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 March 31, 2021

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 5,414,296 shares of Common Stock, par value $0.001 per share, outstanding as of May 7, 2021.

 

 

 

 


 

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
March 31, 2021 (unaudited) and December 31, 2020

3

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2021 and 2020 (unaudited)

4

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2021 and 2020 (unaudited)

5

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Equity
for the Three Months Ended March 31, 2021 and 2020 (unaudited)

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

Item 4.

Controls and Procedures

25

 

 

 

PART II.

OTHER INFORMATION

27

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 3.

Defaults Upon Senior Securities

28

 

 

 

Item 4.

Mine Safety Disclosures

28

 

 

 

Item 5.

Other Information

28

 

 

 

Item 6.

Exhibits

29

 

 

SIGNATURES

30

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

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

 

 

 

March 31, 2021

 

 

December 31,

2020

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

17,803,015

 

 

$

11,552,943

 

Finance receivables:

 

 

 

 

 

 

 

 

Original product - net (Note 2)

 

 

101,811

 

 

 

116,017

 

Special product - New Neighbor Guaranty program, net of allowance for credit losses of (Note 3)

 

 

53,777

 

 

 

52,757

 

Prepaid expenses and other assets

 

 

212,132

 

 

 

399,124

 

Current assets

 

 

18,170,735

 

 

 

12,120,841

 

Fixed assets, net

 

 

5,617

 

 

 

6,171

 

Real estate assets owned

 

 

80,057

 

 

 

18,767

 

Operating lease - right of use assets (Note 7)

 

 

134,859

 

 

 

160,667

 

Long-term investments - debt securities (Note 9)

 

 

1,679,284

 

 

 

-

 

Long-term investments - equity securities (Note 9)

 

 

1,789,338

 

 

 

-

 

Investments in unconsolidated affiliates (Note 9)

 

 

4,569,054

 

 

 

-

 

Other assets

 

 

10,984

 

 

 

10,984

 

Long-term assets

 

 

8,269,193

 

 

 

196,589

 

Total assets

 

$

26,439,928

 

 

$

12,317,430

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Note payable (Note 5)

 

 

38,053

 

 

 

96,257

 

Accounts payable and accrued expenses

 

 

271,515

 

 

 

237,033

 

Due to related party (Note 4)

 

 

232,734

 

 

 

158,399

 

Current portion of lease liability (Note 7)

 

 

78,675

 

 

 

-

 

Total current liabilities

 

 

620,977

 

 

 

491,689

 

 

 

 

 

 

 

 

 

 

Lease liability - long-term (Note 7)

 

 

68,002

 

 

 

171,648

 

Deferred taxes (Note 6)

 

 

3,484

 

 

 

-

 

Note payable - long-term (Note 5)

 

 

186,235

 

 

 

185,785

 

Long-term liabilities

 

 

257,721

 

 

 

357,433

 

Total liabilities

 

 

878,698

 

 

 

849,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.001; 30,000,000 shares authorized; 5,414,296 and 3,083,760 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively

 

 

5,414

 

 

 

3,084

 

Additional paid-in capital

 

 

39,538,550

 

 

 

29,996,257

 

Accumulated deficit

 

 

(14,159,791

)

 

 

(18,536,224

)

Total stockholders’ equity

 

 

25,384,173

 

 

 

11,463,117

 

Non-controlling interest

 

 

177,057

 

 

 

5,191

 

Total stockholders’ equity

 

 

25,561,230

 

 

 

11,468,308

 

Total liabilities and stockholders’ equity

 

$

26,439,928

 

 

$

12,317,430

 

 

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 March 31,

 

 

 

 

2021

 

 

2020

 

Revenues:

 

 

 

 

 

 

 

 

 

Interest on delinquent association fees

 

 

$

77,444

 

 

$

219,514

 

Administrative and late fees

 

 

 

15,071

 

 

 

23,045

 

Recoveries in excess of cost - special product

 

 

 

29,473

 

 

 

22,628

 

Underwriting and other revenues

 

 

 

22,703

 

 

 

27,929

 

Rental revenue

 

 

 

31,917

 

 

 

48,080

 

Total revenues

 

 

 

176,608

 

 

 

341,196

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Staff costs and payroll

 

 

 

1,301,981

 

 

 

316,059

 

Professional fees

 

 

 

482,943

 

 

 

506,995

 

Settlement costs with associations

 

 

 

-

 

 

 

11,920

 

Selling, general and administrative

 

 

 

99,769

 

 

 

80,223

 

Recovery of cost from related party receivable

 

 

 

(10,000

)

 

 

(100,000

)

Real estate management and disposal

 

 

 

18,290

 

 

 

85,342

 

Depreciation and amortization

 

 

 

1,696

 

 

 

5,812

 

Collection costs

 

 

 

2,048

 

 

 

(8,321

)

Other operating expenses

 

 

 

7,545

 

 

 

3,794

 

Total operating expenses

 

 

 

1,904,272

 

 

 

901,824

 

Operating loss from continuing operations

 

 

 

(1,727,664

)

 

 

(560,628

)

Realized gain on securities

 

 

 

5,671,464

 

 

 

-

 

Unrealized gain on securities

 

 

 

595,392

 

 

 

-

 

Interest income

 

 

 

13,055

 

 

 

-

 

Interest expense

 

 

 

(464

)

 

 

(6,894

)

Income (loss) from continuing operations before income taxes

 

 

 

4,551,783

 

 

 

(567,522

)

Income tax expense

 

 

 

(3,484

)

 

 

-

 

Net income (loss) from continuing operations

 

 

 

4,548,299

 

 

 

(567,522

)

Gain from operations of discontinued operations

 

 

 

-

 

 

 

16,428

 

Net gain from discontinued operations

 

 

 

-

 

 

 

16,428

 

Net income (loss)

 

 

 

4,548,299

 

 

 

(551,094

)

Less: Net income attributable to non-controlling interest

 

 

 

(171,866

)

 

 

 

 

Net income (loss) attributable to LM Funding America Inc.

 

 

$

4,376,433

 

 

$

(551,094

)

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per share:

 

 

 

 

 

 

 

 

 

Basic income (loss) per common share - continuing operations

 

 

$

0.87

 

 

$

(0.88

)

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

 

 

$

-

 

 

$

0.03

 

Basic income (loss) per common share - net income (loss) - attributable to LM Funding

 

 

$

0.87

 

 

$

(0.85

)

Diluted income (loss) per common share - continuing operations

 

 

$

0.80

 

 

$

(0.88

)

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

 

 

$

-

 

 

$

0.03

 

Diluted income (loss) per common share - net income (loss) - attributable to LM Funding

 

 

$

0.80

 

 

$

(0.85

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

5,047,498

 

 

 

646,606

 

Diluted

 

 

 

5,439,398

 

 

 

646,606

 

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 Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,548,299

 

 

$

(551,094

)

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,696

 

 

 

5,812

 

Right to use asset depreciation

 

 

25,808

 

 

 

25,093

 

Stock compensation

 

 

-

 

 

 

128,847

 

Recovery of uncollectible related party receivables

 

 

-

 

 

 

(100,000

)

Accrued investment income

 

 

(12,784

)

 

 

-

 

Gain on disposal of discontinued operations

 

 

-

 

 

 

(16,428

)

Deconsolidation of  affiliate

 

 

(43,623

)

 

 

-

 

Unrealized gain on securities

 

 

(595,392

)

 

 

-

 

Realized gain on sale of securities

 

 

(5,671,464

)

 

 

-

 

Change in assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

710,163

 

 

 

20,436

 

Accounts payable and accrued expenses

 

 

157,514

 

 

 

(8,102

)

Advances (repayments) from related party

 

 

200,749

 

 

 

197,024

 

Lease liability payments

 

 

(24,971

)

 

 

(22,684

)

Deferred taxes

 

 

3,484

 

 

 

-

 

Net cash provided (used in) operating activities

 

 

(700,521

)

 

 

(321,096

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Net collections of finance receivables - original product

 

 

14,206

 

 

 

28,035

 

Net collections of finance receivables - special product

 

 

(1,020

)

 

 

29,839

 

(Payments)/proceeds for real estate assets owned

 

 

(62,432

)

 

 

(3,026

)

Net cash payment for IIU disposal

 

 

-

 

 

 

(246,914

)

Investment in convertible note receivable

 

 

(1,666,500

)

 

 

-

 

Investment in unconsolidated affiliate

 

 

(5,738,000

)

 

 

-

 

Investment in securities

 

 

(15,547,454

)

 

 

-

 

Proceeds from securities, net

 

 

21,218,918

 

 

 

-

 

Loan to purchase securities

 

 

1,784,250

 

 

 

-

 

Repayment of loan to purchase securities

 

 

(1,784,250

)

 

 

-

 

Net cash used by investing activities

 

 

(1,782,282

)

 

 

(192,066

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Principal repayments

 

 

(343,687

)

 

 

(34,770

)

Insurance financing repayments

 

 

(468,061

)

 

 

-

 

Exercise of warrants

 

 

9,544,623

 

 

 

-

 

Proceeds from stock subscription

 

 

-

 

 

 

250,000

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

8,732,875

 

 

 

215,230

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

 

6,250,072

 

 

 

(297,932

)

 

 

 

 

 

 

 

 

 

CASH - BEGINNING OF YEAR

 

 

11,552,943

 

 

 

1,069,823

 

CASH - END OF YEAR

 

$

17,803,015

 

 

$

771,891

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

-

 

 

$

-

 

Cash paid for interest

 

$

-

 

 

$

6,894

 

 

 

 

 

 

 

 

 

 

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 Three Months Ended March 31, 2021 and 2020

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional paid in capital

 

 

Accumulated Deficit

 

 

Non-Controlling Interest

 

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2019

 

 

626,852

 

 

$

627

 

 

$

17,329,060

 

 

$

(14,494,762

)

 

$

-

 

 

$

2,834,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for services

 

 

37,200

 

 

 

37

 

 

 

128,810

 

 

 

-

 

 

 

-

 

 

 

128,847

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(551,094

)

 

 

-

 

 

 

(551,094

)

 

Balance - March 31, 2020

 

 

664,052

 

 

$

664

 

 

$

17,457,870

 

 

$

(15,045,856

)

 

$

-

 

 

$

2,412,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2020

 

 

3,083,760

 

 

$

3,084

 

 

$

29,996,257

 

 

$

(18,536,224

)

 

$

5,191

 

 

$

11,468,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercised

 

 

2,330,536

 

 

 

2,330

 

 

 

9,542,293

 

 

 

-

 

 

 

-

 

 

 

9,544,623

 

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,376,433

 

 

 

171,866

 

 

 

4,548,299

 

 

Balance - March 31, 2021

 

 

5,414,296

 

 

$

5,414

 

 

$

39,538,550

 

 

$

(14,159,791

)

 

$

177,057

 

 

$

25,561,230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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. (“we”, “our”, “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 created two subsidiaries, LMFA Financing LLC on November 21, 2020 and LMFAO Sponsor LLC on October 29, 2020. LMFAO Sponsor LLC created a majority owned subsidiary LMF Acquisition Opportunities Inc. on October 29, 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.

During 2020, we begin exploring other specialty finance business opportunities that are complementary to or that can leverage our historical business.

 

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.

7


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 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. 

 

Reverse Stock Split

On May 11, 2020, our shareholders voted in favor of the approval of an amendment to our Certificate of Incorporation, in the event it is deemed advisable by our Board of Directors, to effect an additional reverse stock split of the Company’s issued and outstanding common stock at a ratio within the range of one-for-two (1:2) and one-for-ten (1:10), as determined by the Board of Directors.  On April 21, 2021, our Board of Directors approved a one-for-five reverse split of the Company’s common stock. As a result, on May 7, 2021, the Company effected a common share consolidation (“Reverse Stock Split”) by means of a one-for-five (1:5) reverse split of its outstanding common stock,  which resulted in a decrease in outstanding common stock to 5,414,296 shares.  The Reverse Stock Split became effective on May 7, 2021 and the Company’s common stock began trading on The Nasdaq Capital Market on a split-adjusted basis on May 7, 2021.  The Company has retroactively adjusted all share amounts and per share data herein to give effect to the Reverse Stock Split.

 

8


 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of LMFA and its wholly-owned subsidiaries: LM Funding, LLC; LMF October 2010 Fund, LLC; REO Management Holdings, LLC (including all 100% owned subsidiary limited liability companies); LM Funding of Colorado, LLC; LM Funding of Washington, LLC; LM Funding of Illinois, LLC; and LMF SPE #2, LLC and various single purpose limited liability corporations owned by REO Management Holdings, LLC which own various properties. It also includes LMFA Sponsor LLC (a 70.5% owned subsidiary). All significant intercompany balances have been eliminated in consolidation.

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim condensed consolidated financial statements as of March 31, 2021 and for the Three Months ended March 31, 2021 and March 31, 2020, respectively are unaudited. In the opinion of management, the interim condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods. The accompanying condensed consolidated balance sheet as of December 31, 2020, is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for fiscal the year ended December 31, 2020.

 

Investment in Securities

Investment in Securities includes investments in common stocks and convertible notes receivables.  Investments in securities are reported at fair value with changes in unrecognized gains or losses included in other income on the income statement.

 

Investments in Unconsolidated Entities

 

We account for investments in less than 50% owned and more than 20% owned entities using the equity method of accounting. Because we have elected the fair value option for these securities, unrealized holding gains and losses during the period are included in earnings.

Loss Per Share

Basic loss per share is calculated as net loss to common stockholders divided by the weighted average number of common shares outstanding during the period (as adjusted to give effect to the Reverse Stock Split).

The Company issued approximately 2.3 million shares at various times during the three months ended March 31, 2021 and has weighted average these new shares in calculating loss per share. The Company also issued approximately 37 thousand shares at various times during the three months ended March 31, 2020 and has weighted average these new shares in calculating loss per share.

The Company has restated all share amounts to reflect the Reverse Stock Split.

Diluted loss per share for the period equals basic loss per share as the effect of any convertible notes, stock based compensation awards or stock warrants would be anti-dilutive.  

The anti-dilutive stock based compensation awards and convertible notes consisted of:

 

 

 

As of March 31,

 

 

2021

 

2020

Stock Options

 

3,860

 

3,860

Stock Warrants

 

391,900

 

791,857

 

 

 

 

 

 

9


 

Note 2. Finance Receivables – Original Product

The Company’s original funding product provides financing to community associations only up to the secured or “Super Lien Amount” as discussed in Note 1.  Finance receivables for the original product as of March 31, 2021 and December 31, 2020 based on the year of funding are approximately as follows:

 

 

 

March 31, 2021

 

 

December 31,

2020 (Audited)

 

Funded during the current year

 

$

13,000

 

 

$

25,000

 

1-2 years outstanding

 

 

13,000

 

 

 

12,000

 

2-3 years outstanding

 

 

9,000

 

 

 

9,000

 

3-4 years outstanding

 

 

6,000

 

 

 

12,000

 

Greater than 4 years outstanding

 

 

185,000

 

 

 

200,000

 

 

 

 

226,000

 

 

 

258,000

 

Reserve for credit losses

 

 

(125,000

)

 

 

(142,000

)

 

 

$

101,000

 

 

$

116,000

 

 

 

Note 3. Finance Receivables – Special Product (New Neighbor Guaranty program)

The Company typically funds amounts equal to or less than the “Super Lien Amount”.  During 2012 the Company began offering Associations an alternative product under the New Neighbor Guaranty program where the Company funds amounts in excess of the “Super Lien Amount”.  

Under this special product, the Company purchases substantially all of the outstanding past due assessments due from delinquent property owners, in addition to all interest, late fees and other charges in exchange for the Company’s commitment to pay monthly assessments on a going forward basis up to 48 months.  

As of March 31, 2021, maximum future contingent payments under these arrangements was approximately $1,700.  

Delinquent assessments and accrued charges under these arrangements as of March 31, 2021 and December 31, 2020, are as follows:

 

 

 

 

March 31, 2021

 

 

December 31,

2020 (Audited)

 

Finance receivables, net

 

$

54,000

 

 

$

53,000

 

Delinquent assessments

 

 

134,000

 

 

 

148,000

 

Accrued interest and late fees

 

 

40,000

 

 

 

57,000

 

Number of active units with delinquent assessments

 

 

14

 

 

 

20

 

 

Allowance for credit losses are recorded for losses that are considered “probable” and can be “reasonably estimated” in accordance with ASC 450-20.  Recoverability of the Company’s Original Product is generally assured because of the protection of the Super Lien under Florida statute and as such no allowance is recorded.    

Credit losses on the NNG product were estimated by the Company based on analyzing the investment in each unit and comparing that balance to the average payout for completed units for the past 12 months. The allowance for losses based on these analyses, had a remaining balance of $7,000 and $6,500 as of March 31, 2021 and December 31, 2020, respectively.

Note 4. Due to Related Party

Legal services for the Company associated with the collection of delinquent assessments from property owners are performed by a law firm, Business Law Group (“BLG”), which was owned solely by Bruce M. Rodgers, the Chief Executive Officer of LMFA, until and through the date of the initial public offering. Following the offering, Mr. Rodgers transferred his interest in BLG to other attorneys at the firm through a redemption of his interest in the firm, and BLG is now under control of those lawyers. The law firm has historically performed collection work primarily on a deferred billing basis wherein the law firm receives payment for services rendered upon collection from the property owners or at amounts ultimately subject to negotiations with the Company.

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During 2016, the Company experienced a decline in collection events that affected revenues both to the Company and BLG.  That resulted in an increase in the related party receivable and reflects the decision by the Company to advance funds to BLG based on the amount of their unpaid legal fees due from property owners.  Effective January 1, 2017, the Company entered into a new services agreement with BLG which partially alters the traditional deferred billing arrangement noted above.  

 

Under the new agreement, the Company pays BLG a fixed monthly fee of $82,000 for services rendered.  The Company will continue to pay BLG a minimum per unit fee of $700 in any case where there is a collection event and BLG receives no payment from the property owner.  This provision has been expanded to also include any unit where the Company has taken title to the unit or where the association has terminated its contract with either BLG or the Company.    

Amounts expensed by the Company to BLG for the Three Months ended March 31, 2021 and 2020 were approximately $246,000 and $259,000, respectively.  As of March 31, 2021 and December 31, 2020, receivables from property owners for charges ultimately payable to BLG approximate $1,214,000 and $1,332,000, respectively.

Under the related party agreement with BLG in effect during 2020 and 2019, the Company pays all costs (lien filing fees, process and serve costs) incurred in connection with the collection of amounts due from property owners.  Any recovery of these collection costs is accounted for as a reduction in expense incurred.  The Company incurred expenses related to these types of costs for the three months ended March 31, 2021 and 2020 were $22,000 and $36,000, respectively. Recoveries during the three months ended March 31, 2021 and 2020, related to those costs were approximately $19,000 and $45,000, respectively.  

The Company also shares office space and related common expenses with BLG.  All shared expenses, including rent, are charged to BLG based on an estimate of actual usage.  Any expenses of BLG paid by the Company that have not been reimbursed or settled against other amounts are reflected as due from related parties in the accompanying consolidated balance sheet.  BLG was charged approximately $17,000 for the office sub-lease during the three months ended March 31, 2021.

Amounts payable to BLG as of March 31, 2021 and December 31, 2020 were approximately $232,700 and $158,400, respectively. In the first three months of March 31, 2021, the Company subsequently recouped $10,000 of previously written-off amounts to BLG.

Note 5. Debt and Other Financing Arrangements

 

 

 

March 31, 2021

 

 

December 31,

2020 (Audited)

 

Financing agreement with FlatIron capital that is unsecured. Down payment of $20,746 was required upfront and equal installment payments of $19,251 to be made over a 10 month period. The note matures on May 1, 2021. Annualized interest is

5.95%

 

$

38,503

 

 

$

96,257

 

 

 

 

 

 

 

 

 

 

Promissory note issued by a financial institution, bearing interest at 1.0%, interest and no principal payments.   The note matures April 30, 2022. Annualized interest is 1.0%. This is a U.S. Small Business Administration’s Paycheck Protection Program (the “PPP Loan”)

 

 

185,785

 

 

 

185,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

224,288

 

 

$

282,042

 

 

As of March 31, 2021, minimum annual principal payments are as follows:

 

 

 

 

 

 

2021

 

 

224,288

 

2022

 

 

-

 

2023

 

 

-

 

2024

 

 

-

 

2025

 

 

-

 

After 2025

 

 

-

 

 

 

$

224,288

 

11


 

 

On April 30, 2020, the company obtained a $185,785 Paycheck Protection Program loan. These business loans were established by the 2020 US Federal government Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to help certain businesses, self-employed workers, sole proprietors, certain nonprofit organizations, and tribal businesses continue paying their workers.

 

The Paycheck Protection Program allows entities to apply for low interest private loans to pay for their payroll and certain other costs. The loan proceeds will be used to cover payroll costs, rent, interest, and utilities. The loan may be partially or fully forgiven if the Company keeps its employee counts and employee wages stable. The program was implemented by the U.S. Small Business Administration. The interest rate is 1.0% and has a maturity date of 2 years. We have applied for loan and interest forgiveness in the fourth quarter of 2020.

 

On May 6, 2021, we received notice from the Paycheck Protection Program that $157,250 of our loan had been forgiven.  As such, we owe the remaining balance of $28,534 which will be repaid by June 30, 2021. See details regarding forgiveness in Footnote 10.

Note 6. Income Taxes

Prior to the Company’s initial public offering in October 2015, the earnings of the Predecessor, which was a limited liability company taxed as a partnership, were taxable to its members.  In connection with the contribution of membership interests to the Company (a C-Corporation formed in 2015), the net income or loss of the Company after the initial public offering is taxable to the Company and reflected in the accompanying consolidated financial statements.

The Company performs an evaluation of the realizability of its deferred tax assets on a quarterly basis.  The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets, including the scheduled reversal of temporary differences, recent and projected future taxable income and prudent and feasible tax planning strategies.  The estimates and assumptions used by the Company in computing the income taxes reflected in the accompanying consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year. Adjustments are recorded based on filed returns when finalized or the related adjustments are identified.

Under ASC 740-10-30-5, Income Taxes, deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not (i.e., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The Company considers all positive and negative evidence available in determining the potential realization of deferred tax assets including, primarily, the recent history of taxable earnings or losses. Based on operating losses reported by the Company during 2020 and 2019, the Company concluded there was not sufficient positive evidence to overcome this recent operating history. As a result, the Company believed that a valuation allowance was necessary based on the more-likely-than-not threshold noted above. The Company had recorded a valuation allowance of approximately $3,551,000 as of March 31, 2021 and $4,658,000 as of December 31, 2020.

Significant components of the tax expense (benefit) recognized in the accompanying consolidated statements of operations for the three months ended March 31, 2021 and March 31, 2020) are as follows:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

Current tax benefit

 

 

 

 

 

 

 

 

Federal

 

$

911,648

 

 

$

(148,257

)

State

 

 

188,624

 

 

 

(30,675

)

Total current tax benefit

 

 

1,100,272

 

 

 

(178,932

)

Deferred tax expense

 

 

8,214

 

 

 

39,257

 

Valuation allowance (expense)

 

 

(1,105,002

)

 

 

139,675

 

Income tax (reduction) benefit

 

$

3,484

 

 

$

-

 

 

 

12


 

The reconciliation of the income tax computed at the combined federal and state statutory rate of 25.3% for the three months ended March 31, 2021 and 2020 to the income tax benefit is as follows:

 

 

 

Three Months Ended March 31,

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2021

 

 

2020

 

 

2020

 

Expense (benefit) on net loss

 

$

1,107,447

 

 

 

25.3

%

 

$

(139,675

)

 

 

28.3

%

Nondeductible expenses

 

 

1,039

 

 

 

0.0

%

 

 

-

 

 

 

(13.90

)%

Valuation allowance (expense)

 

 

(1,105,002

)

 

 

(25.3

)%

 

 

139,675

 

 

 

(14.30

)%

Other items

 

 

-

 

 

 

0.0

%

 

 

-

 

 

 

0.0

%

Tax expense/ effective rate

$

 

3,484

 

 

 

-

%

 

 

-

 

 

 

-

%

 

 

The significant components of the Company’s deferred tax liabilities and assets as of March 31, 2021 and December 31, 2019 are as follows: 

 

 

 

 

 

 

As of March 31, 2021

 

 

As of December 31, 2020

 

 

 

(Unaudited)

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Tax expense for internally developed software

 

$

-

 

 

$

(1,814

)

Tax depreciation in excess of book

 

 

-

 

 

 

(2,917

)

Total deferred tax liabilities

 

 

-

 

 

 

(4,731

)

Deferred tax assets:

 

 

 

 

 

 

 

 

Loss carryforwards

 

 

2,810,664

 

 

 

3,913,579

 

Step up in basis at contribution to C-Corp

 

 

529,302

 

 

 

511,052

 

Stock option expense

 

 

124,876

 

 

 

124,876

 

Step up in basis - purchase of non-controlling interest

 

 

48,789

 

 

 

49,950

 

Allowance for credit losses

 

 

33,466

 

 

 

33,466

 

Accrued liabilities

 

 

-

 

 

 

20,573

 

Total deferred tax asset

 

 

3,547,097

 

 

 

4,653,496

 

Valuation allowance

 

 

(3,550,581

)

 

 

(4,658,226

)

Net deferred tax asset

 

$

(3,484

)

 

$

-

 

 

During the 3 months ended March 31, 2021, the Company offset $1.1 million of it’s tax expense with $1.1 million of its valuation allowance.

Note 7. Commitments and Contingencies

Leases

The Company leases certain office space, construction and office equipment, vehicles and temporary housing generally under non-cancelable operating leases. Leases with an initial term of one year or less are not recorded on the balance sheet, and the Company generally recognizes lease expense for these leases on a straight-line basis over the lease term. As of March 31, 2021, the Company’s operating leases have remaining lease terms ranging from less than one year to 3 years, some of which include options to renew the leases. The exercise of lease renewal options is generally at the Company’s sole discretion. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.

The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and current and long-term operating lease liabilities are separately stated on the Consolidated Balance Sheet as of March 31, 2021. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The present value of future lease payments are discounted using either the implicit rate in the lease, if known, or the Company’s incremental borrowing rate for the specific lease as of the lease commencement date. The rate was determined as a fair value of the lease over a 37 month period using a 6.5% interest rate for the present value calculation. The ROU asset is also adjusted for any prepayments made or incentives received. The lease terms include options to extend or terminate the lease only to the extent it is reasonably certain any of those options will be exercised. Lease expense is recognized on a straight-line

13


basis over the lease term. The Company accounts for lease components (e.g., fixed payments) separate from the non-lease components (e.g., common-area maintenance costs). The Company does not have any material financing leases.

The Company leased its office under an operating lease beginning March 1, 2014 and ending July 31, 2019. The Company’s new office lease began July 15, 2019 and ends July 31, 2022. A related party has a sub-lease for approximately $4,900 per month plus operating expenses.

 

The Company shares this space and the related costs associated with this operating lease with a related party (see Note 4) that also performs legal services associated with the collection of delinquent assessments.  Net rent expense recognized for the Three Months ended March 31, 2021 and 2020 were approximately $24,900 and $18,100, respectively.

 

The following table presents components of lease expense excluding discontinued operations for the Three Months ended March 31, 2021 and 2020:

 

 

Three Months

Ended

March 31,

2021

Three Months

Ended

March 31,

2020

Operating lease expense

24,856

18,080

 

24,856

18,080

 

The following table presents supplemental balance sheet information related to operating leases as of March 31, 2021 and December 31, 2020:

 

 

 

Balance Sheet Line Item

As of March 31, 2021

 

As of December 31, 2020

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

ROU assets

 

Right of use asset, net

$

134,859

 

$

160,667