Shares of Troika Media Group (NASDAQ:TRKA) tumbled 25% last Thursday after the firm revealed it had received a Staff Delisting Determination from the Nasdaq exchange. Troika had failed to meet two previous deadlines of reaching a $1 minimum bid price, and no further 180-day extension was granted.

That means the popular meme stock now has roughly 30-45 days to reach a $1 minimum price — the amount of time it takes for a Nasdaq delisting hearing. Otherwise, the stock will be removed from the Nasdaq and potentially begin trading over the counter (OTC).

That leaves Troika’s management with few good options.

In one scenario, the firm’s talks with Jefferies to “explore strategic alternatives” could suddenly yield a compelling takeover bid. The company’s current market capitalization values Troika at around $85 million, or 32% less than its merger value in 2022. A private equity firm might sense an opportunity for a quick flip.

Alternatively, Troika might attempt a last-minute refinance of its debts and use the cash infusion to buy back shares. At current share prices, a $50 million share buyback program could eliminate 250,000 shares, or 60% of Troika’s outstanding common stock as of May 12.

However, neither option seems plausible, given Troika’s underwhelming first-quarter results and abridged timeline. Acquisitions can take months of due diligence to complete, which Troika no longer has. And worse-than-expected quarterly figures will give potential acquirers a reason to wait.

That means a reverse stock split is now the most likely scenario for Troika in the coming weeks. Meme investors beware — although a reverse split will certainly get Troika’s stock above $1, these events historically signal worse news to come.

TRKA Stock: The Fundamentals of Troika Media

To summarize what we know so far about Troika Media:

Troika Media Group is an acquisitions company that can trace its roots back to Roomlinx, a Nevada-based firm founded in 1998.

In 2022 … Troika bought out Converge, LLC, an ad tech firm generating around $21 million in profits annually. Suddenly, Troika’s history of losses became immaterial. “Troika 2.0” would become a cash cow… at least in theory

The deal, however, didn’t come for free. To fund the $125 million acquisition, Troika turned to Blue Torch Capital, a direct lender specializing in micro-cap companies… That turned Troika Media into a potentially volatile play.

The firm would also issue $50 million of Series E convertible preferred stock that could produce up to 200,000 new shares when redeemed. These shares avoid SEC reporting requirements when exercised by having a 4.99% beneficial ownership limit. SG 13D/G reporting only begins at a 5% level.

Together, these funding deals meant that Troika’s shares historically traded at a steep discount. Markets knew shareholders could get diluted if Series E stockholders converted their holdings at low prices.

These fears were realized in March when Troika’s filings revealed its outstanding stock had quintupled in less than four months. In a 10-Q filing, the ad tech firm revealed that “304,838 shares of Series E Preferred Stock were converted into approximately 121.9 million shares of common stock” during the first quarter. Warrants and other dilutive exercises have since increased its share count to 413,121,171.

What a Reverse Split Means for Troika Shareholders

Long-run studies have shown that companies that reverse split their shares typically fall 10.76% in their first year and 33.9% over three years. Once you include the negative performance leading up to the split, investors can expect a 48% total loss.

That’s because momentum effects have long existed in the stock market. Strong performers tend to keep doing well, while weak companies fade away. Troika’s recent share weakness signals more losses to come.

The ad tech company is also popular among short sellers, which adds downside risk. According to data from Fintel.io, the cost to borrow Troika’s stock to sell short already sits at 28%, over 100 times greater than Apple’s (NASDAQ:AAPL) interest rate. That means a reverse split could cause even greater selling pressure. Reverse splits tend to decrease stock volatility and make the stock more attractive to short sellers.

Consider the outcome of Mullen Automotive’s (NASDAQ:MULN) recent 1-for-25 reverse split. Shares of the company collapsed 28% in the two days leading up to the announcement and have since dropped another 27% as short sellers have piled in. Meme stock Vinco Ventures (NASDAQ:BBIG) has seen a similar bonanza in short selling after its 1-for-20 reverse split this month.

The Red Flags of Troika Media

Troika’s fundamental performance should also give investors pause. On May 15, the company’s first-quarter earnings report revealed that revenues had declined 13% sequentially, based on Refinitiv figures, and that cash flow had turned negative for the first time since the Converge LLC acquisition. The company could generate less than $20 million in adjusted EBITDA at current rates, far underperforming its $27 million target set out in 2022.

Corporate governance is also worrying. Significant warrant exercises generally trigger an 8-K filing if management considers them “major events that shareholders should know about.” A 5X increase in outstanding shares arguably falls into this category.

Nevertheless, Troika Media has avoided mentioning dilution until necessary in its quarterly reports. Instead, these dilutions coincided with positive news releases from the firm. In February 2023, the firm announced it had engaged Jefferies LLC to help “optimize its capital structure and explore strategic alternatives.” Troika also withdrew an S-1 filing that would allow for more share issuances.

Prices spiked 39% as rational investors concluded that the ad tech firm had agreed with its creditors to offload these potentially dilutive shares. These gains would quickly vanish after the dilution was revealed in quarterly filings.

Troika shares spiking on conversions.

Source: Koyfin

Ultimately, investors will want to tread carefully with TRKA stock. Management has made clear that they’re willing to reverse split shares to prevent a delisting. Though short-term speculators will surely enjoy the price action, long-term investors will have seen this story before.

Attempts to reach Troika Media’s investor relations department, CFO Eric Naidrich and Blue Torch Capital have been unsuccessful.

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As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.