The following management's discussion and analysis should be read in conjunctionwith the Company's historical consolidated financial statements and the relatednotes thereto included in our audited financial statements for the year endedJune 30, 2021, and the notes thereto. The management's discussion and analysiscontains forward-looking statements that involve risks and uncertainties, suchas statements of our plans, objectives, expectations and intentions. Anystatements that are not statements of historical fact are forward-lookingstatements. When used, the words "believe," "plan," "intend," "anticipate,""target," "estimate," "expect" and the like, and/or future tense or conditionalconstructions ("will," "may," "could," "should," etc.), or similar expressions,identify certain of these forward-looking statements. These forward-lookingstatements are subject to risks and uncertainties that could cause actualresults or events to differ materially from those expressed or implied by theforward-looking statements in this quarterly report. The Company's actualresults and the timing of events could differ materially from those anticipatedin these forward-looking statements as a result of several factors. The Companydoes not undertake any obligation to update forward-looking statements toreflect events or circumstances occurring after the date of this quarterlyreport.
Critical Accounting Policy & Estimates
Our Management's Discussion and Analysis of Financial Condition and Results ofOperations section discusses our financial statements, which have been preparedin accordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amount ofrevenues and expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments, includingthose related to revenue recognition, accrued expenses, financing operations,and contingencies and litigation. Management bases its estimates and judgmentson historical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that are notreadily apparent from other sources.
Actual results may differ from these estimates under different assumptions andconditions. The most significant accounting estimates inherent in thepreparation of our financial statements include estimates as to the appropriatecarrying value of certain assets and liabilities which are not readily apparentfrom other sources. These accounting policies are described at relevant sectionsin this discussion and analysis and in the condensed consolidated financialstatements included in this quarterly report.
Troika Media Group, Inc. was incorporated in Nevada in 2003. In October 2016,our secured lenders took control of the Company's then operating subsidiarieswhich ceased operations and are included in discontinued operations. The Companyis a transatlantic agency focusing on branding, digital marketing andperformance media services, using actionable intelligence across all broadcastdigital media and live experiences. On June 12, 2017, we commenced our currentoperations upon the merger with Troika Design Group, Inc., a strategic brandconsultancy with deep expertise in entertainment media, sports, consumer goodsand service brands. On June 29, 2018, we acquired all of the equity interests ofMission Culture LLC and Mission Media Holdings Limited, a company headquarteredin London, with North American operations since 2009, as a brand experience andcommunications agency that specializes in consumer immersion through a culturallens, via live experiences, brand partnerships, public relations and social andinfluencer engagement. On May 21, 2021, we acquired substantially all of theassets of Redeeem LLC (n/k/a Troika IO, Inc.), a peer-to-peer NFT blockchainexchange founded in 2018.
The Impact of the Global COVID-19 Virus
In March 2020, the World Health Organization categorized the coronavirus(COVID-19) as a pandemic, and it continues to spread throughout the UnitedStates and the rest of the world with different geographical locations impactedmore than others. The outbreak of COVID-19 and the resulting public and privatesector measures to reduce its transmission, such as the imposition of socialdistancing and orders to work-from-home, stay-at-home and shelter-in-place, haveadversely impacted our business and those of our clients. Businesses haveadjusted, reduced, or suspended operating activities, which has negativelyimpacted the clients we service. We continue to believe our focus on ourstrategic strengths, including talent, our differentiated market strategy andthe relevance of our services, including the longevity of our relationships,will continue to assist our Company as we navigate a rapidly changingmarketplace. The effects of the COVID-19 pandemic have negatively impacted ourresults of operations, cash flows and financial position; however, the continuedextent of the impact will vary depending on the duration and severity of theeconomic and operational impacts of COVID-19.
We took steps to protect the safety of our employees, with a large majority ofour worldwide workforce working from home, while developing creative ideas toprotect the health and well-being of our communities and setting up our peopleto help them do their best work for our clients while working remotely. Withrespect to managing costs, we have implemented multiple initiatives to align ourexpenses with changes in revenue. The steps taken across our agencies andcorporate group include deferred merit increases, freezes on hiring andtemporary labor, major cuts in non-essential spending, staff reductions,furloughs in markets where that option is available and salary reductions,including voluntary salary deferment for our senior corporate management team.In addition, we remain committed to and have intensified our efforts around cashflow discipline, including the identification of significant capitalexpenditures that can be deferred, and working capital management. We began tosee the effects of COVID-19 on client spending, notably in the UK and US marketswith our Mission subsidiaries throughout the second quarter of calendar 2020with much of the work force of the UK subsidiary on furlough, and with ourTroika Design subsidiary furloughed as March 2020 progressed. Due to mandatorystay at home orders and social distancing, our experiential business has beenparticularly impacted by COVID-19. Promotional and experiential events with theCompany's assistance are particularly susceptible to external factors weredelayed by many of the Company's Mission clients due to the effects of COVID-19.The Company had temporarily furloughed employees to reflect current reduceddemands associated with those client sets. However, as of the first and secondquarters of calendar 2021, we started to see business dramatically improve andexpect greater improvement in our results in our next fiscal quarters. As citieshave commenced openings with the improvement of vaccines distribution andinfection rates declining, our client activities have doubled and there is areal optimism that the economic conditions are improving. Sports, Entertainment,Pharma clients are contracting our services across all entities at rates similarto 2019.
In the current environment, a major priority for us is preserving liquidity. Ourprimary liquidity sources are operating cash flow, cash and cash equivalents andshort-term investments. Although we expect to experience a decrease in our cashflow from operations as a result of the impact of COVID-19, we have obtainedrelief under the CARES Act in the form of a Small Business Administration backedloans. In aggregate we received $1.7 million in SBA stimulus "Payroll ProtectionProgram" funding in April 2020 of which the majority of these funds were usedfor payroll. As per the US Government rules, the funds used for payroll,healthcare benefits, and other applicable operating expenses can be forgiven andthe Company reported them as such in December 2020 considering the Companybelieves we have substantially met these conditions. On August 14, 2020, theCompany received an additional $500,000 in loans with 30 year terms under theSBA's "Economic Injury Disaster Loan" program which the Company intends to useto address any cash shortfalls that may result from the current pandemic. InFebruary 2021, the Company obtained additional relief under the CARES Act in theform of a Small Business Administration backed loans and received an additional$1.7 million in SBA stimulus "Payroll Protection Program" funds which will beused for payroll, healthcare benefits, and other applicable operating expenses.In July 2021, the Company was notified that all of the stimulus funds wereforgiven with the exception of approximately $8,000 which was returned in thethree months ending September 30, 2021.
In the United Kingdom, as of April 1, 2020, Mission furloughed twenty-sevenemployees, saving 78,000 in April payroll, being made up of 55,000 of furloughmonies from the government and 16,000 in associated payroll savings and appliedfor a 3-month rent holiday. In May 1, 2020, Mission put on furlough anadditional 5 employees bringing the total to 32, alongside a 10% pay cut for allemployees not furloughed, saving 111,000 in May payroll, being made up of62,000 of furlough monies from the government, 33,000 of associated payrollsavings and 16,000 in savings related to the pay cut. On April 1, 2020, TroikaDesign Group actioned a 15% salary reduction across the majority of the LosAngeles staff and furloughed one office manager for a total savings of $112,000per month. Finally, certain members of the Company's executive team deferredcompensation temporarily. In August 2020, the Company received 50,000 in loansrelated to the COVID pandemic with an interest rate of 2.5% to be paid over fiveyears beginning one year after receipt. The Company used these proceeds toaddress any cash shortfalls that resulted from the pandemic.
The extent to which the COVID-19 outbreak continues to impact the Company'sresults will depend on future developments that are highly uncertain and cannotbe predicted, including new information that may emerge concerning the severityof the virus and the actions to contain its impact.
For the three months ended September 30, 2021 compared to the three months endedSeptember 30, 2020.
Our revenues for the three months ended September 30, 2021 and 2020 were$8,349,000 and $4,132,000, respectively, an increase of approximately $4,217,000or 102.1%. The driver of this increase is a resurgence of business at TroikaDesign and the UK subsidiary of Mission-Media Holdings which recognizedincreases of $2,575,000 (113.2%) and $1,440,000 (173.6%), respectively, inrevenue in relation to the prior period which was significantly impacted by theCOVID pandemic.
The costs of revenue exclusive of operating expenses for the three months endedSeptember 30, 2021 and 2020 were $4,837,000 and $2,280,000, respectively, anincrease of $2,557,000, or 112.1%. The increase is directly correlated to theaforementioned increase in revenue at Troika Design and the UK subsidiary ofMission-Media Holdings as result of these business units beginning theirrecovery from the COVID pandemic and the gradual return of live-events. Thegross profit margin for the three months ended September 30, 2021 and 2020decreased from 44.8% to 42.1% due to a higher proportion of consulting feesbeing generated in the prior period which have a higher gross profit margin incomparison to revenue generated from project-based and live-event business.
The operating costs for the three months ended September 30, 2021 and 2020 were$7,005,000 and $5,809,000 respectively, an increase of $1,196,000 or 20.6%. Theprimary driver of this increase was $857,000 in additional salary cost andpayroll taxes primarily due to the Redeeem acquisition and the return offurloughed employees, $659,000 increase in stock-based compensation, due to theRedeeem acquisition, and a $373,000 increase in board of director fees. Thiswas offset by a $436,000 decrease in rental expense and $268,000 reduction inlegal fees.
As a result of the foregoing, our net loss for the three months ended September30, 2021 decreased to $2,139,000 from $3,921,000 for the three months endedSeptember 30, 2020.
As of September 30, 2021, compared with June 30, 2021:
As of September 30, 2021, the Company has a working capital deficit of$(5,279,000) compared with a deficit of $(4,004,000) at June 30, 2021. Theincrease in working capital deficit was primarily the result of a net loss of$2,139,000 for the three months ended September 30, 2021. The increase inworking capital deficit also reflects a decrease of $2,314,000 in cash and anincrease of $900,000 in contract liabilities offset by a decrease of $967,000 inaccounts payable and accrued expenses and an increase of $649,000 in accountsreceivable.
As of September 30, 2021, compared with September 30, 2020:
Net cash used in operating activities increased by $1,079,000 from $(1,182,000)to $(2,261,000) for the three months ended September 30, 2020 and 2021,respectively. The increase was the result of an increase of $2,999,000 in cashused relating to accounts payable and accrued expenses, $368,000 reduction inthe amortization of intangibles, and $399,000 increase in contract liabilitiesto government grants. This was offset by a $1,782,000 decrease in net loss,$805,000 increase in stock-based compensation relating to the Redeeemacquisition, $989,000 increase in contract liabilities relating to revenue.
Net cash used in investing activities increased by $61,000 as a result ofcapital expenditures being increased to $68,000 from $7,000 for the three monthsended September 30, 2021 and 2020, respectively.
Net cash provided by financing activities decreased by $735,000 from $715,000 to$(20,000) for the three months ended September 30, 2020 and 2021, respectively.The decrease was the result of a $565,000 decrease in proceeds from stimulusloan programs and a $150,000 decrease in proceeds from convertible notepayables.
During the three months ended September 30, 2021 and 2020, the Company did notrecognize any proceeds from the sale of its securities.
As a result of the forgoing, the Company had a decrease in cash of $2,314,000for the three months ended September 30, 2021 in comparison to a decrease of$483,000 for the three months ended September 30, 2020.
The following table sets forth the reconciliation of Adjusted Earnings BeforeInterest Taxes Depreciation & Amortization ("Adjusted EBITDA") to Net Income(Loss):
Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adj.EBITDA"):
The adjusted EBITDA metric is most helpful when used in determining the valueof a company for transactions such as mergers, acquisitions or raising capital.
The adjustments made to a company's EBITDA can vary quite a bit from one companyto the next, but the goal is the same. Adjusting the EBITDA metric aims to"normalize" the figure so that it is somewhat generic, meaning it containsessentially the same line-item expenses that any other, similar company in itsindustry would contain.
We believe that our financial statements and the other financial data included,have been prepared in a manner that complies, in all material respects, withgenerally accepted accounting principles in the United States ("GAAP"). However,for the reasons discussed below, we have presented certain non-GAAP measuresherein.
We have presented the following non-GAAP measures to assist investors inunderstanding our core net operating results on an on-going basis: (i) AdjustedEBITDA as it relates to Net Income. These non-GAAP financial measures may alsoassist investors, securities analysts and others in making comparisons of ourcore operating results with those of other companies and making informedbusiness decisions.
As used herein, net income represents net loss plus depreciation andamortization, interest expense, net and income tax expense. As used herein,Adjusted EBITDA represents Net Income plus the following add backs;
Net Income plus unrealized gains, depreciation and amortization, interestexpense, non-operating related management bonus compensation, foreign exchangelosses, stock-based compensation expense and litigation expenses.
We recognize that Adjusted EBITDA off net income, have limitations as analyticalfinancial measures. For example, neither EBITDA nor Adjusted EBITDA reflects:
Additionally, Adjusted EBITDA excludes non-cash expense for stock-basedcompensation, which is currently and is expected to remain a key element of ouroverall long-term incentive compensation package.
The bulk of the adjustments are often different types of expenses that are addedback to EBITDA. The resulting adjusted EBITDA often reflects a higher earningslevel because of the reduced expenses.
EBITDA Adjustments included below:
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
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TROIKA MEDIA GROUP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q) - marketscreener.com