Right Wing Biz Watch
Truth or Dare: Risky Choices for Lenders and Investors in Truth Social Merger Deal
By David Lieberman, November 22, 2023
A moment of truth is approaching for Truth Social as a 510-page corporate filing to the Securities and Exchange Commission last week provides a rare peek at the finances of Donald Trump’s social media company.
The doorstop document shows that millions of dollars of loans are coming due for its parent, Trump Media and Technology Group (TMTG) and it needs lenders to give it more time, and to provide bridge loans of anywhere from $5 million to $50 million, in order to pay them off.
The problem? Some apparently have lost patience after repeated delays in closing TMTG’s October 2021 merger deal with Digital World Acquisition Corp. (DWAC)a publicly traded special purpose acquisition company (SPAC) that’s poised to provide Trump with cash and stock. As a result, TMTG says, lenders’ willingness to help is “directly conditional” on completing the deal with DWAC by December 31.
If the money comes through, the former president and likely 2024 GOP nominee would remain in control of the company that bears his name, even as battles 91 felony charges and seeks a return to the White House.
‘Substantal Doubt’
But if there’s no agreement by year end, TMTG says, then it has “substantial doubt” it will have “sufficient funds to meet its liabilities as they fall due” over the next 12 months.
TMTG’s auditor, BF Borgers, also has “substantial doubt” Trump’s company could last a year or more due to its “recurring losses from operations and…significant accumulated deficit.
”A merger with DWAC would funnel roughly $875 million to TMTG. About $307 million of the total would come from DWAC’s public shareholders. Much of the remainder would come from private investors including a subsidiary of Shanghai-based ARC Group that owns nearly 15 percent of DWAC and is identified as its “sponsor.”
That infusion is key: advertisers aren’t paying the kind of money Truth Social needs since it hit iOS devices in April 2022 and Android devices the following October.
TMTG says it generated $2.3 million in revenues in the first six months of 2023 – about a third as much as CBS reportedly is charging for a single 30-second TV spot in this February’s Super Bowl. That is well short of the $9.8 million TMTG spent on its operations in the first half of this year.
Like many startups, TMTG borrowed cash to keep going. It sold nearly $38 million in notes that at least some lenders can exchange for stock after a merger with DWAC
Yet the new filing shows that entities that loaned $6.2 million said in July that TMTG had defaulted on its payment terms, which the company denies. Others whose loans are due have not demanded payment yet, but could.
“Management is currently in discussions with certain existing noteholders regarding options for extending their notes’ respective maturity dates, and is working to raise funds through the issuance of TMTG Convertible Notes,” the company says. “TMTG believes that it may be difficult to raise additional funds through traditional financing sources in the absence of material progress toward completing its merger with Digital World.
”The preliminary prospectus is the most solid sign yet that the merger is moving ahead. And many investors seemed encouraged. DWAC’s stock price appreciated 7.3 percent last week, ahead of the overall market which rose 2.2 percent.
TMTG CEO Devin Nunes called the filing “a monumental milestone” for the merger, adding that the company plans to work with the SEC “to bring this deal to a close as quickly as possible.”
DWAC tells its shareholders that a merger with TMTG is the “most attractive opportunity” for them. That’s due in part to its “strong management team” along with “the potential number of users and accelerated adoption of Truth Social, as well as the additional business verticals in development.
”DWAC seems optimistic. It disclosed yesterday that it just sold $900,000 worth of notes, convertible into stock, that it says will help “pay costs and expenses in connection with completing an initial business combination,” presumably with TMTG.
‘Worthless’ Investments?
But DWAC did not seek a so-called fairness opinion from a third party to assure shareholders that a deal would serve their interests. As a result, “Digital World’s stockholders will be relying solely on the judgment of the Digital World Board in determining the value of the Business Combination.”
Buyer beware. The filing notes that investments by DWAC directors and ARC “will be worthless if Digital World does not complete a business combination.” Conversely, they are “likely to earn a substantial profit” from a deal – potentially nearly $70 million – even if it doesn’t pay off for public investors.
That could incentivize the insiders to “complete an initial business combination with a riskier, weaker-performing or less-established target business.”
That’s a good description of TMTG, which has 37 full-time employees.
Trump in Charge…and On Trial
Trump would continue to run the show as Chairman of the merged company’s seven-member board, including six designated by TMTG. He would own a class of shares that entitle him to 55 percent of the votes, potentially giving TMTG security holders 72 percent, DWAC shareholders 21.6 percent and ARC 6.4 percent.
But his grapples with “numerous lawsuits and other matters that could damage his reputation, cause him to be distracted from the business or could force him to resign from TMTG’s board of directors.” See The Righting’s Trump Trial Tracker for the latest on Trump’s multiple civil and criminal case.
If Trump stopped contributing to Truth Social “due to death, disability, criminal conviction, incarceration, or any other reason, or limit his involvement with TMTG due to his ongoing candidacy for political office, TMTG would be significantly disadvantaged,” the filing says.
Current Troubles
TMTG is already feeling pinched. It “paused hiring” and “reduced non-labor spend in areas such as travel, rent, consulting fees, and professional services” beginning in the second quarter of 2022.
This past March the company eliminated “several positions” that “most significantly impacted TMTG’s streaming video on demand (“SVOD”) and infrastructure teams.” It blamed the setback on the SEC’s “unprecedented obstruction of TMTG’s planned merger with DWAC.”
DWAC agreed in July to a cease-and-desist order, and to pay an $18 million civil penalty if the Trump deal closes, after an SEC investigation concluded that executives misled ordinary investors in September 2021 when it went public. They did not disclose that they were already negotiating a deal with TMTG.
Three people who knew this bought DWAC shares and made a windfall profit when the deal was announced, the SEC and Justice Department said in a civil complaint that charged them with insider trading. DWAC’s stock price briefly rocketed from $10 to a high of $175.
The three pleaded not guilty, DWAC’s filing says.
Retraction Demands
DWAC shareholders who want out of the TMTG merger can ask the company to buy back their stock. Trump would not proceed with a merger if 64 percent decide to take the money and run – potentially siphoning $195.7 million or more out of the deal.
DWAC would have to reimburse all of its public shareholders if it doesn’t merge with TMTG or another operating company by September 8, 2024.
How did Trump’s company — which says it “aims to safeguard public debate and open dialogue” – respond to the embarrassing disclosures?
Just the way you’d think: TMTG sent “more than a dozen retraction demands” on a “tsunami of fake news stories about the submission,” it said on Truth Social. It added that “our lawyers are prepped and ready to hold these media outlets responsible.”
TMTG’s spokeswoman, MZ Group’s Shannon Devine, said in a statement:. “Contrary to the relentless mainstream media campaign peddling false information about Truth Social, we’ve given millions of Americans their voices back using technology operated at a fraction of the cost of the Big Tech platforms. Truth Social continues to move forward toward completing its merger, which we believe will enable important new ventures for the company.”
Right Wing Biz Watch is a ongoing series of articles examining the business and finances of right wing media. Its author, David Lieberman, covered the media business full time for 30 years at USA Today and other publications before joining The New School as an Associate Professor in its graduate Media Management program.
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