Newsmax’s sketchy offering memorandum and the investor presentation— used to to market up to $225 million in preferred shares—raise obvious questions. Why does Newsmax think it will dramatically reverse a three-year trend of stagnant revenues? Why is it confident that future profits can pay the 7% coupon on preferred shares? Why does the placement agent for selling the shares operate in a house on a residential street? And will stock proceeds be eaten up by legal expenses?
Here’s a list of big red flags in any due diligence process:
1. A dodgy “investment bank"
Well recognized investment banks worry about reputation risk associated with a likely business failure, which is why they insist on timely financials. Never heard of the firm arranging the stock sale, Digital Offering LLC? It’s “a next generation investment bank” headquartered in somebody’s den on a residential street in Laguna Beach, California. According to Google maps, other enterprises sharing the same address include a stove repair business and a moving company.
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2. No timely financials.
If a company like Newsmax wants to sell shares to the general public, it must release audited financials within 60 days following the end of its fiscal year, which is December 31st for Newsmax. It must also file quarterly financials within 40 days following the end of each quarter. By June 2024, audited 2023 financials, and first quarter 2024 financials, are long overdue. So far, Newsmax offers nothing. The accounting firm that signed off on the 2022 numbers, BDO, disavowed any connection to the sketchy 2023 numbers. The disclaimer is comprehensive:
This preliminary financial information has been prepared by management of Newsmax, Inc., the parent company of Newsmax Media, Inc. BDO USA, P.C. has not compiled, examined, reviewed or audited this information and accordingly does not express an opinion or any other form of assurance on the preliminary financial information included herein.
BDO’s audit opinion for fiscal year 2022 was released on November 16, 2023, which was pretty late, and notable, given that seven months later, BDO hasn't reviewed the 2023 numbers.
3. The most recent draft financials foreshadow insolvency.
In 2021, Newsmax earned $20 million. In 2022 it lost $20 million. In 2023, the draft statements show a $42 million loss. The 2023 numbers seem dubious in several respects. But if you accept them at face value, it looks like the company has been hemorrhaging cash and won’t be able to pay its current liabilities without a cash infusion. At year-end 2021, Newsmax had $25.3 million in cash and short-term investments; by 12/31/23 that number was $7.3 million. If Newsmax operations continue on that track, it will burn through another $7 million this year. Which would leave it without funds to cover a current $7.3 million "settlement liability,” prior to paying out an additional $32 million "settlement liability” in a subsequent year.
And what created that $39 million settlement liability? We have no idea. But that settlement isn't directed toward two major plaintiffs with defamation suits, Dominion Voting Systems and Smartmatic, who are seeking larger amounts. There’s also a $24 million charge for “asset impairment,” which looks unusual because there’s no sign that the company ever held an asset worth $24 million. Newsmax provided no footnotes to explain its 2023 numbers.
Ostensibly, the contemplated $225 million private placement will cover those settlement payments and may be sufficient to secure a going concern opinion from BDO.
4. Projections look problematic
Because of its rising viewership, Newsmax tells investors that it expects to dramatically reverse a trend of stagnant revenues, to increase from $135 million in 2023 to $180 million in 2024.
The company seeks to buck an industrywide trend. Even this election year, demand for political media, and right-wing media in particular, seems to be shrinking. According to TheRighting.com, the numbers of unique visitors at right-wing websites in 2024, when compared by 2023 and 2020, are down precipitously. In 2023, Newsmax operating expenses rose much faster than revenues. And the cable TV industry is also in rapid decline.
5. A lawsuit may explain why there’s no going concern opinion.
If a company wants to issue shares to the public, it needs an auditor's going concern opinion, that is, an opinion that the company can stay in business. In its October 2022 audit opinion, BDO wrote:
In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, which raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued or available to be issued.
BDO can defer to management’s judgement up to a point. BDO cannot ignore litigation that may cripple the company’s ability to keep operating over the next fiscal year. Which means it cannot ignore the possible outcome of the September 2024 trial in Delaware of Smartmatic v. Newsmax. Ordinarily, it’s very hard to prevail in a defamation claim against a media company. But this claim is much more clear-cut than the case brought by Dominion against Fox News. That lawsuit was settled just before trial with a $787 million payout by Fox.
Unlike Fox, Newsmax never earned billions in profits. And a recent Washington Post article about LinkedIn founder Reid Hoffman, “A billionaire is boosting a major defamation lawsuit against Fox News,” suggests that Smartmatic has ample resources to battle Ruddy’s company in court.
In its move to encroach upon Fox News’s cable audience in the aftermath of the 2020 election, Newsmax amplified the obvious lie that Smartmatic voting machines played a key role in rigging the outcome. That assertion was mathematically impossible. Smartmatic machines were only used in Los Angeles County, where voters chose Biden over Trump by two to one. But even if the vote were reversed in that very blue county, so that Trump won Los Angeles by a landslide, Biden would have still won the California vote by a decisive margin. No kid who writes for a high school newspaper—where students are taught to pin down the who, what, when where and why of any story—could overlook the basic fact that Smartmatic machines did not drive an outcome affecting Trump’s election. The falsehoods used against Smartmatic were repeated on Newsmax over and over, though the network did subsequently broadcast a correction on December 19, 2020.
The Newsmax business model, like the Fox News model, is to claim First Amendment indemnification whenever it amplifies a source’s falsehoods. The company insists that it isn’t telling lies, merely reporting the inherently newsworthy statements of political figures like Steve Bannon or Sidney Powell. Management claims it has no obligation to fact check the claims made by others. Alternatively, their argument is that its on-air talent is merely expressing opinions, not asserting cut-and-dry facts, which may be actionable. Those defenses are often sufficient to get a lawsuit dismissed. Fox asserted those defenses in the Dominion case, though damning internal emails showed how the on-air talent knew they were spreading lies about the outcome of the 2020 election, and about Dominion in particular. The Smartmatic case against Fox is still pending.
Smartmatic now alleges that Newsmax engaged in obstruction of justice, by withholding and destroying internal documents sought during pre-trial discovery. In response, Newsmax alleges that Smartmatic is implicated in a bribery case related to the company's activities in the Philippines, though it's unclear how that information would be relevant to a lawsuit about the vote count in a U.S. election.
The Delaware trial, scheduled to commence on September 26, 2024, may expose some dirty laundry. Newsmax says it plans to launch an IPO afterwards, in the fourth quarter of 2024, or the 1st quarter of 2025. That process would compel Chris Ruddy to answer some obvious questions that are currently unaddressed. Most of those questions will be answered in a Delaware court, which may decide that Newsmax should meet the same fate as Infowars.