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Several media reports linked the DJT decline on Monday (June 10) to Trump Media’s filing with the SEC. (For example, the Barron’s (Article “Trump Media shares plunge after releasing re-audited financial report.”) However, this decline was not due to the “re-audit.”

Let us first consider the characteristics of the decline

The stock is once again struggling with price barriers. These are particularly important at the moment because the fundamental valuation of the stock is significantly below the current price. Is this the start of a new sell-off? It could be, because there are uncertainties.

Why the renewed review did not lead to a decline in share prices

Note: As a reminder, Trump Media’s previous auditor was BF Borgers CPA PC. The SEC recently charged Borgers with fraud and barred him from conducting audits, so Trump Media has hired a new auditor (Semple, Marchal & Cooper, LLP) to re-audit its finances.

The conclusion of the Semple audit report to the Board was good:

“In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.”

This report is included in the S-1/A filing on pages F-1 through F-6. (FYI: All of Trump Media’s SEC filings are available on Trump Media’s website.)

The new auditor’s changes were mostly minimal (a few hundred dollars here and there). There was also a recategorization of the operating lease flows and values. And there were some immaterial formatting changes. The net effect was that there were no material changes to the balance sheet, income statement, or cash flow statement.

The real reason for the decline: potential sellers are in sight

With the filing of SEC Form S-1/A, the SEC approval process has been restarted. The SEC says it typically approves S-1 filings within 30 days. When that happens, all 176 million shares will be registered and shareholders will be able to sell UNLESS…

Many shareholders are subject to a lock-up clause that postpones their ability to sell until six months after the merger on March 25 (i.e. until September 25). The proportion of outstanding shares that are subject to the lock-up clause is 73.9%.

Note: There are two reasons why the lock-up period might end earlier. From page 4 of the S-1/A filing:

“Lock-up Period” means the period beginning on March 25, 2024 and ending on the earlier of (i) September 25, 2024, (ii) the date on which the closing price of the Common Stock equals or exceeds $12.00 per share (adjusted for stock splits, stock dividends, restructurings, recapitalizations and the like) for any 20 trading days within any 30 trading day period beginning on August 22, 2024, and (iii) the date on which the Company completes a liquidation, merger, stock exchange or similar transaction that results in all shareholders of the Company having the right to exchange their equity interests in the Company for cash, securities or other property.”

The 30 days could also be shorter because the SEC has already reviewed most of the material included in the original S-1 filing.

So… Some of the newly registered shares will be available for sale soon, the majority will be available for sale by September 25th.

But will shareholders sell or hold on?

Certainly some will sell. The shareholders who received shares for services rendered or to repay loans could be the first to benefit after they complete their deals with Trump Media. Also, those originally associated with Digital Acquisition could see the timing of the saleability as a target in their efforts to be the first to invest. Finally, there are the shareholders who want to monetize some or all of their shares.

So selling is to be expected. The question then is, who will buy? With fundamental value low, the Trump name is likely to be more attractive. And that’s not just for those who attend Donald Trump’s rallies. Others who want to support his pre-election activities could also be willing buyers.

Don’t dismiss short sellers

The current short interest (about 4.5 million shares) represents about 10% of the “float” shares. That is, the 44 million tradable shares out of the 176 million outstanding. (176 million times $39 gives Trump Media’s market cap of $6.9 billion.) Once all 176 million shares are registered and the lock-up period expires, the float will have quadrupled.

Remember, short sellers are not bad actors. They are part of the market-making process and follow an investing style of selling high and buying low. They help keep stock prices and valuations in balance.

Conclusion: Uncertainties affect DJT

The registration of shares, which then become tradable, could lead to sales even if the share price falls. This is obviously an unwelcome uncertainty for shareholders.

Then there are the short sellers, who can make any sell-off worse as long as the valuation remains well below the share price.

And finally, there are Trump Media’s fundamentals. Yes, the company made money from the merger, but how is the business doing? With no information on first-quarter results, the second quarter will be very important. That means both the results of this quarter, which is now coming to an end, and management’s explanations of what it is doing to achieve future growth and profitability.

Time will tell, as there are still uncertainties.

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