Starting yesterday morning, I have spent many hours of reading filings, interspersed with a number of calls with shareholders. Hence, my delay in commenting.
It has been mentioned to me that this is a SPAC. This is NOT a SPAC. A SPAC is a merger into an empty shell company, which LFER (Life on Earth, Inc.) is not. This is a buyout of CareClix Holding’s four subsidiaries. The term SPA, used in the last paragraph, means “a binding legal contract between two parties that obligates a transaction between a buyer and a seller.”
The buyout includes CareClix, Inc., which owns the CareClix software (the primary asset of CareClix Holdings). It also includes the three CareClix companies that were recently registered in Florida. CareClix Holdings, Inc. is not mentioned as part of the buyout, only the subsidiaries.
I feel the most important part of this lengthy post is at the bottom (feel free to skip there), but first, I think you should have some facts about LFER, since we may soon own shares. This is long, but it might save you from reading about a 100 pages of financial statements--unless you like that kind of thing. The most recent financial statement for LFER is as of August 31, 2021, which is unaudited and the sales revenues were less than $26k. For this synopsis, I am using the audited annual Financial, Fiscal YE May 31, 2021. I feel it is more relevant since there is very little to add in the following quarter.
1. The company was founded in 2013 to manufacture and sell natural beverages. The manufacturing didn’t last long. They continued to distribute beverages from other companies, but never had much success.
2. November, 2019 the company approved a reverse split 5:1, effective May 1, 2020.
3. In December, 2019 LFER filed Chapter 7 Bankruptcy and decided to change from being a beverage distribution company to a technology company.
4. May, 2020, they purchased SmartAxiom with patents and core Internet of Things (IoT) software that enables securing sensor devices and communication to the cloud-based software. The purchase price was $6,250M, paid as follows:
a. $1,950,000 by issuing 13,000,000 common stock (computes to $0.15 ps)
b. $2,100,000 by issuing 210,000 shares of Series D preferred shares, convertible into 10 shares of common stock (computes to $10 per preferred share)
c. $2,200,000 to be paid pursuant to a full earnout based on SmartAxion GAAP revenue recognition in the amount of $1,500,000 within the first eighteen months after closing date of the acquisition. The earnout will be prorated based on the SmartAxiom revenues received over an eighteen-month period. (This means the seller is financing LFER. The payments are based on revenues earned with the SmartAxion software, but not on other types of revenues.)
5. As of May of this year, LFER had three full time employees (the executives), and the SmartAxiom subsidiaries had six full time employees and eight subcontractors.
6. As of May 31, this year, the company has a negative working capital of $9,676,000.
7. The total assets of the company were $5.2M, of which $5.102M is the value of the software purchased from SmartAxiom. They had about $113k in cash and receivables.
8. Total liabilities were almost $9.9M.
9. Operating cash flows were negative $413k.
10. Most of the operating expenses were financed through loans and $290k of sales of preferred shares.
11. 100% of SmartAxiom (SA) revenues came from one customer.
12. Annual gross SA revenues were $74k, net of cost of goods sold
$43k. This reflects revenues for the entire year, including prior to the purchase of SA.
13. SA net loss, $4.3M
14. LFER has numerous loans with interest rates which range between 7% and several that are at at 20%.
15. It appears the norm for paying off debt is to pay as much as possible in common shares (sometimes preferred). The range of share price in the last year has been between .02 and .21, currently .10. But, when calculating the number of common shares needed to pay debt, the calculation is usually based on a per share value considerably higher than market. Sometimes between $1.50 and $2, although market price has not been that high since the r/s.
16. I do realize it is not uncommon to finance debt with stock, but LFER consistently defaults on the cash portion of the loans--which accounts for a number of lawsuits against them (along with a couple of former employees suing for wages and expenses.) They usually settle out of court, often with giving more stock.
As for the 8-k buyout filing:
1. Although not specified, I think it is clear the inner circle will receive the preferred shares. If I can assume the valuation of the preferred shares are the same value ($10) as what was used in number 4 above, using the ratio of 10:1, they would be receiving a value of $1 for each of their common shares. They are not disclosing, until the closing document is filed, how many common shares those shareholders will get when they choose to convert back to common shares. If the closing document specifies to use market value of common shares at the time of conversion, they have the potential to receive many more shares than what they held originally.
2. It does not specify which series of preferred shares they will get. Series D are all outstanding. LFER would have to authorize new shares to give them Series D, so I would guess they would get either Series B or C, both of which pay 10% dividends (of course, that depends on whether there is ever a profit).
3. The rest of us would get common shares in LFER at 1:1, which is currently at .082.
4. The filing does not designate how many Series A shares the majority shareholder, Charles Scott, is receiving. There is no ratio to make it relevant to how many shares he owns in CareClix.
5. Series A gives him voting rights 50:1. If you didn’t catch that, he gets 50 votes for every share he is given.
6. If you read the last sentence in the paragraph, you will realize the Series A shares is not the only compensation he is getting. Note the wording: Shares of Series A ….as PART OF THE CONSIDERATION AT CLOSING.
My conclusions:
The general rule of law is that a corporation must be operated for the benefit of all shareholders, not just the majority shareholder. I am not a lawyer, but I don’t see how it is legal to designate certain common stock shareholders to get preferred shares, while others get common stock. I also don’t see how it is legal that Charles Scott gets an unstated number of shares, which may, or may not be, based on what he currently owns. And, I definitely don’t see how he has the right to take 100% of the proceeds of the sale. That should be apportioned between all shareholders determined by % of ownership, after all debts are paid.
This filing shows why they were stonewalling us, and why they waited so late to make this filing. It was my intent to travel to their headquarters this week with two other shareholders, but the trip was delayed until December 7th for several reasons. They had already received legal notification of our intent to examine all financial ledgers, minutes of meeting and other documents, as we were allowed by law. We were prepared to obtain a court order, if they tried to flout the law and turn us away.
I am 99% sure of several acts of malfeasance Charles Scott has committed, which has prevented the Financials from being signed by auditors, unless restitution and tax consequences were taken care of first. The documents could have confirmed that. However, our intent was not to go after Charles Scott. Our intent was to find the answers that all of us have been seeking and then make a determination of what course of action needed to be taken. This buyout not only wipes out any problems with the financial statements, but also looks like Charles Scott will come out with more shares and money in his pocket and will still be in control (unless there is anyone in LFER who will have more shares of Series A shares than CS after closing, but I doubt it). Even if we were not going after CS, legally, I would have still liked to have seen some accountability.
I have been told, by several shareholders, that it is better to have stock in LFER, which can be traded, than to have stock in SOLI, which is worthless. Better to take a loss, depending on our individual cost basis, than to get nothing at all. I cannot disagree with that, and I understand why they wish to have no further legal action, and why they are happy about this buyout. It is actually a relief to me to not spend so much of my time on SOLI matters and, also, not worry about letting other shareholders down if we didn’t succeed. However, I still think this deal is a bitter pill.
