$TRKA investment thesis

Troika Media Group – $TRKA

What is Troika Media Group?

Troika Media Group is as stated – a media company. Situated in the Marketing Tech sector (MarTech), Troika provides marketing technology solutions to their clients.

If you were to look at their website, you’d see the least marketing savvy site that only lists SEC disclosures: Link. If you were to look into Troika’s past, you’d see a failed company. Troika started as a holding company for digital media companies. If you are unfamiliar with this space, this includes products varying from digital advertisements (e.g. NYC Subway ads), email campaigns, website advertisements, YouTube ads, NFTs, and more. Essentially any form of digital content that promotes a brand or product likely originated from a digital media campaign.

Troika was a failed company because they had no clear vision. If I’ve errantly grabbed your attention so far, I recommend you listen to the Annual Investor Call (from Nov ‘22) on their website starting ~11 minutes. Sid (CEO) covers the history of Troika, which includes, but is not limited to the following events:

  • –  Acquired Troika Design Group in 2017 (Link)

  • –  Merged with Mission Media in 2018 (Link)

  • –  IPO’d for $24m in 2021

  • –  Acquired Redeeem (a Crypto/NFT platform) in 2021 (Link)

  • –  Acquired Converge Media in 2022 (Link)

    These mergers and acquisitions were “media” focused, but in reality had no synergy. Additionally, most of the products were abject failures that were massively unprofitable assets for Troika. Troika would put the acquisition management in high paid, executive roles in the company and then proceeded to IPO, where they raised cash and aggressively diluted shareholders.

    Luckily for Troika, one of the acquisitions was a success. I can’t say if it was a mistaken stroke of luck, but Troika acquired Converge Media, which is a legitimate media consulting business for the hefty price tag of $125m. Converge management was placed in executive roles at Troika, and immediately took over the Troika business. With support from shareholders and the board, Sid Toama (COO of Converge) became CEO of Troika. As CEO, Sid proceeded to close every non-Converge part of the business, which included letting go of the employees associated with those failed acquisitions. Similar to a wolf hiding in a sheep’s clothing, Converge is hiding in Troika’s remnants after the acquisition and subsequent gutting of the former Troika business.

    To give Troika credit, Sid does give credit to their ability to raise capital via an IPO and dilution. Outside of that, Sid presents Troika as a failure and proceeds to highlight the reformed Converge business at the Annual Investor Meeting. To Converge’s credit, Troika’s revenues grew 1300%+ in the one full quarter of Converge operations with a positive net income. As you listen to the investor meeting, it is easy to hear the tone and frustration from which Sid explains the Troika failures and successes of Converge. There’s an argument to be made that the Converge business wants to prove itself, and that’s where my thesis begins.

Investment Thesis in Troika Media

Acquisition Overview:

Troika acquired Converge for $125m. I will outline the details of the acquisition at length later. What’s most important is what that $125m acquired as that is the remaining piece of Troika. From here on out, every reference to Troika will be in reference to the Converge business.

Converge as a business recorded $300m in gross revenue with $21m in net income in 2021. Since 2006, they’ve generated $5b+ in revenues. This is an established business with long-standing clients and proven revenues. The $125m purchase price was set at 5.4x Converge’s adjEBIDTA. They also grew revenues from $238m in 2020, or 20% year over year.

To start with the obvious, Troika works in a space that is being hammered by macro headwinds. Marketing budgets are being slashed and many competitors have proceeded with multiple rounds of layoffs. Additionally, Troika’s client relationships pose risks, which include:

  1. No long term contracts – clients are able to leave with no notice

  2. Revenue concentration – 5 clients (undisclosed) make up 65% of their revenues

  3. Troika fronts the marketing spend, and generates revenue based on client success

a. If their marketing campaigns are unsuccessful, they’ll eat the cost and likely lose the client

My thesis is not based on the MarTech growth or sector, but I wanted to address this as it is an obvious question that begs answers. If you looked at a major competitor, Wunderkind, you’d notice they’ve recently announced another round of layoffs. The MarTech space is juvenile, as well as lacking in employee talent. Wunderkind likely announced layoffs as Bed Bath and Beyond was their largest client. Working with quality names is critical. Troika works with high profile, blue-chip names such as AT&T, ADT, and True Value. Nothing to write home about, but companies that are not a contagion risk. Likewise, Troika has been in business since 2006, and is not exclusively hiring college graduates or going viral on TikTok videos for cool office spaces like certain competitors were. Competitors, or hot start ups, are unable to compete long term as they cannot retain talent with their college graduate hires who see a MarTech job as a stepping stone. In the ashes of former competitors, Troika should thrive as they have an established, competent team that produces predictable results at scale. And has for a long time.

If there was any reason to be skeptical of the Converge acquisition and former revenue and net income numbers, you can reference the Troika Q3 earnings to alleviate that skepticism. Year over year, revenues increased from $8.3m to $119.8m or a 1300%+ increase. Summer quarters are typically lagards for MarTech as well (no BFCM or holidays), so this headline revenue is shocking. Even more shocking is the positive net income of $1.3m, which included costs

associated with the restructuring of the former Troika business. To say the Converge business beat expectations would be an understatement. Here is a management team that within 2 quarters navigated their team through a messy acquisition, axed their new bosses, and managed to scale up revenues while posting a profit.

In case any of these details were unclear, here is a more concise summary of the transformation from the company’s recent annual report:

Troika Converge business acquisition
Acquisition Details

The Converge acquisition is clearly the defining moment for Troika, so it is important to understand the associated price tag. This is where things get complicated, and I apologize for any misunderstanding on my part. Part of my intent for entering this competition was to generate discussion on the debt situation in order to confirm my understanding of this investment.

The $125m price tag for Converge was separated into two parts: $75m debt financing and $50m in Series E Convertible Preferred Stock. The details are as follows:

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 against claims for indemnification. The escrowed shares will be held until the later of (a) one year from the Closing Date, or (b) the resolution of indemnification claims.

Blue Torch Finance LLC provided $76.5m in debt financing to Troika for the Converge acquisition. The full details of the financing are included in the annual report. To summarize simply, this is a four-year LIBOR Rate Loan. There are also compliance provisions based on quarterly EBITDA, which Troika is currently not compliant with, but expects to meet by Q2 ‘23. In the interim, BT has been extending limited waivers on their compliance requirements.

$29.1m was held in escrow and will be released to the Converge sellers upon delivery of the audited Converge financial statements. Interestingly, the audited financial statements have been provided, but BT is holding the escrow funds hostage of which $4.7m are owed to Sid Toama (CEO). Given the Converge sellers are compliant with the escrow requirements, but non compliant with the debt financing requirements, it would appear there is a handshake agreement whereas the escrow funds will not be released until Troika is compliant with their financing. That or BT does not agree with the audited financial statements. There is an incentive for current management to be compliant with the BT financing in order to release the escrow funds.

The Series E Convertible Preferred Shares were issued for $50m for the remainder of the Converge acquisition. Initially they were set for conversion at $1.50 with warrants exercisable for 5 years at $2. Troika raised the funds for the acquisition, but never actually issued the Series E Preferred Shares.

Instead, new PIPE Terms were issued in September with agreement by the Series E holders whereby Troika entered into a Series E buyout period. During this period, warrant exercise prices and preferred conversion prices were lowered, and Troika would look to raise funds with Blue Torch to buyout the Series E shares. Shareholders are pending an update on the results of this buyout effort. Failure to buyout the Series E Preferred Shares would register 500k convertible shares and 33.3m warrants (floor price of $.25) as compared to the 67m shares currently outstanding. The buyout period ended November 26, and recent volume could indicate that the buyout failed and Series E holders are converting and selling into the open market. This constitutes the largest risk to the thesis.

The investment thesis can thus be summarized as the following:

  • –  Troika has a market cap of $13.5m

  • –  Troika will likely generate $300m+ in revenues in 2023 alongside $20m+ in net income

  • –  With more quarters of proven revenue, Troika will be compliant with their debt financing

  • –  Blue Torch is incentivized to help the business survive to protect their debt financing and

    have structured the debt funding with a 2026 balloon payment that can be refinanced

  • –  The Series E convertible debt poses an unparalleled risk/reward

Series E Commentary

The thesis for Troika becomes realized the moment there’s an announcement on the Series E Convertible shares. If the company is able to buyout the shares and eliminate the potential dilution, the company should immediately re-rate. If the company is unable to buyout the shares and the dilution occurs, the thesis dies.

There are indications that the Series E shares will not be the death kiss that it seems. As mentioned earlier, the Series E shares were never issued. Imagine being an investor who footed $50m for an acquisition and the company never delivered. You’d imagine there’d be lawsuits, right? Instead 6 months later Troika announced that every Series E holder agreed to a buyout proposition with a 2 month standstill period where Troika negotiated with their debt lender.

The Series E holders are being gracious. The Series E holder is likely an insider or someone with a vested interest in Troika performing. Q4 earnings should give insight into the Series E buyout efforts and be an immediate catalyst for the stock price to move (up or down) significantly.

If Troika can avoid the Series E dilution and walk away with the Converge business intact with $125m in debt, I’d argue they deserve a 5x EBITDA valuation. I will discount the growth in revenues that Q3 earnings suggested and use their 2022 numbers. $23m in adjEBITDA would reflect a $115m price tag, or an 850% return from today’s price.

Other Notes about Troika Media

There’s decent stock based compensation for executives and directors at Troika. While you could see this as a negative, it also incentivizes stock performance. Given Troika trades for pennies, it would make sense that management wouldn’t be incentivized to sell shares and would focus on stock based returns.

There’s also some residual common shares vesting from previous acquisitions. For example, the Redeeem acquisition has additional shares vesting in 2023.

Author: Daniel Bianchini @danban_

This investment thesis participates in the Moram investment competition. If you want to vote for it, voting will be open for Moram’ subscribers from this Sunday evening (5th March 2023) to next Saturday.

Disclaimer: This thesis is only for educational purposes and does not constitute any investment advice

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