UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission file number 001-37605

 

LM FUNDING AMERICA, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

47-3844457

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification no.)

 

 

1200 West Platt Street

Suite 100

Tampa, FL

33606

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: 813-222-8996

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

Trading symbol

Name of each exchange on which registered

Common Stock par value $0.001 per share

LMFA

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had 15.4 million shares of Common Stock, par value $0.001 per share, outstanding as of November 16, 2020.

 

 

 

 


LM FUNDING AMERICA, INC.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
September 30, 2020 (unaudited) and December 31, 2019

3

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)

4

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2020 and 2019 (unaudited)

5

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Equity
for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II.

OTHER INFORMATION

36

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

Item 3.

Defaults Upon Senior Securities

37

 

 

 

Item 4.

Mine Safety Disclosures

37

 

 

 

Item 5.

Other Information

37

 

 

 

Item 6.

Exhibits

38

 

 

SIGNATURES

39

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Balance Sheets

 

 

 

September 30, 2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

12,234,506

 

 

$

822,909

 

Finance receivables:

 

 

 

 

 

 

 

 

Original product - net (Note 3)

 

 

169,594

 

 

 

273,711

 

Special product - New Neighbor Guaranty program, net of allowance for credit losses of (Note 4)

 

 

95,944

 

 

 

129,272

 

Prepaid expenses and other assets

 

 

217,084

 

 

 

145,267

 

Due from related party (Note 5)

 

 

-

 

 

 

125,045

 

Discontinued operations - current assets (Note 10)

 

 

-

 

 

 

276,953

 

Current assets

 

 

12,717,128

 

 

 

1,773,157

 

Fixed assets, net (Note 1)

 

 

8,378

 

 

 

8,288

 

Real estate assets owned  (Note 1)

 

 

20,281

 

 

 

21,084

 

Operating lease - right of use assets (Note 8)

 

 

185,370

 

 

 

260,260

 

Other investments - related party (Note 1)

 

 

-

 

 

 

1,500,000

 

Goodwill (Note 2)

 

 

-

 

 

 

4,039,586

 

Other Assets

 

 

11,122

 

 

 

11,021

 

Discontinued operations - long-term assets, net (Note 10)

 

 

-

 

 

 

27,245

 

Long-term assets

 

 

225,151

 

 

 

5,867,484

 

Total assets

 

$

12,942,279

 

 

$

7,640,641

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Note payable (Note 6)

 

 

-

 

 

 

69,540

 

Related party convertible note payable

 

 

-

 

 

 

3,461,782

 

Accounts payable and accrued expenses

 

 

383,058

 

 

 

210,870

 

Due to related party (Note 5)

 

 

264,412

 

 

 

-

 

Current portion of lease liability (Note 8)

 

 

98,846

 

 

 

94,235

 

Discontinued operations - current liabilities (Note 10)

 

 

-

 

 

 

280,057

 

Total current liabilities

 

 

746,316

 

 

 

4,116,484

 

 

 

 

 

 

 

 

 

 

Lease liability - long-term (Note 8)

 

 

97,368

 

 

 

171,648

 

Note payable - long-term (Note 6)

 

 

339,797

 

 

 

-

 

Discontinued operations - long-term liabilities (Note 10)

 

 

-

 

 

 

517,584

 

Long-term liabilities

 

 

437,165

 

 

 

689,232

 

Total liabilities

 

 

1,183,481

 

 

 

4,805,716

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, par value $.001; 30,000,000 shares authorized; 15,418,799  and 3,134,261 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

 

 

15,419

 

 

 

3,134

 

Additional paid-in capital

 

 

29,978,962

 

 

 

17,326,553

 

Accumulated deficit

 

 

(18,235,583

)

 

 

(14,494,762

)

Total stockholders’ equity

 

 

11,758,798

 

 

 

2,834,925

 

Total liabilities and stockholders’ equity

 

$

12,942,279

 

 

$

7,640,641

 

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 


3


LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (unaudited)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on delinquent association fees

 

$

105,592

 

 

$

348,451

 

 

$

495,280

 

 

$

1,226,464

 

Administrative and late fees

 

 

19,929

 

 

 

33,690

 

 

 

78,397

 

 

 

116,497

 

Recoveries in excess of cost - special product

 

 

37,127

 

 

 

30,927

 

 

 

122,117

 

 

 

57,199

 

Underwriting and other revenues

 

 

27,651

 

 

 

49,242

 

 

 

96,815

 

 

 

164,757

 

Rental revenue

 

 

62,185

 

 

 

90,353

 

 

 

143,609

 

 

 

310,307

 

Total revenues

 

 

252,484

 

 

 

552,663

 

 

 

936,218

 

 

 

1,875,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Staff costs and payroll

 

 

2,522,481

 

 

 

318,823

 

 

 

3,151,033

 

 

 

924,154

 

Professional fees

 

 

385,705

 

 

 

380,307

 

 

 

1,372,281

 

 

 

1,334,380

 

Settlement costs with associations

 

 

17,934

 

 

 

8,825

 

 

 

29,854

 

 

 

49,003

 

Selling, general and administrative

 

 

96,483

 

 

 

102,027

 

 

 

251,434

 

 

 

285,430

 

Recovery of cost from related party receivable

 

 

(100,000

)

 

 

-

 

 

 

(300,000

)

 

 

-

 

Provision for credit losses

 

 

30,000

 

 

 

7,641

 

 

 

30,000

 

 

 

266

 

Real estate management and disposal

 

 

53,432

 

 

 

84,362

 

 

 

152,882

 

 

 

381,796

 

Depreciation and amortization

 

 

(3,383

)

 

 

18,122

 

 

 

10,383

 

 

 

55,513

 

Collection costs

 

 

771

 

 

 

(3,974

)

 

 

(28,484

)

 

 

(17,275

)

Other operating expenses

 

 

3,120

 

 

 

3,009

 

 

 

13,758

 

 

 

18,265

 

Total operating expenses

 

 

3,006,543

 

 

 

919,142

 

 

 

4,683,141

 

 

 

3,031,532

 

Operating loss from continuing operations

 

 

(2,754,059

)

 

 

(366,479

)

 

 

(3,746,923

)

 

 

(1,156,308

)

Gain on disposal of assets

 

 

-

 

 

 

(6,421

)

 

 

-

 

 

 

(6,421

)

Interest expense

 

 

(2,300

)

 

 

23,150

 

 

 

10,326

 

 

 

76,913

 

Loss from continuing operations before income taxes

 

 

(2,751,759

)

 

 

(383,208

)

 

 

(3,757,249

)

 

 

(1,226,800

)

Income tax benefit

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net loss from continuing operations

 

 

(2,751,759

)

 

 

(383,208

)

 

 

(3,757,249

)

 

 

(1,226,800

)

Gain on disposal of discontinued operations

 

 

-

 

 

 

-

 

 

 

16,428

 

 

 

-

 

Gain from operations of discontinued operations

 

 

-

 

 

 

103,561

 

 

 

-

 

 

 

39,632

 

Net gain/(loss) from discontinued operations

 

 

-

 

 

 

103,561

 

 

 

16,428

 

 

 

39,632

 

Net loss

 

$

(2,751,759

)

 

$

(279,647

)

 

$

(3,740,821

)

 

$

(1,187,168

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per common share - continuing operations

 

$

(0.28

)

 

$

(0.12

)

 

$

(0.66

)

 

$

(0.39

)

Basic earnings/(loss) per common share - discontinued operations

 

$

-

 

 

$

0.03

 

 

$

0.00

 

 

$

0.01

 

Basic loss per common share - net loss

 

$

(0.28

)

 

$

(0.09

)

 

$

(0.66

)

 

$

(0.38

)

Diluted loss per common share - continuing operations

 

$

(0.28

)

 

$

(0.12

)

 

$

(0.66

)

 

$

(0.39

)

Diluted earnings/(loss) per common share - discontinued operations

 

$

-

 

 

$

0.03

 

 

$

0.00

 

 

$

0.01

 

Diluted loss per common share - net loss

 

$

(0.28

)

 

$

(0.09

)

 

$

(0.66

)

 

$

(0.38

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

9,790,538

 

 

 

3,134,160

 

 

 

5,662,035

 

 

 

3,133,495

 

Diluted

 

 

9,790,538

 

 

 

3,134,160

 

 

 

5,662,035

 

 

 

3,133,495

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

4


LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,740,821

)

 

$

(1,187,168

)

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,919

 

 

 

51,990

 

Right to use asset depreciation

 

 

74,890

 

 

 

27,133

 

Stock compensation

 

 

135,679

 

 

 

10,366

 

Recovery of uncollectible related party receivables

 

 

(300,000

)

 

 

-

 

Gain on termination of operating lease

 

 

-

 

 

 

(1,421

)

Gain on sale of fixed assets

 

 

-

 

 

 

(5,000

)

Gain on disposal of discontinued operations

 

 

(16,428

)

 

 

-

 

Reserve for accounts

 

 

30,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Change in assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

120,598

 

 

 

79,996

 

Accounts payable and accrued expenses

 

 

272,976

 

 

 

91,929

 

Advances (repayments) from related party

 

 

689,457

 

 

 

(1,174

)

Other liabilities

 

 

-

 

 

 

62,580

 

Lease liability payments

 

 

(69,669

)

 

 

(23,466

)

Deferred taxes

 

 

-

 

 

 

(14,200

)

Net cash used in operating activities

 

 

(2,797,399

)

 

 

(908,435

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Net collections of finance receivables - original product

 

 

74,117

 

 

 

115,769

 

Net collections of finance receivables - special product

 

 

33,328

 

 

 

88,046

 

(Payments)/proceeds for real estate assets owned

 

 

(3,920

)

 

 

80,076

 

Purchase of fixed assets

 

 

(1,286

)

 

 

(13,299

)

Proceeds from sale of fixed assets

 

 

-

 

 

 

5,000

 

Cash received from investment in note receivable - related party

 

 

1,500,000

 

 

 

-

 

Net cash received from business acquisition

 

 

(246,914

)

 

 

51,327

 

Net cash provided by investing activities

 

 

1,355,325

 

 

 

326,919

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings

 

 

185,785

 

 

 

-

 

Principal repayments

 

 

(108,043

)

 

 

(135,149

)

Exercise of warrants

 

 

3,081,480

 

 

 

22,320

 

Proceeds from stock subscription

 

 

9,447,535

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

12,606,757

 

 

 

(112,829

)

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

 

11,164,683

 

 

 

(694,345

)

 

 

 

 

 

 

 

 

 

CASH - BEGINNING OF YEAR

 

 

1,069,823

 

 

 

3,520,753

 

CASH - END OF YEAR

 

$

12,234,506

 

 

$

2,826,408

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

10,326

 

 

$

31,936

 

Income taxes

 

$

-

 

 

$

-

 

SUPPLEMENTAL DISCLOSURES OF NON-CASHFLOW INFORMATION

 

 

 

 

 

 

 

 

Financing loan for purchase of fixed assets

 

$

-

 

 

$

12,892

 

Insurance financing

 

$

192,514

 

 

$

127,490

 

ROU asset obligation recognized

 

$

-

 

 

$

331,477

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


LM Funding America, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019

 

 

Common Stock

 

 

Additional paid-

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

in capital

 

 

Deficit

 

 

Total Equity

 

Balance - December 31, 2018

 

 

3,124,961

 

 

$

3,125

 

 

$

17,295,408

 

 

$

(11,489,884

)

 

$

5,808,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercised for cash

 

 

9,300

 

 

 

9

 

 

 

22,311

 

 

 

-

 

 

 

22,320

 

Stock compensation expense

 

 

-

 

 

 

-

 

 

 

3,500

 

 

 

-

 

 

 

3,500

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(457,018

)

 

 

(457,018

)

Balance - March 31, 2019

 

 

3,134,261

 

 

$

3,134

 

 

$

17,321,219

 

 

$

(11,946,902

)

 

$

5,377,451

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

-

 

 

 

-

 

 

 

3,431

 

 

 

-

 

 

 

3,431

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(450,503

)

 

 

(450,503

)

Balance - June 30, 2019

 

 

3,134,261

 

 

$

3,134

 

 

$

17,324,650

 

 

$

(12,397,405

)

 

$

4,930,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

-

 

 

 

-

 

 

 

3,435

 

 

 

-

 

 

 

3,435

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(279,647

)

 

 

(279,647

)

Balance - September 30, 2019

 

 

3,134,261

 

 

$

3,134

 

 

$

17,328,085

 

 

$

(12,677,052

)

 

$

4,654,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2019

 

 

3,134,261

 

 

$

3,134

 

 

$

17,326,553

 

 

$

(14,494,762

)

 

$

2,834,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

186,000

 

 

 

186

 

 

 

128,661

 

 

 

-

 

 

 

128,847

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(551,094

)

 

 

(551,094

)

Balance - March 31, 2020

 

 

3,320,261

 

 

$

3,320

 

 

$

17,455,214

 

 

$

(15,045,856

)

 

$

2,412,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for cash

 

 

520,838

 

 

 

521

 

 

 

1,249,479

 

 

 

 

 

 

 

1,250,000

 

Warrants exercised for cash

 

 

1,227,700

 

 

 

1,228

 

 

 

2,945,252

 

 

 

 

 

 

 

2,946,480

 

Stock compensation expense

 

 

-

 

 

 

-

 

 

 

3,397

 

 

 

-

 

 

 

3,397

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(437,968

)

 

 

(437,968

)

Balance - June 30, 2020

 

 

5,068,799

 

 

 

5,069

 

 

 

21,653,342

 

 

 

(15,483,824

)

 

 

6,174,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for cash

 

 

8,500,000

 

 

 

8,500

 

 

 

8,172,035

 

 

 

 

 

 

 

8,180,535

 

Warrants exercised for cash

 

 

1,700,000

 

 

 

1,700

 

 

 

15,300

 

 

 

 

 

 

 

17,000

 

Stock compensation expense

 

 

-

 

 

 

-

 

 

 

3,435

 

 

 

-

 

 

 

3,435

 

Warrants exercised for cash

 

 

150,000

 

 

 

150

 

 

 

134,850

 

 

 

 

 

 

 

135,000

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,751,759

)

 

 

(2,751,759

)

Balance - September 30, 2020

 

 

15,418,799

 

 

$

15,419

 

 

$

29,978,962

 

 

$

(18,235,583

)

 

$

11,758,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6


LM FUNDING AMERICA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

LM Funding America, Inc. (“LMFA” or the “Company”) was formed as a Delaware corporation on April 20, 2015. LMFA was formed for the purpose of completing a public offering and related transactions in order to carry on the business of LM Funding, LLC and its subsidiaries (the “Predecessor”). LMFA is the sole member of LM Funding, LLC and operates and controls all of its businesses and affairs.

LM Funding, LLC a Florida limited liability company organized in January 2008 under the terms of an Operating Agreement effective January 8, 2008 as amended, had two members: BRR Holding, LLC and CGR 63, LLC. The members contributed their equity interest to LMFA prior to the closing of its initial public offering.

The Company acquired IIU, Inc. on January 16, 2019 (“IIU”), which provided global medical insurance products for international travelers, specializing in policies covering high-risk destinations, emerging markets and foreign travelers coming to the United States. All policies were fully underwritten with no claim risk remaining with IIU. IIU was disposed of on January 8, 2020.

We are a specialty finance company that provides funding to nonprofit community associations primarily located in the state of Florida. We offer incorporated nonprofit community associations, which we refer to as “Associations,” a variety of financial products customized to each Association’s financial needs. Our original product offering consists of providing funding to Associations by purchasing their rights under delinquent accounts that are selected by the Associations arising from unpaid Association assessments. Historically, we provided funding against such delinquent accounts, which we refer to as “Accounts,” in exchange for a portion of the proceeds collected by the Associations from the account debtors on the Accounts. In addition to our original product offering, we have started purchasing Accounts on varying terms tailored to suit each Association’s financial needs, including under our New Neighbor Guaranty™ program.

 

Specialty Finance Company

We purchase an Association’s right to receive a portion of the Association’s collected proceeds from owners that are not paying their assessments. After taking assignment of an Association’s right to receive a portion of the Association’s proceeds from the collection of delinquent assessments, we engage law firms to perform collection work on a deferred billing basis wherein the law firms receive payment upon collection from the account debtors or a predetermined contracted amount if payment from account debtors is less than legal fees and costs owed. Under this business model, we typically fund an amount equal to or less than the statutory minimum an Association could recover on a delinquent account for each Account, which we refer to as the “Super Lien Amount”. Upon collection of an Account, the law firm working on the Account, on behalf of the Association, generally distributes to us the funded amount, interest, and administrative late fees, with the law firm retaining legal fees and costs collected, and the Association retaining the balance of the collection. In connection with this line of business, we have developed proprietary software for servicing Accounts, which we believe enables law firms to service Accounts efficiently and profitably.

Under our New Neighbor Guaranty program, an Association will generally assign substantially all of its outstanding indebtedness and accruals on its delinquent units to us in exchange for payment by us of monthly dues on each delinquent unit. This simultaneously eliminates a substantial portion of the Association’s balance sheet bad debts and assists the Association to meet its budget by receiving guaranteed monthly payments on its delinquent units and relieving the Association from paying legal fees and costs to collect its bad debts. We believe that the combined features of the program enhance the value of the underlying real estate in an Association and the value of an Association’s delinquent receivables. We intend to leverage our proprietary software platform, as well as our industry experience and knowledge gained from our original line of business, to expand the New Neighbor Guaranty program in certain situations and to potentially develop other new products in the future.

Because we acquire and collect on the delinquent receivables of Associations, the Account debtors are third parties about whom we have little or no information. Therefore, we cannot predict when any given Account will be paid off or how much it will yield. In assessing the risk of purchasing Accounts, we review the property values of the underlying units, the governing documents of the relevant Association, and the total number of delinquent receivables held by the Association.

Specialty Finance Products

Original Product

Our original product relies upon Florida statutory provisions that effectively protect the principal amount invested by us in each Account. In particular, Section 718.116(1), Florida Statutes, makes purchasers and sellers of a unit in an Association jointly and

7


severally liable for all past due assessments, interest, late fees, legal fees, and costs payable to the Association. As discussed above, the Florida Statutes grants to Associations a so-called “super lien”, which is a category of lien that is given a statutorily higher priority than all other types of liens other than property tax liens. The amount of the Association’s priority over a first mortgage holder that takes title to a property through foreclosure (or deed in lieu), referred to as the Super Lien Amount, is limited to twelve months’ past due assessments or, if less, one percent (1.0%) of the original mortgage amount. Under our contracts with Associations for our original product, we pay Associations an amount up to the Super Lien Amount for the right to receive all collected interest and late fees on Accounts purchased from the Associations.

The Statutes specify that the rate of interest an association (or its assignor) may charge on delinquent assessments is equal to the rate set forth in the association’s declaration or bylaws. In Florida if a rate is not specified, the statutory rate is equal to 18% but may not exceed the maximum rate allowed by law. Similarly, the Statutes in Florida also stipulate that administrative late fees cannot be charged on delinquent assessments unless so provided by the association’s declaration or bylaws and may not exceed the greater of $25 or 5% of each delinquent assessment.

In other states in which we have offered our original product, which are currently only in Washington, Colorado and Illinois, we rely on statutes that we believe are similar to the above-described Florida statutes in relevant respects. A total of approximately 22 U.S. states, Puerto Rico and the District of Columbia have super lien statutes that give Association assessments super lien status under some circumstances, and of these states, we believe that all of these jurisdictions other than Alaska have a regulatory and business environment that would enable us to offer our original product to Associations in those states on materially the same basis.

New Neighbor Guaranty

In 2012, we developed a new product, the New Neighbor Guaranty, wherein an Association assigns substantially all of its outstanding indebtedness and accruals on its delinquent units to us in exchange for payments in an amount equal to the regular ongoing monthly or quarterly assessments for delinquent units when those amounts would be due to the Association. We assume both the payment and collection obligations for these assigned Accounts under this product. This simultaneously eliminates an Association’s balance sheet bad debts and assists the Association to meet its budget by receiving guaranteed assessment payments on its delinquent units and relieving the Association from paying legal fees and costs to collect its bad debts. We believe that the combined features of the product enhance the value of the underlying real estate in an Association and the value of an Association’s delinquent receivables.

Before we implement the New Neighbor Guaranty program for an Association typically asks us to conduct a review of its accounts receivable. After we have conducted the review, we inform the Association which Accounts we are willing to purchase and the terms of such purchase. Once we implement the New Neighbor Guaranty program, we begin making scheduled payments to the Association on the Accounts as if the Association had non-delinquent residents occupying the units underlying the Accounts. Our New Neighbor Guaranty contracts typically allow us to retain all collection proceeds on each Account other than special assessments and accelerated assessment balances. Thus, the Association foregoes the potential benefit of a larger future collection in exchange for the certainty of a steady stream of immediate payments on the Account.

Recent Developments

IIU Acquisition and Disposal

On November 2, 2018, the Company invested cash by purchasing a Senior Convertible Promissory Note in the original principal amount of $1,500,000 (the “IIU Note”) from IIU, a synergistic Virginia based travel insurance brokerage company controlled by Craven House North America, LLC (“Craven”) N.A., (whose ownership excluding unexercised warrants was approximately 20% of the Company’s outstanding stock at the time of the acquisition).  The maturity date of the IIU Note was 360 dates after the date of issuance (subject to acceleration upon an event of default).  The IIU Note carried a 3.0% interest rate, with accrued but unpaid interest being payable on the IIU Note’s maturity date.  

On January 16, 2019, the Company entered into a Stock Purchase Agreement with Craven (the “IIU SPA”) to purchase all of the outstanding capital stock of IIU as a possible synergistic effort to diversify revenue sources that were believed to be accretive to earnings.  IIU provided global medical insurance products for international travelers, specializing in policies covering high-risk destinations, emerging markets and foreign travelers coming to the United States. All policies were fully underwritten with no claim risk remaining with IIU.

The Company purchased 100% of the issued and outstanding capital stock of IIU from Craven for $5,089,357 subject to adjustment as set forth in the IIU SPA.  IIU was required to have a minimum net working capital of $15,000 and at least $152,000 in cash. The Company paid the purchase price under the IIU SPA at closing as follows:

 

The Company cancelled all principal and accrued interest of the IIU Note, which consisted of aggregate principal indebtedness and accrued interest of $1,507,375 as of January 16, 2019.

 

The Company issued to Craven a $3,581,982 Senior Convertible Promissory Note (the “Craven Convertible Note”) for the balance of the purchase price.  At the option of Craven, the Craven Convertible Note could be paid in restricted shares of our common stock or cash.  The Craven Convertible Note bore simple interest at 3% per annum.  The Craven Convertible Note

8


 

was due and payable 360 days from the closing date of the IIU SPA. If repaid by the Company in restricted common stock, the outstanding principal and interest of the Craven Convertible Note would be paid by the Company by issuing to Craven a number of restricted common shares equal to the adjusted principal and accrued interest owing to Craven under the Craven Convertible Note divided by $2.41. On the date of issuance of the Craven Convertible Note, the closing share price of the Company was $1.42.

 

Pursuant to the terms of the IIU SPA, the purchase price was subsequently reduced by $120,200, to $4,969,200.

On December 20, 2019, the Company loaned $1.5 million to Craven (“Craven Secured Promissory Note”) which had an initial maturity date of April 15, 2020 and carried an interest rate of 0.5% that was to be paid monthly. The Company subsequently extended the due date of the Craven Secured Promissory Note to August 1, 2021.   The Craven Secured Promissory Note was secured by, among other things, a pledge of Craven’s 640,000 shares of common stock of the Company and the assignment of the assets of Craven in favor of the Company. On June 29, 2020, the Company received from Craven $1,503,719 as payment in full of all principal and accrued interest due from the Craven Secured Promissory Note.

On January 8, 2020, the Company entered into a Stock Purchase Agreement (“SPA”) with Craven pursuant to which the Company sold back to Craven all of the issued and outstanding shares of IIU for $3,562,569.  The purchase price was paid by Craven through the cancellation of the $3,461,782 Craven Convertible Note plus forgiveness of $100,787 of accrued interest. The Company originally paid $4,969,200 for the purchase of IIU in January 2019, which included a negative $720,386 net fair value of assets and $5,689,586 of goodwill. As a result, goodwill was impaired by $1.65 million. The sale of IIU resulted in a gain of $16,428.  

 

Specialty Health Insurance

Our former subsidiary IIU Inc. (“IIU”) through its wholly owned company Wallach and Company (“Wallach”) offered health insurance, travel insurance and other travel services to:

 

United States citizens and residents traveling abroad

 

Non United States citizens or residents who travel to the United States

These services were typically sold through a policy offered by Wallach and fully underwritten by a third party insurance company.  The policies offered included:

 

HealthCare Abroad - Short term medical insurance, medical evacuation and international assistance for Americans traveling overseas. There is an age limit of 84 years old.

 

HealthCare Global – up to 6 months coverage for Americans traveling abroad and foreign nationals traveling outside their home countries to destinations other than the United States.  There is an age limit of 70 years old.

 

HealthCare America – up to 90 days coverage for foreign nationals visiting the United States. There is an age limit of 70 years old.

 

HealthCare International – International medical insurance & assistance for persons living outside their home country.  There is an age limit of 70 years old.

 

HealthCare War – up to 6 months coverage for Americans traveling abroad and foreign nationals traveling outside their home countries to identified war risk areas.  There is an age limit of 70 years old.

 

As such, IIU is considered a disc