Business Context and Reporting Period
This Form 8-K Current Report was filed by Conversion Labs, Inc. (noting a discrepancy with the request metadata which listed "Lifemd, Inc.") on August 27, 2020, covering events occurring on August 28 and August 31, 2020. The filing details a material definitive agreement involving a private placement of securities and the establishment of a new class of preferred stock.
Key Financial Metrics and Transaction Details
- Financing Amount: The Company entered into a Securities Purchase Agreement to sell 3,500 Units at $1,000 per Unit, totaling $3,500,000.
- Cash Proceeds: $2,892,500 is being paid in cash at closing.
- Debt Conversion: $607,500 of the purchase price is satisfied by converting outstanding principal and interest from a previously issued Secured Convertible Promissory Note.
- Use of Proceeds: Working capital and customer acquisition.
- Consulting Compensation: The Company issued warrants to purchase up to 3,750,000 shares of Common Stock to CL1 Partners LLC for consulting services.
- Warrant Purchase: CL1 Partners LLC purchased additional warrants for a total cash consideration of $25,000 ($15,000 for Class A and $10,000 for Class B).
Material Changes and Security Terms
The filing reports the creation of Series B Convertible Preferred Stock and the issuance of various warrants, representing a significant change in the Company's capital structure.
- Series B Preferred Stock:
- Stated Value: $1,000 per share.
- Conversion Price: $0.65 per share of Common Stock (subject to adjustment).
- Dividends: 13% per annum, cumulative, compounded quarterly. Dividends are generally payable in kind (additional shares) unless specific conditions are met allowing for cash payment.
- Voting Rights: Vote together with Common Stock on an as-converted basis.
- Investor Warrants:
- Each Unit includes a warrant to purchase 2,000 shares of Common Stock.
- Exercise Price: $0.92 per share.
- Term: 5 years, exercisable immediately.
- Lock-up: Investor cannot sell securities for one year following closing.
- Consulting Warrants:
- Warrant 1: 2,500,000 shares at ~$1.04/share; exercisable in 18 monthly installments starting 6 months post-issuance.
- Warrant 2: 1,250,000 shares at $1.15/share; exercisable 24 months post-issuance.
Redemption and Forced Conversion Provisions
- Forced Conversion: If the Common Stock VWAP exceeds $3.00 and average daily volume exceeds 200,000 shares for 90 days (after 12 months), the Company may force conversion of Series B stock into Common Stock.
- Redemption Option: Holders may require the Company to redeem Series B stock after December 31, 2020, if sufficient Common Stock is unavailable for conversion, or after the 3-year anniversary (subject to market cap/volume conditions).
Guidance, Risks, and Contingencies
The filing does not provide specific financial guidance or outlook beyond the stated use of proceeds for working capital and customer acquisition. Key risks and contingencies include:
- Dilution: The transaction involves significant potential dilution to existing common shareholders due to the low conversion price ($0.65) and the large number of warrants issued.
- Liquidity Restrictions: The Investor is subject to a one-year lock-up period. The securities were issued under Section 4(a)(2) and Regulation D exemptions, meaning they are restricted securities.
- Dividend Obligation: While dividends are cumulative, the Company has no obligation to pay them in cash unless specific market conditions are met or the Board declares them, potentially leading to further dilution via PIK (Payment-in-Kind) shares.
- Corporate Actions: If 30% of the Series B shares remain outstanding, the Company cannot take certain corporate actions without the affirmative vote of the Series B holders.
Investor Verification Checklist
- Verify the exact closing date and confirmation of the $2,892,500 cash receipt.
- Confirm the total number of shares of Common Stock issuable upon full conversion of Series B Preferred Stock and exercise of all warrants to assess total dilution.
- Review the "Certificate of Designations" (Exhibit 3.1) for specific anti-dilution adjustment mechanisms.
- Monitor the Company's ability to meet the 13% cumulative dividend accruals and the potential impact of PIK shares on future capitalization.
- Check for any subsequent filings regarding the listing of Common Stock on a National Securities Exchange, which affects redemption rights.