Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are not statements of historical fact are forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” “may,” “will,” “should,” “could,” “potential,” “continue,” “intends,” “plans,” and similar words and terms used in the discussion of future operating and financial performance and plans identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results, or events
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and involve risks and uncertainties, and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
Introduction
This MD&A is provided as a supplement to, and should be read in conjunction with, the audited consolidated financial statements and footnotes thereto included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K to help provide an understanding of our financial condition, changes in financial condition and results of operations.
Our MD&A is organized as follows:
Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.
Results of Operations. This section provides an analysis of our results of operations for Fiscal Years 2022 and 2021 on a consolidated basis.
Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, as well as an analysis of our cash flows for Fiscal Years 2022 and 2021. The discussion of our financial condition and liquidity includes summaries of our primary sources of liquidity, our contractual obligations, and off balance sheet arrangements that may have existed at June 30, 2022.
Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies. This section cross-references a discussion of accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are discussed in the notes to our consolidated and combined financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Business Overview
Description of our Business
Converge Acquisition
On March 22, 2022 (the “Closing Date”), the Company through its wholly owned subsidiary CD Acquisition Corp, consummated the transactions contemplated by a Membership Interest Purchase Agreement dated as of November 22, 2021 (as amended, the "MIPA") for the acquisition of all the equity of Converge Direct, LLC and its affiliates ("Converge") and 40% of the equity of Converge Marketing Services, LLC, an affiliated entity, for a notional aggregate purchase price of $125.0 million valued for accounting purposes at approximately $114.9 million. The MIPA identifies the seller parties as the Converge Sellers. The cash portion of the purchase price consisted of $65.9 million paid on the date of the acquisition, $29.1 million held in escrow (the “Converge Holdback”) payable upon satisfaction of certain conditions, and another $5.0 million payable twelve months after the acquisition date contingent on the Company satisfying its bank covenants and at the option of the payee payment will be in the form of cash or common stock of the Company valued at $2 per share. The remaining $25.0 million was paid in the form of 12.5 million shares of the Company’s restricted common stock at a price of $2.00 per share, which for accounting purposes was valued at $1.19 per share for $14.9 million. All 12.5 million shares are subject to a nine (9) month lock-up period. Pursuant to the provisions of the MIPA, an aggregate of $2.5 million (10%) or 1,250,000 shares of the common stock issued to the Converge Sellers are held in escrow to secure for indemnification. The escrowed shares will be held until the later of (a) one year from the Date, or (b) the resolution of indemnification .
On the Closing Date, the Company entered into an Escrow Agreement with Blue Torch Finance LLC, a representative of the Converge Sellers and Alter Domus (US) LLC acting as Escrow Agent. The Escrow Agreement provided for the escrow of the Converge Holdback totaling $29.1 million of the $76.5 million proceeds, under the Credit Facility to be released to the Converge Sellers upon delivery to Blue Torch Finance LLC of the audited financial statements of Converge Direct LLC and affiliates for the years ended December 31, 2020 and 2019. Delivery of such financial statements was completed
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during the Company’s Fourth Quarter; however, Blue Torch has not consented to the release of the escrowed funds, which is required under the terms of the Escrow Agreement for the release of the Converge Holdback.
Revenue
The Company has two material revenue streams;
Managed Services
The Company’s Managed Services are typically orientated around the management of a customer’s marketing, data, and/or creative program. The Company’s deliverables relate to the planning, designing, and activating of a solution program or set of work products. The Company executes this revenue stream by leveraging internal and external creative, technical or media-based resources, third party AdTech solutions, proprietary business intelligence systems, data delivery systems, and other key services required under the terms of a scope of work with a client. Our fees to our clients are billed in a variety of ways, which can consist of a percentage of a customer’s total budget, media spend, or retainer.
Performance Solutions
The Company’s Performance Services are typically orientated around the delivery of a predetermined event or outcome to a client. Typically, the revenue associated with the event (as agreed upon in a scope of work) is based on a click, lead, call, appointment, qualified event, case, sale, or other defined business metric. The Company engages in a myriad of consumer engagement tactics, ecosystems, and, methods to generate and collect a consumer’s interest in a particular service or good. Our fees associated with these clients are billed based on the occurrence of a click, lead, call, appointment, qualified event, case, sale, or other defined business metric.
Revenue Categories
A key focus of our revenue architecture and growth is how we generate from two Product Lines across all of our revenue streams. Our approach to growth has been to expand our Internal Brand and Data capabilities, which allow us to provide broader consumer outreach for all our clients and optimize of the cost of the customer engagement expense. Our sectors are curated to have consumer linkages that promote our ability to introduce consumers within our engagement ecosystems to our client programs for secondary benefit to us and our clients using the first-party data that we generate.
Client-Brand
Under the Client Brand product line, revenues are earned from the fees we charge to our customers when we advertise directly for them. In servicing our clients under this reportable segment, the consumer interacts directly with our client and does not interface with the Company at any point during the transaction process.
Internal-Brand and Data
Under the Internal-Brand product line, we earn revenues from the fees we charge to our customers when we engage with consumers under our internally owned and operated brand names. The end consumer interfaces directly with our brand and may be redirected to our customer based on information obtained during the transaction process or whose details may be passed on to a client for future engagement with a particular consumer. We generate rich first party data within this product line that can be monetized across a mix of customer acquisition campaigns and incremental revenue streams. Our innovative internal brands are capable of being utilized for an array of customer awareness and acquisition programs.
Costs of Revenue
Cost of revenues consists of the payments made to third parties, such as media costs and administrative fees (Google, Facebook, The Trade Desk, etc.), technology fees (The Trade Desk, Invoca, LiveRamp, etc.), production expenses (printing, logistics, etc), data costs, and other third-party expenses that Company incurs on behalf of a client that is needed to deliver the services.
General and Administrative Expenses
The Company’s selling, general, and administrative expenses primarily consist of administrative costs, including employee compensation and benefits, professional fees, as well as sales and marketing costs.
Income Taxes
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See Note 15 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information on income taxes.
RESULTS OF OPERATIONS
Comparison of the Year Ended June 30, 2022 versus the Year Ended June 30, 2021
The table below sets forth, for the periods presented, our consolidated results of operations for the periods indicated.
Years Ended June 30,
Increase (Decrease) in Net Income
Amount
% of Revenues
Amount
% of Revenues
Revenues
Cost of revenues
Gross margin
Operating expenses:
Selling, general and administrative expenses
Depreciation and amortization
Restructuring and other related charges
Impairments and other (gains) losses, net
Total operating expenses
Operating loss
Other income (expense):
Interest expense
Loss contingency on equity issuance
Gain on change in fair value of derivative liabilities
Other income
Foreign exchange gain (loss)
Amortization expense of note payable discount
Total other income (expense)
Loss from operations before income taxes
Income tax expense
Net Loss
NM - Percentage is not meaningful
The results of operations for the year ended June 30, 2022, have been significantly impacted by the Converge Acquisition. All financial results herein for the fiscal year ended June 30, 2022, include the results of operations of the Converge companies which are reflective of the period March 22, 2022 (the Acquisition closing date), though June 30, 2022. See Note 3 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information on the Converge Acquisition.
Revenues
Revenues for the year ended June 30, 2022, increased by approximately $100.2 million as compared with the prior year period, resulting in a total of approximately $116.4 million. The increase was attributable to the following:
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Increase in managed services revenue
Increase in performance marketing revenue
Other net increases
The increase in Managed Services revenue and Performance Marketing revenues is directly attributable to the Converge Acquisition and is reflective of the period March 22, 2022 (the date of the Converge Acquisition closing), through June 30, 2022. The Converge Acquisition contributed approximately $90.3 million in revenue during that 101 day period, which is representative of 78% of the Company's total revenue for fiscal year 2022.
The increase in other revenues of approximately $8.9 million was primarily driven by the gradual return to more normal business activities as a result of the lifting of government restrictions that were in place in the prior year period due to COVID-19.
Cost of Revenues
For the year ended June 30, 2022, cost of revenues increased by approximately $80.6 million to $88.1 million as compared with the prior year period. The increase is primarily attributable to incremental costs of approximately $77.8 million resulting from the addition of the Converge business.
Gross Margin
For the year ended June 30, 2022, gross margin increased by approximately $19.6 million to $28.3 million, or 24% of revenue, as compared with the prior year period, primarily due to the increase in revenues partially offset by the increase cost of revenues related to the Converge Acquisition as discussed above.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the year ended June 30, 2022, increased by approximately $19.9 million to $45.3 million as compared with the prior year period. The increase is primarily attributable to an increase in employee related costs of approximately $13.3 million, an increase in professional fees of approximately $4.2 million, an increase of approximately $1.5 million in miscellaneous costs, an increase in travel and entertainment costs of approximately $0.6 million, and an increase in office and occupancy costs of approximately $0.3 million.
The increase in employee related costs of approximately $13.6 million is primarily due to an increase in stock-based compensation of $8.7 million, increases in salaries and other related costs of approximately $1.7 million (exclusive of employees acquired with the Converge Acquisition), employee related costs of approximately $3.3 million directly attributable to the Converge Acquisition, and an increase in professional fees due to one-time costs incurred for legal, accounting, and other services performed related to the Converge Acquisition. These increases were partially offset by a decrease in consulting fees of approximately $3.5 million.
Depreciation and Amortization
Depreciation and amortization expenses for the year ended June 30, 2022, increased to approximately $3.1 million from $2.3 million in the prior year period. The increase is primarily attributable to amortization of intangible assets acquired as a result of the Converge Acquisition.
Restructuring and Other Related Charges
For the year ended June 30, 2022, the company recorded approximately $5.6 million of restructuring charges related to employee severance and other employee related benefits. During the fourth quarter of 2022, the Company shut down Redeeem operations, as well as consolidated the operations for certain Troika entities. This has resulted in the departure of key executives as well as certain additional reductions in workforce in order to align with management's new strategic direction. There were no such amounts recorded in the prior year.
Impairments and Other (Gains) Losses, Net
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For the year ended June 30, 2022, the company recorded approximately $7.7 million in net impairment charges and other gains, representing an increase of $10.9 million as compared with the prior year period. The increase is comprised of impairments of goodwill totaling approximately $8.8 million, the absence of a $3.1 million gain in the prior year period, and impairments of net intangible assets totaling $0.4 million. These increases were partially offset by gains in the current year period totaling $1.4 million.
For the year ended June 30, 2022, impairment charges of $8.8 million included of goodwill impairments of $6.7 million related to Mission UK as a result of the Sale agreement entered into on August 1, 2022, and goodwill impairment of $2.0 million and intangible assets impairments of $0.4 million related to the discontinuation of operations for the Redeeem subsidiary. See Note 3 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information.
The above increases were offset by $1.0 million gain on legal settlements, which was related to the Stephensons' settlement, (See Note 11 to the consolidated financial statements included in Item 15 Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information on the legal matters). The remaining increase included an approximate $0.3 million gain on government grant forgiven related to SBA-backed Paycheck Protection Program grants received due to the ongoing COVID-19 pandemic and a $0.2 million gain on rent abatement. For the year ended June 30, 2021, the Company recognized approximately $3.1 million of income from government grants.
There were no impairment charges recorded during the year ended June 30, 2021.
Interest Expense
Interest expense for the year ended June 30, 2022, is 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 12 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information on the Company's Credit Facility.
Loss Contingency on Equity Issuance
For the year ended June 30, 2022, the company recorded approximately $3.6 million of loss contingency expenses per the Registration Rights Agreement related to partial liquidated damages as a result of not filing the registration statement by the effective date. As of the date of this filing , the Company had paid an aggregate of $2.0 million and will expect to owe an additional $1.0 million by September 30, 2022.
Gain on Change in Fair Value of Derivative Liabilities
For the years ended June 30, 2022 and 2021, the Company recognized approximately $0.6 million and $0.1 million, respectively, of income from the change in fair value of derivative liabilities. The derivative liabilities are associated with the debt and equity financing related to the Converge acquisition.
Adjusted Earnings Before Interest, Tax, Deprecation, and Amortization ("Adjusted EBITDA")
The Company evaluates its performance based on several factors, of which the key financial measure is our net income (loss) before (i) interest expense, net (ii) income tax expense, (3) depreciation, amortization and impairments of property and equipment, goodwill and other intangible assets, (iv) stock-based compensation expense or benefit, (v) restructuring charges or credits, and (vi) gain or losses on dispositions of business and associated settlements,
Management believes that the exclusion of stock based compensation expense or benefit allows investors to better track the performance of the company's business without regard to the settlement of an obligation that is not expected to be made ion cash
Adjusted EBITDA and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company's performance. The company uses revenue and Adjusted EBITDA measure as its most important indicators of its business performance, and evaluates managements effectiveness with specific reference to these indicators. Adjusted EBITDA should be viewed as a supplement to and not a substitute for net income (loss), cash flows
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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 is a reconciliation of net income (loss) to Adjusted EBITDA:
Three Months Ended
Twelve Months Ended
June 30,
June 30,
Net Loss
Interest expense
Income tax expense
Depreciation and amortization
EBITDA
Impairments and other (gains) losses, net
Business Acquisition Costs included in SG&A
Restructuring and other related charges
Loss contingency on equity issuance
Share based comp
Adjusted EBITDA
Favorable Adjusted EBITDA of $5.6 million, for the three months ending June 30, 2022, was primarily driven by the increase in revenues due to the Converge acquisition (as discussed previously) combined with the off-setting of several one-time costs incurred as a result of the ongoing restructuring and transformational efforts by management as well as non-cash charges incurred in the fourth quarter fiscal year 2022.
The Company has made expeditious restructuring decisions in order to avoid distraction by business matters that will not contribute to the transformational reorganization of the business to ensure that our company is well positioned to drive ongoing growth and value for our shareholders.
The fourth quarter contained several non-recurring costs including net impairment charges and other gains totaling $8.0 million, restructuring and other related charges totaling $5.6 million, a loss contingency on equity issuance of $3.6 million and non-cash stock compensation expense of $1.2 million (which are reflected in SG&A).
LIQUIDITY & CAPITAL RESOURCES
Overview
Our primary sources of liquidity are cash, cash equivalents, and cash flows from the operations of our businesses. Our principal uses of cash include working capital-related items (including funding our operations), debt service, investments, and related loans and advances that we may fund from time to time, and liabilities from prior acquisitions. Our decisions as to the use of our available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the timing of cash flow generation. To the extent that we desire to access alternative sources of funding through the capital and credit markets, challenging U.S. and global economic and market conditions could adversely impact our ability to do so at that time.
We regularly monitor and assess our ability to meet our net funding and investing requirements. We believe we have sufficient liquidity from cash and cash equivalents and future cash flows from operations to fund our operations and service the credit facilities for the foreseeable future. See Note 12, Credit Facilities to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for a discussion of the Credit Facility.
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Financing Agreements
On March 21, 2022, Troika Media Group Inc., and each subsidiary of Troika Media Group Inc. as guarantors, entered into a Financing Agreement with Blue Torch Finance LLC (“Blue Torch”) to act as Administrative Agent and Collateral Agent. As part of this Financing Agreement, we entered into a $76.5 million First Lien Senior Secured Term Loan (the “Credit Facility”) with Blue Torch which formed the majority of the purchase price of the Converge Acquisition, as well as for working capital and general corporate purposes.
The Credit Facility provides for: (i) a Term Loan in the amount of $76.5 million; (ii) an interest rate of the LIBOR Rate Loan of three (3) months; (iii) a four-year maturity, amortized 5.0% per year, payable quarterly; (iv) a one (1.0%) percent commitment fee and an upfront fee of two (2.0%) percent of the Credit Facility paid at closing, plus an administrative agency fee of $250 thousand per year; (v) a first priority perfected lien on all property and assets including all outstanding equity of the Company’s subsidiaries; (vi) 1.5% fully-diluted penny warrant coverage in the combined entity; (vii) mandatory prepayment for fifty (50%) percent of excess cash flow and 100% of proceeds from various transactions; (viii) customary affirmative, negative and financial covenants; (ix) delivery of audited financial statements of Converge; and (x) customary closing conditions. The Company agreed to customary restrictive financial and non-financial covenants in the Credit Facility including, but not limited to, a debt leverage ratio, fixed charge coverage ratio, and maintaining liquidity of at least $6.0 million at all times. Additionally, the Company agreed that if Sid Toama or Thomas Marianacci cease to be involved with the day to day operations of the Company, replacements reasonably suitable to Blue Torch shall be appointed within thirty (30) days.
The Company has received limited waivers due to non-compliance with certain covenants of the agreement. The company is currently addressing these items and expects to be in compliance during second quarter of fiscal year 2023.
The Company and each of its subsidiary Guarantors entered into a Pledge and Security Agreement (the “Security Agreement”) dated as of March 21, 2022, as a requirement with the Credit Facility. Each Guarantor pledged and assigned to the Collateral Agent and granted the Collateral Agent with a continuing security interest in all personal property and fixtures of the Guarantors (the “Collateral”) and all proceeds of the Collateral. All equity of the Guarantors was pledged by the Borrower.
On March 21, 2022, each of the Company’s Subsidiaries, as Guarantors, entered into an Intercompany Subordination Agreement (the “ISA”) with the Collateral Agent. Under the ISA, each obligor agreed to the subordination of such indebtedness of each other obligor to such other obligations.
On March 21, 2022, the Company entered into an Escrow Agreement with Blue Torch Finance LLC and Alter Domus (US) LLC acting as Escrow Agent. See "Business Overview- Description of our Business- Converge Acquisition."
In connection with the aforementioned note, the Company recorded deferred financing and issuance costs totaling approximately $9.2 million, including a $1.5 million upfront fee. The costs will be amortized over the life of the note using the effective interest rate method. During the year ended June 30, 2022, the company recorded $792 thousand in amortization expense and made principal payments of $956 thousand.
At any time on or after March 21, 2022, and on or prior to March 21, 2026, the lender has the right to subscribe for and purchase from Troika Media Group, Inc., up to 1,929,439 shares of Common Stock, subject to adjustment. The exercise price per share of Common Stock under this Warrant shall be $.01 per share. If at any time when this Warrant becomes exercisable and the Registration Statement is not in effect this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise”.
The Company is in negotiations with its Senior Secured Lender to revise the terms of its Financing Agreement relating to the Credit Facility.
See Note 12 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for a discussion of the Credit Facility.
Series E Private Placement
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On March 16, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a private offering (the “March 2022 Private Placement”), an aggregate of $50.0 million of securities, consisting of shares of Series E convertible preferred stock of the Company, par value $.01 per share (the “Series E Preferred Stock”) and warrants to purchase (100% coverage) shares of common stock (the “Warrants”) (collectively, the Series E Preferred Stock and Warrants are referred to as the “Securities”). Under the terms of the Purchase Agreement, the Company agreed to sell 500,000 shares of its Series E Preferred Stock and Warrants to purchase up to 33,333,333 shares of the Company’s common stock (the “Conversion Shares”). Each share of the Series E Preferred Stock has a stated value of $100 per share and was originally convertible, at any time, into shares of common stock at a conversion price of $1.50 per share (the “Conversion Price”), subject to adjustment. The Company’s co-managing underwriters were Kingswood Capital Markets (n/k/a E.F. Hutton), a division of Benchmarks Investments, Inc., and Westpark Capital, Inc. The Company sold the Securities for gross proceeds of $50,000.
Associated with the Series E offering, the Company filed a registration statement on Form S-1 (No. 333-264112) which is pending before the Commission as the Company is responding to comments and anticipates further updates based upon the requirement to update the underlying financials to reflect the present financials. The registration statement seeks to register an aggregate of 200,000,000 shares of common stock for resale by the Purchaser, consisting of shares of common stock issuable to the Purchasers upon conversion of 500,000 shares of Series E Preferred Stock pursuant to the terms and conditions of the Certificate of Designation for the Series E Preferred Stock. The 500,000 shares of Series E Preferred Stock have a stated value of $100 per share, or an aggregate of $50.0 million. The shares were originally convertible at $1.50 per share, or an aggregate of approximately 33,333,333 shares of common stock, subject to adjustment, for reverse and forward stock splits, stock dividends, stock combinations and other such transactions. In addition, the Conversion Price will be downwardly adjusted the greater of (i) eighty (80%) percent of the average of the ten (10) lowest daily VWAPs during the forty (40) trading day period beginning on and including the Trading Day immediately follow the Effective Date of the initial Registration Statement, and (ii) the Floor Price of $0.25 per share unless a holder elects to shorten the adjustment period to all or a portion of the Series E Preferred Stock held by such person to between ten (10) and thirty-nine (39) trading days (the "Registration Reset Price").
As of September 27, 2022, the Registration Statement had not been declared effective by the SEC. As a result, the Company is required under the terms of the Registration Rights Agreement to pay to the Purchasers a partial liquidated damages penalty for failure to meet the effectiveness date requirement, which is determined to be the product of two (2%) percent and the aggregate subscription amount paid by each Purchaser under the terms of the Purchase Agreement, with partial liquidated damages capped at fourteen (14%) percent of the subscription amount. Such partial liquidated damages will be owed to the investors within seven days of the failure to meet the requirements for effectiveness, and will be owed monthly to the purchasers until the Registration Statement is declared effective by the SEC.
On September 26, 2022, we entered into the Exchange Agreement with the Purchasers, pursuant to which (i) each Purchaser exchanged its Warrants for the New Warrants and (ii) each Purchaser consented to the New PIPE Terms, including an amendment and restatement of the terms of our Series E Preferred Stock.
In consideration for the issuance of the New Warrants and the other New PIPE Terms, we filed the amended and restated Certificate of Designation with the Secretary of State of the State of Nevada to effect certain changes contemplated by the Exchange Agreement.
The New PIPE Terms effect the following changes, among others, to the rights Series E Holders:
New Warrant Exercise Price: The New Warrant exercise price per share of common stock is $0.55, provided that if all shares of Series E Preferred Stock issued pursuant to the Certificate of Designation are not repurchased by the Company on or prior to November 26, 2022, on such date, the exercise price per share of the New Warrants will revert to $2.00, subject to further adjustment as set forth in the New Warrant.
Series E Conversion Price: The conversion price for the Series E Preferred Stock shall initially equal $0.40 per share, and so long as the arithmetic average of the daily volume-weighted average prices of the Common Stock for the calendar week prior to each of the following respective dates is lower than the Conversion Price at that time, the Conversion Price shall be downwardly adjusted by $0.01 on each of October 24, 2022, October 31, 2022, November 7, 2022, November 14, 2022 and November 21, 2022.
Standstill Period: The Purchasers agreed to the 60-day Standstill Period, during which each Series E Holder may convert not more than 50% of the Series E Preferred Stock held by such holder at the beginning of the Standstill Period.
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Series E Buyout. During the Standstill Period the Company will use commercially reasonable efforts to raise funds to repurchase all outstanding shares of Series E Preferred Stock held by the Purchasers at a purchase price of $100 per share, subject to the provisions of the Certificate of Designation.
Limitation on Sales: During the Standstill Period, the Purchasers agreed not to sell shares of the Company’s common stock for a price less than $0.30 per share.
Liquidated Damages: The Company agreed to pay to the Purchasers all liquidated damages owed through September 21, 2022 (including any pro-rated amounts).
As of the date of this filing, the Company had paid an aggregate of $2.0 million as partial liquidated damages as a result of not filing the registration statement by July 5, 2022. As such, as of June 30, 2022, the Company has recorded a contingent liability in the amount of $3.6 million. See Note 16 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion.
The Company utilized the full amount of proceeds raised in the Series E offering to pay a portion of the cash payment for Converge Direct, LLC and its subsidiaries.
Contractual Obligations
Year 1
Years 2-3
Years 4-5
>5 Years
Total
Operating lease obligations (a)
Debt repayment (b)
Contractual obligations (c)
Total
(a) Operating lease obligations primarily represent future minimum rental payments on various long-term noncancellable leases for office space.
(b) Debt repayments consists of principal repayments required under the Company's Credit Facility.
(c) Contractual obligations recorded on the balance sheet consist of the Company's obligations to the Converge Sellers arising from the Converge Acquisition. See Note 3 - Business Combinations and Dispositions.
Cash Flow Discussion
Net cash used in operating activities increased approximately $0.3 million to $7.1 million for the year ended June 30, 2022, as compared to the prior year period. The increase is primarily due to a net increase in working capital which is reflective of the Converge Acquisition.
Net cash used in operating activities increased by approximately $4.5 million to $6.8 million for the year ended June 30, 2021, as compared to the prior year period. This increase was the result of approximately $3.1 million in gains from stimulus funding, a decrease of $2.0 million in impairment of goodwill, a decrease of $1.9 million in impairment of intangibles, a $1.8 million decrease in the amortization of intangibles, and a $2.7 million decrease in accounts receivable. This was offset by an approximate $2.6 million increase in contract liabilities relating to revenue, a $1.5 million increase in accounts payable, a $0.5 million increase in operating lease liabilities, a $0.5 million increase in long-term liabilities, and a decrease of $6.3 million gain from the derecognition of liabilities from discontinued operations.
Net cash used in investing activities increased by approximately $81.4 million to $82.9 million for the year ended June 30, 2022, as compared to the prior year period, related to the net cash paid for the Converge Acquisition.
Net cash used in investing activities increased by approximately $1.4 million to $1.5 million for the year ended June 30, 2021, as compared to the prior year period. The increase was the result of approximately $1.4 million in cash being paid for the Redeeem acquisition and an increase of $60 thousand in purchases of fixed assets.
Net cash provided by financing activities increased by approximately $93.5 million to $112.6 million for the year ended June 30, 2022. The increase was the result of approximately $69.7 million in net proceeds from the Credit Facility coupled with approximately $44.4 million of net proceeds related to the issuance of the Series E Convertible Preferred Stock private
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placement, partially offset by the absence of $20.7 million in net proceeds from the initial public offering during the year ended June 30, 2021.
Net cash provided by financing activities increased by approximately $16.8 million to $19.2 million for the year ended June 30, 2021, as compared to the prior year period. This increase was primarily the result of approximately $20.7 million in net proceeds from the initial public offering. This increase was offset by a decrease of approximately $1.0 million in proceeds from the sale of Series D preferred shares, a decrease of $0.9 million in proceeds relating to convertible note payables, and a $2.4 million increase in payments settling related party note payables.
Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for information regarding recently issued accounting pronouncements not yet adopted.
Critical Accounting Policies
The preparation of the Company's consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amount of revenues and expenses. Management believes its use of estimates in the consolidated financial statements to be reasonable. See Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information regarding the Company's use of estimates. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five (5) steps:
(i) identification of the contract, or contracts, with a customer;
(ii) identification of the performance obligations in the contract;
(iii) determination of the transaction price;
(iv) allocation of the transaction price to the performance obligations in the contract; and
(v) recognition of revenue when or as a performance obligation is satisfied.
Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested annually for impairment. The annual qualitative or quantitative assessments involve determining an estimate of the fair value of reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill exists. A qualitative assessment evaluates whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step quantitative goodwill impairment test. The first step of a quantitative goodwill impairment test compares the fair value of the reporting unit to its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss may be recognized. The amount of impairment loss is determined by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount. If the carrying amount exceeds the implied fair value then an impairment is recognized equal to that excess.
The Company has adopted the provisions of ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 requires goodwill impairments to be measured on the basis of the fair value of a reporting unit relative to the reporting unit’s carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. Thus, ASU 2017-04 permits an entity to record a goodwill impairment that is entirely or partly due to a decline in the fair value of other assets that, under existing GAAP, would not be impaired or have a reduced carrying amount. Furthermore, the ASU removes “the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying amount
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will apply the same impairment test. Accordingly, the goodwill of reporting unit or entity with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit/entity may indicate that goodwill is impaired.
We test our goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is June 30.
None of the goodwill prior to the Converge Acquisition is deductible for income tax purposes. The goodwill associated with the Converge Acquisition is deductible for income tax purposes on a straight-line basis over fifteen (15) years.
Intangible Assets
Intangible assets with finite useful lives consist of trade names, non-compete agreements, acquired workforce and customer relationships and are amortized on a straight-line basis over their estimated useful lives, which range from three to ten years. The estimated useful lives associated with finite-lived intangible assets are consistent with the estimated lives of the associated products and may be modified when circumstances warrant. Such assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset.
Beneficial Conversion Feature
The Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options, Emerging Issues Task Force (“EITF”) 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No 98-5 To Certain Convertible Instruments. The Beneficial Conversion Feature (“BCF”) of a convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of a convertible note when issued and also records the estimated fair value of any warrants issued with those convertible notes. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.
The BCF of a convertible note is measured by allocating a portion of the note’s proceeds to the warrants, if applicable, and as a reduction of the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which are credited to additional paid-in-capital. The value of the proceeds received from a convertible note is then allocated between the conversion features and warrants on an allocated fair value basis. The allocated fair value is recorded in the financial statements as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense using interest method.
Stock-Based Compensation
The Company recognizes stock-based compensation in accordance with ASC Topic 718 “Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
For non-employee stock-based compensation, the Company has adopted ASC 2018-07, Improvements to Nonemployee Share-Based Payment Accounting which expands on the scope of ASC 718 to include share-based payment transactions for acquiring services from non-employees and requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or the fair value of the services at the grant date, whichever is more readily determinable in accordance with ASC Topic 718.
Foreign Currency Translation:
The consolidated financial statements of the Company are presented in United States Dollars ("USD"). The functional currency for the Company is USD for all entities other than Mission Media Limited whose operations are based in the United Kingdom and their functional currency is British Pound Sterling ("GBP"). Transactions in currencies other than the functional currencies are recorded using the appropriate exchange rate at the time of the transaction. All assets and
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liabilities are translated into USD at balance sheet date, stockholders’ equity is translated at historical rates, and revenue and expense accounts are translated at the average exchange rate for the year or the reporting period. The translation adjustments are reported as a separate component of stockholders’ equity, captioned as accumulated other comprehensive (loss) income. Transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of operations.
The relevant translation rates are as follows: for the year ended June 30, 2022, closing rate at $ 1.219050 USD: GBP, average rate at $ 1.330358 USD: GBP, for the year ended June 30, 2021, closing rate at 1.382800 USD: GBP, average rate at 1.346692 USD: GBP.
