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.
TABLE OF CONTENTS
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Page |
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PART I. |
3 |
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Item 1. |
3 |
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3 |
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4 |
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5 |
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6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
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Item 3. |
35 |
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Item 4. |
35 |
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PART II. |
36 |
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Item 1. |
36 |
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Item 1A. |
36 |
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Item 2. |
37 |
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Item 3. |
37 |
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Item 4. |
37 |
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Item 5. |
37 |
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Item 6. |
38 |
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39 |
2
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. |
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