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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations2
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References in this report (this “Quarterly Report”) to “TMTG,” “we,” “us” or the “Company” refer to Trump Media &
Technology Group Corp. References to our “management” or our “management team” refer to our officers and directors. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction
with the unaudited condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report. All amounts are in thousands, except per share data. Certain information contained in the discussion and analysis
set forth below includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are
not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this report.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”) and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”) that are not historical facts, and involve risks and uncertainties that could cause actual results to differ
materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Quarterly Report, words such as “expect,”
“believe,” “anticipate,” “intend,” “estimate,” “aim,” “plan,” “may,” “will,” “continue,” “should,” “seek” and variations and similar words and expressions identify forward-looking statements. Such forward-looking statements are based on the
beliefs of management, as well as assumptions made by, and information currently available to management. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results
discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of
the Company’s Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 1, 2024, as amended by Amendment Number 1 to Form 10-K filed with the SEC on April 3, 2024, and other
documents filed with the SEC, which describe additional factors that could adversely affect our business, financial condition, or results of operations. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at
www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Overview
TMTG aspires to build a media and technology powerhouse to rival the liberal media consortium and promote free expression. TMTG was founded to fight back against the big tech
companies-Meta (Facebook, Instagram, and Threads), X (formerly Twitter), Netflix, Alphabet (Google), Amazon and others-that it believes collude to curtail debate in America and censor voices that contradict their “woke” ideology. TMTG aims to
safeguard public debate and open dialogue, and to provide a platform for all users to freely express themselves.
TMTG Sub Inc. (formerly known as Trump Media & Technology Group Corp.) (“Private TMTG”) was incorporated on February 8, 2021, and
launched its first product, Truth Social, which is a social media platform aiming to end big tech’s assault on free speech by opening up the internet and giving the American people their voices back. It is a public, real-time platform where any
user can create content, follow other users, and engage in an open and honest global conversation without fear of being censored or cancelled due to their political viewpoints. TMTG does not restrict whom a user can follow, which it believes will
greatly enhance the breadth and depth of available content. Additionally, users can be followed by other users without requiring a reciprocal relationship, enhancing the ability of TMTG users to reach a broad audience.
Truth Social was generally made available in the first quarter of 2022. TMTG prides itself on operating its platform, to the best of its ability, without relying on big tech
companies. Partnering with pro-free-speech alternative technology firms, Private TMTG fully launched Truth Social for iOS in April 2022. Private TMTG debuted the Truth Social web application in May 2022, and the Truth Social Android App became
available in the Samsung Galaxy and Google Play stores in October 2022. Private TMTG introduced direct messaging to all versions of Truth Social in 2022, released a “Groups” feature for users in May 2023, and announced the general availability of
Truth Social internationally in June 2023. Since its launch, Truth Social has experienced substantial growth, from zero to an aggregate of approximately 9.0 million signups for Truth Social via iOS, Android and the web as of mid-February 2024.
However, investors should be aware that since its inception, TMTG has not relied on any specific key performance metric to make business or operating decisions. Consequently, it has not been maintaining internal controls and procedures for
periodically collecting such information, if any. While many mature industry peers may gather and analyze certain metrics, given the early development stage of the Truth Social platform, TMTG’s management team believes that such metrics are not
critical in the near future for the business and operation of the platform. This stance is due to TMTG’s long-term commitment to implementing a robust business plan, which may involve introducing innovative features and potentially incorporating
new technologies, such as advanced video streaming services on its platform. These initiatives may enhance the range of services and experiences TMTG can offer on its Truth Social platform.
At this juncture in its development, TMTG believes that adhering to traditional key performance indicators, such as signups, average revenue per user, ad impressions and pricing, or
active user accounts including monthly and daily active users, could potentially divert its focus from strategic evaluation with respect to the progress and growth of its business. TMTG believes that focusing on these KPIs might not align with the
best interests of TMTG or its stockholders, as it could lead to short-term decision-making at the expense of long-term innovation and value creation. Therefore, TMTG believes that this strategic evaluation is critical and aligns with its commitment
to a robust business plan that includes introducing innovative features and new technologies.
To foster a flourishing digital public forum, TMTG seeks to prevent illegal and other prohibited content from contaminating its platform. In accordance with Truth Social’s terms of
service, illegal and prohibited content includes, but is not limited to a) sexual content or language; b) content that includes sexual activity, sexual intercourse or any type of sexual act; c) any content that portrays or suggest explicit sexual
acts or sexually suggestive positions or poses; d) sexually suggestive (explicit or vague) statements, texts or phrases; or e) content in which sexual acts are requested or offered, including pornography, prostitution, sugar babies, sex trafficking
or sexual fetishes. Using human moderators and an artificial intelligence vendor known as HIVE, Truth Social has developed what TMTG believes is a robust, fair, and viewpoint-neutral moderation system and that its moderation practices are
consistent with, and indeed help facilitate, TMTG’s objective of maintaining “a public, real-time platform where any user can create content, follow other users, and engage in an open and honest global conversation without fear of being censored or
cancelled due to their political viewpoints.”
Prior to the Closing (as hereinafter defined), Private TMTG relied primarily on bridge financing, in the form of convertible promissory notes, to build the Truth Social platform.
TMTG aims to use the funds available as a result of the Business Combination (as hereinafter defined) to catalyze growth, including through strategic investments in marketing, advertising sales, and the technology described below, while continuing
to prioritize feature development and user experience. Private TMTG has historically incurred operating losses and negative cash flows from operating activities. For the reasons described below, TMTG expects to continue to incur operating losses
and negative cash flows from operating activities for the foreseeable future, as it works to expand its user base, attracting more platform partners and advertisers. TMTG’s ability to become profitable and generate positive cash flow depends on
TMTG’s success in growing its user base, platform partners, and advertisers. This growth is expected to come from the overall appeal of the Truth Social Platform.
TMTG may enhance this appeal through new initiatives or by acquiring new technologies. Private TMTG conducted extensive technological due diligence and testing regarding a
particular, state-of-the-art technology that supports video streaming and provides a “home” for cancelled content creators, and which TMTG has worked to acquire and incorporate into its product offerings and/or services as soon as practicable. On
April 16, 2024, TMTG announced that, after six months of testing on its Web and iOS platforms, the Company has finished the research and development phase of a new live TV streaming platform and expects to begin scaling up its own content delivery
network (“CDN”).
TMTG announced plans to roll out its streaming content in three phases:
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Phase 1: Introduce Truth Social’s CDN for streaming live TV to the Truth Social app for Android, iOS, and Web. On August 7, 2024, TMTG announced that TV streaming had become available via all three
modalities.
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Phase 2: Release stand-alone Truth Social over-the-top streaming apps for phones, tablets, and other devices.
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Phase 3: Release Truth Social streaming apps for home TV.
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Such initiatives and acquisitions are subject to material changes and risks, some of which are beyond TMTG’s control. Given these uncertainties, TMTG believes it is premature for
TMTG to predict when it will attain profitability and positive cash flows from its operations.
In order to fund its operations prior to Closing, Private TMTG issued approximately two dozen convertible promissory notes in the aggregate principal amount of $48,155.0 (net of
repayments) from May 2021 through March 2024. All Private TMTG convertible promissory notes (the “Private TMTG Convertible Notes”), including the foregoing, converted to shares of TMTG common stock
immediately before the Closing of the Business Combination. See the section titled “— Liquidity and Capital Resources” below.
The mailing address of TMTG’s principal executive office is 401 N. Cattlemen Rd., Suite 200, Sarasota, Florida 34232.
Recent Developments
Business Combination
On October 20, 2021, Digital World Acquisition Corp. (now known as Trump Media & Technology Group Corp.) (prior to the Closing, “Digital World”),
Merger Sub, Private TMTG, ARC Global Investments II, LLC (which was replaced and succeeded by RejuveTotal LLC, a New Mexico limited liability company effective as of March 14, 2024), in the capacity as the representative of the stockholders of
Digital World, and Private TMTG’s General Counsel in his capacity as the representative of the stockholders of Private TMTG, entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”),
pursuant to which, among other transactions, Merger Sub merged with and into Private TMTG, with Private TMTG continuing as the surviving corporation and as a wholly owned subsidiary of TMTG (the “Merger” and,
together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). On March 25, 2024 (the “Closing Date”), the Business Combination
was consummated (the “Closing”).
In connection with the Business Combination, all shares of Private TMTG common stock issued and outstanding immediately prior to the effective time of the Closing (the “Effective Time”) (other than those properly exercising any applicable dissenters’ rights under Delaware law) were exchanged for the Merger Consideration (as defined in the Merger Agreement) (or, as applicable,
the separate and additional consideration received by former holders of Private TMTG Convertible Notes issued by Private TMTG). Each Private TMTG Convertible Note that was outstanding immediately prior to the Closing was automatically converted
immediately prior to the Effective Time into a number of shares of Private TMTG common stock, in accordance with each such Private TMTG Convertible Note as set forth therein. At the Closing, Digital World Acquisition Corp. changed its name to
“Trump Media & Technology Group Corp.” and Private TMTG changed its name to “TMTG Sub Inc.”
Notwithstanding the legal form of the Merger pursuant to the Merger Agreement, the Merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP because
Private TMTG was determined to be the accounting acquirer under ASC 805. The determination was primarily based on the evaluation of the following facts and circumstances taking into consideration:
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The pre-combination equity holders of Private TMTG hold the majority of voting rights in TMTG;
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The pre-combination equity holders of Private TMTG have the right to appoint the majority of the directors on TMTG’s Board;
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Private TMTG senior management (executives) are the senior management (executives) of TMTG; and
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Operations of Private TMTG comprise the ongoing operations of TMTG.
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Under the reverse recapitalization model, the Merger is treated as Private TMTG issuing equity for the net assets of Digital World, with no goodwill or intangible assets recorded.
As of the Closing, (i) President Donald J. Trump beneficially held approximately 57.6% of the outstanding shares of TMTG common stock and (ii) the public stockholders of TMTG held
approximately 21.9% of the outstanding shares of TMTG common stock. As of the date of this Quarterly Report, President Donald J. Trump beneficially holds approximately 59.9% of the outstanding shares of TMTG common stock, including 36,000,000
Earnout Shares (as defined in the Merger Agreement). President Trump’s entitlement to the Earnout Shares was officially determined by TMTG on April 26, 2024 in accordance with the Merger Agreement, after which President Trump was issued the Earnout
Shares.
Convertible Promissory Notes
Through March 31, 2024, Private TMTG issued Private TMTG Convertible Notes in the aggregate principal amount of $48,155.0 (net of repayments) that accrued interest at a range
between 5% and 10% per annum until converted. See “Note 9 – Convertible Promissory Notes And Warrants,” in the accompanying financial statements for details. Immediately prior to the Closing, all Private TMTG Convertible Notes were converted into
Private TMTG common stock.
WCT Asset Acquisition
On July 3, 2024, TMTG, WorldConnect Technologies, L.L.C. (“WCT”), WorldConnect IPTV Solutions, LLC (“Solutions”) and
JedTec, L.L.C. (“JedTec”) entered into an asset acquisition agreement (the “Asset Acquisition Agreement”), pursuant to which TMTG agreed to acquire substantially all
of the assets of WCT or its affiliate, which mainly included certain agreements, including an option agreement (the “Option Agreement”), dated February 5, 2024, by and between WCT, Perception Group, Inc.,
Perception TVCDN Ltd., and FORA, FOrum RAčunalništva, d.o.o., as amended (each of the parties thereto other than WCT, collectively, “Perception”), as well as ancillary agreements related to the source code
purchase (the “Source Code Purchase Agreement”) and support and maintenance (the “Support and Maintenance Agreement”, together with the Source Code Purchase
Agreement, the “CDN Agreements”). The transaction closed on August 9, 2024, the date which is business days after the Company implemented the Perception Software and Network (as defined below) with all
back-end API services having become generally available on iOS, Google/Android, and web media services and with streaming enabled from at least one data-center (the “Closing Date”).
Pursuant to the Option Agreement, on the Closing Date, WCT assigned to the Company the CDN Agreements, which are expected to be used for the roll out of the CDN technology for the Truth platform (the
updated version of the Company’s Truth Social web and mobile application with streaming enabled using intellectual property obtained from Perception, the “Perception Software and Network”). In addition,
Perception and its affiliates agreed not to use or permit other parties to use the Source Code (as defined below) until August 9, 2029 for any purpose that competes, in the United States, with the Truth platform or commercialization of such
Source Code in the United States. In addition, the Option Agreement grants the (i) option to purchase Perception, subject to a future negotiation of the price and terms of such acquisition and (ii) right of first refusal to purchase Perception in
the event of a bona fide written offer from an unaffiliated third party to purchase more than 50% of the assets of Perception. The Company does not have any current intention to exercise those rights.
Pursuant to the Asset Acquisition Agreement, on the Closing Date, the Company agreed to issue to Solutions and JedTec as consideration up to 5,100,000 shares (the “Shares”)
of TMTG common stock, 2,600,000 shares of which were issued on the Closing Date and 2,500,000 shares of which will be issuable upon the satisfaction of certain Milestones (as defined in the Asset Acquisition Agreement). In addition, with respect
to all of the Shares, for a period of 12 months after the Closing Date, neither JedTec, Solutions nor their respective affiliates will be permitted to collectively sell an amount of the Shares during any consecutive two trading week period (the “Two Week Sale Period”) exceeding the “Set Percentage.” For the purposes of this restriction, the “Set Percentage” means a percentage of the average daily trading volume
of the common stock during the immediately preceding two consecutive trading weeks as reported on primary exchange on which the common stock is traded (i.e., currently the NASDAQ) (the “Prior Two Week ADTV”).
Unsold amounts from a Two Week Sale Period do not carry over to a subsequent Two Week Sale Period. The “Set Percentage” is 3% for the first six months after the Closing Date and 5% from six to 12 months after the Closing Date. For example, if
during the first six months after the Closing date, a Prior Two Week ADTV is 5,000,000 shares, restricted holders cannot sell more than 150,000 shares during the following Two Week Sale Period. Under the same fact pattern during six to 12 months
after the Closing Date, restricted holders could not sell more than 250,000 shares during such Two Week Sale Period.
Concurrently with the execution of the Asset Acquisition Agreement, and as a condition and inducement to the willingness of the Company to enter into it, WCT exercised the Option Agreement and entered
into the Source Code Purchase Agreement and the Support and Maintenance Agreement, which agreements were assigned to the Company on the Closing Date. Under the Source Code Purchase Agreement, Perception agreed to sell a copy of the source code of
the software related to the CDN technology (“Source Code”) and grant the WCT (which grant was assigned under the Asset Acquisition Agreement to the Company) an irrevocable, non-exclusive, worldwide,
perpetual right and license to forever retain, copy, reproduce, use, modify, enhance, create modifications and derivative works of, display, distribute, perform, compile, execute, sublicense, and otherwise exploit the Source Code and all
resulting compiled software for commercial exploitation. The purchase price of $17,500,000 is payable by the Company in four installments to be completed by the third anniversary of the execution date of the Source Code Purchase Agreement.
Further to supplement the Source Code Purchase Agreement, WCT entered into a Support and Maintenance Agreement, under which Perception is to assist TMTG in commercializing the Source Code to develop, launch, and grow the platform. The acquisition
of the Source Code is effective as of the Closing Date. Pursuant to the Asset Acquisition Agreement, TMTG will assume on the Closing Date WCT’s rights and obligations under the Source Code Purchase Agreement and the Support and Maintenance
Agreement. In connection with the Source Code Agreement, TMTG entered into a source code escrow agreement related to the sale of the Source Code. Pursuant to such agreement, Perception will deposit a copy of the Source Code into an escrow
account. Subject to certain terms and conditions, immediately after the Closing Date, the escrow agent will hold the Source Code until Perception receives the full purchase price of $17,500,000 for the Source Code. Upon full payment, the Source
Code and any modifications will be released to TMTG.
TMTG entered into a registration rights agreement with Solutions and JedTec on the Closing Date, pursuant to which the TMTG will file a registration statement with the SEC to register
for resale the Shares within 15 days following the Closing Date upon receiving a demand for registration from WCT. TMTG will use its reasonable best efforts to cause such registration statement to
become effective and remain effective until all the Shares covered by such registration statement have been sold.
Key Factors Affecting Results of Operations
Executive Promissory Notes
Private TMTG issued TMTG Executive Promissory Notes to certain executives prior to the Closing Date. The principal amounts of such notes were as follows: $1,150.0 for Devin Nunes,
our Chief Executive Officer, $4,900.0 for Phillip Juhan, our Chief Financial Officer, and $200.0 for Andrew Northwall, our Chief Operating Officer, and the aggregate amount of such notes for other executives was $650.0. Private TMTG was not
required to pay any interest pursuant to such notes. Upon the closing of the Merger, such notes automatically converted in whole, without any further action by the holders thereof, into 625,000 shares of TMTG common stock.
Inflation and the Global Supply Chain
Currently the U.S. economy is experiencing a bout of increased inflation, resulting in rising prices. The U.S. Federal Reserve, as well as its counterparts in other countries, have
engaged in a series of interest rate hikes in an effort to combat rising inflation. Although inflation did not have a significant impact on our results of operations for the periods ended June 30, 2024 and 2023, we anticipate that inflation will
have an impact on our business going forward, including through a material increase in our cost of revenue and operating expenses in the coming years, if not permanently. Continued or permanent rises in core costs could impact our growth
negatively.
Current Economic Conditions
We are subject to risks and uncertainties caused by events with significant macroeconomic impacts, including, but not limited to, the COVID-19 pandemic, the Russian invasion of
Ukraine, the Israel-Hamas war, and actions taken to counter inflation. Supply chain constraints, labor shortages, inflation, and rising interest rates and reduced consumer confidence have caused advertisers in a variety of industries to be cautious
in their spending and to either pause or slow their campaigns.
In order to manage our cost structure in light of the current macroeconomic environment and pending TMTG’s access to additional capital via the Business Combination, we sought
opportunities to reduce our expense growth. Following the elimination of several positions in March 2023, we paused hiring in the second quarter of 2023. We were subsequently more selective about the roles that we filled, resulting in some
attrition. We also reduced non-labor spend in areas such as travel, rent, consulting fees, and professional services.
The extent of the ongoing impact of these macroeconomic events on our business and on global economic activity is uncertain and may continue to adversely affect our business,
operations and financial results. Our past results may not be indicative of our future performance, and historical trends in revenue, income (loss) from operations, net income (loss), and net income (loss) per share may differ materially.
Private TMTG’s Former Chairman President Donald J. Trump
TMTG’s success depends in part on the popularity of our brand and the reputation and popularity of President Donald J. Trump. The value of TMTG’s brand may diminish if the
popularity of President Donald J. Trump were to suffer. Adverse reactions to publicity relating to President Donald J. Trump, or the loss of his services, could adversely affect TMTG’s revenues, results of operations and its ability to maintain or
generate a consumer base. President Donald J. Trump is involved in numerous lawsuits and other matters that could damage his reputation.4 Additionally, TMTG’s business
plan relies on President Donald J. Trump bringing his former social media followers to TMTG’s platform. In the event any of these, or other events, cause his followers to lose interest in his messages, the number of users of our platform could
decline or not grow as we have assumed. To the extent users prefer a platform that is not associated with President Donald J. Trump, TMTG’s ability to attract users may decrease.
Growth in User Base
We currently rely on the sale of advertising services for all of our revenue. If we experience a decline in the number of users or a decline in user engagement, including as a
result of the loss of high-profile individuals and entities who generate content on Truth Social, advertisers may not view Truth Social as attractive for their marketing expenditures, and may reduce their spending with us, which would harm our
business and operating results.
Truth Social is being developed as a global platform for public self-expression and conversation in real time and our business depends on continued and unimpeded access to Truth
Social on the internet by our users and advertisers. We face strong competition to attract and engage users, including other social media platforms that focus on the same audience that Truth Social focuses on, competitors that develop products,
features, or services that are similar to ours or that achieve greater market acceptance, companies which have greater financial resources and substantially larger user bases, which offer a variety of internet and mobile device-based products,
services and content.
The growth of our user base depends upon many factors both within and beyond our control, including the popularity, usefulness, ease of use, performance and reliability of our
products and services compared to those of our competitors; the amount, quality and timeliness of content generated by our users; the frequency and relative prominence of the ads displayed by us or our competitors; the safety and security of Truth
Social; and whether there is improper access to or disclosure of our users’ information, which could harm our reputation.
4 NTD: To reviewed/updated as necessary by litigation counsel.
Prior to the Closing, Private TMTG relied primarily on bridge financing, in the form of convertible promissory notes, to build the Truth Social platform. TMTG intends to use the
funds available as a result of the Business Combination to catalyze growth, including through strategic investments in marketing, advertising sales, and new technologies as described above, while continuing to prioritize feature development and
user experience. Private TMTG has historically incurred operating losses and negative cash flows from operating activities. For the reasons described below, TMTG expects to continue to incur operating losses and negative cash flows from operating
activities for the foreseeable future, as it works to expand its user base, attracting more platform partners and advertisers.
Attract, Retain and Motivate Talented Employees
Our results of operations rely on the leadership and experience of our relatively small number of key executive management personnel, and the loss of key personnel or the inability
of replacements to quickly and successfully perform in their new roles could adversely affect our business. We have experienced management departures and may continue to experience management departures. Any significant diversion of management
attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on our business, financial condition and results of operations. The loss of the services
of these key employees or our executive management members could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring
increased costs.
Furthermore, although the risk is somewhat mitigated by the non-competition agreements signed by certain key employees in connection with the Closing of the Business Combination, if
we lose or terminate the services of one or more of our key employees or if one or more of our current or former executives or key employees joins a competitor or otherwise competes with us, it could impair our business and our ability to
successfully implement our business plan. Additionally, if we are unable to hire qualified replacements for our executive and other key positions in a timely fashion, our ability to execute our business plan would be harmed. Even if we can quickly
hire qualified replacements, we could experience operational disruptions and inefficiencies during any such transition. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified
personnel. In addition, many of our key technologies and systems will be custom-made for our business by our personnel. The loss of key engineering, product development, marketing and sales personnel could disrupt our operations and have an adverse
effect on our business.
Expansion into New Geographic Markets
We plan to continue expanding our business operations by offering our products around the globe, and Truth Social is generally available internationally. As a result, we have
entered new international markets where we have limited or no experience in marketing, selling, and deploying our products and may be subject to increased business and economic risks. We may not be able to monetize our products and services
internationally as a result of competition, advertiser demand, differences in the digital advertising market and digital advertising conventions, as well as differences in the way that users in different countries access or utilize our products and
services. Differences in the competitive landscape in international markets may impact our ability to monetize our products and services. It is possible that governments of one or more countries may seek to censor content available on Truth Social
in their country or impose other restrictions that may affect the accessibility of Truth Social in their country for an extended period of time or indefinitely.
In addition, governments in other countries may seek to restrict access to Truth Social from their country entirely if they consider us to be in violation of their laws. In the
event that access to Truth Social is restricted, in whole or in part, in one or more countries or our competitors are able to successfully penetrate geographic markets that we cannot access, our ability to retain or increase our user base and user
engagement may be adversely affected, we may not be able to maintain or grow our revenue as anticipated, and our financial results could be adversely affected. We may be subject to greater risks than typical social media platforms because of the
focus of our offerings and the involvement of President Donald J. Trump. If we fail to deploy or manage our operations in international markets successfully, our business may suffer.
Key Operating Metrics
From its inception through the Closing, Private TMTG focused on developing Truth Social by enhancing features and user interface rather than relying on traditional performance
metrics like average revenue per user, ad impressions and pricing, or active user accounts, including monthly and daily active users. While many industry peers may gather and report on these or similar metrics, given the early development stage of
the Truth Social platform, TMTG’s management team has not relied on any particular key performance metric to make business or operating decisions. TMTG believes that this evaluation is critical and in line with its commitment to implement a robust
business plan that may involve introducing innovative features and potentially incorporating new technologies. At this juncture in its development, TMTG believes that adhering to traditional key performance indicators, such as signups, average
revenue per user, ad impressions and pricing, or active user accounts including monthly and daily active users, could potentially divert its focus from strategic evaluation with respect to the progress and growth of its business. TMTG believes that
focusing on these key performance indicators might not align with the best interests of TMTG or its stockholders, as it could lead to short-term decision-making at the expense of long-term innovation and value creation. Therefore, TMTG believes
that this strategic evaluation is critical and aligns with its commitment to a robust business plan that includes introducing innovative features and new technologies.
In connection with such an evaluation, and consistent with SEC guidance, TMTG will consider the relevant key performance indicators for its then-current business operations and
determine whether it has effective controls and procedures in place to process information related to the disclosure of key performance indicators and metrics. Should this be the case, TMTG may decide to collect and report such metrics if they are
deemed to significantly enhance investors’ understanding of TMTG’s financial condition, cash flows, and other aspects of its financial performance. However, TMTG may find it challenging or cost-prohibitive to implement such effective controls and
procedures and may never collect, monitor, or report any or certain key operating metrics. As the platform evolves and new technologies and features are added, TMTG’s management team expects to reevaluate whether TMTG will gather and monitor one or
more metrics and rely on such information in making management decisions. If TMTG determines to do so, TMTG expects to present such material key operating metrics appropriately in its periodic reports to enhance investors’ understanding of its
financial condition, cash flows, and any other changes in financial condition and results of operations.
Components of Results of Operations
Revenue
As of the period ended June 30, 2024, all revenue has been derived from the advertising of products and services on the Truth Social platform. Advertising revenue is generated by
displaying advertisements as posts (attributable to “Truth Ads”) in users’ Truth Social feeds.
On August 19, 2022, TMTG entered into an Advertising Publisher Agreement (“Rumble Agreement”) with Rumble USA, Inc. (“Rumble”), pursuant to which Rumble was engaged to sell advertising space for the placement of advertisements on Truth Social by making Truth Social Ad units (“Ad Unit” or “Ad Units”) available for advertisers on an advertising manager service maintained by Rumble. TMTG and Rumble executed a minimum guarantee advertising publisher agreement on October 30, 2023 (the “Minimum Guarantee Rumble Agreement”), which replaced the Rumble Agreement. While TMTG determines the number of Ad Units available on our Truth Social platform, the prices for the Ad Units are set by an auction
operated and managed by Rumble. Under the current agreement, 70% of the total aggregate gross revenues from the sale of Ad Units are allocated to TMTG, and the Ad Units will comprise at least 85% of the aggregate number of paid advertisements
directly into Truth Social feeds by TMTG each month. We recognize advertising revenue during the period in which we satisfy our performance obligation by displaying advertisements in users’ Truth Social feeds. We reimburse Rumble for the direct
out-of-pocket costs incurred by Rumble in the performance of the service covered by the Rumble Agreement, including processing fees and chargebacks/refunds paid to advertisers in relation to an Ad Unit.
On October 3, 2022, TMTG entered into a Publisher Agreement (the “TAME Agreement”) with The Affinity Media Exchange, Inc. (“TAME”), pursuant to which TMTG engaged TAME as its non-exclusive agent and representative for the sale of Digital Advertising Inventory on Truth Social. “Digital Advertising Inventory” means all advertising
opportunities on the Truth Social platform which are inserted or added to the TMTG website, app, ad stacks, or video exchange players of Truth Social. Within 25 days of the end of each calendar month, TAME is required to provide TMTG with month end
sales reporting by platform and to pay TMTG the net revenues actually paid to TAME by the advertisers, after deducting TAME’s commissions equal to 10% of the Digital Advertising Inventory revenue actually collected on behalf of TMTG for Truth
Social.
The Rumble Agreement grants to Rumble a worldwide, non-exclusive, royalty-free license to use any and all trademarks, service marks, trade names, symbols, logos and other branding
identifiers of TMTG and Truth Social solely for purposes of performing the services covered by the Rumble Agreement, provided, however, that such license does not include permission to alter, modify, edit, denigrate, or distort Donald J. Trump’s
name, photograph, likeness (including caricature), voice, and biographical information, or any reproduction or simulation thereof.
The TAME Agreement does not contain a license to intellectual property.
Neither the Rumble Agreement nor the TAME Agreement provide for access to TMTG’s platform or services.
For a description of TMTG’s revenue recognition policies, see Note 2, Significant Accounting Policies and Practices, in TMTG’s unaudited condensed consolidated financial statements
as of and for the three and six months ended June 30, 2024 and 2023, included in this Quarterly Report.
Cost of Revenue
Cost of revenue primarily encompasses expenses associated with generating advertising revenue. These costs are determined by allocating staff direct and indirect costs
proportionately, based on the time spent managing the agency relationships with external vendors. These costs are mainly in connection with activities related to coordinating with these third-party vendors as the third-party vendors are responsible
to control and facilitate the delivery of advertising services.
TMTG expects cost of revenue to increase in absolute dollars in the future and as a percentage of revenue as it expands its Truth Social platform. Such increases will likely include
investment in infrastructure costs, other direct costs, including revenue share expenses, allocated facility costs as well as traffic acquisition costs (“TAC”).
Infrastructure costs allocated may include data center costs related to TMTG’s co-located facilities, lease and hosting costs, related support and maintenance costs and energy and
bandwidth costs, public cloud hosting costs; and personnel-related costs, including salaries, benefits and stock-based compensation, for our operations teams.
TAC costs may include costs TMTG incurs with third parties in connection with the sale to advertisers of its advertising products that it places on third-party publishers’ websites and applications or
other offerings collectively resulting from acquisitions.
General and Administration Expenses
General and administration expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation for TMTG’s executive, finance, legal,
information technology, human resources and other administration employees. In addition, general and administration expenses include fees and costs for professional services, including consulting, third-party legal and accounting services and
facilities costs and other supporting overhead costs that are not allocated to other departments.
We also expect to incur additional expenses as a result of operating as a public company, including expenses necessary to comply with rules and regulations applicable to companies
listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel-related costs, including salaries, commissions, benefits and stock-based compensation, for our employees engaged in sales, sales
support, business development and media, marketing, corporate communications and customer service functions. In addition, marketing and sales-related expenses also include advertising costs, market research, trade shows, branding, marketing, public
relations costs, allocated facilities costs, and other supporting overhead costs.
Research and Development Expenses
Research and development expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for TMTG’s engineers and other employees
engaged in the research and development of its products and services. In addition, research and development expenses include allocated facilities costs and other supporting overhead costs.
Depreciation Expense
Depreciation expense consists primarily of depreciation of furniture, fixtures, and equipment.
Non-Operating Income and Other Items
Change in Fair Value of Derivative Liabilities
Private TMTG determined the automatic discounted share-settlement feature of its convertible promissory notes was an embedded derivative requiring bifurcation accounting as (1) the
feature was not clearly and closely related to the debt host and (2) the feature met the definition of a derivative under ASC 815 (Derivatives and Hedging).
The bifurcated embedded features of the Private TMTG Convertible Notes were initially recorded on the balance sheet at their fair value on the date of issuance. After the initial
recognition, the fair value of the embedded derivative feature changed over time due to changes in market conditions. The change in fair market value has been included in the statement of operations through the date the debt was converted.
Interest Expense
Interest expense consists of accreted interest expense on Private TMTG’s outstanding convertible promissory note obligations, amortization of deferred financing costs, other related
financing expenses and the post-merger interest expense related to DWAC’s Note Purchase Agreements. The convertible promissory notes (net of any related debt issuance costs) accreted interest using the respective effective interest rate method
until the debt was extinguished.
Interest Income
Interest income consists of interest earned from banking institutions.
Income Tax Expense
TMTG is subject to income taxes in the United States. The Company maintains a net operating loss (“NOL”) position but has not recognized a
benefit in future years. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation
allowance is provided when it is more likely than not that the deferred tax assets will not be realized. TMTG has established a full valuation allowance to offset its U.S. net deferred tax assets due to the uncertainty of realizing future tax
benefits from our NOL carryforwards and other deferred tax assets. The utilization of the net operating losses prior to the Merger will be limited as per IRC Section 382.
Results of Operations
Comparison of the three months ended June 30, 2024 and 2023.
The results of operations presented below should be reviewed in conjunction with TMTG’s unaudited condensed consolidated financial statements as of and for the three months ended
June 30, 2024 and 2023, together with the related notes thereto, included elsewhere in this Quarterly Report.
The following table sets forth TMTG’s unaudited statements of operations for the three months ended June 30, 2024 and 2023, and the dollar and percentage change between the two
periods:
|
(in thousands)
|
|
For the three months ended
June 30, 2024
|
|
|
For the three months ended
June 30, 2023
|
|
|
Variance,
$
|
|
|
Variance,
%
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
836.9
|
|
|
$
|
1,192.1
|
|
|
$
|
(355.2
|
)
|
|
|
(30
|
%)
|
|
Cost of revenue
|
|
|
36.2
|
|
|
|
41.2
|
|
|
|
(5.0
|
)
|
|
|
(12
|
%)
|
|
Gross profit
|
|
|
800.7
|
|
|
|
1,150.9
|
|
|
|
(350.2
|
)
|
|
|
(30
|
%)
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,861.6
|
|
|
|
2,197.4
|
|
|
|
2,664.2
|
|
|
|
121
|
%
|
|
Sales and marketing
|
|
|
1,175.3
|
|
|
|
388.4
|
|
|
|
786.9
|
|
|
|
203
|
%
|
|
General and administration
|
|
|
13,418.6
|
|
|
|
2,321.4
|
|
|
|
11,097.2
|
|
|
|
478
|
%
|
|
Depreciation
|
|
|
3.7
|
|
|
|
16.6
|
|
|
|
(12.9
|
)
|
|
|
(78
|
%)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
19,459.2
|
|
|
|
4,923.8
|
|
|
|
14,535.4
|
|
|
|
295
|
%
|
|
(in thousands)
|
|
For the three months ended
June 30, 2024
|
|
|
For the three months ended
June 30, 2023
|
|
|
Variance,
$
|
|
|
Variance,
%
|
|
| |
|
(unaudited)
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
|
(18,658.5
|
)
|
|
|
(3,772.9
|
)
|
|
|
(14,885.6
|
)
|
|
|
395
|
%
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
157.8
|
|
|
|
(20,606.3
|
)
|
|
|
20,764.1
|
|
|
|
(101
|
%)
|
|
Interest income
|
|
|
2,132.7
|
|
|
|
-
|
|
|
|
2,132.7
|
|
|
|
-
|
|
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
1,611.1
|
|
|
|
(1,611.1
|
)
|
|
|
(100
|
%)
|
|
Loss before income tax expense
|
|
|
(16,368.0
|
)
|
|
|
(22,768.1
|
)
|
|
|
6,400.1
|
|
|
|
(28
|
%
)
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(16,368.0
|
)
|
|
$
|
(22,768.1
|
)
|
|
$
|
6,400.1
|
|
|
|
(28
|
%)
|
Revenues
Revenues decreased by approximately $355.2, or 30%, for the three months ended June 30, 2024 compared to revenue of approximately $1,192.1 for the three months ended June 30, 2023.
A significant portion of the decrease was attributable to a change in the revenue share with one of our advertising partners, in connection with an agreement intended to improve the Company’s short-term, pre-Business Combination financial position.
Additionally, revenue has varied as we selectively test a nascent advertising initiative on the Company’s Truth Social platform. This very early-stage initiative resulted in advertising revenues of $836.9 for the three months ended June 30, 2024.
Cost of Revenue
Cost of revenue decreased by approximately $5.0, or 12%, to $36.2 for the three months ended June 30, 2024 compared to approximately $41.2 for the three months ended June 30, 2023.
The modest decline reflects lower personnel-related expenses in the second quarter of 2024 for TMTG employees who contributed to the early-stage testing of Truth Social’s nascent advertising initiative.
Research and Development Expense
Research and development expense increased by approximately $2,664.2, or 121%, to $4,861.6 for the three months ended June 30, 2024 compared to $2,197.4 for the three months ended June 30, 2023. The
increase was primarily due to higher IT consulting and software related costs.
Sales and Marketing Expense
Sales and marketing expense increased by approximately $786.9, or 203%, to $1,175.3 for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The
increase was primarily driven by an increase in marketing expense following access to additional capital.
General and Administration Expense
General and administration expense increased by approximately $11,097.2 or 478%, for the three months ended June 30, 2024 compared to $2,321.4 for the three months ended June 30,
2023. The increase was primarily due to higher legal, license and registration, insurance, accounting, and finance fees during the second quarter of 2024.
Depreciation
Depreciation expense decreased by $12.9, or 78%, to $3.7 for the three months ended June 30, 2024 compared to $16.6 for the three months ended June 30, 2023. The decrease in
depreciation expense reflects the fully depreciated book value of most of the Company’s computer equipment purchased in prior years.
Change in the Fair Value of Derivative Liabilities
The loss from the change in the fair value of the derivative liabilities of the Private TMTG Convertible Notes decreased 100% from $1,611.1 for the three months ended June 30, 2023.
All Private TMTG Convertible Notes were automatically converted into shares of our common stock immediately prior to Closing of the Business Combination on March 25, 2024. The issuance of Private TMTG common stock upon conversion of the Private
TMTG Convertible Notes extinguished the derivative liabilities immediately prior to the Closing. Therefore, there was no derivative liability as of June 30, 2024 and no adjustment to earnings pertaining to the Private TMTG Convertible Notes
derivative liabilities during the second quarter of 2024.
Interest Expense
Interest expense decreased approximately $20,764.1, or 101%, for the three months ended June 30, 2024 compared to interest expense of $20,606.3 for the three months ended June 30,
2023. The decrease was due primarily to the conversion of Private TMTG convertible promissory notes to stockholders’ equity and not accruing accreted interest as compared for the three months ended June 30, 2023.
Interest Income
Interest income increased to approximately $2,132.7 for the three months ended June 30, 2024 compared to $0.0 for the three months ended June 30, 2023. The increase was due
primarily to interest earned in the second quarter of 2024 on proceeds received from the Business Combination that closed March 25, 2024.
Income Tax Expense
TMTG did not record an income tax benefit for the three months ended June 30, 2024 and 2023 as no net credit was recognized due to the uncertainty of realizing future tax benefits
emanating from the NOL carryforwards and other deferred tax assets. TMTG has established a full valuation allowance to offset its net deferred tax assets due to these uncertainties.
Comparison of the six months ended June 30, 2024 and 2023.
The results of operations presented below should be reviewed in conjunction with TMTG’s unaudited condensed consolidated financial statements as of and for the six months ended June
30, 2024 and 2023, together with the related notes thereto, included elsewhere in this Quarterly Report.
The following table sets forth TMTG’s unaudited statements of operations for the six months ended June 30, 2024 and 2023, and the dollar and percentage change between the two
periods:
|
(in thousands)
|
|
For the six months ended
June 30, 2024
|
|
|
For the six months ended
June 30, 2023
|
|
|
Variance,
$
|
|
|
Variance,
%
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,607.4
|
|
|
$
|
2,308.3
|
|
|
$
|
(700.9
|
)
|
|
|
(30
|
%)
|
|
Cost of revenue
|
|
|
129.6
|
|
|
|
82.5
|
|
|
|
47.1
|
|
|
|
57
|
%
|
|
Gross profit
|
|
|
1,477.8
|
|
|
|
2,225.8
|
|
|
|
(748.0
|
)
|
|
|
(34
|
%)
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
38,020.2
|
|
|
|
5,009.5
|
|
|
|
33,010.7
|
|
|
|
659
|
%
|
|
Sales and marketing
|
|
|
2,245.7
|
|
|
|
644.5
|
|
|
|
1,601.2
|
|
|
|
248
|
%
|
|
General and administration
|
|
|
78,213.7
|
|
|
|
4,157.7
|
|
|
|
74,056.0
|
|
|
|
1,781
|
%
|
|
Depreciation
|
|
|
9.3
|
|
|
|
32.9
|
|
|
|
(23.6
|
)
|
|
|
(72
|
%)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
118,488.9
|
|
|
|
9,844.6
|
|
|
|
108,644.3
|
|
|
|
1,104
|
%
|
|
(in thousands)
|
|
For the six months ended
June 30, 2024
|
|
|
For the six months ended
June 30, 2023
|
|
|
Variance,
$
|
|
|
Variance,
%
|
|
| |
|
(unaudited)
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(117,011.1
|
)
|
|
|
(7,618.8
|
)
|
|
|
(109,392.3
|
)
|
|
|
1,436
|
%
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,659.8
|
)
|
|
|
(22,630.6
|
)
|
|
|
19,970.8
|
|
|
|
(88
|
%)
|
|
Interest income
|
|
|
2,161.5
|
|
|
|
-
|
|
|
|
2,161.5
|
|
|
|
-
|
|
|
Loss on the extinguishment of debt
|
|
|
(542.3
|
)
|
|
|
-
|
|
|
|
(542.3
|
)
|
|
|
-
|
|
|
Change in fair value of derivative liabilities
|
|
|
(225,916.0
|
)
|
|
|
7,271.0
|
|
|
|
(233,187.0
|
)
|
|
|
(3,207
|
%)
|
|
Loss before income tax expense
|
|
|
(343,967.7
|
)
|
|
|
(22,978.4
|
)
|
|
|
(320,989.3
|
)
|
|
|
1,397
|
%
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(343,967.7
|
)
|
|
$
|
(22,978.4
|
)
|
|
$
|
(320,989.3
|
)
|
|
|
1,397
|
%
|
Revenues
Revenues decreased by approximately $700.9, or 30%, for the six months ended June 30, 2024 compared to revenue of approximately $2,308.3 for the six months ended June 30, 2023. A
significant portion of the decrease was attributable to a change in the revenue share with one of our advertising partners, in connection with an agreement intended to improve the Company’s short-term, pre-Business Combination financial position.
Additionally, revenue has varied as we selectively test a nascent advertising initiative on the Company’s Truth Social platform. This very early-stage initiative resulted in advertising revenues of $1,607.4 for the six months ended June 30, 2024.
Cost of Revenue
Cost of revenue increased by approximately $47.1, or 57%, to $129.6 for the six months ended June 30, 2024 compared to approximately $82.5 for the six months ended June 30, 2023.
Effectively all of the increase was due to an increase in personnel-related expenses, which reflect the allocation of a portion of salary and bonus expense for three TMTG employees who contributed to the early-stage testing of Truth Social’s
nascent advertising initiative.
Research and Development Expense
Research and development expense increased by approximately $33,010.7, or 659%, for the six months ended June 30, 2024 compared to $5,009.5 for the six months ended June 30, 2023.
The increase was primarily due to $30,142.5 of non-cash stock-based compensation expense recorded in the first quarter of 2024 related to the issuance of convertible notes to certain vendors engaged in the development of our planned live TV
streaming platform.
Sales and Marketing Expense
Sales and marketing expense increased by approximately $1,601.2, or 248%, to $2,245.7 for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The
increase was primarily driven by a $600.0 bonus paid to an entity owned by a former director of and consultant to Private TMTG, as further described herein, and a $1,001.2 increase in marketing expense following access to additional capital.
General and Administration Expense
General and administration expense increased by approximately $74,056.0, or 1,781%, for the six months ended June 30, 2024 compared to $4,157.7 for the six months ended June 30,
2023. The increase was primarily due to merger related costs including $54,445.5 of non-cash stock-based compensation expense recorded in the first quarter of 2024 in connection with the issuance of Private TMTG Promissory Notes issued to Company
executives (and one consultant) that converted into shares of our common stock upon execution of the Merger.
Depreciation
Depreciation expense decreased by $23.6, or 72%, to $9.3 for the six months ended June 30, 2024 compared to $32.9 for the six months ended June 30, 2023. The decrease in
depreciation expense reflects the fully depreciated book value of most of the Company’s computer equipment purchased in prior years.
Change in the Fair Value of Derivative Liabilities
The loss from the change in the fair value of the derivative liabilities of the Private TMTG Convertible Notes increased by approximately $233,187.0, or 3,207%, for the six months
ended June 30, 2024, compared to the six months ended June 30, 2023. All Private TMTG Convertible Notes were automatically converted into shares of our common stock immediately prior to Closing of the Business Combination, and pursuant to ASC 815,
the derivative liabilities were revalued immediately prior to the conversion of the Private TMTG Convertible Notes on March 25, 2024, when our closing share price was $49.95 per share. The substantial increase in the value of our common stock when
combined with the certainty of our execution of the Merger were primarily responsible for the increase in the change in fair value of the derivative liabilities. The increase in the fair value of the derivative liabilities is a non-cash expense and
the issuance of Private TMTG common stock upon conversion of the Private TMTG Convertible Notes extinguished the derivative liabilities immediately prior to the Closing. Therefore, there were no derivative liability as of June 30, 2024 and there
will no longer be future earnings adjustments pertaining to the Private TMTG Convertible Notes derivative liabilities.
Interest Expense
Interest expense decreased by approximately $19,970.8, or 88%, to $2,659.8 for the six months ended June 30, 2024 compared to $22,630.6 for the six months ended June 30, 2023. The
decrease was due primarily to the conversion of Private TMTG convertible promissory notes to stockholders’ equity and not accruing accreted interest as compared for the six months ended June 30, 2023.
Interest Income
Interest income increased to approximately $2,161.5 for the six months ended June 30, 2024 compared to $0.0 for the six months ended June 30, 2023. The increase was due to interest
earned in the second quarter of 2024 on proceeds received from the Business Combination that closed March 25, 2024.
Income Tax Expense
TMTG did not record an income tax benefit for the six months ended June 30, 2024 and 2023 as no net credit was recognized due to the uncertainty of realizing future tax benefits
emanating from the NOL carryforwards and other deferred tax assets. TMTG has established a full valuation allowance to offset its net deferred tax assets due to these uncertainties.
Liquidity and Capital Resources
Historically, Private TMTG financed operations primarily through cash proceeds from the Private TMTG Convertible Notes. Our primary short-term requirements for liquidity and capital
are to fund general working capital.
TMTG is currently seeking to (1) grow its initial product, Truth Social; (2) increase its product offerings and services, including through the acquisition of streaming technology;
and (3) pursue strategic acquisitions and/or partnership. TMTG intends to fund these activities through a combination of deploying cash on hand, generating advertising revenues, issuing equity (including up to 5,100,000 shares in connection with an
asset acquisition agreement signed on July 3, 2024), and/or selling stock pursuant to that certain Standby Equity Purchase Agreement dated July 3, 2024.
Although TMTG anticipates that current cash on hand will be sufficient to fund its operations for the foreseeable future, TMTG cannot guarantee that it will not be required to
obtain additional financing, or that additional financing, if needed, will be available on terms acceptable to TMTG, or at all. In addition, although there are no other present binding understandings, commitments, or agreements with respect to any
acquisition of other businesses, products, or technologies, TMTG will, from time to time, evaluate acquisitions of other businesses, products, and technologies. If TMTG is unable to raise additional equity or debt financing, as and when needed, it
could be forced to forego such acquisitions or significantly curtail its operations.
As of June 30, 2024 and December 31, 2023, the cash and cash equivalents balance was approximately $343,954.4 and $2,572.7, respectively. The $341,381.7 increase in the Company’s
cash and cash equivalents in the first six months of 2024 is primarily due to cash proceeds of $233,017.5 from the Business Combination, $47,455.0 from the issuance of convertible notes, and $93,805.4 from the exercise of warrants. Cash and cash
equivalents consist of interest-bearing deposits held at financial institutions. Cash deposits are held at major financial institutions and are subject to credit risk to the extent those balances exceed applicable Federal Deposit Insurance
Corporation (FDIC) limitations.
Cash Flows
The following table shows our cash flows provided by (used in) operating activities, investing activities and financing activities for the stated periods:
|
(in thousands)
|
|
For the six months ended
June 30, 2024
|
|
|
For the six months ended
June 30, 2023
|
|
|
Variance
|
|
|
Variance
%
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(30,754.3
|
)
|
|
|
(7,370.9
|
)
|
|
|
(23,383.4
|
)
|
|
|
317
|
% |
|
Net cash used in investing activities
|
|
|
(2,141.9
|
)
|
|
|
(2.2
|
)
|
|
|
(2,139.7
|
)
|
|
|
97,259
|
% |
|
Net cash provided by financing activities
|
|
$
|
374,277.9
|
|
|
$
|
-
|
|
|
$
|
374,277.9
|
|
|
|
-
|
|
Net Cash Used in Operating Activities
Net cash used in operating activities for the six months ended June 30, 2024 was approximately $30,754.3 compared to $7,370.9 used in operating activities during the six months
ended June 30, 2023. The increase in cash used in operating activities was primarily driven by $17,499.9 of higher operating expenses (i.e., higher legal, insurance, license and registration, accounting and finance, IT consulting, software, and
server costs) and $6,580.0 of cash bonuses.
Net Cash Used in Investing Activities
Net cash used in investing activities for the six months ended June 30, 2024 was approximately $2,141.9 compared to $2.2 used in investing activities during the six months ended
June 30, 2023. The increase in cash used in investing activities was driven by investment in servers and network equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2024 was approximately $374,277.9 compared to $0.0 provided by financing activities for the six months
ended June 30, 2023. The increase was due to due to cash proceeds of $233,017.5 from the Business Combination, $47,455.0 from the issuance of convertible notes, and $93,805.4 from the exercise of warrants.
Convertible Promissory Notes
Notes 1 to 7 were Convertible Promissory Notes issued from May 2021 through October 2021 with a cumulative face value of $5,340.0 (including $240.0 of debt issuance costs), maturity
of 24 months from each respective issuance date and interest was accrued at 5% based on the simple interest method (365 days year) for each note. Each of Notes 1 to 7 contemplated multiple plausible outcomes that include conversion upon a Qualified
SPAC Business Combination (“SPAC”) and at least one of the following conversion triggers: Qualified Initial Public Offering (“IPO”), private equity transaction and/or
change of control. All outstanding principal of these Notes, together with all accrued but unpaid interest on such principal, would convert to equity. The number of shares of Company stock to be issued to the lender upon conversion of the Notes in
the event of a completed SPAC transaction would be the number of shares of the Company stock (rounded to the nearest whole share) equal to the quotient of: (a) the principal plus accrued interest on the Notes then outstanding, divided by $4.00. In
other, non-SPAC conversion scenarios, the number of shares of Company stock to be issued to the Lender upon conversion of the Notes was variable based on the application of an automatic discounted share-settlement feature. For Notes 1 and 2, the
number of shares of Company stock to be issued to the Lender upon a non-SPAC conversion event would be the number of shares of Company stock (rounded to the nearest whole share) equal to the quotient of: (a) the principal plus accrued interest on
the Notes then outstanding (b) divided by 40% of the initial public offering price per share of a qualified initial public offering. For Notes 3 to 7, the number of shares of Company stock to be issued to the Lender upon a non-SPAC conversion event
would be the number of shares of Company stock (rounded to the nearest whole share) equal to the quotient of: (a) the principal plus accrued interest on the Notes then outstanding (b) divided by 40% of (i) the initial public offering price per
share of a qualified initial public offering, (ii) the price per share as determined by the valuation of the Company in connection with a qualified private equity raise, or (iii) in the case of a change of control, the price per share determined
in accordance with the Company’s then current fair value determined by an independent valuation firm.
Notes 8 to 12 were Convertible Promissory Notes issued from November 2021 through December 2021 with a cumulative face value of $17,500.0, maturity of between 18 months and 36
months and interest was accrued at a range between 5% and 10% based on the simple interest method (365 days year) for each note. Notes 8 to 12 were convertible simultaneously with the completion of a SPAC merger agreement or IPO. All outstanding
principal of these Notes, together with all accrued but unpaid interest on such principal, would convert to equity. The number of shares of Company stock to be issued to the Lender upon conversion of the Notes would be the number of shares of the
Company Stock (rounded to the nearest whole share) equal to the quotient of: (a) the principal plus accrued interest on the Notes then outstanding (b) divided by either US$25, US$21 or US$20 subject to the respective conditions of the individual
Notes; provided, however, in the event that the stock price quoted for the Company on NASDAQ or The New York Stock Exchange (as applicable) at the time of the closing of the Qualified SPAC Business Combination (the “TMTG
Stock Price”) is less than either $50 per share, $42 per share, $40 per share subject to the respective conditions of the individual Notes, then the Conversion Price would be reset to 50% of the then current TMTG Stock Price subject to a
floor of $10 per share.
Notes 13 to 18 were Convertible Promissory Notes issued from January 2022 through March 2022. Note 19 was issued on August 23, 2023. Notes 13 to 19 were Convertible Promissory
Notes issued with a cumulative face value of $17,360.0 (net of repayments), maturity of 18 months and interest will be accrued at a range between 5% and 10% based on the simple interest method (365 days year) for each note. Notes 13 to 19 were
convertible simultaneously with the completion of a SPAC merger agreement or IPO. All outstanding principal of these Notes, together with all accrued but unpaid interest on such principal, would convert to equity. The number of shares of Company
stock to be issued to the Lender upon conversion of the Notes would be the number of shares of the Company Stock (rounded to the nearest whole share) equal to the quotient of: (a) the principal plus accrued interest on the Notes then outstanding
(b) divided by either US$25 or US$21 subject to the respective conditions of the individual.
Notes 20 to 23 were Convertible Promissory Notes issued from November 2023 through March 2024 with a cumulative face value of $7,955.0, maturity of 18 months and interest will be
accrued at 10% based on the simple interest method (365 days year) for each note. Notes 20 to 23 were convertible with the completion of a SPAC merger agreement IPO. The outstanding principal of the Notes, accrued but unpaid interest on such
principal, would convert to equity. The number of shares of Company stock to be issued to the Lender upon conversion of the Notes in the event of a SPAC transaction would be the number of shares of the Company stock (rounded to the nearest whole
share) equal to the quotient of: (a) the principal plus accrued interest on the Notes then outstanding (b) divided by US$10. The number of shares of Company stock to be issued to the Lender upon conversion of the Notes in the event of an IPO would
be the number of shares of the Company stock (rounded to the nearest whole share) equal to the quotient of: (a) the principal plus accrued interest on the Notes then outstanding (b) divided by 50% of the IPO price per share.
Several of the Private TMTG Convertible Notes were amended, extended, and/or restated after their initial issuance and prior to their conversion.
Each Private TMTG Convertible Note that was issued and outstanding immediately prior to the Closing automatically converted immediately prior to the effective time of the Closing
into a number of shares of Private TMTG common stock as such Private TMTG Convertible Note would automatically have been converted into upon the Closing, in accordance with the Merger Agreement.
Additionally, pursuant to a note purchase agreement entered into by and between Digital World and certain institutional investors on February 8, 2024 (the “Note Purchase Agreements”), Digital World agreed to issue up to $50,000.0 in convertible promissory notes (the “DWAC Convertible Notes”). The DWAC Convertible Notes: (a) accrued interest at an
annual rate of 8.00% and are payable on the earlier of (i) the date that is 12 months after the date on which the Digital World consummated the Business Combination, which interest is not payable to the extent the holder exercises the conversion
right and (ii) the date that the winding up of Digital World was effective (such date, the “Maturity Date”); (b) were convertible (i) at any time following the consummation of the Business Combination, but
prior to the Maturity Date, redemption or otherwise the repayment in full of the DWAC Convertible Notes, at each holder’s option, in whole or in part, and subject to the terms and conditions of the DWAC Convertible Notes, including any required
shareholders’ approval upon the consummation of the Business Combination and (ii) into that number of shares of common stock of the Company and warrants included in the units, each unit consisting of one share of common stock of the Company and
one-half of one warrant of the Company (the “Conversion Units”), equivalent to (A) the portion of the principal amount of the applicable DWAC Convertible Note (excluding any accrued interest, which shall not
be payable with respect to the DWAC Convertible Note that was converted) being converted, divided by (B) $8.00 (the “Conversion Price”); (c) could have been redeemed by the Company, in whole or in part,
commencing on the date on which all common stock of the Company issuable to the holders has been registered with the SEC, by providing a 10-day notice of such redemption (the “Redemption Right”), which
Redemption Right was contingent upon the trading price of the common stock of the Company exceeding 130% of the applicable conversion price on at least 3 trading days, whether consecutive or not, within the 15 consecutive trading days ending on the
day immediately preceding the day on which a redemption notice is issued by the Company; (d) were initially drawable for 20% of the applicable investor’s commitment amount and a final drawdown for the remaining 80% to occur upon the closing of the
Business Combination, with the proceeds of such final drawdown deposited into a control account as indicated by the Company (the “Control Account”). The proceeds from such final drawdown deposited into the
Control Account remained therein and could not be withdrawn by the Company until such time as (i) the Company exercised the Redemption Rights using the proceeds in the Control Account, (ii) any portion of the applicable DWAC Convertible Note was
converted, at which time such portion shall be released from the Control Account or (iii) if prior to the conversion, a resale registration statement of the Company covering all common stock issued pursuant to the DWAC Convertible Notes had been
declared effective by the SEC. The DWAC Convertible Notes were subject to specified events of default and had registration rights pursuant to the registration rights agreement entered into by the Company and the parties thereto as of September 2,
2021. Following the effectiveness on June 18, 2024, of a resale registration statement covering all common stock issued pursuant to the DWAC Convertible Notes, all such notes were converted on or before June 20, 2024. The proceeds of the final
drawdown were released from the Control Account on July 1, 2024.
Liquidity and Going Concern
Private TMTG commenced operations on February 8, 2021, and began the initial launch of its social media platform in the first quarter of 2022. In October of 2021, Private TMTG
entered into a definitive Merger Agreement with Digital World. The companies consummated the Merger on March 25, 2024.
Company operations and investment activities consumed $70,783.5 of cash from February 8, 2021 (inception) through June 30, 2024, primarily funded by $47,915.0 of cash proceeds (net
of repayments and debt issuance cost) from the issuance of the Private TMTG Convertible Notes and cash proceeds from the Business Combination. The March 25, 2024 Closing triggered the automatic conversion of the Private TMTG Convertible Notes to
Private TMTG common stock immediately prior to such Closing, thus eliminating the liability.
Concurrently with the Closing, Private TMTG received $273,017.5 of net cash proceeds from the Business Combination, comprised of $233,017.5 of unrestricted cash and $40,000.0 of
then-restricted cash. Moreover, the Company received $93,805.4 of cash proceeds from the exercise of warrants during the second quarter of 2024. As a result, the Company had a total of $343,954.4 in cash as of June 30, 2024. As noted above,
following conversion of the DWAC Convertible Notes on or before June 20, 2024, the formerly-restricted cash was transferred to an unrestricted account on July 1, 2024.
Private TMTG experienced operating losses in preceding years and through the first half of 2024. On average, Private TMTG operations consumed approximately $12,577.3 of cash per
year from its inception (February 8, 2021) through year-end 2023. In addition, for the six months ended June 30, 2024, and 2023, the Company had negative operating cash flows of $30,754.3 (including transaction related cash disbursements) and
$7,370.9, respectively. As of December 31, 2023, Private TMTG had a negative working capital position, primarily due to the short-term nature of the Private TMTG Convertible Notes, which converted to Private TMTG common stock immediately prior to
the Closing. Based upon the receipt of cash proceeds related to the Business Combination, the resulting positive working capital position (i.e., $353,525.3 of current assets less $14,295.2 of current liabilities), and no debt on the balance sheet
as of June 30, 2024, management believes there is not substantial doubt regarding the Company’s ability to continue as a going concern as of June 30, 2024, and the substantial doubt as of December 31, 2023, has been mitigated. The Company believes
it has sufficient working capital to fund operations for at least the next twelve months from the date of issuance of the accompanying financial statements.
Off-Balance Sheet Arrangements
As of June 30, 2024, TMTG did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other
contractual arrangement to which an entity unconsolidated with TMTG is a party, under which it has any obligation arising under a guaranteed contract, derivative instrument or variable interest or a retained or contingent interest in assets
transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in
financial market prices and rates. Our market risk exposure is primarily interest rates, access to credit and funds to run day-to-day operations, and the result of fluctuations in foreign currency exchange rates if we expand internationally.
Failure to mitigate these risks could have a negative impact on revenue growth, gross margin, and profitability.
Interest Rate Risk
Our cash and cash equivalents are comprised of demand deposits in bank accounts held at financial institutions. We do not enter into investments for trading or speculative purposes
and have not used any derivative financial instruments to manage our interest rate risk exposure.
Credit Risk
As of June 30, 2024 and 2023, effectively all of our cash and cash equivalents were maintained with a large financial institution. We have reviewed the financial statements of our
banking institution and believe it currently has sufficient assets and liquidity to conduct its operations in the ordinary course of business with little or no credit risk to us.
As of June 30, 2024 and 2023, two advertising partners combined represented in excess of 98% of accounts receivable.
Emerging Growth Company Status
In April 2012, the JOBS Act was enacted. Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying
with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. TMTG has elected to take advantage of the extended
transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, TMTG will not be subject to
the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult.
Critical Accounting Policies and Significant Management Estimates
TMTG prepares its financial statements in accordance with GAAP. The preparation of financial statements also requires TMTG to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, costs and expenses and related disclosures. TMTG bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could
differ significantly from the estimates made by TMTG’s management team. To the extent that there are differences between TMTG’s estimates and actual results, its future financial statement presentation, balance sheet, results of operations and cash
flows will be affected. TMTG believes that the accounting policies discussed below are critical to understanding its historical and future performance, as these policies relate to the more significant areas involving our management team’s judgments
and estimates. Critical accounting policies and estimates are those that TMTG considers the most important to the portrayal of its balance sheet and results of operations because they require its most difficult, subjective, or complex judgments,
often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
The preparation of TMTG’s financial statements in conformity with GAAP requires it to make estimates and judgments that affect the amounts reported in those financial statements and
accompanying notes. Although TMTG believes that the estimates it uses are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates. TMTG’s
significant accounting policies are described in Note 2 to TMTG’s unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2024 and 2023, included in this Quarterly Report. TMTG’s critical accounting
policies are described below.
Revenue Recognition. TMTG records revenue in accordance with ASC 606. TMTG determines the amount of revenue to be recognized through
application of the following steps – Identification of the contract, or contracts with a customer; – Identification of the performance obligations in the contract; – Determination of the transaction price; – Allocation of the transaction price to
the performance obligations in the contract; – Determining whether TMTG is the principal or the agent in arrangements where another party is involved in providing specified services to a customer; and – Recognition of revenue when or as TMTG
satisfies the performance obligations.
Private TMTG entered into advertising contractual arrangements with advertising manager service companies. The advertising manager service companies provide advertising services to
customers that facilitate the placement of ads on the Truth Social platform. TMTG determines the number of Ad Units available on its Truth Social platform. The advertising manager service companies have sole discretion over the terms of the auction
and all payments and actions associated therewith. Prices for the Ad Units are set by an auction operated and managed by these third-party companies. TMTG has the right to block specific advertisers at its sole reasonable discretion, consistent
with applicable laws, rules, regulations, statutes, and ordinances. TMTG is an agent in these arrangements, and recognizes revenue for its share in exchange for arranging for the specified advertising to be provided by the advertising manager
service companies. The advertising revenues are recognized in the period when the advertising services are provided.
TMTG determined that the contractual arrangements with Rumble and TAME, respectively, are agency arrangements as determined by ASC 606-10-55.
Rumble is an advertising manager service involved in providing advertising services through its Ad Manager Service Platform on the Truth Social website to customers. Rumble will
make Truth Social Ad Units available for purchase by advertisers on the Ad Manager Service. TMTG determines the number of Ad Units available on its Truth Social website. TMTG determined that the nature of its promise is to arrange for advertising
services to be provided by Rumble. The distinct service is selling advertising space for the placement of advertisements (“Ads”) on Truth Social and not combined with any other service as contemplated in
paragraph ASC 606-10-55-36.
In evaluating the nature of its promise (as described in paragraph 606-10-55-36), TMTG determined that Rumble has sole discretion over the terms of the auction and all payments and
actions associated therewith. Prices for the Ad Units will be set by an auction operated and managed by Rumble. Rumble therefore controls (as described in paragraph ASC 606 -10-25-25) each specified Ad unit used by the customer. The services are
not combined with any other services as contemplated in paragraph ASC 606-10-25-21(a).
ASC 606-10-55-38 is applicable as TMTG is an agent, its performance obligation is to arrange for the provision of advertising by Rumble. TMTG does not control the advertising
provided by Rumble to satisfy the customer’s requirements. TMTG therefore recognizes revenue in the amount of its share in exchange for arranging for the specified advertising to be provided by Rumble. The share is reduced by any costs incurred by
Rumble. The requirements of ASC 606-10-55-37 are not applicable as TMTG does not obtain control as outlined in this section. Also refer to the analysis of control indicators in ASC 606-10-55-39. ASC 606-10-55-39 (indicator of control before
advertising is sold to customers) is not applicable due to: Rumble and not TMTG is primarily responsible for fulfilling the promise to provide the specified advertising; the Company has no inventory risk related to advertising used by a customer or
TMTG has no discretion in establishing the price for the specified advertising. ASC 606-10-55-40 is not applicable as no principal obligations were transferred.
The TAME contractual arrangement is significantly smaller in financial scope than the Rumble arrangement; however, the nature of the promise is similar for both vendors. TAME also
has discretion over the terms of the auction and all payments and actions associated therewith. ASC 606-10-55-38 is therefore applicable, and the Company recognizes revenue in the amount of its share in exchange for arranging for the specified
advertising to be provided by TAME. ASC 606-10-55-39 is not applicable for similar reasons as outlined in the preceding paragraph.
Software Development Costs. We expense software development costs, including costs to develop software products or the software component
products to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility typically is reached shortly before the release of such products. As a result, development costs that meet the
criteria for capitalization were not material for the six months ended June 30, 2024.
Software development costs also include costs to develop software to be used solely to meet internal needs and cloud-based applications used to deliver our services. We capitalize
development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed, and the software will be used to perform the function intended. Costs capitalized for
developing such software applications were not material for the six months ended June 30, 2024.
Stock Based Compensation. TMTG measures the cost of services received in exchange for an award of equity instruments based on the fair value
of the award. The fair value of the award is measured on the grant date for equity classified instruments, and liability classified awards are subject to remeasurement in accordance with ASC 718. Awards granted to directors are treated on the same
basis as awards granted to employees.
Income Taxes. TMTG is subject to income taxes in the United States. Significant judgment is required in determining its provision (benefit)
for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. Income taxes are accounted for under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. TMTG recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Income tax
amounts are therefore recognized for all situations where the likelihood of realization is greater than 50%. Changes in recognition or measurement are reflected in income tax expense in the period in which the change in judgment occurs. Accrued
interest expense and penalties related to uncertain tax positions are recorded in income tax expense.
Convertible Promissory Notes. Private TMTG issued the Private TMTG Convertible Notes, which contained a range of fixed rate conversion
features, whereby the outstanding principal and accrued interest would be converted into common shares at a fixed discount to the market price of the common stock at the time of conversion. The Private TMTG Convertible Notes represented a financial
instrument other than an outstanding share that embodies a conditional obligation that Private TMTG must or may have settled by issuing a variable number of its equity shares. The bifurcated embedded features of the convertible promissory notes
were initially recorded on the balance sheet at their fair value on the date of issuance. After the initial recognition, the fair value of the convertible promissory notes (derivative feature component) may have changed over time due to changes in
market conditions. The change in fair market value was included in the statement of operations. The liability component of the bifurcated convertible promissory notes (net of any related debt issuance costs) accreted interest using the respective
effective interest rate method until maturity.
Fair Value of Financial Instruments. TMTG uses a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2. Significant other inputs that are directly or indirectly observable in the marketplace.
Level 3. Significant unobservable inputs which are supported by little or no market activity.
The derivative liability component of Private TMTG Convertible Notes were classified as Level 3 due to significant unobservable inputs. Historically, the estimated fair value of the
conversion feature of the derivative liability has been based on traditional valuation methods including Black-Scholes option pricing models and Monte Carlo simulations.
Use of Estimates. The preparation of financial statements in accordance with U.S. GAAP requires TMTG to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates include assumptions used in the fair value of equity instruments, the valuation allowance against deferred tax assets, and the estimates of fair value of derivative liabilities, earn-out shares and
stock-based compensation.
Recent Accounting Pronouncements
See Note 2 to TMTG’s unaudited condensed consolidated financial statements for the six months ended June 30, 2024 and 2023.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Effective May 3, 2024, TMTG dismissed BF Borgers CPA PC (“BF Borgers”) as its independent registered public accounting firm. On May 4, 2024,
TMTG engaged Semple, Marchal & Cooper, LLP (“SMC”) as BF Borgers’ replacement. The decision to change independent registered public accounting firms was made with the recommendation and approval of the
Audit Committee.
BF Borgers’ audit reports on TMTG’s consolidated financial statements as of and for the fiscal years ended December 31, 2023 and December 31, 2022 did not contain an adverse opinion
or a disclaimer of opinion and were not qualified or modified as to audit scope or accounting principles.
During the fiscal years ended December 31, 2023 and 2022, and the subsequent interim period, there were no disagreements, as that term is defined in Item 304(a)(1)(iv) of Regulation
S-K, between TMTG and BF Borgers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to BF Borgers’ satisfaction, would have caused BF Borgers to
make reference to such disagreements in its audit reports.
During the fiscal years ended December 31, 2023 and 2022, and the subsequent interim period, there were no reportable events within the meaning of Item 304(a)(1)(v) of Regulation
S-K.
Interest Rate Fluctuation Risk
TMTG’s investment portfolio may consist of short-term and long-term interest-bearing obligations, including government and investment-grade debt securities and money market funds.
These securities may be classified as available-for-sale and, consequently, would be recorded on the unaudited condensed consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other
comprehensive income (loss), net of tax. TMTG’s investment policy and strategy will be focused on the preservation of capital and supporting its liquidity requirements. TMTG does not intend to enter into investments for trading or speculative
purposes.
Foreign Currency Exchange Risk
Transaction Exposure
TMTG may transact business in various foreign currencies and have international revenue, as well as costs denominated in foreign currencies. This may expose us to the risk of
fluctuations in foreign currency exchange rates. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, could negatively affect our revenue and other operating results as expressed in U.S. dollars.
Financial Market Risk
The primary objective of any investment activities is to preserve principal, while at the same time maximizing income we receive from investments without significantly increased
risk. Some of the securities TMTG may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if TMTG holds a security that was
issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the value of its investment will decline. To minimize this risk in the future, TMTG may maintain its portfolio of cash equivalents and
investments in a variety of securities, including (but not limited to): commercial paper, money market funds, government and non-government debt securities and certificates of deposit.
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
Not applicable for smaller reporting companies.
| Item 4. |
Controls and Procedures |
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, upon the Closing, TMTG’s Chief Executive Officer and Chief Financial Officer (the “Certifying
Officers”), to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of TMTG’s management, including its Certifying Officers, TMTG carried out an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. In connection with the preparation of our consolidated financial statements as of and for the years ended December 31, 2023 and
2022, TMTG’s management identified a material weakness in its internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of an entity’s financial statements will not be prevented or detected on a timely basis. TMTG’s management determined that the material weakness primarily related to its failure to design and
maintain formal accounting policies, processes, and controls to analyze, account for and properly disclose income recordation as well as a need for additional accounting personnel who have the requisite experience in SEC reporting regulation.
TMTG is committed to remediating the material weaknesses described above and continuing remediation efforts during 2024. We are implementing several remediation measures including,
but not limited to hiring additional accounting staff with the requisite background and knowledge, engaging third parties to assist in complying with the accounting and financial reporting requirements related to significant and complex
transactions as well as adding personnel to assist with formalizing our business processes, accounting policies and internal control documentation, strengthening supervisory reviews by our management, and evaluating the effectiveness of our
internal controls in accordance with the framework established by Internal Control - Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission. While our efforts are ongoing, we plan to continue
to take additional steps to remediate the material weaknesses, improve our financial reporting systems, and implement new policies, procedures, and controls; however, we cannot guarantee those measures will prevent or detect material weaknesses in
the future.
Although we intend to continue with our remediation efforts mentioned above, all identified material weaknesses continue to exist as of the date of this Quarterly Report and we
cannot provide any assurance that we, or our independent registered public accounting firm, will not identify new material weaknesses in our internal controls over financial reporting in the future. While we are undertaking efforts to remediate
these material weaknesses, the material weaknesses will not be considered remediated until our remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded through testing, that
the newly implemented and enhanced controls are designed and operating effectively. We are working to remediate the material weaknesses as efficiently and effectively as possible but expect that full remediation could potentially go beyond December
31, 2024. At this time, we cannot provide an estimate of costs expected to be incurred in connection with implementing this remediation plan; however, these remediation measures will be time consuming, incur significant costs, and place significant
demands on our financial and operational resources.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
| Item 1. |
Legal Proceedings.
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Except as indicated below, to the knowledge of our management team, there is no litigation currently pending or contemplated against us, or against any of our property.
We have cooperated with a FINRA inquiry concerning events (specifically, a review of trading) that preceded the public announcement of the Merger Agreement and the consummation of
the Business Combination. According to FINRA’s request, the inquiry should not be construed as an indication that FINRA has determined that any violations of Nasdaq rules or federal securities laws have occurred, or as a reflection upon the merits
of the securities involved or upon any person who effected transactions in such securities.
Settlement in Principle
Digital World was the subject of an investigation by the SEC with respect to certain statements, agreements and the timing thereof included in Digital World’s registration
statements on Form S-1 in connection with its IPO and Form S-4 relating to the Business Combination (the “Investigation”).
On July 3, 2023, Digital World reached an agreement in principle (the “Settlement in Principle”) in connection with the Investigation. The Settlement in Principle was subject to
approval by the SEC.
On July 20, 2023, the SEC approved the Settlement in Principle, announcing it settled its dispute with Digital World and entered an order (the “Order”)
finding that Digital World violated certain antifraud provisions of the Securities Act and the Exchange Act, in connection with Digital World’s IPO filings on Form S-1 and the Form S-4 concerning certain statements, agreements and omissions
relating to the timing and discussions Digital World had with Private TMTG regarding the proposed business combination. In the Order, Digital World agreed (i) that any amended Form S-4 filed by Digital World would be materially complete and
accurate with respect to certain statements, agreements and omissions relating to the timing and discussions that Digital World had with Private TMTG regarding the proposed business combination and (ii) to pay a civil money penalty in an amount of
$18 million to the SEC promptly after the closing of any merger or a comparable business combination or transaction, whether with Private TMTG or any other entity.
In connection with the consummation of the Business Combination, on March 25, 2024, Digital World paid the $18 million civil penalty to the SEC pursuant to the Order.
Section 16 Claim
On October 20, 2023, Robert Lowinger (the “Plaintiff”) filed a complaint against Rocket One Capital, LLC (“Rocket One”), Michael Shvartsman,
Bruce Garelick, and Digital World in the U.S. District Court for the Southern District of New York. The case is Lowinger v. Rocket One Capital, LLC, et al., No. 1:23-CV-9243 (S.D.N.Y. Oct. 20, 2023). According to the complaint, Digital World was
named as a party in the lawsuit because the Plaintiff is seeking relief for the benefit of Digital World. In the complaint, the Plaintiff contends that, in 2021, Mr. Garelick and Rocket One were directors of Digital World and that they purchased
securities of Digital World. The Plaintiff further alleges that within a six-month period from the date of their purchases, both Mr. Garelick and Rocket One sold securities in Digital World and realized profits from those sales. Additionally, the
Plaintiff alleges that Mr. Shvartsman had a financial interest in the profits resulting from Rocket One’s purchases and sales of Digital World’s securities. According to the Plaintiff, under Section 16(b) of the Exchange Act (15 U.S.C. §78p(b)),
Rocket One, Mr. Shvartsman, and Mr. Garelick are each required to disgorge certain trading profits to Digital World.
On March 1, 2024, Digital World filed a motion to dismiss the claims against Digital World. On June 5, 2024, the U.S. District Court for the Southern District of New York granted a motion by
Defendants Michael Shvartsman and Bruce Garelick to transfer the action to the U.S. District Court for the Southern District of Florida. In transferring the action, the U.S. District Court for the Southern District of New York held that pending
motions to dismiss, including the motion filed by Digital World, will be decided by the U.S. District Court for the Southern District of Florida (C.A. No. 24-CV-22429). On July 17, 2024, Defendants Rocket One, Mr. Shvartsman, and Mr. Garelick
moved to stay the case during the pendency of SEC v. Garelick, et al., No. 23-CV-05567 (S.D.N.Y.) and USA v. Shvartsman, et al., No. 1:23-CR-00307 (S.D.N.Y.).
Litigation with United Atlantic Ventures (“UAV”) in Delaware
On July 30, 2021, an attorney for the Trump Organization, on behalf of President Trump, declared void ab initio a services agreement that
had granted Private TMTG, among other things, extensive intellectual property and digital media rights related to President Trump for purposes of commercializing the various Private TMTG initiatives (the “Services
Agreement”). Neither Private TMTG nor Digital World was a party to such agreement.
On each of January 18, 2024 and February 9, 2024, Digital World received letters from counsel to UAV, a party to the Services Agreement. The letters contained certain assertions and
enclosed a copy of the Services Agreement that had been declared void two and a half years earlier. Specifically, counsel for UAV claims that the Services Agreement grants UAV rights to (1) appoint two directors to TMTG and its successors (i.e., TMTG after the Business Combination), (2) approve or disapprove of the creation of additional TMTG shares or share classes and anti-dilution protection for future issuances and (3) a $1.0 million expense
reimbursement claim. In addition, UAV asserts that the Services Agreement is not void ab initio and claims that certain events following the July 30, 2021 notification support its assertion that such
Services Agreement was not void.
On February 6, 2024, a representative of UAV sent a text message to a representative of a noteholder of TMTG suggesting that UAV might seek to enjoin the Business Combination. On
February 9, 2024, Private TMTG received from counsel to UAV a letter similar to those letters received by Digital World, which also threatened Private TMTG with legal action regarding UAV’s alleged rights in Private TMTG, including, if necessary,
an action to enjoin consummation of the Business Combination.
On February 28, 2024, UAV filed a verified complaint against Private TMTG in the Chancery Court seeking declaratory and injunctive relief relating to the authorization, issuance,
and ownership of stock in Private TMTG and filed a motion for expedited proceedings (C.A. No. 2024-0184-MTZ). On March 4, 2024, UAV filed an amended complaint, converting their action from a direct action to a purported derivative action, and
adding members of the Private TMTG board as defendants.
On March 9, 2024, the Chancery Court held a hearing to decide UAV’s motion to expedite proceedings. During the oral argument, Private TMTG agreed that any additional shares of
Private TMTG issued prior to or upon the consummation of the Business Combination would be placed in escrow pending a resolution of the dispute between the parties. The Chancery Court entered an order consistent with the foregoing on March 15,
2024, and scheduled a status conference for April 1, 2024.
On April 2, 2024, UAV filed a motion for leave to file a second amended complaint together with a motion for preliminary injunction and a motion for contempt and anti-suit
injunction related to Private TMTG’s filing of a separate litigation against UAV and others in Florida state court. Private TMTG maintains that the contempt claims are meritless. On April 9, 2024, the Chancery Court granted the motion for leave to
file a second amended complaint on April 9, 2024 and re-assigned the case to a new judge.
On April 11, 2024, UAV filed its second amended complaint, naming the prior defendants together with five new defendants—TMTG and the current directors on the TMTG Board who were
not on Private TMTG’s board of directors.
On April 22, 2024, all of the defendants moved to vacate the Chancery Court’s prior order expediting the matter. Additionally, all of the defendants moved to dismiss the second amended complaint.
Following briefing and oral argument on the motion to vacate, on April 30, 2024, the Chancery Court vacated the prior provisions of the March 15 order expediting the matter.
On May 6, 2024, UAV filed its Renewed Motion for Contempt of the March 15, 2024 Order against Private TMTG (“First Contempt Motion”) seeking, among other things, to enjoin Private TMTG and related
parties from prosecuting certain claims in Florida state court. A hearing on this motion, which was previously set for July 12, 2024, was cancelled by the Chancery Court after UAV failed to timely submit a reply brief. On May 8, 2024, the
Chancery Court stayed discovery and granted a protective order with respect to all discovery served on defendants and all other persons from whom discovery was being sought.
On June 5, 2024, UAV filed for leave to again amend its complaint. The Chancery Court granted the motion for leave to amend on July 8, 2024, and UAV filed its Third Amended Complaint on July 9, 2024.
The Third Amended Complaint dismissed as defendants three current TMTG directors (W. Kyle Green, Linda McMahon, and Robert Lighthizer) and added four former Digital World directors (Frank J. Andrews, Patrick F. Orlando, Edward J. Preble, and
Jeffrey A. Smith).
On July 17, 2024, UAV filed a second contempt motion against Private TMTG and TMTG (“Second Contempt Motion”) alleging additional violations of the March 15 Order.
On July 23, 2024, all of the defendants with the exception of Patrick F. Orlando moved to dismiss the Third Amended Complaint.
This matter remains pending.
Lawsuit Against ARC and Patrick Orlando in Florida
On February 26, 2024, representatives of ARC Global Investments II, LLC (“ARC”) claimed to Digital World that after a “more comprehensive”
review, the conversion ratio for Digital World Class B common stock into Digital World Class A common stock upon the completion of the Business Combination was approximately 1.8:1. ARC’s new claim also contradicted the previous assertion by Patrick
Orlando, the managing member of ARC, that the conversion ratio was 1.68:1. Digital World’s board of directors viewed these claims as an attempt by Mr. Orlando to secure personal benefits, breaching his fiduciary duty to Digital World and its
shareholders.
Digital World and Private TMTG initiated a lawsuit against ARC in the Civil Division for the Twelfth Judicial Circuit Court in Sarasota County, Florida, on February 27, 2024 (Docket
No. 2024-CA-001061-NC). The complaint sought a declaratory judgment affirming the appropriate conversion ratio as 1.34:1, as previously disclosed, damages for tortious interference with the contractual and business relationship between Private TMTG
and Digital World, and damages for conspiracy with unnamed co-conspirators to interfere with the same. The complaint also sought damages for Mr. Orlando’s breach of fiduciary duty, which exposed Digital World to regulatory liability and resulted in
an $18 million penalty, and for his continuous obstruction of Digital World’s merger with Private TMTG to extort various concessions that benefited only him and harmed Digital World and its shareholders. Furthermore, the complaint sought damages
for the wrongful assertion of dominion over Digital World’s assets inconsistent with Digital World’s possessory rights over those assets. On March 8, 2024, Digital World voluntarily dismissed its declaratory judgment claim against ARC.
On March 17, 2024, Digital World and Private TMTG filed an amended complaint, adding a claim for violation of Florida’s Deceptive and Unfair Trade Practices Act. Digital World
further alleged breach of fiduciary duty of loyalty, breach of fiduciary duty of care, and conversion claims against Mr. Orlando. With respect to ARC, Digital World alleged aiding and abetting a breach of fiduciary duty.
On April 3, 2024, Defendants ARC and Mr. Orlando filed a joint motion to dismiss the amended complaint or, in the alternative, to stay the proceeding pending the Delaware Action.
Defendants ARC and Mr. Orlando also filed that same day a motion to stay discovery in the action. On May 29, 2024, TMTG f/k/a Digital World moved to compel discovery from ARC and Mr. Orlando. On July 15, 2024, the Court entered an order denying the
foregoing discovery motions. In an order dated July 29, 2024, the Court denied the motion to dismiss or, in the alternative, stay the proceeding. On July 30, 2024, Defendants ARC and Mr. Orlando filed a notice of appeal regarding the Court’s
denial of their joint motion to dismiss, and filed a motion for stay pending appeal on August 2, 2024.
On July 31, 2024, TMTG filed a motion for leave to file a second amended complaint, which has been set for a hearing on September 10, 2024.
At a June 17, 2024, status hearing, the Court set a proposed trial date of August 2025.
Litigation with ARC in Delaware
On February 29, 2024, ARC filed a lawsuit in the Court of Chancery of the State of Delaware (C.A. No. 2024-0186-LWW) against Digital World and its directors, alleging an impending violation of the
Digital World Charter for failure to commit to issue the number of conversion shares to ARC that ARC claims it is owed upon the consummation of the Business Combination. The complaint claimed a new conversion ratio of 1.78:1 and sought specific
performance and damages for the alleged breach of the Digital World Charter, a declaratory judgment that the certain derivative securities of Digital World should be included in the calculation of the conversion ratio, a finding that the
directors of Digital World breached their fiduciary duties, and a preliminary injunction to enjoin the Business Combination until Digital World “corrected” the conversion ratio.
We do not believe ARC’s 1.78:1 conversion ratio and related claims are supported by the terms of the Digital World Charter. As a result, we have vigorously defended Digital World’s
calculation of the conversion ratio and related rights. In addition to its complaint, ARC also filed a motion with the Chancery Court requesting that the case schedule be expedited to enable the Chancery Court to conduct an injunction hearing prior
to the March 22, 2024 shareholder vote. On March 5, 2024, the court denied ARC’s motion, stating that it would not conduct a merits or injunction hearing before March 22, 2024. Consequently, the Chancery Court also denied ARC’s request to postpone
the vote until after a merits hearing.
The Chancery Court ruled that Digital World’s proposal to deposit disputed shares into an escrow account at the close of the Business Combination was adequate to prevent potential
irreparable harm related to ARC’s share conversion. The court also found that Digital World’s public disclosures about ARC’s claims and possible conversion scenarios at the close of the Business Combination further mitigated the risk of irreparable
harm due to insufficient disclosure for the March 22, 2024 vote.
On May 23, 2024, ARC filed a motion for leave to amend its complaint. ARC requested leave to add new factual allegations and legal theories, in addition to a cause of action for
breach of implied covenant of good faith and fair dealing. On June 5, 2024, the Court denied leave to add a cause of action for breach of implied covenant of good faith and fair dealing, but granted leave in part to add new legal theories to
existing claims and adjust its claimed conversion ratio from 1.78:1 to 1.81:1.
A one-day trial in this matter took place on July 29, 2024. The ultimate resolution as to whether none, a portion, or all of the disputed conversion shares will be issued remains
to be determined as of August 8, 2024.
In relation to the Delaware Lawsuit, Digital World notified its shareholders on March 14, 2024, of its intention to apply a conversion ratio to all Digital World Class B common
stock shares to ensure that ARC and the Non-ARC Class B Shareholders receive an equal number of common stock shares in the Company per share of Digital World Class B common stock. Accordingly, on March 21, 2024, Digital World entered into the
Disputed Shares Escrow Agreements with the Escrow Agent, pursuant to which TMTG deposited into escrow the number of shares of TMTG Common Stock representing the difference between the actual conversion ratio, determined by Digital World’s board of
directors upon closing of the Business Combination (which was determined to be 1.348:1), and a conversion ratio of 2.00. Any release of shares is subject to the terms and conditions of the Disputed Shares Escrow Agreements.
Lawsuit With Patrick Orlando in Delaware
On March 15, 2024, Plaintiff Patrick Orlando brought a lawsuit against Digital World in the Chancery Court seeking advancement of legal fees associated with Mr. Orlando’s
involvement in civil litigation against Digital World in Florida and certain other matters (the “Advancement Lawsuit”) (C.A. No. 2024-0264-LWW).
Mr. Orlando’s allegations relate to certain provisions in the Digital World Charter, Digital World’s bylaws, and an indemnity agreement allegedly entered into between Mr. Orlando
and Digital World. Mr. Orlando alleges that those certain provisions require Digital World to pay the legal fees Mr. Orlando incurred and will incur in connection with legal proceedings in which he is involved by reason of the fact that he is or
was a director or officer of Digital World. Mr. Orlando seeks a court order that (i) declares that he is entitled to legal fees for certain proceedings described in the complaint, (ii) requires Digital World to pay for legal fees incurred and
future legal fees to be incurred for those proceedings, (iii) requires Digital World to pay the fees incurred to bring the Advancement Lawsuit, and (iv) requires Digital World to pay pre- and post-judgment interest on the amounts owed to Mr.
Orlando.
On April 3, 2024, the Chancery Court entered a Stipulation and Advancement Order (“Stipulation”) stating that Mr. Orlando is entitled to advancement of attorneys’ fees and costs incurred with legal
proceedings described in the Stipulation, subject to Digital World’s right to challenge the reasonableness of those attorneys’ fees and costs. The Stipulation further states that Mr. Orlando is entitled to fees incurred in connection with
enforcement of advancement rights and sets forth procedures that will govern future requests for advancement of attorneys’ fees and costs. As of August 8, 2024, TMTG had paid or agreed to pay more than $800,000 to Mr. Orlando’s attorneys pursuant
to such Stipulation.
On April 23, 2024, Mr. Orlando filed a motion for leave to supplement the Advancement Lawsuit to add a claim for advancement of legal fees and expenses Mr. Orlando has incurred and will incur in
connection with his defense of an action for declaratory judgment brought by members of ARC regarding Mr. Orlando’s removal as the managing member of ARC. Mr. Orlando also sought reimbursement for the legal fees and expenses incurred in
connection with his supplement to the Advancement Lawsuit, as well as pre-judgment and post-judgment interest on the amounts he claims are owed to him. The Chancery Court granted Mr. Orlando’s motion for leave, adding the additional claim to the
Advancement Lawsuit.
A merits hearing in this matter has been scheduled for September 23, 2024.
Lawsuit Against UAV, Litinsky, Moss, and Orlando in Florida
On March 24, 2024, Private TMTG filed a lawsuit in the Circuit Court of the Twelfth Judicial Circuit for Sarasota County, Florida (Docket No. 2024-CA-001545-NC) against UAV, Andrew
Litinsky, Wesley Moss, and Patrick Orlando. In view of UAV’s repeated demands concerning its alleged stock ownership and director appointment rights, the complaint alleges claims for a declaratory judgment against UAV determining that the Services
Agreement is unenforceable against Private TMTG. The complaint also asserts a claim for unjust enrichment against UAV based on its failure to competently provide services to the company. Finally, the complaint asserts claims for damages for (a)
breach of the fiduciary duty of loyalty against Mr. Litinsky and Mr. Moss based on their dealings with Mr. Orlando, (b) aiding and abetting and conspiracy to breach fiduciary duty against Mr. Orlando based on the same events, and (c) breach of the
fiduciary duty of care against Mr. Litinsky and Mr. Moss for their gross negligence in managing the company.
On April 25, 2024, Private TMTG filed a motion to consolidate this lawsuit with the Lawsuit Against ARC and Patrick Orlando in Sarasota County, Florida described above for purposes
of discovery and pretrial proceedings. The motion to consolidate was denied without prejudice on August 2, 2024.
On June 27, 2024, the court granted Mr. Moss, Mr. Litinsky, and UAV’s motion to stay proceedings pending resolution of the Delaware litigation involving UAV. The court also denied
Private TMTG’s motion for an anti-suit injunction.
On July 3, 2024, Mr. Orlando filed a motion to dismiss. On July 15, 2024, UAV, Mr. Litinsky, and Mr. Moss filed a notice of inactive status, stating that the court should place the
action on inactive status.
On July 17, 2024, Private TMTG sought review of the court’s order granting UAV’s motion to stay in Florida’s Second District Court of Appeal by filing a petition for a writ of
certiorari with that court (Case No. 2D2024-1642). On August 2, 2024, Private TMTG filed a motion to stay the stay pending certiorari review.
Lawsuit By Orlando and Benessere in Miami, Florida
On April 2, 2024, Patrick Orlando and Benessere Investment Group, LLC filed suit against TMTG in the Circuit Court of the Eleventh Judicial District in Miami-Dade County Florida (Docket No.
2024-005894-CA-01). Orlando and Benessere seek a declaratory judgment that TMTG is restricted from disclosing material exchanged with Orlando and Benessere pursuant to a joint defense agreement previously entered into by the parties in addition
to a request for damages for any breach of the joint defense agreement. Also on April 2, 2024, Orlando and Benessere filed a motion for preliminary injunction for enforcement of the joint defense agreement. As of August 8, 2024, the motion for
preliminary injunction had not been set for hearing. On July 10, 2024, the Court scheduled a case management conference for September 16, 2024.
Litigation with ARC Noteholders in Miami, Florida
On May 8, 2024, a group of ARC noteholders (Edwin B. Tucker et al.) filed suit against ARC and Digital World n/k/a TMTG in the Circuit Court of the Eleventh Judicial District in Miami-Dade County,
Florida (Docket No. 2024-008668-CA-01). The noteholders seek specific performance and compensatory damages from both defendants or, in the alternative, damages for breach of contract from ARC, in connection with shares of TMTG to which the ARC
noteholders assert they are entitled. TMTG was served in this action on June 11, 2024, and filed a motion to dismiss on July 26, 2024. On July 11, 2024, ARC filed a motion to dismiss for, among other things, improper venue. The court granted
ARC’s motion to dismiss on August 7, 2024, indicating that the noteholders intend to refile in New York County, New York.
Lawsuit filed in Small Claims Court – Pinellas County, Florida
On April 29, 2024, a small claims action (Case No. 24-003593-SC) was filed in Pinellas County by Keith Rossignol and Richard Epp, appearing pro se, against “Digital World
Acquisition, Inc.”, demanding the return of one hundred shares in Digital World to each Plaintiff (i.e., 200 shares total) or, alternatively, an $8,000 Judgment, plus court costs, if Digital World “fails to
reinstate the 200 shares promptly.” The court granted TMTG’s motion to dismiss the action for lack of subject matter jurisdiction, improper venue, failure to state a claim, failure to include an indispensable party, and failure to sue the right
defendant. On June 17, 2024, Rossignol filed an amended statement of claim, demanding that TMTG sell back one hundred shares in Digital World to Rossignol at the original price or, alternatively, an $8,000 Judgment. On July 8, 2024, TMTG filed a
motion to dismiss. A pre-trial conference has been scheduled for August 21, 2024.
Litigation with Odyssey Transfer & Trust Company in Delaware
On June 20, 2024, TMTG’s transfer agent, Odyssey, filed an interpleader action in the U.S. District Court of the District of Delaware (C.A. No. 24-CV-00729). The complaint pertains
to a dispute regarding share ownership between Michael Melkersen and ARC and includes TMTG as a nominal defendant. Odyssey is seeking an order from the Court discharging Odyssey of further liability and requiring ARC and TMTG to resolve their
competing claims as to 716,140 Class A shares of TMTG and 25,000 TMTG warrants.
On July 22, 2024, TMTG filed a motion for discharge and dismissal. This matter remains pending.
Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in our Annual Report on Form 10-K filed with the
SEC on April 1, 2024, as amended by Amendment Number 1 to Form 10-K filed with the SEC on April 3, 2024 (the “Annual Report”). Any of these factors could result in a significant or material adverse effect on
our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. Other than as disclosed below, as of the date of this
Quarterly Report, there have been no material changes to the risk factors disclosed in our Annual Report filed with the SEC.
Risks Related to TMTG’s Business
In connection with the preparation of its financial statements as of and for the year ended December 31, 2023, Private TMTG identified material weaknesses
in its internal control over financial reporting, and TMTG may identify additional material weaknesses in its previously issued financial statements that, in the future, may cause TMTG to fail to meet its reporting obligations or result in
material misstatements of its financial statements.
As a privately-held company, Private TMTG was not required to evaluate its internal control over financial reporting in a manner that meets the standards of publicly traded
companies required by Section 404(a) of the Sarbanes-Oxley Act. As a public company, TMTG will be required to provide management’s attestation on internal control over financial reporting. If TMTG is unable to establish or maintain appropriate
internal control over financial reporting or implement these additional requirements in a timely manner or with adequate compliance, it could result in material misstatements in our consolidated financial statements, failure to meet our reporting
obligations on a timely basis, increases in compliance costs, and subject us to adverse regulatory consequences, all of which may adversely affect investor confidence in TMTG and the value of our common stock.
Private TMTG historically had limited accounting and financial reporting personnel and other resources with which to address its internal controls and procedures. In connection with
the preparation of its financial statements as of and for the year ended December 31, 2023 and 2022, Private TMTG’s management identified a material weakness in its internal control over financial reporting. A “material weakness” is a deficiency,
or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of an entity’s financial statements will not be prevented or detected on a timely basis. The
following material weaknesses were identified:
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TMTG did not maintain a sufficient complement of personnel with accounting knowledge, experience and training to appropriately analyze, record and disclose accounting matters to provide reasonable assurance
of preventing material misstatements; and
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TMTG did not perform risk assessment procedures on internal controls to detect financial reporting risks in a timely manner, and also lacked documentation on policies and procedures that are critical to the
accomplishment of financial reporting objectives.
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TMTG is committed to remediating the material weaknesses described above and continuing remediation efforts during 2024. TMTG is implementing several remediation measures including,
but not limited to hiring additional accounting staff with the requisite background and knowledge, engaging third parties to assist in complying with the accounting and financial reporting requirements related to significant and complex
transactions as well as adding personnel to assist TMTG with formalizing its business processes, accounting policies and internal control documentation, strengthening supervisory reviews by our Management Team, and evaluating the effectiveness of
its internal controls in accordance with the framework established by Internal Control — Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission. While
TMTG’s efforts are ongoing, TMTG plans to continue to take additional steps to remediate the material weaknesses, improve its financial reporting systems, and implement new policies, procedures, and controls; however, TMTG cannot guarantee those
measures will prevent or detect material weaknesses in the future.
Although TMTG intends to continue with its remediation efforts mentioned above, all identified material weaknesses continue to exist as of the date of this prospectus and we cannot
provide any assurance that TMTG, or its independent registered accounting firm, will not identify new material weaknesses in TMTG’s internal controls over financial reporting in the future. While we are undertaking efforts to remediate these
material weaknesses, the material weaknesses will not be considered remediated until our remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded through testing, that the
newly implemented and enhanced controls are designed and operating effectively. We are working to remediate the material weaknesses as efficiently and effectively as possible but expect that full remediation could potentially go beyond December 31,
2024. At this time, we cannot provide an estimate of costs expected to be incurred in connection with implementing this remediation plan; however, these remediation measures will be time consuming, incur significant costs, and place significant
demands on our financial and operational resources.
If TMTG identifies any new material weaknesses in the future, any such newly identified material weakness could limit its ability to prevent or detect a misstatement of its accounts
or disclosures that could result in a material misstatement of its annual or interim financial statements. In addition, to the extent there are future disagreements with or required changes to TMTG’s auditors, TMTG’s ability to prepare and timely
comply with its reporting obligations may be significantly impaired. In any of these occurrences were to materialize, TMTG may be unable to maintain compliance with securities law requirements and applicable stock exchange listing requirements
regarding timely filing of periodic reports, investors may lose confidence in our financial reporting and the price of our securities may decline as a result. TMTG cannot assure you that any measures it has taken or may take in the future will be
sufficient to remediate the existing material weaknesses, avoid potential future material weaknesses or disagreements with its auditors.
Risks Related to President Donald J. Trump
President Donald J. Trump is the subject of numerous legal proceedings, the scope and scale of which are unprecedented for a former President of the
United States and current candidate for that office. An adverse outcome in one or more of the ongoing legal proceedings in which President Donald J. Trump is involved could negatively impact TMTG and its Truth Social platform.
On September 21, 2022, the Attorney General of the State of New York—who pledged to pursue President Donald J. Trump even before taking office—launched a civil suit against
President Donald J. Trump and affiliated individuals and entities. Included among these affiliated entities was The Trump Organization. Donald J. Trump, Jr., who is a TMTG director, is the Executive Vice President of The Trump Organization. The
suit alleged business fraud relating to misrepresentations in the preparation of President Donald J. Trump’s annual statements of financial condition in the years 2011 through 2021. President Donald J. Trump had previously been held in civil
contempt in April 2022 for failing to comply with a subpoena for documents during the course of the New York Attorney General’s investigation related to these charges. In June 2023, a New York appeals court narrowed the fraud case, the trial for
which commenced in October 2023 and closing oral arguments were concluded on January 11, 2024. New York Supreme Court Justice Arthur Engoron, in a Decision and Order dated February 16, 2024, held President Donald J. Trump and defendants liable
under the following five causes of action. Specifically, (i) for repeatedly and persistently falsifying business records, thus violating Executive Law § 63(12) and New York Penal Law 175.05; (ii) for conspiracy to falsify business records; (iii)
for repeatedly and persistently issuing false financial statements, thus violating Executive Law § 63(12) and New York Penal Law 175.45; (iv) for repeatedly and persistently committing insurance fraud in violation of Executive Law § 63(12) and New
York Penal Law 176.05; and (v) for conspiracy to commit insurance fraud. The court ordered President Donald J. Trump and defendants to pay approximately $354,868,768 in aggregate disgorgement of ill-gotten gains, including $168,040,168 with
pre-judgment interest from March 4, 2019; $126,828,600, with pre-judgment interest from May 11, 2022, and $60,000,000, with pre-judgment interest from June 26, 2023. The trial court enjoined President Donald J. Trump, among others, from serving as
an officer or director of any New York corporation or other legal entity in New York for a period of three years, and from applying for loans from any financial institution chartered by or registered with the New York Department of Financial
Services for a period of three years. However, the foregoing injunctions were subsequently stayed pending appeal.
In its February 16, 2024 ruling, the court ordered Judge Barbara Jones (ret.) to continue in her role as an Independent Monitor, tasked with overseeing the Trump Organization’s
financial disclosures to any third parties and any transfer or other dissipation of assets, for a period of no less than three years following the ruling. In addition to the continued monitorship, the court also ordered that an Independent Director
of Compliance be installed at the Trump Organization, who will be responsible for ensuring good financial and accounting practices, will establish internal written protocols for financial reporting, and will also approve any financial disclosures
to third parties in advance of submission.
On March 30, 2023, the Manhattan District Attorney indicted President Donald J. Trump on 34 counts of falsifying business records in the first degree under the New York State Penal
Law, in connection with a so-called “hush money” payment made before the 2016 presidential election. On May 30, 2024, President Trump was found guilty on all 34 counts. Sentencing has been postponed until at least September 18, 2024 following a
U.S. Supreme Court decision regarding presidential immunity.
On May 9, 2023, a jury found President Donald J. Trump liable for both battery and defamation against E. Jean Carroll, and Ms. Carroll was awarded $5 million in total damages for
both claims (the latter of which arose from a 2022 post by President Donald J. Trump on Truth Social). The jury also determined that Ms. Carroll did not prove, by a preponderance of the evidence, that President Donald J. Trump raped her. On July
19, 2023, a federal district court judge denied President Donald J. Trump’s request for a new trial and/or reduction in damages. President Donald J. Trump appealed, and a panel of the U.S. Court of Appeals heard oral arguments on October 23, 2023.
On January 26, 2024, following a second civil trial in the U.S. District Court for the Southern District of New York, Ms. Carroll was awarded an additional $83.3 million in connection with statements made by President Donald J. Trump in 2019. On
February 7, 2024, the judge denied President Donald J. Trump’s motion for a mistrial. An appeal is pending. President Donald J. Trump’s countersuit against Ms. Carroll for defamation was dismissed on August 7, 2023.
On June 8, 2023, President Donald J. Trump was indicted by a special counsel appointed by the U.S. Attorney General on 37 federal charges, including willful retention of national
defense information related to documents seized during an FBI raid at Mar-a-Lago in August 2022. On July 15, 2024, a judge in the U.S. District Court for the Southern District of Florida dismissed the superseding indictment based on a finding that
the special counsel’s appointment violated the Appointments Clause of the U.S. Constitution. The court also found the special counsel’s use of a permanent indefinite appropriation violated the Appropriations Clause. On July 15, 2024, the special
counsel filed a notice of appeal of the district court’s dismissal.
On August 1, 2023, President Donald J. Trump was indicted by the special counsel on four (4) additional federal charges—conspiracy to violate rights, conspiracy to defraud the
government, and one count each of obstructing an official proceeding and conspiring to do so—in connection with the 2020 election and events related to the certification thereof on January 6, 2021. President Donald J. Trump pleaded not guilty, and
moved to dismiss the indictment based on presidential immunity. On July 1, 2024, , the U.S. Supreme Court held that the President is entitled to absolute immunity from criminal prosecution for acts within his conclusive and preclusive
constitutional authority, and at least presumptive immunity from prosecution for all his official acts. The U.S. Supreme Court determined that President Trump was absolute immune from prosecution for certain conduct alleged in the indictment, but
remanded the case to the U.S. District Court for the District of Columbia for further proceedings consistent with its opinion.
On August 14, 2023, President Donald J. Trump and 18 co-defendants were indicted on state racketeering charges brought by the district attorney in Fulton County, Georgia in
connection with the aftermath of the 2020 election. In September and October 2023, four of President Donald J. Trump’s co-defendants pleaded guilty. President Donald J. Trump pleaded not guilty. In November 2023, the prosecutor requested an August
5, 2024 trial date. On January 25, 2024, President Donald J. Trump filed a motion to join a co-defendant’s motion to dismiss the grand jury indictment and disqualify the district attorney. On March 13, 2024, the judge dismissed three counts against
President Trump. On March 15, 2024, the judge declined to disqualify the district attorney, provided that a special prosecutor with whom she had a romantic relationship left the case. President Donald J. Trump and several of his co-defendants have
filed an appeal and are continuing to seek the district attorney’s disqualification. The Georgia Court of Appeals has scheduled oral argument of the appeal for December 5, 2024, and no trial date for President Donald J. Trump has been set.
The foregoing does not purport to be an exhaustive list of legal proceedings in which President Donald J. Trump is or has been involved. In June 2016, USA Today published an
analysis of litigation involving President Donald J. Trump, which found that over the previous three decades President Donald J. Trump and his businesses had been involved in at least 3,500 legal cases in U.S. federal and state courts. Of the
approximately 3,500 suits, President Donald J. Trump or one of his companies were plaintiffs in 1,900; defendants in 1,450; and bankruptcy, third party, or other in 150. President Donald J. Trump was named personally in at least 169 suits in
federal court. Over 150 other cases were in the Seventeenth Judicial Circuit Court of Florida (covering Broward County, Florida) since 1983. In the 1,300 cases where the record establishes the outcome, President Donald J. Trump settled 175 times,
lost 38, won 450, and had another 137 cases end with some other outcome. In the other 500 cases, judges dismissed plaintiffs’ claims against President Donald J. Trump. However, you should not rely on or infer any trends based on the disposition of
such prior cases against President Donald J. Trump as no assurance can be given regarding the results of the pending legal proceedings.
Although TMTG is not a party to any of the above-referenced matters, TMTG cannot predict what effect, if any, an adverse outcome to such matters, or even their continued existence,
may have on President Donald J. Trump’s personal reputation and TMTG’s business or prospects.
If TMTG encounters issues with the rollout and implementation of its streaming content plans, TMTG may delay or decide not to fully implement the service, which may affect
TMTG’s growth strategy and operation.
TMTG plans to roll out its streaming content in three phases: Phase 1: Introduce Truth Social’s content CDN for streaming live TV to the Truth Social app for Android, iOS, and Web. Phase 2: Release
stand-alone Truth Social over-the-top streaming apps for phones, tablets, and other devices. Phase 3: Release Truth Social streaming apps for home TV. As part of the roll out of its own CDN, TMTG expects to obtain data center services and
purchase e-servers and related equipment for the project. On July 3, 2024, TMTG; WCT; Solutions; and JedTec entered into the Asset Acquisition Agreement, as well as ancillary agreements, relating to streaming technology. The transaction closed
on August 9, 2024. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—WCT Asset Acquisition.”
TMTG expects to fully launch Phase 1 by the end of 2024. On August 7, 2024, TMTG announced that TV streaming had become available via all three modalities. Beta versions of Phases 2 and 3 are expected to follow
shortly after the launch of the beta version of Phase 1. On August 7, 2024, TMTG announced that TV streaming had become available on the Truth Social app via all three modalities. TMTG anticipates starting to generate revenue from this
technology during 2025, contingent upon the successful implementation of all three phases.
The foregoing timeline and revenue generation expectations are preliminary and depend on several factors, including TMTG’s ability to economically launch its CDN technology. This
may depend on TMTG’s ability to develop, negotiate improved licensing terms for, or acquire CDN technology, integrate such technology, successfully complete beta testing, and list the relevant apps on leading app stores. Any delays or challenges in
these areas could materially affect the timeline and/or implementation of the CDN technology. If TMTG is unable to address these challenges effectively, it could result in significant delays, increased costs, and the inability to meet revenue
timeline expectations. Any of these risks may lead to TMTG deciding to cease the implementation of the rollout of TMTG’s streaming content and CDN technology altogether, which would have a material adverse effect on TMTG’s growth strategy and may
result in a material adverse effect on the results and operations of TMTG.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
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(a) [During the quarter ended June 30, 2024, there were no unregistered sales of our securities that were not reported in a Current Report on Form 8-K.]6
(b) None.
(c) None.
| Item 3. |
Defaults Upon Senior Securities.
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None.
| Item 4. |
Mine Safety Disclosures.
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Not Applicable.
| Item 5. |
Other Information.
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(a) None.
(b) None.
(c) During the quarter ended June 30, 2024, none of our directors or officers
adopted or terminated a “Rule 10b5-1 trading agreement” or a “non-Rule 10b5-1 trading agreement” (in each case defined in Item 408 of Regulation S-K).
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
6 NTD: TMTG, please confirm there were no unregistered sales of TMTG’s securities that were not reported in a Current Report on
Form 8-K during the period from April 1, 2024 through June 30, 2024.
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No.
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Description of Exhibit
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Agreement and Plan of Merger, dated as of October 20, 2021, as amended on May 11, 2022, August 8, 2023, and September 29, 2023 by and among Digital World Acquisition Corp., DWAC Merger Sub Inc. and Trump Media & Technology Group
Corp. (incorporated by reference to Annex A to the proxy statement/prospectus which is part of Amendment No. 6 to the Registration Statement on Form S-4, filed by Digital World Acquisition Corp. on February 14, 2024).
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Second Amended and Restated Certificate of Incorporation of Trump Media & Technology Group Corp. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, filed by Trump Media & Technology Group Corp. on April
1, 2024).
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Amended and Restated Bylaws of Trump Media & Technology Group Corp. (incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 2 to the Registration Statement on Form S-4, filed by Digital World Acquisition Corp. on
March 5, 2024).
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Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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101.INS*
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Inline XBRL Instance Document
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101.SCH*
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Inline XBRL Taxonomy Extension Schema Document
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101.CAL*
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Inline XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF*
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Inline XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB*
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Inline XBRL Taxonomy Extension Labels Linkbase Document
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101.PRE*
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Inline XBRL Taxonomy Extension Presentation Linkbase Document
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104*
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Cover Page Interactive Data File.
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* Filed herewith.
** Furnished herewith
† Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant agrees to furnish a copy of all omitted
exhibits and schedules to the SEC upon its request.
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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TRUMP MEDIA & TECHNOLOGY GROUP CORP.
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Date: August 9, 2024
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By:
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/s/ Devin Nunes
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Name:
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Devin Nunes
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Title:
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Chief Executive Officer
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(Principal Executive Officer)
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Date: August 9, 2024
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By:
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/s/ Phillip Juhan
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Name:
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Phillip Juhan
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Title:
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Chief Financial Officer
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(Principal Financial and Accounting Officer)
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