Conversion of ROM3 Rehab, LLC to ROM Technologies, Inc.
Note: If you do not find an answer to your question here, please feel free to contact:
- If you are an investor, contact ROMTech Investor Relations, Luke Settle, at [email protected].
- If you are an employee, or any other kind of stakeholder besides an investor, contact ROMTech’s Chief Financial Officer, Leland Thoburn, at [email protected].
WHY DID YOU CHANGE FROM AN LLC TO A C CORPORATION?
The vast majority of companies traded on public stock exchanges are C Corporations. This is
the more familiar and more usual form for a business that wishes to be so listed.
Additionally, in the event a publicly traded company wished to acquire our business, they
would find it easier to do so if we were a C Corporation, as opposed to an LLC. So the C
Corporation structure enables and facilitates our access to the public capital markets and
the companies that trade there.
C Corporations are also able to offer stock options with a greater range of benefits, and it can offer certain employee benefits more economically, thus making it easier to attract talent.
For a more detailed explanation of the issues connected with doing business as an LLC versus a C Corporation, see https://www.inc.com/guides/starting-a-c-corp.html.
WHAT DO YOU MEAN BY A “C” CORPORATION
A corporation is one of three legal forms for a business to take (the other forms being a
partnership, or a sole proprietorship; an LLC can mimic, in part, any of these three).
Within the corporate form there are two major kinds of corporations – the “S” Corporation,
and a “C” Corporation. An “S” Corporation, while technically a corporation in form, has many
of the characteristics of a partnership. “S” Corporations (as well as LLCs) have significant
limitations on who may own them, and how they may operate. For example, “S” Corporations may
have no more than 100 shareholders, and may only have United States citizens (i.e. no trusts
or IRAs) for shareholders. The “C” Corporate form is the form used by nearly all large or
publicly traded companies in the United States.
For more information about the difference between the different forms a business may take, see https://www.sba.gov/business-guide/launch-your-business/choose-business-structure.
HOW WILL THIS CONVERSION AFFECT ME TAX-WISE IN 2019?
If you hold units in ROM3 Rehab, LLC, you may have received form K-1s from us for each tax year up through 2019. Those K-1s specify your allocation of the losses generated by ROM3 as it grew through its unprofitable early stages. This is how an LLC (or an “S” Corporation, or a partnership) operates – any income or losses generated by the business are shared by the owners as their own personal income or loss, in proportion to their ownership interests. For example, if Bob owns 60% of a business and Don owns 40%, and that business generates $100 in losses in a tax year, then Bob will be able to deduct $60 from his taxable income, while Don will be able to deduct $40. So for each year that you held units in ROM3 Rehab, LLC, you received a K-1 reflecting your share of the income or losses of the business (in our case, as with practically every start up business, this means losses through the early years). When we shut down the LLC and transfer the business to the corporation, you will “recapture” (take back as income) any losses you were previously allocated. In our example above, if Bob and Don’s business closed, Bob would recapture $60 as income and Don would recapture $40. Your 2019 K-1 will reflect that recapture, as well as your share of the 2019 losses. For most investors we do not anticipate that the recapture will be a significant allocation. However, the exact tax impact on you will depend on how (or if) you used the losses that were allocated to you in previous years, so please check with your tax professional to get a clearer idea of how the closing of the LLC will affect you.
HOW WILL THIS CONVERSION AFFECT ME TAX-WISE IN YEARS 2020 AND BEYOND?
After 2019, you will no longer receive a form K-1, and you will no longer receive any allocation of ROM’s income or loss for the year. After 2019, the only tax impact that your investment in ROM will have on you will be limited to:
- If you sell shares in the business at a price that is greater than what you paid, the difference will be taxable to you either as ordinary income or capital gains, depending on how long you held the stock.
- If the corporation issues dividends, it will issue you a 1099 at the end of the year for the amount of those dividends.
There should be no taxable event if you exercise your warrants or convert your note (except that upon conversion, any accrued interest will be reported on a 1099 for the year of conversion). However, in all matters relating to tax, please do not rely solely on these FAQs, but consult your tax advisor as well.
I HOLD UNITS IN ROM3 REHAB, LLC. WILL I STILL RECEIVE MY FORM K-1 FOR TAX YEAR 2019?
If you hold units in ROM3 Rehab, LLC, you will still receive your form K-1 for tax year 2019. However, 2019 will be the last K-1 you receive. Starting with tax year 2020, the only tax documents you will receive will be for the usual capital transactions (exercise of warrants, sale of shares, or receipt of distributions). Also, you may receive a minor adjustment on your 2019 K-1 to reflect the closing of the LLC. We do not anticipate that this will be a significant allocation.
DO I NEED TO HAVE ANY OF MY DOCUMENTS CHANGED?
No. The process we are going through is called a “conversion”. This means that the law considers it is the same business continuing forward in time, but in a different form. Therefore, all of the assets and liabilities of the old business remain valid.
IF I WISH TO SELL ANY OF THE SECURITIES I HOLD IN ROMTECH, WHAT DO I DO?
United States securities laws restrict the transfer or sale of shares in a privately held company. Despite the conversion, ROM is still a privately held company. You would have to consult a securities attorney to find out how to sell your interests, and obtain approval from us. We do not believe that such a process is or will be economically efficient. Once we become a publicly traded company, all of this changes of course. If and when that occurs, you will receive instructions from us about how to take advantage of the liquidity offered by the public stock markets.
There are exceptions to the restrictions on transfer. Any stock in a privately held company may be transferred upon death, through probate or not. Your estate attorney should be able to help you with this.
WHY ARE YOU RAISING SO MUCH MONEY? DOESN’T THIS DILUTE ME?
Raising capital always dilutes the percentages of existing shareholders. The key issue however is not the percentage of your interest, but the value of your interest. As new money is raised, it is applied by the company in order to grow the business. If that growth adds to the company’s valuation, you may very well have “a smaller piece of a bigger pie” and see a profit.
For example, let’s say you own 100 shares of XYZ company, and that XYZ company has already issued 10,000 shares to everybody – founders, employees, yourself, other shareholders. Your 100 shares is 1% of that total. If the company is worth $10,000, your 100 shares are worth $100 (1% of $10,000), or $1 per share.
Let’s then say the company raises $500 by selling 500 new shares to a new investor. The company now has 10,500 shares outstanding. You still have your 100 shares, but your percentage interest is now .9524%, not 1%. You seem to have lost ground. But the value of the company is now $10,500 (the previous $10,000 of value, with $500 added to its bank accounts from the new investors). Each share is still worth $1 ($10,500 (value) divided by 10,500 shares outstanding). The value of your 100 shares is still $100.
Ideally, the company then spends that $500 in ways that increase the value even more, say by creating a new marketing campaign. With increased sales, the company is now worth $12,000. Again, your percentage interest has decreased from 1% to .9524%. But your 100 shares are now worth $114.29 ($12,000 multiplied by .9524%). The price per share has increased from $1.00 to $1.14.
Dilution is inevitable. The story of every successful company is the story of company valuation increasing at a pace that more than offsets the dilution that every shareholder experiences during a company’s growth.
WHERE DO I STAND WITH MY INVESTMENT IN THIS COMPANY? HOW MANY SHARES DO I OWN AND AT WHAT TERMS?
The person who worked with you on your initial investment in ROM can give you this information. If you do not recall who that is, or if you cannot reach them for any reason, contact investor relations by emailing Lelonnie Savali at [email protected]
WILL THE EMAIL ADDRESSES FOR YOUR EMPLOYEES CHANGE?
They will, however the old email addresses will continue to function indefinitely, and any emails sent to the old email addresses will be forwarded appropriately. You may make note of updated email addresses at your convenience.
WHAT DO YOU MEAN BY “COMMERCIALIZATION”?
“Commercialization is the process of bringing new products or services to market.” reference https://www.investopedia.com/terms/c/commercialization.asp. In other words, we are reaching the point where we can finally begin manufacturing, marketing, and selling our devices.
HOW WILL AN EXIT HAPPEN?
We can make no promises about any exit opportunity (i.e., a means by which shareholders can sell their holdings in ROM). However, it is our goal to create such an exit opportunity for our shareholders. The two most common exit opportunities are (1) listing the shares of ROM on a public stock market, where they can be easily bought and sold (a process which is triggered by an “Initial Public Offering” of those shares, otherwise referred to as an “IPO”); and (2) a sale of ROM to another company, preferably a company whose shares are already being bought and sold on a public market. The Board of ROM will explore these alternatives as soon as the Company is sufficiently viable to be attractive to a public market or an acquirer.
WILL SHAREHOLDERS BE KEPT UP-TO-DATE ON THE PROGRESS OF ANY EXIT OPPORTUNITY?
ROM’s Board of Directors will inform shareholders of progress to the extent that it is legally permitted to do so. However, the regulations of the United States Securities and Exchange Commission generally prohibit any such communication for the 6 months prior to an IPO. Any negotiations with potential acquirers will also likely be subject to confidentiality requirements imposed by the potential acquirer. ROM’s Board will be as transparent about such events as it is legally entitled to, however as a general rule, we will likely be muzzled until an exit event is imminent, or has occurred.
WHEN WILL THE PUBLIC OFFERING HAPPEN?
A public offering is contingent upon many factors, such as the overall condition of the economy, recent public offerings by similar companies, and other factors that are outside of the control of ROM. The Board of ROM will monitor these events and circumstances and make decisions about capital events like a public offering based on what it believes are the long term best interests of the shareholders.
WILL SHAREHOLDERS GET TO VOTE ON AN EXIT?
ROM’s board of directors will certainly listen to any communication any shareholder wishes to send regarding an exit strategy. A formal vote on an exit strategy is unlikely, primarily because of the confidentiality requirements of such a process. The board is elected in the first place to represent the rights and interests of the shareholders, so a process already exists by which the shareholders’ interests are represented.
IN THE EVENT OF A LIQUIDITY EVENT, WILL EVERY SHAREHOLDER SHARE EQUITABLY/PROPORTIONATELY? OR WILL THE BOARD NEGOTIATE TO TAKE THE PROFITS FOR THEMSELVES?
Delaware corporate law requires that a board of directors act in the best interests of all of its shareholders. ROM’s board of directors has never had any intention other than to abide by such law. As of this writing (January 2020), there is only one class of shareholders in ROM. The members of the board, employees, investors, third parties, all hold the same class of shares (common stock) with the same rights. Thus, all shareholders will be treated equally, based on their proportionate interests in the company.