Section 1.1: Understanding Pro-Forma Financial Statements

Every company undergoing a "significant business combination" must furnish financial statements to illustrate how the merger would impact its financial health. These are known as Unaudited Pro-Forma Financial Statements.

According to the SEC, "pro forma financial information aims to inform investors about the ongoing effects of a transaction by illustrating how a specific deal might have influenced historical financial statements, showcasing the changes in the company's financial standing and operational results." (Source: SEC.gov | Financial Reporting Manual Regulation SX Article 11)

The preparation of these statements involves merging the historical financial data of both entities and incorporating adjustments for merger-related expenses, incurred debts, interest alterations, cash variations, and other balance sheet modifications. This process seeks to provide shareholders with a credible forecast of their holdings and a glimpse into the past performance of the combined entity. TMTG submitted these statements alongside their prospectus and their April 15, 2024, S-1 share registration. A closer inspection reveals a noteworthy item:

TMTG Pro-Forma Income Statement as of December 31, 2023

(Source: sec.gov/Archives/edgar/data/1849635/000114036124019745/ny20026576x1_s1.htm#tUPF)

The highlighted figure of $102,991,000 in expenses, unaccounted for in the income statements of both TMTG and Digital World Acquisition Corp. (DWAC) as of December 31, 2023, relates to the merger finalized on March 26, 2024. Pro-Forma statements presuppose that the merger occurred by the end of December 2023, raising questions about these expenses that must have arisen between December 2023 and the merger date.

The explanatory note EE clarifies this situation:

TMTG S-1 Filing April 15, 2024 (Source: sec.gov/Archives/edgar/data/1849635/000114036124019745/ny20026576x1_s1.htm#tUPF)

(Note 4 erroneously mentions 2022, but the accurate year is 2023, as indicated in the heading and financial statements.)

These costs encompass transaction-related fees, including legal, accounting, advisory, and consulting charges, alongside an $18 million SEC settlement. This prompts an important question:

$102,991,000 — $18,000,000 SEC fine = $84,991,000 in three months for legal, accounting, advisory, and consulting fees? Even after the SEC penalty for fraud (Source: SPAC that plans to merge with Trump Media settles SEC charges of fraud | Reuters), this amount is staggering for a company of this scale.

The unaudited pro-forma balance sheet as of December 31, 2023, reports $310.6 million in cash at DWAC prior to the merger, and $276.3 million at TMTG post-merger after borrowing $50 million (Item L):

TMTG S-1 April 15, 2024, Balance Sheet-Assets (Source: sec.gov/Archives/edgar/data/1849635/000114036124019745/ny20026576x1_s1.htm#tUPF)

Recent comments from Devin Nunes and Donald Trump on Truth Social state that the company has "$200 million in the bank." (This translates to less than $1.50 per share.) In a recent interview, Devin Nunes remarked:

"Why are we well positioned? Because we have no debt. We're emerging from this with no debt. We have a platform that operates exceptionally well and connects with millions." (Source: sec.gov/Archives/edgar/data/1849635/000114036124018649/ef20026360_ex99–1.htm)

Was the cash flow from $310.6 million on December 31, 2023, to $200 million by early April an accurate representation? Furthermore, the Pro-Forma indicates $50 million in post-merger debt on the balance sheet. What has happened to this debt? Was it converted to stock, diluting existing shareholders, or repaid with cash? If cash was used for repayment, it raises two significant points: 1) they would have considerably less cash, and 2) why are they registering 100% of the shares anticipated from this debt conversion?

The most plausible scenario is that the debt was transformed into stock and warrants, or Nunes miscommunicated regarding the debt or cash status.

Section 1.2: Anticipated Q1 2024 Earnings Report

What can we expect from TMTG's Q1 earnings? In 2023, the company's revenue averaged $1.033 million per quarter, although the December quarter saw only $751k. If they maintain the average revenue of $1.033 million while incurring $102.991 million in expenses for the quarter, the operating income will likely be disastrous.

Even after accounting for a $54.0 million benefit from reversing interest expenses tied to converting convertible debt to stock (refer to items AA and DD in the income statement), a net loss for the quarter could mirror the full-year loss reported for 2023. This projection assumes that R&D, Sales & Marketing, and G&A expenses remain stable, which may be optimistic given the anticipated rise in executive compensation and the $6.4 million in retention bonuses.

Amidst these numerous variables, one aspect appears clear: TMTG is on track for a considerable loss in its inaugural quarter as a public entity. Additionally, a significant influx of shares is set to hit the market, potentially increasing the total outstanding shares from 136.7 million to over 204.4 million. This includes 40 million "Earnout" shares expected to be issued by April 23, 2024, and 21.5 million shares related to in-the-money warrants, which become exercisable after April 26, 2024. A minor fraction of these warrants is subject to a lock-up period.

According to SEC regulations, TMTG must submit their 10-Q for the quarter ending March 31, 2024, by May 15, 2024. If I were in their position, I wouldn't rush to file. What remains puzzling is why this stock continues to trade as though it's worth more than its cash value per share.