrangements with them. We may not be able to arrange enough investment within the time the investment is required or that if it is arranged, that it will be on favorable terms. If we cannot obtain the needed capital, we may not be able to become profitable and may have to curtail or cease our operations. Additional equity financing, if available, may be dilutive to the holders of our capital stock. Debt financing may involve significant cash payment obligations, covenants and financial ratios that may restrict our ability to operate and grow our business.
Going Concern
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with GAAP. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern, the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its obligations as they become due within one year from the date that financial statements are issued. In performing this evaluation as of the date of the filing of this 10-Q, the Company has determined that the Company may not have sufficient liquidity under its cash flow forecasts to fund commitments for the twelve months following the date of the filing of this 10-Q.
The costs of and distractions caused by restructuring, pursuing a Potential Transaction, negotiating amendments to the Financing Agreement, and servicing the Blue Torch debt, have materially depleted liquidity and negatively impacted performance of the Company. Consequently, management has concluded that there is substantial doubt about the Company’s ability to fund ongoing operations and meet debt service obligations over the ensuing twelve month period.
The unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.
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Cash Flow Discussion
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| (unaudited) | (unaudited) | ||||||||||
| Net cash (used in) provided by operating activities | $ | (14,819,269) | $ | 1,423,296 | |||||||
| Net cash used in investing activities | (46,805) | (83,585,591) | |||||||||
| Net cash (used in) provided by financing activities | $ | (1,933,229) | $ | 107,624,060 | |||||||
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2023, increased approximately $16.2 million to approximately $14.8 million, as compared to the prior period. Cash used in operating activities consists primarily of the revenue we generate from providing services to our customers. Uses of cash from operating activities consist of employee compensation and benefits, professional fees, rent, utilities, interest, strategic financing costs, and various other costs of running our business. The increase in operating cash used is largely attributable to an increase in payments for professional services related to exploring strategic alternatives and an increase in interest payments related to our senior secured term loan.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2023, decreased by approximately $83.5 million to approximately $46.8 thousand as compared with the prior period. The decrease is a result of the absence of the cash paid in the prior year period related to the Converge acquisition.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2023, was approximately $1.9 million compared to net cash provided by financing activities of approximately $107.6 million for the prior period. The decrease of approximately $109.6 million in cash provided by financing activities in the current period was primarily due to the absence of net proceeds received from bank loan of $69.7 million and preferred stock of $44.4 million related to the Converge Acquisition, partially offset by the absence of payments related to loss contingency on equity issuance of $3.6 million, the absence of payments made for the redemption of Series-A Preferred Stock of $0.4 million, and the absence of payments made for stimulus loan of $0.4 million.
Financing Agreements
On March 21, 2022, the Company entered into the Financing Agreement. This $76.5 million Credit Facility was used in part to fund the purchase price of the Converge Acquisition, as well as for working capital and general corporate purposes.
The Credit Facility provides for: (i) a Term Loan in the amount of $76.5 million; (ii) an interest rate of the LIBOR Rate Loan of three months; (iii) a four-year maturity amortized 5.0% per year, payable quarterly; (iv) a 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 covenants in the Credit Facility and leverage ratios, fixed charge coverage ratios, and maintaining liquidity of at least $6.0 million at all times.
On September 22, 2023, the Company and Blue Torch entered into the First Amendment to Financing Agreement by adding provisions for the use of secured overnight financing rate loans in place of LIBOR rate loans. See the Company’s Current Report on Form 8-K filed with the SEC on September 27, 2023, the contents of which are incorporated by reference herein.
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The Company and each of its subsidiary Guarantors entered into 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 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 the ISA with the Collateral Agent. Under the ISA, each obligor agreed to the subordination of such indebtedness of each other obligor to such other obligations.
On March 21, 2022, the Company entered into the Escrow Agreement with Blue Torch and Alter Domus (US) LLC, as Escrow Agent. The Escrow Agreement provides for the escrow of $29.1 million of the $76.5 million proceeds, under the Credit Facility to be held until the audited financial statements of Converge Direct LLC and affiliates for the years ended December 31, 2020 and 2019, are delivered to Blue Torch, which were delivered during fourth quarter of fiscal year 2022. As of September 30, 2023, Blue Torch has not authorized the release of the funds in escrow.
Although the Company believes that the Converge Sellers’ recourse is solely to the escrow account, it is possible that the Converge Sellers could make claims against the Company for the deferred amount. In the event that the Converge Sellers were to make and be successful in such claims, the Company believes that a court would likely order Blue Torch to release the escrowed funds to satisfy such claims.
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 the Company, up to 77,178 shares of Common Stock, subject to adjustment. The number was adjusted to 177,178 of common shares effective December 9, 2022. The exercise price per share of Common Stock under this Warrant shall be $.01 per share. If at any time when this Warrant becomes exercisable and a related Registration Statement is not in effect the Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise”.
The Company has made principal repayments aggregating to approximately $4.8 million through September 30, 2023, under the Credit Financing Agreement. As of September 30, 2023, there was approximately $71.7 million principal and accrued interest outstanding under the Credit Facility's term loan.
In connection with the Credit Facility, 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 three months ended September 30, 2023, the Company recorded approximately $0.6 million in amortization expense and made principal payments totaling approximately $0.0 million. During the three months ended September 30, 2022, the Company did not recognize amortization expense related to the note payable and did not make any principal payments.
Blue Torch Extensions, Waivers, and Amendments
On October 14, 2022, Blue Torch and the Company entered into the Original Limited Waiver. The Original Limited Waiver was initially scheduled to expire on October 28, 2022, if not terminated earlier by Blue Torch, but the Original Waiver Period was subsequently extended through February 10, 2023 by the First Amendment to Limited Waiver to Financing Agreement dated as of October 28, 2022, the Second Amendment to the Limited Waiver to Financing Agreement dated as of November 11, 2022, the Third Amendment to the Limited Waiver to Financing Agreement dated as of November 25, 2022, the Fourth Amendment to the Limited Waiver to Financing Agreement dated as of December 9, 2022, the Fifth Amendment to the Limited Waiver to Financing Agreement dated as of December 23, 2022, the Sixth Amendment to the Limited Waiver to Financing Agreement dated as of January 13, 2023, and the Seventh Amendment to the Limited Waiver to the Financing Agreement dated January 31, 2023, and the Eight Amendment to the Limited Waiver to the Financing Agreement dated as of February 7, 2023.
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On February 10, 2023, Blue Torch and the First A&R Limited Waiver of the Specified Events of Default under the Financing Agreement, which amended and restated the Original Limited Wavier. The First A&R Limited Waiver provided that, among other things, during the First A&R Waiver Period, the Company would comply with certain sale and refinancing milestones and refrain from engaging in any “Permitted Acquisition” under the Financing Agreement or making certain post-closing payments to Converge Sellers. The First A&R Limited Waiver would have expired on the earliest of (x) the occurrence of an Event of Default under the Financing Agreement that is not a Specified Event of Default, (y) a failure by the Company to comply with certain sale and refinancing milestones set forth in a side letter agreed by the Company and the Lenders and (z) June 30, 2023, subject to potential extension of up to sixty (60) days to obtain regulatory and/or shareholder approval in the event the Company is pursuing a sale transaction.
On April 14, 2023 and April 28, 2023, Blue Torch and the Company entered into the Extension Letters that extended the Applicable Milestones.
On May 8, 2023, the Company and Blue Torch entered into the First Amendment to First A&R Limited Waiver and an amended and restated letter agreement that, in each case, superseded the Prior Waiver Documents, and pursuant to which the Company affirmed its commitment to work in good faith to consummate a sale of the Company’s business or assets or a refinancing transaction before the expiration of the First A&R Waiver Period, and Blue Torch agreed to remove the Applicable Milestones and to extend the Outside Date from June 30, 2023 to July 14, 2023, subject to a potential extension if a definitive written agreement is delivered on or prior to July 14, 2023 that provides for cash repayment in full of all obligations owed to Blue Torch or which is otherwise acceptable to Blue Torch. In addition, under the First Amendment to the First A&R Limited Waiver, the Company agreed to pay Blue Torch an “exit fee” equal to five (5%) percent of the aggregate outstanding principal balance of the Company’s indebtedness with Blue Torch as of the date of the First Amendment to the First A&R Limited Waiver, plus accrued interest, subject to reduction or waiver if such Blue Torch indebtedness is repaid in full in cash by the dates specified therein. The foregoing summary does not purport to be complete and is subject to, and qualified in its entirety by, Amendment No. 1 to the A&R Limited Waiver attached as Exhibit 10.2 to this Quarterly Report on Form 10-Q. See also "Subsequent Events" of this Quarterly Report on Form 10-Q for a description of Amendments Two, Three, and Four to the First A&R Limited Waiver, the First Amendment to the Financing Agreement and the Second A&R Limited Waiver and the First Amendment to the Second A&R Limited Waiver.
On July 28, 2023, the Company and Blue Torch entered into the third amendment to the First A&R Limited Wavier (the “Third Amendment to First A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from July 28, 2023, to August 28, 2023, subject to potential extension if a definitive written agreement was delivered on or prior to August 28, 2023 providing for cash repayment in full of all obligations owed to Blue Torch or which was otherwise acceptable to Blue Torch.
On August 22, 2023, the Company and Blue Torch entered into a fourth amendment to the First A&R Limited Waiver effective as of August 18, 2023 (the “Fourth Amendment to First A&R Limited Waiver”) pursuant to which Blue Torch agreed to extend the Outside Date from August 28, 2023 to September 29, 2023, subject to potential extension if a definitive written agreement is delivered on or prior to September 29, 2023 providing for cash repayment in full of all obligations owed to Blue Torch or which is otherwise acceptable to Blue Torch.
On September 22, 2023, the Company and Company Subsidiaries entered into the First Amendment to Financing Agreement (the "First Amendment to Financing Agreement”) with Blue Torch and the Lenders. The First Amendment to Financing Agreement amends the Financing Agreement by adding provisions for the use of secured overnight financing rate loans in place of LIBOR rate loans.
On September 29, 2023, Blue Torch and the Company entered into a Second Amended and Restated Limited Waiver (the “Second A&R Limited Waiver”) of certain Specified Events of Default under the Financing Agreement, as amended by the First Amendment. The Second A&R Limited Waiver amends and restates the First A&R Limited Waiver. The Company and Blue Torch entered into the Second A&R Limited Wavier to, among other things, (i) waive certain Specified Events of Default including any failure of the Company to make the quarterly principal and interest payments due to be paid on or about September 30, 2023 under the Financing Agreement; and (ii) extend the Outside Date. The Second A&R Limited Waiver will expire on the earliest of (x) the occurrence of an Event of Default under the Financing Agreement that is not a Specified Event of Default, (y) a failure by the Company to comply with certain sale and refinancing milestones set forth in a side letter agreed by the Company and the Lenders and (z) a revised Outside Date of October 13, 2023 .
The Second A&R Limited Waiver concerns events of default that relate to the Company’s existing and anticipated failures to satisfy certain financial and non-financial covenants under the Financing Agreement. If the Company is unsuccessful in
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curing the continuing events of default by the expiration of the Current Waiver Period, the Company intends to seek further extensions of the Current Waiver Period with Blue Torch and the Lenders, although we cannot assure you that Blue Torch and the Lenders would be willing to grant extensions. If the Company failed to obtain an extension, the Company would be in default under the Financing Agreement and the Lenders would be able to exercise remedies available to them under the Financing Agreement. Any such action would likely have a material adverse effect on the Company and its financial condition.
The foregoing summaries do not purport to be complete and is subject to, and qualified in its entirety by, the Second Amendment to First A&R Limited Waiver, the Third Amendment to First A&R Limited Waiver and Fourth Amendment to A&R Limited Waiver filed with our Current Reports on Form 8-K filed with the SEC on July 17, 2023, July 28, 2023 and August 28, 2023, respectively, the First Amendment to Financing Agreement filed with our Current Reports on Form 8-K filed with the SEC on September 27, 2023, the Second A&R Limited Waiver filed with our Current Reports on Form 8-K filed with the SEC on October 4, 2023.
See also "Subsequent Events" of this Quarterly Report on Form 10-Q for a description of Amendments One, Two, Three, Four, Five, Six , Seven and Eight to the Second A&R Limited Waiver.
Contractual Obligations
As of September 30, 2023, we had non-cancelable operating lease commitments of approximately $7.6 million, long-term debt with a $71.7 million principal balance, acquisition liabilities related to the Converge sellers of $9.3 million, liquidation damages related to the Preferred Series-E holders of $0.9 million, and restructuring liabilities of $0.1 million. For the three months ended September 30, 2023, the Company funded its operations using available cash.
In addition, see Notes 7. Credit Facilities and 8. Leases to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for the principal repayments required under the Company’s Term Loan Facility and maturities of the Company's operating lease liabilities, respectively.
Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 2 to the condensed consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements not yet adopted.
Critical Accounting Policy & Estimates
There have been no material changes to the Company’s critical accounting policies from those set forth in our Transition Report on Form 10-K/T (as amended by Form 10-KT/A) for the six month transition period ended December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Issuer is not required to provide the information called for in this item due to its status as a Smaller Reporting Company.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosures, controls and procedures were not effective.
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Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting or in any other factors that could significantly affect these controls during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management has continued to take steps to improve its controls and procedures, including but not limited to, formalizing policies and procedures, and enhancing month-end close processes and account reconciliations. Upon their implementation, these internal controls will dramatically improve in the near future our ability to prevent and detect mistakes, noncompliance and potential fraud.
Limitations on Effectiveness of Control and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company may become involved in legal proceedings or may be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that a negative final outcome of matter listed below could have a material adverse effect on its business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors. To estimate whether a loss contingency should be accrued by a charge to income, we evaluate, among other factors, the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. We do not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated The Company is not a party to any material pending legal proceedings or a proceeding being contemplated by a governmental authority nor is any of the Company’s property the subject of any pending legal proceedings or a proceeding being contemplated by a governmental authority except as set forth in our Transition Report on Form 10-K/T for the transition period ended December 31, 2022.
On July 17, 2023, the Converge Sellers in their capacities as the sellers of Converge filed the Complaint in the Supreme Court of the State of New York, New York County against the Defendants. On July 28, 2023, Mr. Toama, who was Chief Executive Officer of the Company, informed the Company that he intended to withdraw from the Converge Seller Action without prejudice. Mr. Toama recused himself from all deliberations by the Board concerning the Action. The Board also formed a Special Litigation Committee composed of Board members Randall Miles, Grant Lyon, Jeffrey Stein, and Wendy Parker with delegated full power to evaluate, investigate, review, and analyze the facts and circumstances surrounding the Action.
The Complaint generally alleges that the Defendants owe sums to the Converge Sellers under the MIPA. The Complaint seeks, among other things, a judgment that the Defendants breached the MIPA and damages relating to the purported breach. Nothing in this Quarterly Report on Form 10-Q shall be deemed an admission of liability in respect of the Action.
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Item 1A. Risk Factors
Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our Transition Report on Form 10-KT (as amended by Form 10-KT/A) for the six month transition period ended December 31, 2022, the occurrence of any one of which could have a material adverse effect on our actual results.
We are subject to risks and uncertainties associated with our Chapter 11 Cases.
The Chapter 11 Cases could have a material adverse effect on our business, financial condition, results of operations and cash flows. So long as the Chapter 11 Cases continue, our senior management may be required to spend a significant amount of time and effort dealing with the proposed Sale Transaction and 363 Sale Process instead of focusing on our business operations. Bankruptcy Court protection also may make it more difficult to retain management and the key personnel necessary to the success and growth of our business. In addition, during the period of time we are involved in the Chapter 11 Cases, our customers and suppliers may lose confidence in our ability to meet their commercial needs and may seek to establish alternative commercial relationships.
Other significant risks associated with the Chapter 11 Cases that could result in material adverse effects on our business, financial condition, results of operations, and cash flows include or relate to the following:
•our ability to obtain the Bankruptcy Court’s approval with respect to motions or other requests made to the Bankruptcy Court in the Chapter 11 Cases;
•our ability to consummate the Sale Transaction;
•the effects of the filing of the Chapter 11 Cases on our business and the interests of various constituents, including our shareholders;
•the high costs of the Chapter 11 Cases and related fees;
•our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of the Chapter 11 Cases;
•Bankruptcy Court rulings in the Chapter 11 Cases as well as the outcome of all other pending litigation and the outcome of the Chapter 11 Cases in general;
•the length of time that we will operate with Chapter 11 protection and any resulting risk that we will not satisfy the milestones specified in the Restructuring Support Agreement and in our agreement with our secured lenders with respect to our use of their cash collateral;
•the availability of operating capital during the pendency of the Chapter 11 Cases, including any event that could terminate our right to continued access to the cash collateral of our lenders to use as operating capital;
•third-party motions in the Chapter 11 Cases, including motions which may be filed by a creditors’ committee that may be appointed in the Chapter 11 Cases, which may interfere with our ability to consummate the Sale Transaction;
•the potential adverse effects of the Chapter 11 Cases on our liquidity and results of operations;
•the feasibility of the Sale Transaction in light of possible changes in our business and its prospects;
•the adequacy of our cash balances at the time of our projected exit from the Chapter 11 Cases; and
•our ability to continue as a going concern.
Because of the risks and uncertainties associated with the Chapter 11 Cases, we may not be able to accurately predict or quantify the ultimate impact the Chapter 11 Cases may have on our business, financial condition, results of operations and cash flows, nor can we accurately predict the ultimate impact the Chapter 11 Cases may have on our corporate or capital structure.
The Chapter 11 Cases raise substantial doubt regarding our ability to continue as a going concern.
The Chapter 11 Cases are being jointly administered under the caption In re Troika Media Group, Inc., et al. Under Chapter 11 of the Bankruptcy Code, certain claims in existence prior to our filing of the petition for relief under the Bankruptcy Code are stayed while we continue business operations as a debtor-in-possession. Our operations and our ability to develop and execute our business plan are subject to significant risks and uncertainties associated with Chapter 11 Cases. These conditions raise substantial doubt about our ability to continue as a going concern.
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Delays in the Chapter 11 Cases may increase the risks of our being unable to consummate the Sale Transaction and increase our costs associated with the Chapter 11 Cases.
There can be no assurance that we will be able to consummate the Sale Transaction. A prolonged Chapter 11 proceeding could adversely affect our relationships with customers, suppliers and employees, among other parties, which in turn could adversely affect our business, financial condition, results of operations and cash flows and our ability to continue as a going concern. A weakening of our financial condition, cash flows and results of operations could adversely affect our ability to implement the Sale Transaction (or any other plan of reorganization). If we are unable to consummate the Sale Transaction, we may be forced to liquidate our assets.
The Restructuring Support Agreement is subject to significant conditions and milestones that may be difficult for us to satisfy.
There are certain material conditions we must satisfy under the Restructuring Support Agreement, including the timely satisfaction of milestones in the Chapter 11 Cases, which include the consummation of the Sale Transaction. Our ability to timely complete such milestones is subject to risks and uncertainties, many of which are beyond our control.
If the Restructuring Support Agreement is terminated, our ability to confirm and consummate the Sale Transaction could be materially and adversely affected.
The Restructuring Support Agreement contains a number of termination events, upon the occurrence of which certain parties to the Restructuring Support Agreement may terminate the agreement. If the Restructuring Support Agreement is terminated as to all parties thereto, each of the parties thereto will be released from its obligations in accordance with the terms of the Restructuring Support Agreement. Such termination may result in the loss of support for the Sale Transaction by the parties to the Restructuring Support Agreement, which could adversely affect our ability to confirm and consummate the Sale Transaction. If the Sale Transaction is not consummated, there can be no assurance that the Cases would not be converted to chapter 7 liquidation cases or that any new plan would be as favorable to holders of claims against the Debtors as contemplated by the Restructuring Support Agreement.
Even if the Sale Transaction is consummated, we may not be able to achieve our stated goals or continue as a going concern.
Even if the Sale Transaction or any other Chapter 11 plan of reorganization is consummated, we may continue to face a number of risks, such as changes in economic conditions, changes in our industry, changes in demand for our products and services and increasing expenses. Some of these risks become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the case may be completed. As a result of these risks and others, we cannot guarantee that the Sale Transaction will achieve our stated goals or that we will be able to continue as a going concern.
Furthermore, even if our debt and other liabilities are reduced or discharged through the Sale Transaction, we may need to raise additional funds through public or private debt or equity financing or other various means to fund our business after the completion of the Chapter 11 Cases. Our access to additional financing may be limited, if it is available at all. Therefore, adequate funds may not be available when needed or may not be available on favorable terms, or at all.
In certain instances, a chapter 11 case may be converted to a case under chapter 7 of the Bankruptcy Code.
Upon a showing of cause, the Bankruptcy Court may convert our Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code. In such event, a chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for through the Sale Transaction because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
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As a result of the Chapter 11 Cases, our historical financial information may not be indicative of our future performance, which may be volatile.
During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the filing of the Chapter 11 Cases. In addition, if we emerge from chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to the Sale Transaction.
We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to consummation of a plan of reorganization. With few exceptions, all claims that arose prior to confirmation of a plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. Any claims not ultimately discharged pursuant to the plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our business, financial condition, results of operations and cash flows on a post-reorganization basis.
The pursuit of the Chapter 11 Cases has consumed, and will continue to consume, a substantial portion of the time and attention of our management, which may have an adverse effect on our business, financial condition, results of operations and cash flows, and we may experience increased levels of employee attrition.
While the Chapter 11 Cases continue, our management will be required to spend a significant amount of time and effort focusing on the Chapter 11 Cases instead of focusing exclusively on our business operations. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations, particularly if the Chapter 11 Cases are protracted.
Furthermore, during the pendency of the Chapter 11 Cases, we may experience increased levels of employee attrition, and our employees may face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the longer the Chapter 11 Cases continue, the more likely it is that vendors and employees will lose confidence in our ability to emerge from Chapter 11 successfully.
Aspects of the Chapter 11 Cases limit the flexibility of our management team in running our business.
While we operate our business under supervision by the Bankruptcy Court, we are required to obtain approval of the Bankruptcy Court, and in some cases certain other parties, prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with various parties-in-interest, and one or more hearings. Parties-in-interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities, transactions and internal restructurings that we believe are beneficial to us, which may have an adverse effect on our business, financial condition, results of operations and cash flows.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Note 11 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference herein.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosure
Not Applicable.
Item 5. Other Information
Not Applicable.
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Item 6. Exhibits
| Exhibit Number | Exhibit Title | |||||||
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| 101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document. | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | |||||||
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*Filed or furnished herewith.
† Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Troika Media Group, Inc. | ||||||||
| (Registrant) | ||||||||
| /s/ Eric Glover | ||||||||
| (Signature) | ||||||||
Date: December 21, 2023 | Name: | Eric Glover | ||||||
| Title: | Chief Financial Officer | |||||||
| (Principal Financial Officer) | ||||||||
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