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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, 2022

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 13,091,883 shares of Common Stock, par value $0.001 per share, outstanding as of May 9, 2022.

 

 

 

 


 

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, 2022 (unaudited) and December 31, 2021

3

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2022 and 2021 (unaudited)

4

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2022 and 2021 (unaudited)

5

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

PART II.

OTHER INFORMATION

28

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 3.

Defaults Upon Senior Securities

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, 2022

 

 

December 31,

2021

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

24,536,467

 

 

$

32,559,185

 

Finance receivables:

 

 

 

 

 

 

 

 

Original product - net

 

 

20,543

 

 

 

13,993

 

Special product - New Neighbor Guaranty program, net of allowance for credit losses of

 

 

16,148

 

 

 

14,200

 

Short-term investments - convertible debt securities (Note 7)

 

 

845,424

 

 

 

539,351

 

Marketable securities (Note 7)

 

 

308,950

 

 

 

2,132,051

 

Short-term investments - debt security (Note 7)

 

 

2,106,082

 

 

 

2,000,000

 

Prepaid expenses and other assets

 

 

944,464

 

 

 

1,251,852

 

Income tax receivable (Note 4)

 

 

143,822

 

 

 

-

 

Note receivable from related party (Note 7)

 

 

310,000

 

 

 

-

 

Digital assets, net (Note 9)

 

 

504,366

 

 

 

-

 

Current assets

 

 

29,736,266

 

 

 

38,510,632

 

Fixed assets, net

 

 

14,820

 

 

 

17,914

 

Real estate assets owned

 

 

80,057

 

 

 

80,057

 

Operating lease - right of use assets (Note 5)

 

 

337,413

 

 

 

59,969

 

Long-term investments - equity securities (Note 7)

 

 

949,754

 

 

 

1,973,413

 

Investments in unconsolidated affiliates (Note 7)

 

 

4,713,390

 

 

 

4,676,130

 

Deposit on mining equipment (Note 8)

 

 

23,893,672

 

 

 

16,775,100

 

Other assets

 

 

10,726

 

 

 

10,726

 

Long-term assets

 

 

29,999,832

 

 

 

23,593,309

 

Total assets

 

$

59,736,098

 

 

$

62,103,941

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

325,489

 

 

 

463,646

 

Note payable - short-term (Note 3)

 

 

57,344

 

 

 

114,688

 

Due to related party (Note 2)

 

 

373,800

 

 

 

121,220

 

Current portion of lease liability (Note 5)

 

 

90,072

 

 

 

68,002

 

Income tax payable (Note 4)

 

 

-

 

 

 

326,178

 

Other liabilities

 

 

1,725

 

 

 

-

 

Total current liabilities

 

 

848,430

 

 

 

1,093,734

 

Lease liability - long-term (Note 5)

 

 

248,475

 

 

 

-

 

Long-term liabilities

 

 

248,475

 

 

 

-

 

Total liabilities

 

 

1,096,905

 

 

 

1,093,734

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $.001; 150,000,000 shares authorized; no shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

 

 

-

 

 

 

-

 

Common stock, par value $0.001; 350,000,000 shares authorized; 13,091,883 and 13,017,943 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

 

 

13,092

 

 

 

13,018

 

Additional paid-in capital

 

 

78,173,269

 

 

 

74,525,106

 

Accumulated deficit

 

 

(19,505,057

)

 

 

(13,777,006

)

Total stockholders’ equity

 

 

58,681,304

 

 

 

60,761,118

 

Non-controlling interest

 

 

(42,111

)

 

 

249,089

 

Total stockholders’ equity

 

 

58,639,193

 

 

 

61,010,207

 

Total liabilities and stockholders’ equity

 

$

59,736,098

 

 

$

62,103,941

 

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,

 

 

 

 

2022

 

 

2021

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Interest on delinquent association fees

 

$

101,268

 

 

$

77,444

 

 

Administrative and late fees

 

 

16,708

 

 

 

15,071

 

 

Recoveries in excess of cost - special product

 

 

17,365

 

 

 

29,473

 

 

Underwriting and other revenues

 

 

16,791

 

 

 

22,703

 

 

Rental revenue

 

 

38,872

 

 

 

31,917

 

 

Total revenues

 

 

191,004

 

 

 

176,608

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Staff costs and payroll

 

 

4,292,197

 

 

 

1,301,981

 

 

Professional fees

 

 

774,820

 

 

 

482,943

 

 

Settlement costs with associations

 

 

160

 

 

 

-

 

 

Selling, general and administrative

 

 

114,920

 

 

 

99,769

 

 

Recovery of cost from related party receivable

 

 

-

 

 

 

(10,000

)

 

Real estate management and disposal

 

 

31,481

 

 

 

18,290

 

 

Depreciation and amortization

 

 

3,094

 

 

 

1,696

 

 

Collection costs

 

 

(3,820

)

 

 

2,048

 

 

Other operating expenses

 

 

8,384

 

 

 

7,545

 

 

Total operating expenses

 

 

5,221,236

 

 

 

1,904,272

 

 

Operating loss

 

 

(5,030,232

)

 

 

(1,727,664

)

 

Realized gain (loss) on securities

 

 

(395,181

)

 

 

5,671,464

 

 

Unrealized gain on convertible debt security

 

 

288,320

 

 

 

-

 

 

Unrealized gain on marketable securities

 

 

130

 

 

 

-

 

 

Unrealized gain (loss) on investment and equity securities

 

 

(986,399

)

 

 

595,392

 

 

Digital assets other income

 

 

4,366

 

 

 

-

 

 

Interest income

 

 

98,370

 

 

 

13,055

 

 

Interest expense

 

 

-

 

 

 

(464

)

 

Dividend income

 

 

1,375

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(6,019,251

)

 

 

4,551,783

 

 

Income tax expense

 

 

-

 

 

 

(3,484

)

 

Net income (loss)

 

 

(6,019,251

)

 

 

4,548,299

 

 

Less: Net income (loss) attributable to non-controlling interest

 

 

291,200

 

 

 

(171,866

)

 

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

 

$

(5,728,051

)

 

$

4,376,433

 

 

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per share:

 

 

 

 

 

 

 

 

 

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

 

$

(0.44

)

 

$

0.87

 

 

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

 

$

(0.44

)

 

$

0.80

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

13,060,736

 

 

 

5,047,498

 

 

Diluted

 

 

13,060,736

 

 

 

5,439,398

 

 

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,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,019,251

)

 

$

4,548,299

 

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,094

 

 

 

1,696

 

Right to use non cash lease expense

 

 

23,343

 

 

 

25,808

 

Stock compensation

 

 

329,500

 

 

 

-

 

Stock option expense

 

 

3,318,737

 

 

 

-

 

Accrued investment income

 

 

(96,657

)

 

 

(12,784

)

Digital assets other income

 

 

(4,366

)

 

 

 

 

Gain on deconsolidation of  affiliate

 

 

-

 

 

 

(43,623

)

Unrealized gain on convertible debt security

 

 

(288,320

)

 

 

-

 

Unrealized gain on marketable securities

 

 

(130

)

 

 

(595,392

)

Unrealized loss on investment and equity securities

 

 

986,399

 

 

 

-

 

Realized (gain) loss on securities

 

 

395,181

 

 

 

(5,671,464

)

Proceeds from securities

 

 

1,428,050

 

 

 

21,218,918

 

Investment in convertible note receivable converted into marketable security

 

 

-

 

 

 

(15,547,454

)

Change in assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

280,208

 

 

 

710,163

 

Digital assets, net

 

 

(500,000

)

 

 

-

 

Accounts payable and accrued expenses

 

 

(136,430

)

 

 

157,514

 

Advances (repayments) from related party

 

 

252,580

 

 

 

200,749

 

Lease liability payments

 

 

(30,242

)

 

 

(24,971

)

Income tax payable

 

 

(326,178

)

 

 

3,484

 

Income tax receivable

 

 

(143,822

)

 

 

-

 

Net cash provided by (used in) operating activities

 

 

(528,304

)

 

 

4,970,943

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Net collections of finance receivables - original product

 

 

(6,550

)

 

 

14,206

 

Net collections of finance receivables - special product

 

 

(1,948

)

 

 

(1,020

)

Payments for real estate assets owned

 

 

-

 

 

 

(62,432

)

Deposit for mining equipment

 

 

(7,118,572

)

 

 

-

 

Investment in convertible note receivable

 

 

-

 

 

 

(1,666,500

)

Loan to purchase securities

 

 

-

 

 

 

1,784,250

 

Investment in note receivable - related party

 

 

(310,000

)

 

 

-

 

Repayment of loan to purchase securities

 

 

-

 

 

 

(1,784,250

)

Investment in unconsolidated affiliate

 

 

-

 

 

 

(5,738,000

)

Net cash (used in) provided by investing activities

 

 

(7,437,070

)

 

 

(7,453,746

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Principal repayments

 

 

-

 

 

 

(343,687

)

Insurance financing repayments

 

 

(57,344

)

 

 

(468,061

)

Exercise of warrants

 

 

-

 

 

 

9,544,623

 

Net cash provided by (used in) financing activities

 

 

(57,344

)

 

 

8,732,875

 

NET INCREASE (DECREASE) IN CASH

 

 

(8,022,718

)

 

 

6,250,072

 

CASH - BEGINNING OF YEAR

 

 

32,559,185

 

 

 

11,552,943

 

CASH - END OF YEAR

 

$

24,536,467

 

 

$

17,803,015

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF NON-CASHFLOW INFORMATION

 

 

 

 

 

 

 

 

ROU assets and operating lease obligation recognized

 

$

300,787

 

 

$

-

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

470,000

 

 

 

-

 

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

5


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

For the Three Months Ended March 31, 2022 and 2021

(unaudited)

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional paid in capital

 

 

Accumulated Deficit

 

 

Non-Controlling Interest

 

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2020

 

 

3,083,760

 

 

$

3,084

 

 

$

29,996,257

 

 

$

(18,536,224

)

 

$

5,191

 

 

$

11,468,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2021

 

 

13,017,943

 

 

$

13,018

 

 

$

74,525,106

 

 

$

(13,777,006

)

 

$

249,089

 

 

$

61,010,207

 

 

Stock issued for services

 

 

73,940

 

 

 

74

 

 

 

(74

)

 

 

-

 

 

 

-

 

 

 

-

 

 

Stock compensation

 

 

-

 

 

 

-

 

 

 

329,500

 

 

 

-

 

 

 

-

 

 

 

329,500

 

 

Stock option expense

 

 

-

 

 

 

-

 

 

 

3,318,737

 

 

 

-

 

 

 

-

 

 

 

3,318,737

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,728,051

)

 

 

(291,200

)

 

 

(6,019,251

)

 

Balance - March 31, 2022

 

 

13,091,883

 

 

$

13,092

 

 

$

78,173,269

 

 

$

(19,505,057

)

 

$

(42,111

)

 

$

58,639,193

 

 

 

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

 

6


 

LM FUNDING AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022

(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. The LM Funding America Inc. organized another subsidiary, US Digital Mining and Hosting Co., LLC., on September 10, 2021.

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 began 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.

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.

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 we are typically asked 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. 

Cryptocurrency Mining Business

On September 15, 2021, we announced that we plan to operate in the Bitcoin mining ecosystem. As of the date of this filing, we have not commenced operations. We aim to deploy the computing power that we will create to mine Bitcoin and validate transactions on the Bitcoin network. We believe that recent developments in Bitcoin mining have created an opportunity for us to deploy capital and conduct large-scale mining operations in the United States.  We have formed a new wholly owned subsidiary, US Digital Mining and Hosting Co, LLC, a Florida limited liability company (US Digital), to develop and operate our cryptocurrency mining business.

 

We have committed to purchasing an aggregate of 5,046 Bitcoin S19J Pro Antminer cryptocurrency mining machines for an aggregate purchase price of $31.6 million (the “Mining Machines”). We received 841 Mining Machines during the first half of May 2022. We anticipate receiving the remaining Mining Machines to be delivered in batches over an estimated delivery timeframe starting in June 2022 and continuing through October 2022.  The Bitmain Purchase Agreements required us to pay $7.9 million or 25% of the total purchase price as a non-refundable deposit for the Mining Machines within 7 days of the date of the signing of the respective Bitmain Purchase Agreements, and additional 35% of the batch price at least 6 months prior to shipment of such batch, and the remaining 40% of each batch price one month prior to the shipment of the batch.  

 

In October 2021, we also entered into a sale and purchase agreement (the “Uptime Purchase Agreement”) with Uptime Armory LLC (“Uptime”) pursuant to which US Digital agreed to purchase, and Uptime agreed to supply to US Digital, an aggregate of 18 modified 40-foot cargo containers (“POD5ive containers”) that will be designed to hold and operate 280 S19 Pro Antminers manufactured by Bitmain. The purchase price of the POD5ive containers totals $3.15 million of which $2.4 million or 75% was paid in 2021 as a non-refundable down payment and the remaining 25% is due within five business days after Uptime delivers a “notice of completion” of the equipment. On the same effective date, US Digital also entered into a hosting agreement with Uptime Hosting LLC to host the Company’s 18 POD5ive containers at a secure location and provide power, maintenance and other services specified in the contract for 6 cents per kilowatt with a term of one year. Under the hosting agreement we paid a deposit of $0.8 million in 2021 and will pay an additional deposit for each container three months prior to delivery at the hosting site of $44 thousand and a final deposit for each container one month prior to arrival at the hosting site of $44 thousand.

8


 

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.

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; US Digital Mining Hosting Co., LLC; LMF SPE #2, LLC. LMFAO Sponsor 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, 2022 and for the Three Months ended March 31, 2022 and March 31, 2021, 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 consolidated balance sheet as of December 31, 2021, 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, 2021.

 

Reclassifications

Certain prior period amounts on the balance sheet have been reclassified to conform to the current period presentation.

 

Digital Assets, net

When applicable, we account for all digital assets other than stablecoin as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. We have ownership of and control over our digital assets and use third-party custodial services to secure it. The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition. We account for stablecoin as financial assets in accordance with ASC 310, Receivables. The stablecoin are recorded at amortized cost, which approximates their fair value.

We determine the fair value of our digital assets that are accounted for as intangible assets in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for such assets (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances indicate that it is more likely than not that our digital assets are impaired. If the current carrying value of a digital asset exceeds the fair value so determined, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the price determined.

The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented separately from of any impairment losses.

During the three months ended March 31, 2022, the Company purchased an aggregate of $500,000 in stablecoin issued by Gemini Trust Company, LLC, (“GUSD”) that is backed by dollar denominated assets held by the issuer in segregated accounts with U.S.

9


regulated financial institutions.  The Company earns additional Gemini dollars on GUDS holdings, which we earned approximately $4 thousand in Gemini dollars during the period which is recognized as digital assets income.

As of March 31, 2022 we had $504,366 of GUSD. The GUSD is redeemable at a 1:1 exchange for USD at any time. The Company’s GUSD holdings are classified as Level 1 within the fair value hierarchy and carried at amortized cost, which approximates their fair value.

There is currently no specific guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.

 

Investment in Securities

Investment in Securities includes investments in common stocks, note receivables, 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.  The fair value of the BORQ convertible note receivable is based on its classification as a trading security. The Symbiont note receivable is reported at amortized costs less impairment.

Fair Value of Financial Instruments

FASB ASC 825-10, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet.

 

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.

Income (Loss) Per Share

Basic income (loss) per share is calculated as net income (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 74 thousand shares and 2.3 million shares at various times during the Three Months ended March 31, 2022 and March 31, 2021, respectively, and has weighted averaged these new shares in calculating income (loss) per share for the relevant period.

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

Diluted income (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 consisted of:

 

 

 

As of March 31,

 

 

2022

 

2021

Stock Options

 

3,956,827

 

3,860

Stock Warrants

 

7,702,441

 

391,900

 

 

 

 

 

 

Note 2. 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 Company’s filing initial public offering in 2015. Following the offering in 2015, Mr. Rodgers transferred his interest in BLG to other attorneys at the firm through a redemption of his interest in the firm, and BLG became 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.

10


 

Under the agreement, the Company paid BLG a fixed monthly fee of $82,000 for services rendered. The Company paid 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.  

On February 1, 2022, the Company consented to the assignment by BLG to the law firm BLG Association Law, PLLC (“BLGAL”) of the Services Agreement, dated April 15, 2015, previously entered into by the Company and Business Law Group, P.A. (the “Services Agreement”).  The Services Agreement had set forth the terms under which Business Law Group, P.A. would act as the primary law firm used by the Company and its association clients for the servicing and collection of association accounts.  The assignment of the Services Agreement was necessitated by the death of the principal attorney and owner of Business Law Group, P.A.  In connection with the assignment, BLGAL agreed to amend the Services Agreement on February 1, 2022, to reduce the monthly compensation payable to the law firm from $82,000 to $53,000 (the “Amendment”).  Bruce M. Rodgers, the chairman and CEO of the Company, is a 50% owner of BLGAL, and the assignment and Amendment was approved by the independent directors of the Company. A $150 thousand termination fee was also paid to BLG in association with the assignment.

The Company had originally engaged BLG on behalf of many of its Association clients to service and collect the Accounts and to distribute the proceeds as required by Florida law and the provisions of the purchase agreements between LMF and the Associations. This engagement was subsequently assigned to BLGAL as described above. Ms. Gould who is one of our directors, worked as the General Manager of BLG and works as the General Manager of BLGAL .

Amounts collected from property owners and paid to BLG or BLGAL as applicable for the Three Months ended March 31, 2022 and 2021 were approximately $188,000 and $246,000, respectively.  As of March 31, 2022 and December 31, 2021, receivables from property owners for charges ultimately payable to BLGAL or BLGAL were approximately $643,000 and $677,000, respectively.

Under the Services Agreement in effect during the Three Months ended March 31, 2022 and 2021, 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, 2022 and 2021 in the amounts of $24,000 and $22,000, respectively. Recoveries during the Three Months ended March 31, 2022 and 2021, related to those costs were approximately $20,000 for 2022 and $ 19,000  for 2021, respectively.  

The Company also shares office space and related common expenses with BLGAL (and previously BLG).  All shared expenses, including rent, are charged to BLG based on an estimate of actual usage.  Any expenses of BLGAL and 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 sheets.  BLGAL and BLG, as applicable were charged a total of approximately $15,000 and $17,000 for the office sub-lease during the Three Months ended March 31, 2022 and 2021, respectively.

In 2017, the Company assessed the collectability of the amount due from BLG and concluded that even though BLG had repaid $252,771 during 2017, it did not have the ability to repay the remaining balance at the end of 2017 and as such took a reserve of approximately $1.4 million for the balance due as of December 31, 2017. In 2021 and 2020, the Company subsequently recouped $200,000 and $500,000, respectively, of this write-off. Additional recoveries of the reserve are not expected. No amounts were recouped in 2022.

Amounts payable to BLGAL and BLG, in aggregate as of March 31, 2022 and December 31, 2021 were approximately $373,800 and $121,200, respectively.

 

11


 

Note 3. Debt and Other Financing Arrangements

 

 

 

March 31, 2022

 

 

December 31,

2021

 

 

 

 

 

 

 

 

 

 

Financing agreement with FlatIron capital that is unsecured. Down payment of $36,255 was required upfront and equal installment payments of $19,114 to be made over a 10 month period. The note matures on May 1, 2022. Annualized interest is 3.95%

 

$

57,344

 

 

$

114,688

 

 

 

 

 

 

 

 

 

 

 

 

$

57,344

 

 

$

114,688

 

 

 

Note 4. 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 2022 and 2021, 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 $4,677,000 as of March 31, 2022 and $3,246,000 as of December 31, 2021.

Significant components of the tax expense (benefit) recognized in the accompanying consolidated statements of operations for the Three Months ended March 31, 2022 and March 31, 2021 are as follows:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

March 31, 2022

 

 

March 31, 2021

 

 

 

Current tax benefit

 

 

 

 

 

 

 

 

 

 

Federal

 

$

(361,715

)

 

$

911,648

 

 

 

State

 

 

(48,102

)