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LM FUNDING AMERICA, INC. - Quarter Report: 2018 September (Form 10-Q)

 

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, 2018

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.)

 

 

302 Knights Run Avenue

Suite 1000

Tampa, FL

33602

(Address of principal executive offices)

(Zip code)

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

 

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 2.3 million shares of Common Stock, par value $0.001 per share, outstanding as of November 13, 2018.

 

 


LM FUNDING AMERICA, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
September 30, 2018 (unaudited) and December 31, 2017

3

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

4

 

 

 

 

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2018 and 2017 (unaudited)

5

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

PART II.

OTHER INFORMATION

24

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

25

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

Item 3.

Defaults Upon Senior Securities

25

 

 

 

Item 4.

Mine Safety Disclosures

25

 

 

 

Item 5.

Other Information

25

 

 

 

Item 6.

Exhibits

25

 

 

SIGNATURES

27

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

 

 

 

September 30,

2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

929,149

 

 

$

590,394

 

Finance receivables:

 

 

 

 

 

 

 

 

Original product - net (Note 2)

 

 

465,004

 

 

 

637,937

 

Special product - New Neighbor Guaranty program - net (Note 3)

 

 

263,835

 

 

 

339,471

 

Prepaid expenses and other assets

 

 

233,967

 

 

 

101,339

 

Fixed assets, net (Note 1)

 

 

42,813

 

 

 

69,505

 

Real estate assets owned (Note 1)

 

 

124,586

 

 

 

196,707

 

Other Assets

 

 

32,036

 

 

 

32,964

 

Total assets

 

$

2,091,390

 

 

$

1,968,317

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Notes payable (Note 5)

 

 

 

 

 

 

 

 

Principal amount, net

 

$

569,610

 

 

$

39,028

 

Accounts payable and accrued expenses

 

 

520,373

 

 

 

477,953

 

Due to related party (Note 4)

 

 

46,010

 

 

 

-

 

Accrued loss litigation settlement

 

 

-

 

 

 

505,000

 

Other liabilities and obligations

 

 

27,950

 

 

 

49,353

 

Total liabilities

 

 

1,163,943

 

 

 

1,071,334

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, par value $.001; 30,000,000 shares authorized; 625,318 shares issued and outstanding

 

 

625

 

 

 

625

 

Additional paid-in capital

 

 

12,085,029

 

 

 

11,914,083

 

Accumulated deficit

 

 

(11,158,207

)

 

 

(11,017,725

)

Total stockholders’ equity

 

 

927,447

 

 

 

896,983

 

Total liabilities and stockholders’ equity

 

$

2,091,390

 

 

$

1,968,317

 

 

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)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on delinquent association fees

 

$

459,505

 

 

$

593,613

 

 

$

1,574,960

 

 

$

1,888,205

 

Administrative and late fees

 

 

59,517

 

 

 

64,959

 

 

 

178,146

 

 

 

218,883

 

Recoveries in excess of cost - special product

 

 

31,446

 

 

 

134,787

 

 

 

90,546

 

 

 

219,160

 

Underwriting and other revenues

 

 

79,838

 

 

 

87,286

 

 

 

188,024

 

 

 

221,065

 

Rental revenue

 

 

151,204

 

 

 

161,726

 

 

 

591,553

 

 

 

496,614

 

Total revenues

 

 

781,510

 

 

 

1,042,371

 

 

 

2,623,229

 

 

 

3,043,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Staff costs and payroll

 

 

273,400

 

 

 

470,056

 

 

 

974,334

 

 

 

1,479,232

 

Professional fees

 

 

432,265

 

 

 

533,591

 

 

 

888,949

 

 

 

1,639,278

 

Settlement costs with associations

 

 

11,731

 

 

 

101,175

 

 

 

38,846

 

 

 

257,256

 

Selling, general and administrative

 

 

71,864

 

 

 

178,615

 

 

 

224,079

 

 

 

630,466

 

Provision for credit losses

 

 

-

 

 

 

-

 

 

 

581

 

 

 

-

 

Real estate management and disposal

 

 

178,372

 

 

 

144,992

 

 

 

460,312

 

 

 

414,928

 

Depreciation and amortization

 

 

10,884

 

 

 

18,825

 

 

 

55,195

 

 

 

65,015

 

Collection costs

 

 

8,797

 

 

 

37,994

 

 

 

38,959

 

 

 

136,489

 

Other operating expenses

 

 

3,614

 

 

 

4,153

 

 

 

15,493

 

 

 

10,969

 

Total operating expenses

 

 

990,927

 

 

 

1,489,401

 

 

 

2,696,748

 

 

 

4,633,633

 

Operating loss

 

 

(209,417

)

 

 

(447,030

)

 

 

(73,519

)

 

 

(1,589,706

)

Other income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(377,387

)

 

 

(122,406

)

 

 

(471,963

)

 

 

(375,042

)

Gain (loss) on litigation

 

 

-

 

 

 

-

 

 

 

405,000

 

 

 

(505,000

)

Loss before income taxes

 

 

(586,804

)

 

 

(569,436

)

 

 

(140,482

)

 

 

(2,469,748

)

Income tax expense

 

 

-

 

 

 

4,134,436

 

 

 

-

 

 

 

3,431,536

 

Net Loss

 

$

(586,804

)

 

$

(4,703,872

)

 

$

(140,482

)

 

$

(5,901,284

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.94

)

 

$

(14.25

)

 

$

(0.22

)

 

$

(17.88

)

Diluted

 

 

(0.94

)

 

 

(14.25

)

 

 

(0.22

)

 

 

(17.88

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

625,318

 

 

 

330,000

 

 

 

625,318

 

 

 

330,000

 

Diluted

 

 

625,318

 

 

 

330,000

 

 

 

625,318

 

 

 

330,000

 

 

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) 

 

 

Nine Months ended September 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(140,482

)

 

$

(5,901,284

)

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

55,195

 

 

 

64,003

 

Amortization of debt discount

 

 

154,676

 

 

 

-

 

Stock compensation

 

 

16,270

 

 

 

21,799

 

Amortization of debt issuance costs

 

 

291,760

 

 

 

73,922

 

(Gain) loss on litigation

 

 

(405,000

)

 

 

505,000

 

 

 

 

 

 

 

 

 

 

Change in assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(44,686

)

 

 

14,571

 

Accounts payable

 

 

(41,408

)

 

 

5,050

 

Accrued expenses

 

 

(216,172

)

 

 

20,355

 

Advances (repayments) to related party

 

 

46,010

 

 

 

94

 

Other liabilities

 

 

(21,403

)

 

 

46,813

 

Deferred taxes

 

 

-

 

 

 

3,431,536

 

Net cash used in operating activities

 

 

(305,240

)

 

 

(1,718,141

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Net collections of finance receivables - original product

 

 

172,933

 

 

 

152,810

 

Net collections of finance receivables - special product

 

 

75,633

 

 

 

157,812

 

Capital expenditures

 

 

-

 

 

 

(4,468

)

Proceeds for real estate assets owned

 

 

43,619

 

 

 

320,997

 

Net cash provided by investing activities

 

 

292,185

 

 

 

627,151

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from borrowing

 

 

500,000

 

 

 

-

 

Principal repayments

 

 

(56,430

)

 

 

(574,611

)

Debt issue costs

 

 

(91,760

)

 

 

-

 

Net cash provided by (used in) financing activities

 

 

351,810

 

 

 

(574,611

)

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

 

338,755

 

 

 

(1,665,601

)

CASH - BEGINNING OF YEAR

 

 

590,394

 

 

 

2,268,180

 

 

 

 

 

 

 

 

 

 

CASH - END OF YEAR

 

$

929,149

 

 

$

602,579

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

-

 

 

$

313,042

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Debt discount on issuance of warrants

 

 

154,676

 

 

$

-

 

Insurance financing

 

 

87,012

 

 

 

-

 

 

 

 

 

 

 

 

 

 

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


5


 

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 dated 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 is a specialty finance company that provides funding principally to community associations that are almost exclusively located in Florida. The business of the Company is conducted pursuant to relevant state statutes (the “Statutes”), principally Florida Statute 718.116. The Statutes provide each community association lien rights to secure payment from unit owners (property owners) for assessments, interest, administrative late fees, reasonable attorneys’ fees, and collection costs. In addition, the lien rights granted under the Statutes are given a higher priority (a “Super Lien”) than all other lien holders except property tax liens. The Company provides funding to associations for their delinquent assessments from property owners in exchange for an assignment of the association’s right to collect proceeds pursuant to the Statutes. The Company derives its revenues from the proceeds of association collections.

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.

The Statutes limit the liability of a first mortgage holder for unpaid assessments and related charges and fees (as set forth above) in the event of title transfer by foreclosure or acceptance of deed in lieu of foreclosure. This liability is limited to the lesser of twelve months of regular periodic assessments or one percent of the original mortgage debt on the unit (the “Super Lien Amount”).

 

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. 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 September 30, 2018 and for the three and nine months ended September 30, 2018 and September 30, 2017, 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, 2017, 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, 2017.

6


 

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the evaluation of any probable losses on amounts funded under the Company’s New Neighbor Guaranty program as disclosed below, the evaluation of probable losses on balances due from a related party, the realization of deferred tax assets, the evaluation of contingent losses related to litigation and fair value estimates of real estate assets owned.

Revenue Recognition

Accounting Standards Codification (“ASC”) 606 of the Financial Accounting Standards Board (“FASB”) states an entity needs to conclude at the inception of the contract that collectability of the consideration to which it will be entitled in exchange for the goods and services that will be transferred to the customer is probable. That is, in some circumstances, an entity may not need to assess its ability to collect all of the consideration in the contract. The Company provides funding to community associations by purchasing their rights under delinquent accounts from unpaid assessments due from property owners (the “accounts”). Collections on the accounts may vary greatly in both the timing and amount ultimately recovered compared with the total revenues earned on the accounts because of a variety of economic and social factors affecting the real estate environment in general. The Company’s contracts with its customers have very specific performance obligations.  The Company has determined that the known amount of cash to be realized or realizable on its revenue generating activities cannot be reasonably estimated.  

The Company classifies its finance receivables as nonaccrual and recognizes revenues in the accompanying statements of income on the cash basis or cost recovery method. The Company applies the cash basis method to its original product and the cost recovery method to its special product as follows:

Finance Receivables—Original Product: Under the Company’s original product, delinquent assessments are funded only up to the Super Lien Amount as discussed above. Recoverability of funded amounts is generally assured because of the protection of the Super Lien Amount. As such, payments by unit owners on the Company’s original product are recorded to income when received in accordance with the provisions of the Florida Statute (718.116(3)) and the provisions of the purchase agreements entered into between the Company and community associations. Those provisions require that all payments be applied in the following order: first to interest, then to late fees, then to costs of collection, then to legal fees expended by the Company and then to assessments owed. In accordance with the cash basis method of recognizing revenue and the provisions of the statute, the Company records revenues for interest and late fees when cash is received. In the event the Company determines the ultimate collectability of amounts funded under its original product are in doubt, payments are applied to first reduce the funded or principal amount.

Finance Receivables—Special Product (New Neighbor Guaranty program): During 2012, the Company began offering associations an alternative product under the New Neighbor Guaranty program where the Company will fund amounts in excess of the Super Lien Amount. Under this special product, the Company purchases substantially all of the delinquent assessments owed to the association, in addition to all accrued interest and late fees, in exchange for payment by the Company of (i) a negotiated amount or (ii) on a going forward basis, all monthly assessments due for a period up to 48 months. Under these arrangements, the Company considers the collection of amounts funded is not assured and under the cost recovery method, cash collected is applied to first reduce the carrying value of the funded or principal amount with any remaining proceeds applied next to interest, late fees, legal fees, collection costs and any amounts due to the community association. Any excess proceeds still remaining are recognized as revenues. If the future proceeds collected are lower than the Company’s funded or principal amount, then a loss is recognized.

Cash

The Company maintains cash balances at several financial institutions that are insured under the Federal Deposit Insurance Corporation’s (“FDIC”) Transition Account Guarantee Program. Balances with the financial institutions may exceed federally insured limits.

Finance Receivables

Finance receivables are recorded at the amount funded or cost (by unit). The Company evaluates its finance receivables at each period end for losses that are considered probable and can be reasonably estimated in accordance with ASC 450-20. As discussed above, recoverability of funded amounts under the Company’s original product is generally assured because of the protection of the Super Lien Amount. However, the Company did have an accrual at September 30, 2018 and December 31, 2017 for an allowance for credit losses for this program of $180,000 and $194,000, respectively.

7


 

Under the New Neighbor Guaranty program (special product), the Company funds amounts in excess of the Super Lien Amount. When evaluating the carrying value of its finance receivables, the Company looks at the likelihood of future cash flows based on historical payoffs, the fair value of the underlying real estate, the general condition of the community association in which the unit exists, and the general economic real estate environment in the local area. The Company estimated an allowance for credit losses for this program of $51,230 as of each of September 30, 2018 and December 31, 2017 under ASC 450-20 related to its New Neighbor Guaranty program.

The Company will charge any receivable against the allowance for credit losses when management believes the collectability of the receivable is confirmed. The Company considers writing off a receivable when (i) a first mortgage holder who names the association in a foreclosure suit takes title and satisfies an estoppel letter for amounts owed which are less than amounts the Company funded to the association; (ii) a tax deed is issued with insufficient excess proceeds to pay amounts the Company funded to the association; (iii) an association settles an account for less than amounts the Company funded to the association or (iv) the association terminates its relationship with the Company’s designated legal counsel. Upon the occurrence of any of these events, the Company evaluates the potential recovery via a deficiency judgment against the prior owner and the ability to collect upon the deficiency judgment within the statute of limitations period or whether the deficiency judgment can be sold. If the Company determines that collection through a deficiency judgment or sale of a deficiency judgment is not feasible, the Company writes off the unrecoverable receivable amount. Any losses greater than the recorded allowance will be recognized as expenses. Under the Company’s revenue recognition policies, all finance receivables (original product and special product) are classified as nonaccrual.

During the nine months ended September 30, 2018 and 2017, write offs charged against the allowance for credit losses were $14,105 and $73,770, respectively. Any losses greater than the recorded allowance will be recognized as expenses. Under the Company’s revenue recognition policies, all finance receivables (original product and special product) are classified as nonaccrual.

Real Estate Assets Owned

In the event collection of a delinquent assessment results in a unit being sold in a foreclosure auction, the Company has the right to bid (on behalf of the community association) for the delinquent unit as attorney in fact, applying any amounts owed for the delinquent assessment to the foreclosure price as well as any additional funds that the Company, in its sole discretion, decides to pay. If a delinquent unit becomes owned by the community association by acquiring title through an association lien foreclosure auction, by accepting a deed-in-lieu of foreclosure, or by any other way, the Company in its sole discretion may direct the community association to quitclaim title of the unit to the Company.

Properties quitclaimed to the Company are in most cases acquired subject to a first mortgage or other liens,and are recognized in the accompanying consolidated balance sheets solely at costs incurred by the Company in excess of original funding. At times, the Company will acquire properties through foreclosure actions free and clear of any mortgages or liens. In these cases, the Company records the estimated fair value of the properties in accordance with ASC 820-10, Fair Value Measurements. Any real estate held for sale is adjusted to fair value less the cost to dispose in the event the carrying value of a unit or property exceeds its estimated net realizable value.

The Company capitalizes costs incurred to acquire real estate owned properties and any costs incurred to get the units in a condition to be rented.  These costs include, but are not limited to, renovation/rehabilitation costs, legal costs, and delinquent taxes.  These costs are depreciated over the estimated minimum time period the Company expects to maintain possession of the units.  Costs incurred for unencumbered units are depreciated over 20 years and costs for units subject to a first mortgage are depreciated over 3 years.  As of September 30, 2018 and December 31, 2017, capitalized real estate costs, net of accumulated depreciation, were $124,586 and $196,707, respectively.  

During the three and nine month periods ended September 30, 2018 and 2017, depreciation expense for real estate was $5,858 and $28,503, respectively for 2018 and $8,539 and $34,459, respectively for 2017.

If the Company elects to take a quitclaim title to a unit or property held for sale, the Company is responsible to pay all future assessments on a current basis, until a change of ownership occurs. The community association must allow the Company to lease or sell the unit to satisfy obligations for delinquent assessments of the original debt. All proceeds collected from any sale of the unit shall be first applied to all amounts due the Company plus any additional funds paid by the Company to purchase the unit, if applicable. Rental revenues and sales proceeds related to real estate assets held for sale are recognized when earned and realizable. Expenditures for current assessments owed to associations, repairs and maintenance, utilities, etc. are expensed when incurred.

If the community association elects (prior to the Company obtaining title through its own election) to maintain ownership and not quitclaim title to the Company, the community association must pay the Company all interest, late fees, collection costs, and legal fees expended, plus the original funding on the unit, which have accrued according to the purchase agreement entered into by the community association and the Company. In this event, the unit will be reassigned to the community association.

8


 

Fixed Assets

The Company capitalizes all acquisitions of fixed assets in excess of $500. Fixed assets are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Fixed assets are comprised of furniture, computer and office equipment with an assigned useful life of 3 to 5 years. Fixed assets also include capitalized software costs. Capitalized software costs include costs to develop software to be used solely to meet the Company’s internal needs, consist of employee salaries and benefits and fees paid to outside consultants during the application development stage, and are amortized over their estimated useful life of 5 years. As of September 30, 2018 and December 31, 2017, capitalized software costs, net of accumulated amortization, was $27,766 and $45,210, respectively. Amortization expense for capitalized software costs for the three and nine month periods ended September 30, 2018 and 2017 was $5,815 and $17,444, respectively for 2018, and $5,815 and $17,444, respectively for 2017. 

Debt Issue Costs

The Company capitalizes all debt issue costs and amortizes them on a method that approximates the effective interest method over the remaining term of the note payable. The Company capitalizes all debt issue costs and amortizes them on a method that approximates the effective interest method over the remaining term of the note payable. The Company incurred $91,760 of debt issuance costs for the nine months ended September 30, 2018. Unamortized debt issue costs of $0 at September 30, 2018 and $0 at December 31, 2017 are presented in the accompanying condensed consolidated balance sheets as other assets until the loan proceeds are received which at that time will be reclassified as a direct deduction from the carrying amount of that debt liability in accordance with Accounting Standards Update (“ASU”) 2015-03 (see below). The Company adopted this new standard in the first quarter of fiscal 2016. The adoption of this standard did not have a material impact on the Company's consolidated financial position and had no impact on its consolidated income or cash flows. In addition, the amortization of debt issuance costs is to be reported as interest expense under ASU 2015-03 (ASC 835-30-45-3).  During the three and nine months ended September 30, 2018 and 2017, the amortization of debt issuance costs was $286,055 and $ 291,760, respectively for 2018 and $24,641 and $73,922, respectively for 2017.

Debt Discount

On April 2, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with a New York-based family office (“Investor”), which was subsequently amended (see Note 8. Subsequent Events), pursuant to which the Company issued to Investor a Senior Convertible Promissory Note (“Note”) in the original principal amount of $500,000 in exchange for a purchase price of $500,000.  The maturity date of the Note is six months after the date of issuance (subject to acceleration upon an event of default).  The Note carries a 10.5% interest rate, with accrued but unpaid interest being payable on the Note’s maturity date.  Investor was also issued pursuant to the SPA five- year warrants exercisable at the closing per share bid price on April 2, 2018 to purchase 40,000 shares of the Company’s common stock (the “Warrants”) (see Note 5. Long Term Debt).

The 40,000 warrants were valued on the grant date at approximately $3.87 per warrant or a total of $154,676 using a Black-Scholes option pricing model with the following assumptions: stock price of $7.40 per share (based on the quoted trading price on the date of grant), volatility of 100.6%, expected term of 5 years, and a risk-free interest rate of 2.55%. The fair value of the warrants ($154,676) was treated as a debt discount that is being amortized over 6 months.  The amortization of the discount is recognized as interest expense of which $154,676 was recognized for the three and nine months ended September 30, 2018.

Settlement Costs with Associations

Community associations working with the Company will at times incur costs in connection with litigation initiated by the Company against property owners and/or mortgage holders. These costs include settlement agreements whereby the community association agrees to pay some monetary compensation to the opposing party or judgments against the community associations for fees of opposing legal counsel or other damages awarded by the courts. The Company indemnifies the community association for these costs pursuant to the provisions of the agreement between the Company and the community association. Costs incurred by the Company for these indemnification obligations for the three and nine months ended September 30, 2018 and 2017 were approximately $12,000 and $39,000, respectively for 2018 and $101,000 and $257,000, respectively for 2017. The Company does not limit its indemnification based on amounts ultimately collected from property owners.  

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes resulting primarily from the tax effects of temporary differences between financial and income tax reporting. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

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

9


 

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 2017 and 2016, the Company concluded there was not sufficient positive evidence to overcome this recent operating history. As a result, the Company believes that a valuation allowance was necessary based on the more-likely-than-not threshold noted above. The Company recorded a valuation allowance of approximately of $3,620,000 during the year ended December 31, 2017 equal to its deferred tax asset as of December 31, 2017. The valuation allowance was subsequently reduced to reflect the decrease in deferred tax assets resulting from the tax act of 2017.

 

The Company incurred net income for the first nine months ended September 30, 2018, but no income tax expense was recorded because the net operating carryforward losses would offset the net income resulting in no current tax expense.

Loss Per Share

On October 15, 2018, the Company effected a common share consolidation (“Reverse Stock Split”) by means of a one-for-ten (1:10) reverse split of its outstanding common stock, par value $0.001 per share which resulted in a decrease in outstanding common stock to 625,318 shares.  The Reverse Stock Split became effective, on October 16, 2018 and the Company’s common stock began trading on The Nasdaq Global Market on a split-adjusted basis on October 16, 2018.

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

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

 

As of September 30,

 

2018

2017

Stock Options

19,800

26,700

Stock Warrants

160,000

120,000

 

On April 2, 2018, the Company issued warrants that allowed for the right to purchase 40,000 shares of common stock at an exercise price of $6.605 per share. Due to the subsequent issuance of stock and warrants, these warrants now have the right to purchase 143,587 shares at an exercise price of $1.84 per share. These warrants have average remaining life of 4.50 years as of September 30, 2018. These warrants expire in the year 2023.  

Stock-Based Compensation

 

The following is a summary of the stock option plan activity during the nine months ended September 30, 2018 and 2017:

 

 

 

2018

 

 

2017

 

 

 

Number of Options

 

 

Weighted Average Exercise Price

 

 

Number of Options

 

 

Weighted Average Exercise Price

 

Options Outstanding at Beginning of the year

 

 

11,290

 

 

$

111.10

 

 

 

26,700

 

 

$

110.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

10,000

 

 

 

10.00

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Adjustment

 

 

1,010

 

 

 

125.00

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(2,500

)

 

 

125.00

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding at End of Period

 

 

19,800

 

 

$

62.13

 

 

 

26,700

 

 

$

110.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Exercisable at End of Period

 

 

3,790

 

 

$

107.64

 

 

 

3,790

 

 

$

100.00

 

 

 

10


 

The Company records all equity-based incentive grants to employees and non-employee members of the Company’s Board of Directors in operating expenses in the Company’s Consolidated Statements of Operations based on their fair values determined on the date of grant. Stock-based compensation expense, reduced for estimated forfeitures, is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the outstanding equity awards.

The Company recognized stock compensation expense after forfeitures for the nine month periods ended September 30, 2018 and 2017 of $16,270 and $21,799 respectively.

On May 29, 2018 the Company granted a total of 10,000 stock options to our employees at an exercise price of $10.00 per share.  These awards will vest evenly over a three year period. The maximum term of an option is 10 years from the date of grant.  The grant date fair value of the options granted was $3.50.  The 10,000 options granted in May 2018 were valued on the grant date at approximately $3.50 per option or a total of $35,100 using a Black-Scholes option pricing model with the following assumptions: stock price of $6.00 per share (based on the quoted trading price on the date of grant), volatility of 108.0%, expected term of 6 years, and a risk-free interest rate of 2.65%. The Company expensed $3,972 of these awards as of September 30, 2018 and has $31,128 remaining to be expensed over the next 3 years.

 

Contingencies

The Company accrues for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, the Company reassesses its position and makes appropriate adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal and other regulatory matters.    

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. The Company engages a third-party valuation firm to assist in estimating the fair value of its finance receivables.

Risks and Uncertainties

Funding amounts are secured by a priority lien position provided under Florida law (see discussion above regarding Florida Statute 718.116). However, in the event the first mortgage holder takes title to the property, the amount payable by the mortgagee to satisfy the priority lien is capped under this same statute and would generally only be sufficient to reimburse the Company for funding amounts noted above for delinquent assessments. Amounts paid by the mortgagee would not generally reimburse the Company for interest, administrative late fees and collection costs. Even though the Company does not recognize these charges as revenues until collected, its business model and long-term viability is dependent on its ability to collect these charges.  

In the event a delinquent unit owner files for bankruptcy protection, the Company may at its option be reimbursed by the association for the amounts funded (i.e., purchase price) and all collection rights are re-assigned to the association.

New Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting pursuant to Topic 718. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The amendments in this update are required to be applied prospectively to an award modified on or after the adoption date. This standard became effective for the Company as of January 1, 2018. The impact this standard will have on the Company's consolidated financial statements and related disclosures will be dependent on the terms and conditions of any modifications made to share-based awards after January 1, 2018.

 

11


 

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." This ASU creates a single, comprehensive revenue recognition model for all contracts with customers. The model is based on changes in contract assets (rights to receive consideration) and liabilities (obligations to provide a good or service). Revenue will be recognized based on the satisfaction of performance obligations, which occurs when control of a good or service transfers to a customer and enhanced disclosures will be required regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Either a retrospective or cumulative effect transition method, referred to as the modified retrospective method, is permitted. The impact from the adoption of this standard was immaterial to the consolidated financial statements for the full fiscal year 2018. The Company adopted ASU 2014-09 on January 1, 2018 using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an increase to the opening balance of retained earnings. There was no impact from the cumulative effect adjustment for the nine months ended September 30, 2018.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. ASU 2016-02 requires a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and provides certain practical expedients that companies may elect including those contained in ASU 2018-01, "Leases (Topic 842): Lease Easement Practical Expedient for Transition to Topic 842". This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses which establishes a new approach for credit impairment based on an expected loss model rather than an incurred loss model. The standard requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses.  The guidance is effective January 1, 2020 with a one-year early adoption permitted.  The Company is evaluating the impact of the new guidance.

 

In June 2018, the FASB issued ASU No. 2018-07 " Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting".  The standard simplified the accounting for share-based payments granted to nonemployees for goods and services, therefore guidance on such payments to nonemployees would be mostly aligned with the requirements for share-based payments granted to employees. ASU 2018-07 will be effective for us beginning October 1, 2019, but early adoption is permitted (but no earlier than the adoption date of Topic 606). We are currently evaluating the impact of implementation of this standard on our financial statements.

 

Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact to the Company.

 

Reclassifications

 

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

                                                            

    

 

              

     

12


 

 

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 based on the year of funding are approximately as follows:

 

 

 

September 30, 2018

 

 

December 31, 2017 (Audited)

 

Funded during the current year

 

$

45,000

 

 

$

118,000

 

1-2 years outstanding

 

 

51,000

 

 

 

38,000

 

2-3 years outstanding

 

 

25,000

 

 

 

12,000

 

3-4 years outstanding

 

 

8,000

 

 

 

24,000

 

Greater than 4 years outstanding

 

 

516,000

 

 

 

640,000

 

 

 

 

645,000

 

 

 

832,000

 

Reserve for credit losses

 

 

(180,000

)

 

 

(194,000

)

 

 

$

465,000

 

 

$

638,000

 

Number of active units with delinquent assessments

 

 

896

 

 

 

1,162

 

Amount of outstanding interest and late fees on

   active units

 

$

13,264,000

 

 

$

14,600,000

 

 

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 September 30, 2018, maximum future contingent payments under these arrangements was approximately $269,000.     

Delinquent assessments and accrued charges under these arrangements are as follows:

 

 

September 30, 2018

 

 

December 31, 2017 (Audited)

 

Finance receivables, net

 

$

264,000

 

 

$

339,000

 

Delinquent assessments

 

 

799,000

 

 

 

1,200,000

 

Accrued interest and late fees

 

 

515,000

 

 

 

728,000

 

Number of active units with delinquent assessments

 

 

68

 

 

 

97

 

 

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 New Neighbor Guaranty 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 $51,000 as of each of September 30, 2018 and December 31, 2017.

 

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 or “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.

13


 

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 per month 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 and nine months ended September 30, 2018 and 2017 were approximately $246,000 and $738,000, respectively for 2018 and $246,000 and $738,000, respectively for 2017.  As of September 30, 2018 and December 31, 2017, receivables from property owners for charges ultimately payable to BLG approximate $2,986,000 and $3,657,000, respectively.

Under the related party agreement with BLG in effect during 2017 and 2018, 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 and nine months ended September 30, 2018 and 2017 of $75,000 and $248,000, respectively for 2018 and $128,000 and $394,000, respectively for 2017. Recoveries during the three and nine month periods ended September 30, 2018 and 2017, related to those costs were approximately $66,000 and $208,000, respectively for 2018 and $91,000 and $258,000, respectively for 2017.  

The Company also shares office space and related common expenses with BLG.  All shared expenses, including rent, are charged to the legal firm 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.

The Company assessed the collectability of the amount due from BLG as of December 31, 2017 and concluded that even though BLG had repaid $252,771 during the year, it did not have the ability to repay the remaining balance and as such took a reserve of approximately $1.4 million for the balance due as of December 31, 2017.  Amounts receivable from (payable to) BLG as of September 30, 2018 and December 31, 2017 were approximately $(46,000) and $0, respectively.

 

Note 5. Long-Term Debt and Other Financing Arrangements  

 

 

September 30, 2018

 

 

December 31, 2017 (Audited)

 

Financing agreement with FlatIron capital that is unsecured.  Down payment of $16,500 was required upfront and equal installment payments of $9,610 were made over a 10 month period. The note matured May 31, 2018. Annualized interest rate was 5.25%

 

$

-

 

 

$

39,028

 

Financing agreement with FlatIron capital that is unsecured.  Down payment of $28,125 was required upfront and equal installment payments of $8,701 to be made over a 10 month period. The note matures May 1, 2019. Annualized interest is 5.99%

 

$

69,610

 

 

$

-

 

Senior secured convertible promissory note issued to Esousa Holdings LLC bearing interest at 10.5% that matures October 2, 2018. The interest is payable upon maturity. The note is secured by a lien on all of the assets of the Company.

 

 

500,000

 

 

 

 

 

 

 

 

569,610

 

 

 

39,028

 

Less: debt issuance costs

 

 

-

 

 

 

-

 

         debt discount

 

 

-

 

 

 

 

 

 

 

$

569,610

 

 

$

39,028

 

 

On April 2, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with a New York-based family office (“Investor”), which was subsequently amended on July 23, 2018, pursuant to which the Company issued to Investor a Senior Convertible Promissory Note (“Note”) in the original principal amount of $500,000 in exchange for a purchase price of $500,000.  The maturity date of the Note is nine months after the date of issuance (subject to acceleration upon an event of default).  The Note carries a 10.5% interest rate, with accrued but unpaid interest being payable on the Note’s maturity date (see Note 8. Subsequent

14


 

Events).  Investor was also issued pursuant to the SPA five- year warrants exercisable at a per-share exercise price of $6.605 to purchase 40,000 shares of the Company’s common stock (the “Warrants”) (see section entitled “Debt Discount” under Note 1.). Due to the subsequent issuance of stock and warrants, these warrants now have the right to purchase 143,587 shares at an exercise price of $1.84 per share (See Note 8 Subsequent Events).

 

The Note originally allowed the Investor the option at any time on or after the maturity date to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the Note into fully paid and non-assessable shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), at a conversion price equal to 85% of the lowest daily volume weighted average price of the Common Stock in the 10 trading days immediately prior to conversion.  This conversion feature was removed upon a subsequent amendment on July 23, 2018.

 

On April 2, 2018, the Company also entered into a Common Stock Purchase Agreement (“Purchase Agreement”) with Investor relating to the purchase by Investor from the Company up to $5,000,000 of the Company’s Common Stock.  The Purchase Agreement provides that, upon the terms and subject to the conditions set forth therein, Investor has committed to purchase up to $5,000,000 worth of the Company’s Common Stock (“Purchase Shares”) over a 2-year period beginning on the date on which a registration statement relating to the resale of the Purchase Shares (the “Registration Statement”) is first declared effective by the U.S. Securities and Exchange Commission (the “Commission”).

The Purchase Agreement requires the Company to pay the Investor a commitment fee equal to $200,000 on the earlier of the first draw on the Purchase Agreement or October 3, 2018 which was unpaid as of September 30, 2018. This amount was expensed as interest expense as of September 30, 2018 since the Company cancelled this Purchase Agreement on October 5, 2018.

 

As contemplated by the Purchase Agreement, on April 2, 2018, the Company entered into registration rights agreement with the Investor (the “Registration Rights Agreement”).  The Registration Rights Agreement, as amended on July 23, 2018, requires that an initial registration statement for the Purchase Shares be filed by August 13, 2018 (the “Filing Deadline”) and be declared effective by September 13, 2018 (the “Effectiveness Deadline”).  If the Company fails to meet the Filing Deadline or the Effectivness Deadline, subject to certain terms provided for in the Registration Rights Agreement, the Company will be required to pay liquidated damages to the Investor. The Registration Rights Agreement also provides for customary indemnification and contribution provisions. This Agreement was cancelled at the same time the Purchase Agreement was cancelled on October 5, 2018.

 

Note 6. Management’s Plans

 

On August 27, 2014, FASB issued ASU 2014-05, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern within one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.

 

The Company has experienced significant operating losses over the past 2 years (2016 and 2017) and generated a net loss for the three and nine months ended September 30, 2018. These losses resulted in the usage of all cash proceeds from the Company’s initial public offering in 2015. The Company successfully raised $5.4 million through a secondary public offering on October 30, 2018.

       

We believe that we have enough cash to mitigate the substantial doubt raised by our recent operating losses and satisfy our estimated liquidity needs for the 12 months from the issuance of these financial statements and avoid any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-05.  However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. Additionally, a failure to generate additional liquidity could negatively impact our ability to acquire units.

 

15


 

Note 7. Commitments and Contingencies

Leases

The Company leases its office under an operating lease beginning March 1, 2014 and ending July 31, 2019.

Future minimum lease payments due under this lease as of September 30, 2018 are as follows:

 

Years Ending

 

 

 

 

December 31,

 

 

 

 

2018

 

$

86,000

 

2019

 

 

101,000

 

 

 

$

187,000

 

 

The Company shares this space and the related costs associated with this operating lease with a related party which generates $168,000 of annual rental income (see Note 4) that also performs legal services associated with the collection of delinquent assessments.  The Company’s sub-lease to an unrelated party usually generates $71,000 of annual rental income, however they are currently in default on their sub-lease.

Legal Proceedings

Other than the lawsuit described below, we are not currently a party to material litigation proceedings. However, we frequently become party to litigation in the ordinary course of business, including either the prosecution or defense of claims arising from contracts by and between us and client Associations. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense, and settlement costs, diversion of management resources and other factors.

 

The Company accrues for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, the Company reassesses its position and makes appropriate adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters.

We were a defendant in an action entitled Solaris at Brickell Bay Condominium Association, Inc. v. LM Funding, LLC, which was brought before the Circuit Court of the Eleventh Judicial Circuit, Miami-Dade Civil Division on July 31, 2014.  In this matter, which was initially preliminarily settled in August 2017, the plaintiff (an association under contract with us) alleged claims such as a usurious loan transaction, state and federal civil Racketeer Influenced and Corrupt Organization Act claims, Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) violations, and other related claims, and the plaintiff requested rescission of their agreement with us, forfeiture of all amounts lent by us to the plaintiff, a declaratory judgment that we have violated FDUTPA, other damages for breach of contract and violations of FDUTPA, and attorneys’ fees.  On August 4, 2017, an order by the court was entered on Plaintiff’s Motion for Preliminary Approval of Class Action Settlement Agreement. In the order, the motion of the Plaintiff, Solaris at Brickell Bay Condominium Association, Inc., individually and on behalf of the certified plaintiff class (“Plaintiffs”), for approval of the Class Action Settlement Agreement (the “Settlement Agreement”) with Defendant LM Funding, LLC was granted. Despite our belief that we are not liable for the claims asserted and that we have good defenses thereto, we nevertheless agreed to enter into the Settlement Agreement in order to: (1) avoid any further expense, inconvenience, and distraction of burdensome and protracted litigation and its consequential negative financial effects to our operations; (2) obtain the releases, orders, and final judgment contemplated by the Settlement Agreement; and (3) put to rest and terminate with finality all claims that had been or could have been asserted against us by the Plaintiffs arising from the facts alleged in the lawsuit. Pursuant to the agreement subsequently reached between counsel, all required actions and deadlines set forth in the Settlement Agreement are currently stayed. On March 1, 2018 a continuation of the abatement was granted until April 2, 2018. As of December 31, 2017, the Company had accrued costs of $505,000 as part of the Settlement Agreement. The settlement amount was contingent upon the Company obtaining sufficient financing within the allotted timeframe of the Settlement Agreement. On April 2, 2018, the Plaintiffs withdrew from the Settlement Agreement. On August 14, 2018, the parties to the Solaris class action litigation entered into a revised settlement in which the Plaintiffs amended their complaint (the Fourth Amended Complaint) to reflect no demand for damages and only a claim for declarative and injunctive relief and amended the class definition to reflect a requirement that class members must have active units still under contract with LMF under a “Traditional Model” waterfall in the Allocation of Collection Proceeds.  This was submitted to the court who approved the amended Complaint and Class Action Settlement Agreement.  On November 6, 2018, the court entered an order granting Plaintiff’s Motion for Final Approval of Class Action Settlement.  The New Settlement Agreement will also reimburse the Plaintiff’s opposing counsel $99,000 plus an administrative fee.

As such, the Company adjusted the class action accrual to $100,000 and recorded a $405,000 class action reversal to the statement of operations. The amount was paid in the third quarter ended September 30, 2018.

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The Company received a $200,000 insurance reimbursement for a previously resolved case that is reflected as a reduction of professional fees for the three and nine months ended September 30, 2018.

 

Note 8. Subsequent Events

 

On October 5, 2018, the Company exercised its right to terminate the Purchase Agreement originally entered into on April 2, 2018 with the Investor. The Company also repaid the $500,000 note and accrued interest on October 5, 2018. The Company paid the $200,000 Commitment Fee on November 2, 2018 (see Note 5. Long-Term Debt).

 

On October 30, 2018, LM Funding America, Inc. (the Company) entered into an underwriting agreement (the Underwriting Agreement) with Maxim Group LLC (the Underwriter) with respect to the issuance and sale, in an underwritten public offering (the “Offering”), of (i) 1,005,000 units (the “Units”), with each Unit being comprised of one share of Company common stock, par value $0.001 per share (“Common Stock”), and one warrant to purchase one share of Common Stock (the “Common Warrants”), (ii) 1,495,000 pre-funded units (the “Pre-Funded Units”), with each Pre-Funded Unit being comprised of one pre-funded warrant to purchase one share of Common Stock at an exercise price of $.01 per share (the “Pre-Funded Warrants”) and one Common Warrant. Each Unit was sold for a price of $2.40 per Unit, and each Pre-Funded Unit was sold for a price of $2.39 per Unit.   The shares of Common Stock and Common Warrants included in the Units, and the Common Warrants and Pre-Funded Warrants included in the Pre-Funded Units, were offered together, but the securities included in the Units and Pre-Funded Units are issued separately.

 

Pursuant to the Underwriting Agreement, the Company has granted the Underwriter a 45-day option to purchase up to an additional 375,000 shares of Common Stock and/or Common Warrants and/or Pre-Funded Warrants at price of $2.399999 per shares of Common Stock, $0.000001 per Common Warrant, and $2.389999 per Pre-Funded Unit (the Over-Allotment).

 

Pursuant to the Underwriting Agreement, the Company agreed to issue to the Underwriter warrants (the Underwriter Warrant) to purchase a number of shares of Common Stock equal to an aggregate of 5% of the total number of shares of Common Stock sold in the Offering at an exercise price of $2.64 per share, which is 110% of the public offering price.  The Underwriter Warrant is exercisable for a three-year period beginning six months following the closing of the Offering.  The Underwriter received an underwriting discount equal to 8.0% of the offer price of the aggregate number of Units and Pre-Funded Units sold in the Offering and Over-Allotment. The Company also agreed to reimburse the Underwriter for reasonable out-of-pocket expenses related to the Offering, including, without limitation, the reasonable fees and expenses of counsel to the Underwriter, up to $90,000.

 

The Common Warrants are immediately exercisable at a price of $2.40 per share of Common Stock, subject to adjustment in certain circumstances, and will expire five years from the date of issuance.  The Common Warrants contain a full-ratchet anti-dilution exercise price adjustment upon the issuance of any Common Stock, securities convertible into Common Stock or certain other issuances at a price below the then-existing exercise price of the Common Warrants, with certain exceptions.

 

The Offering closed on November 1, 2018.  A registration statement on Form S-1 relating to the Offering (File No. 333-227203) was declared effective by the Securities and Exchange Commission on October 29, 2018.  The Offering is being made only by means of a prospectus forming a part of the effective registration statement.  Simultaneously with the closing, the Company sold additional Common Warrants to purchase up to 375,000 shares of Common Stock in connection with the partial exercise of the Over-Allotment.  

 

The net proceeds of the Offering are approximately $5.4 million, after deducting the underwriting discounts and commissions and offering expenses and assuming no exercise of the Common Warrants or Underwriter Warrant. The Company intends to use the net proceeds from the Offering for general corporate purposes, including working capital and payment of a past-due $200,000 financing fee to a third-party.  As a result of the Offering, the Company’s stockholders’ equity will exceed $2.5 million and its publicly held shares (i.e., shares not held directly or indirectly by an officer, director, or greater-than-10% of the total shares outstanding) will be approximately 1.1 million shares.

 

On April 2, 2018, the Company issued warrants that allowed for the right to purchase of 40,000 shares of common stock at an exercise price of $6.605 per share. Due to the subsequent issuance of stock and warrants resulting from the Underwriting Agreement, these warrants now have the right to purchase 143,587 shares at an exercise price of $1.84 per share. These warrants have average remaining life of 4.50 years as of September 30, 2018. These warrants expire in the year 2023.

On November 2, 2018, the Company invested part of the proceeds by purchasing a Securities Purchase Agreement (the “IIU SPA”) from IIU Inc. (“IIU”), a possible synergistic Virginia based travel insurance brokerage company controlled by Craven House N.A. (which owns approximately 27% of the Company’s outstanding stock as of November 13, 2018), pursuant to which IIU issued to the Company a Senior Convertible Promissory Note (“IIU Note”) in the original principal amount of $1,500,000 in exchange for a

17


 

purchase price of $1,500,000.  The maturity date of the Note is 360 dates after the date of issuance (subject to acceleration upon an event of default).  The Note carries a 3.0% interest rate, with accrued but unpaid interest being payable on the Note’s maturity date.  

 

The IIU Note allows the Company the right on or after the maturity date to convert any unpaid principal and accrued and unpaid interest of the IIU Note into shares of IIU based on a conversion amount which is the fair value of the common shares of IIU at the time. The conversion price will be reset if IIU issues or sells common shares, convertibles securities or options at a price per share that is less than the conversion price in effect immediately prior to such issue or sale or deemed issuance or sale of such dilutive issuance.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” “believes,” or the negative thereof or any variation thereon or similar terminology or expressions.

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties, and assumptions about us that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect our results and our future performance include, without limitation, our ability to purchase defaulted consumer receivables at appropriate prices, changes in governmental regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, and negative press regarding the debt collection industry which may have a negative impact on a debtor’s willingness to pay the debt we acquire, as well as other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and Item 1A of this Quarterly Report on Form 10-Q.

Except as required by law, we assume no duty to update or revise any forward-looking statements.

Overview

We are a specialty finance company that provides funding to nonprofit community associations primarily located in the state of Florida and, to a lesser extent, nonprofit community associations in the states of Washington, Colorado, and, since February 2016, Illinois. 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. We provide 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. More recently, we have started to engage in the business of purchasing Accounts on varying terms tailored to suit each Association’s financial needs, including under our New Neighbor Guaranty program.

Because of our role as a trusted advisor to our Association clients, we are exploring a potential product line which resembles a more traditional consulting model for Associations desirous of this relationship. Areas of our consultancy may include purchase money mortgage qualification consulting, accounts receivable management, reserve study recommendations, and property tax assessed value analysis. In the event we move forward with this new product line, we will seek to provide services and advice inside of our core competency of community association finance in an effort to drive demand for our financial products.  

In our original product offering, we typically purchase an Association’s right to receive a portion of the proceeds collected from delinquent unit owners. Once under contract, we engage law firms, typically on behalf of our Association clients pursuant to a power of attorney, to perform collection work on delinquent unit accounts. Our law firms typically service collection matters on a deferred billing basis whereby payment is received upon collection from the delinquent unit account debtors or at a predetermined contractual rate if amounts collected from delinquent unit account debtors are less than legal fees and costs incurred. We typically fund an amount less than or equal to the statutory “Super Lien Amount” an Association would recover at some point in the future based on the

18


 

Association’s statutory lien priority. Upon collection of an Account, the law firm retained for the collection matter distributes proceeds pursuant to the terms of the agreement by and between the Association and us. Not all agreements are the same, but our typical payoff distribution will result in us first recovering amounts advanced to the Association, interest, late fees, and costs advanced, with legal fees kept by the retained law firm, and assessment amounts remitted to the Association client. In connection with our business, we have developed proprietary software for servicing Accounts, which we believe enables law firms to service Accounts efficiently and profitably.

Under the 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 an amount less than or equal to the monthly assessment payment for each assigned delinquent unit account. This simultaneously eliminates a substantial portion of the Association’s balance sheet bad debts and assists the Association in meeting its budget by both guaranteeing periodic revenues and relieving the Association of its legal fee and cost burdens typically incurred to collect bad debts.

In our initial underwriting of an Association and its individual Accounts, we review the property values of the underlying units, the governing documents of the Association, the total number of delinquent receivables held by the Association, the legal proceedings instituted, and many other factors. While we are relatively certain of the actions necessary to produce a revenue event, we cannot predict when an individual delinquent unit account will have a revenue event or payoff.

Corporate History and Reorganization

The Company was originally organized in January 2008 as a Florida limited liability company under the name LM Funding, LLC. Historically, all of our business was conducted through LM Funding, LLC and its subsidiaries (the “Predecessor”). Immediately prior to our initial public offering in October 2015, the members of LM Funding, LLC contributed all of their membership interests to LM Funding America, Inc., a Delaware corporation incorporated on April 20, 2015 (“LMFA”), in exchange for an aggregate of 2,100,000 shares of the common stock of LMFA (the “Corporate Reorganization”). Immediately after such contribution and exchange, the former members of LM Funding, LLC became the holders of 100% of the issued and outstanding common stock of LMFA, thereby making the LM Funding, LLC a wholly-owned subsidiary of LMFA. As used in this discussion and analysis, unless the context requires otherwise, references to “LMF,” “LM Funding,” “we,” “us,” “our,” “the Company,” “our company,” and similar references refer to (i) following the date of the Corporate Reorganization, LM Funding America, Inc., a Delaware corporation, and its consolidated subsidiaries, and (ii) prior to the date of the Corporate Reorganization, LM Funding, LLC, a Florida limited liability company, and its consolidated subsidiaries.

Results of Operations

The Three Months Ended September 30, 2018 compared with the Three Months Ended September 30, 2017

Revenues

During the Three Months ended September 30, 2018, total revenues decreased by approximately $261 thousand, or 25%, to $781 thousand from $1,042 thousand in the Three Months ended September 30, 2017.

Interest on delinquent association fees for the Three Months ended September 30, 2018 decreased $134 thousand or 22.6% as the number of payoffs decreased slightly to 212 payoff occurrences as compared to 214 payoff occurrences for the three months ended September 30, 2017.   “Payoffs” consist of recovery of the entire legally collectible portion, or a settlement thereof, of our principal investment, accrued interest, and late fees owed to us from the proceeds of the Accounts collected by the Associations in accordance with our contracts with Associations. We believe the flattening of payoff occurrences is attributed to an improved economy that encourages people to resolve their debt situations.  The decrease in revenue was due in part to a decrease in revenue per unit. The average revenue per unit per the Statement of Operations, excluding rental revenue decreased slightly to $2,970 for the Three Months ended September 30, 2018 compared with $4,110 for the Three Months ended September 30, 2017.

We saw a slight decrease in rental operation revenue in the Three Months ended September 30, 2018 of $11 thousand to $151 thousand from $162 thousand for the Three Months ended September 30, 2017. This was due to a stabilization of the utilization of our rental base in 2017 that has carried over into 2018.  

Operating Expenses

During the Three Months ended September 30, 2018, operating expenses decreased $498 thousand, or 33.5%, to $991 thousand from $1,489 thousand for the Three Months ended September 30, 2017. The decrease in operating expenses can be attributed to various factors, including a reduction in staffing costs of $197 thousand resulting from fewer employees in 2018 as compared to the comparable period in 2017, reduced professional fees of $101 thousand resulting from a reduction in fees arising from corporate

19


 

litigation matters, a $89 thousand decrease in collection expense and a $107 thousand decline in selling, general and administrative costs arising from lower marketing costs, less rent expense due to a sub-lease and lower travel and entertainment costs.

Legal fees, excluding fees from the BLG service agreement, for the Three Months ended September 30, 2018 were $186 thousand as compared with approximately $288 thousand for the Three Months ended September 30, 2017.  In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using our network of third party law firms, against debtors. In addition, debtors occasionally initiate litigation against us. The settlement costs of these lawsuits decreased by approximately $89 thousand to approximately $12 thousand compared with approximately $101 thousand for the Three Months ended September 30, 2017.

Legal fees for BLG for the Three Months ended September 30, 2018 were $246 thousand compared to $246 thousand for the Three Months ended September 30, 2017. See Note 4. Due to Related Party for further discussion regarding the service agreements with BLG.  

Interest Expense

During the Three Months ended September 30, 2018, the Company incurred $377 thousand of interest expense as compared to $122 thousand of interest expense for the Three Months ended September 30, 2017. This increase reflects the expense of all deferred financing costs as the $500,000 loan was repaid on October 5, 2018 and the $200,000 Commitment Fee expense associated with the Purchase Agreement that was cancelled on October 5, 2018 as well as $78 thousand expense of the $154 thousand debt discount associated with the issuance of warrants (See note 5 Debt).   

Income Tax Expense

During the Three Months ended September 30, 2018, the Company did not incur any income tax expense due to the release of the income tax allowance as compared to a $4.1 million income tax expense generated from a deferred tax asset valuation allowance incurred during the Three Months ended September 30, 2017.

Net Loss

During the Three Months ended September 30, 2018, the Company generated a net loss of $587 thousand as compared to a net loss of $4.7 million for the Three Months ended September 30, 2017.  This change was primarily due to reduction in revenue and the deferred tax valuation allowance offset in part by the cost savings and litigation adjustment listed above.

 

The Nine months Ended September 30, 2018 compared with the Nine months Ended September 30, 2017

Revenues

During the Nine months ended September 30, 2018, total revenues decreased by $421 thousand, or 13.8%, to $2,623 thousand from $3,044 thousand in the Nine months ended September 30, 2017.

Interest on delinquent association fees for the Nine months ended September 30, 2018 decreased $313 thousand or 16.6% even as the number of payoffs increased to 614 payoff occurrences as compared to 579 payoff occurrences for the Nine months ended September 30, 2017. “Payoffs” consist of recovery of the entire legally collectible portion, or a settlement thereof, of our principal investment, accrued interest, and late fees owed to us from the proceeds of the Accounts collected by the Associations in accordance with our contracts with Associations. We believe the slight increase in payoff occurrences is attributed to an improved economy that encourages people to resolve their debt situations. The decrease in revenue was due in part to a decrease in revenue per unit. The average revenue per unit per the Statement of Operations, excluding rental revenue decreased to $3,300 for the Nine months ended September 30, 2018 compared with $4,400 for the Nine months ended September 30, 2017.

We saw an increase in rental operation revenue in the Nine months ended September 30, 2018 of $95 thousand to $592 thousand from $497 thousand for the Nine months ended September 30, 2017. This was due to improving the utilization of our rental base in 2017 that has carried over into 2018 and sales or rental properties.  

Operating Expenses

During the Nine months ended September 30, 2018, operating expenses decreased $1,937 thousand, or 41.8% to $2,697 thousand from $4,634 thousand for the Nine months ended September 30, 2017. The decrease in operating expenses can be attributed to various factors, including a reduction in staffing costs of $505 thousand resulting from fewer employees in 2018 as compared to the

20


 

comparable period in  2017, reduced professional fees of $750 thousand resulting from a reduction in fees arising from corporate litigation matters and a $406 thousand decline in selling, general and administrative costs arising from lower marketing costs, less rent expense due to a sub-lease and lower travel and entertainment costs coupled with a $98 thousand decrease in collection expense.

Legal fees, excluding fees from the BLG service agreement, for the Nine months ended September 30, 2018 were $151 thousand compared with approximately $901 thousand for the Nine months ended September 30, 2017 due in part to a $200 thousand insurance reimbursement and a reduction in class action and regular corporate legal fees.  In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using our network of third party law firms, against debtors. In addition, debtors occasionally initiate litigation against us. The settlement costs of these lawsuits decreased by approximately $218 thousand to approximately $39 thousand compared with approximately $257 thousand for the Nine months ended September 30, 2017.

Legal fees for BLG for the Nine months ended September 30, 2018 were $738 thousand compared to $738 thousand for the Nine months ended September 30, 2017. See Note 4. Due to Related Party for further discussion regarding the service agreements with BLG.  

Interest Expense

During the Nine months ended September 30, 2018, the Company incurred interest expense of $472 thousand compared to $375 thousand of interest expense for the Nine months ended September 30, 2017. This increase reflects the expensing of deferred financing costs associated with a $500,000 debt incurred on April 2, 2018, a debt discount of $154 thousand associated with the issuance of warrants and a $200,000 Commitment Fee expense associated with the Purchase Agreement that was cancelled on October 5, 2018. This was offset in part by the decrease in interest associated with the payoff of the $4.7 million of primary debt in December 2017 that was outstanding during the first Nine months of 2017 (See Note 5 Debt).

Gain (Loss) on Litigation

During the Nine months ended September 30, 2018, the Company reassessed its class action litigation and adjusted the $505,000 class action accrual that was incurred during the Nine months ended September 30, 2017 to $100,000 with the $405,000 change reflected as income.

Income Tax Expense

During the Nine months ended September 30, 2018, the Company did not incur any income tax expense due to the release of the income tax allowance as compared to a $3,432 thousand income tax expense arising from a deferred tax asset valuation allowance recorded in the third quarter of 2017.

Net Loss

During the Nine months ended September 30, 2018, the Company generated a net loss of $140 thousand as compared to a net loss of $5,901 thousand for the Nine months ended September 30, 2017.  This change was primarily due to reduction in revenue and the deferred tax valuation allowance offset in part by the cost savings and litigation adjustment listed above.

Liquidity and Capital Resources

General

As of September 30, 2018, we had cash and cash equivalents of $929 thousand compared with $590 thousand at December 31, 2017. This increase was primarily driven by $500 thousand proceeds from debt and receipt of finance receivables. The Company successfully raised net proceeds of $5.4 million through a secondary public offering on October 30, 2018.

Cash from Operations

Net cash used in operations was $305 thousand during the Nine months ended September 30, 2018 compared with $1,718 thousand during the Nine months ended September 30, 2017. This decline in cash used was primarily driven by the Company’s reduced operating loss of approximately $74 thousand for the Nine months ended September 30, 2018 compared with an Operating loss of $1,590 thousand during the Nine months ended September 30, 2017.

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Cash from Investing Activities

Net cash provided by investing activities was $292 thousand for the Nine months ended September 30, 2018 compared to $627 thousand during the Nine months ended September 30, 2017. For the Nine months ended September 30, 2018, we collected $249 thousand of our finance receivables compared to $311 thousand for the Nine months ended September 30, 2017. For the nine months ended September 30, 2018, the Company generated $44 thousand from the disposal of real estate assets held for sale as compared to $321 thousand for the Nine months ended September 30, 2017. Our primary business relies on our ability to invest in Accounts, and during the Nine months ended September 30, 2018, the number of active Accounts has decreased compared with the Nine months ended September 30, 2017. This balance has been in consistent decline since 2012. This balance is very susceptible to housing market fluctuations in Florida.

Cash from Financing Activities

Net cash provided by financing activities was $352 thousand for the Nine months ended September 30, 2018 compared to cash used in financing activities of $575 thousand during the Nine months ended September 30, 2017. At September 30, 2018, the principal indebtedness of the Company was $570 thousand compared with $39 thousand at December 31, 2017 and $4.8 million at September 30, 2017. For the Nine months ended September 30, 2018 the Company had $56 thousand of principal repayments and $92 thousand of debt issue costs (associated with the $500 thousand bridge loan and $5 million equity line mentioned in Note 7) compared to $575 thousand of principal repayments for the Nine months ended September 30, 2017.

Liquidity Outlook

The Company has experienced significant operating losses over the past 2 years (2016 and 2017) and a net loss generated in 2018 primarily with cumulative losses of approximately $11 million as a result of declining revenues and high expenses due to a number of factors.  These losses resulted in the usage of all cash proceeds from the Company’s initial public offering in 2015.  The Company successfully raised net proceeds of $5.4 million through a secondary public offering on October 30, 2018.

 

The Company started a number of initiatives in 2017 which included cost saving initiatives, a focus on collections and a resolve to settle its outstanding debt. The Company initiated a reduction in its workforce from 2017 through 2018 which resulted in the workforce decreasing from 19 full time employees to 10 full time employees (currently 6 employees), a reduction in marketing expenses and a reduction in other controllable expenses.

 

We believe that we have enough cash to mitigate the substantial doubt raised by our recent operating losses and satisfy our estimated liquidity needs for the 12 months from the issuance of these financial statements and avoid any substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-05.  However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. Additionally, a failure to generate additional liquidity could negatively impact our ability to acquire units.

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Debt of the Company consisted of the following:

 

 

 

September 30, 2018

 

 

December 31, 2017 (Audited)

 

Financing agreement with FlatIron capital that is unsecured.  Down payment of $16,500 was required upfront and equal installment payments of $9,610 were made over a 10 month period. The note matured May 31, 2018. Annualized interest rate was 5.25%

 

$

-

 

 

$

39,028

 

Financing agreement with FlatIron capital that is unsecured.  Down payment of $28,125 was required upfront and equal installment payments of $8,701 to be made over a 10 month period. The note matures May 1, 2019. Annualized interest is 5.99%

 

$

69,610

 

 

$

-

 

Senior secured convertible promissory note issued to Esousa Holdings LLC bearing interest at 10.5% that matures October 2, 2018. The interest is payable upon maturity. The note is secured by a lien on all of the assets of the Company.

 

 

500,000

 

 

 

 

 

 

 

 

569,610

 

 

 

39,028

 

Less: debt issuance costs

 

 

-

 

 

 

-

 

         debt discount

 

 

-

 

 

 

 

 

 

 

$

569,610

 

 

$

39,028

 

 

As of September 30, 2018, minimum required payments on commitment for our NNG product were approximately $269,000.

 

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are not required to make disclosures under this item.

 

Item 4.

Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

  

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2018. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of September 30, 2018 for the reasons discussed below. In addition, management identified the following material weaknesses in internal controls over financial reporting in the course of its assessment of the effectiveness of disclosure controls and procedures as of September 30, 2018:

 

The Company did not effectively segregate certain accounting duties due to the small size of its accounting staff.

 

A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Notwithstanding the determination that our internal control over financial reporting was not effective, as of September 30, 2018, and that there was a material weakness as identified in this Quarterly Report, we believe that our

23


 

consolidated financial statements contained in this Quarterly Report fairly present our financial position, results of operations and cash flows for the years covered hereby in all material respects.

 

We expect to be dependent upon our Chief Financial Officer who is knowledgeable and experienced in the application of U.S. Generally Accepted Accounting Principles to maintain our disclosure controls and procedures and the preparation of our financial statements for the foreseeable future. We plan on increasing the size of our accounting staff at the appropriate time for our business and its size to ameliorate our concern that we do not effectively segregate certain accounting duties, which we believe would resolve the material weakness in disclosure controls and procedures, but there can be no assurances as to the timing of any such action or that we will be able to do so. 

 

(b) Changes in internal control over financial reporting.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Other than the lawsuit described below, we are not currently a party to material litigation proceedings. However, we frequently become party to litigation in the ordinary course of business, including either the prosecution or defense of claims arising from contracts by and between us and client Associations. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense, and settlement costs, diversion of management resources and other factors.

 

The Company accrues for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, the Company reassesses its position and makes appropriate adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters.

We were a defendant in an action entitled Solaris at Brickell Bay Condominium Association, Inc. v. LM Funding, LLC, which was brought before the Circuit Court of the Eleventh Judicial Circuit, Miami-Dade Civil Division on July 31, 2014.  In this matter, which was initially preliminarily settled in August 2017, the plaintiff (an association under contract with us) alleged claims such as a usurious loan transaction, state and federal civil Racketeer Influenced and Corrupt Organization Act claims, Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) violations, and other related claims, and the plaintiff requested rescission of their agreement with us, forfeiture of all amounts lent by us to the plaintiff, a declaratory judgment that we have violated FDUTPA, other damages for breach of contract and violations of FDUTPA, and attorneys’ fees.  On August 4, 2017, an order by the court was entered on Plaintiff’s Motion for Preliminary Approval of Class Action Settlement Agreement. In the order, the motion of the Plaintiff, Solaris at Brickell Bay Condominium Association, Inc., individually and on behalf of the certified plaintiff class (“Plaintiffs”), for approval of the Class Action Settlement Agreement (the “Settlement Agreement”) with Defendant LM Funding, LLC was granted. Despite our belief that we are not liable for the claims asserted and that we have good defenses thereto, we nevertheless agreed to enter into the Settlement Agreement in order to: (1) avoid any further expense, inconvenience, and distraction of burdensome and protracted litigation and its consequential negative financial effects to our operations; (2) obtain the releases, orders, and final judgment contemplated by the Settlement Agreement; and (3) put to rest and terminate with finality all claims that had been or could have been asserted against us by the Plaintiffs arising from the facts alleged in the lawsuit. Pursuant to the agreement subsequently reached between counsel, all required actions and deadlines set forth in the Settlement Agreement are currently stayed. On March 1, 2018 a continuation of the abatement was granted until April 2, 2018. As of December 31, 2017, the Company had accrued costs of $505,000 as part of the Settlement Agreement. The settlement amount was contingent upon the Company obtaining sufficient financing within the allotted timeframe of the Settlement Agreement. On April 2, 2018, the Plaintiffs withdrew from the Settlement Agreement. On August 14, 2018, the parties to the Solaris class action litigation entered into a revised settlement in which the Plaintiffs amended their complaint (the Fourth Amended Complaint) to reflect no demand for damages and only a claim for declarative and injunctive relief and amended the class definition to reflect a requirement that class members must have active units still under contract with LMF under a “Traditional Model” waterfall in the Allocation of Collection Proceeds.  This was submitted to the court who approved the amended Complaint and Class Action Settlement Agreement.  On November 6, 2018, the court entered an order granting Plaintiff’s Motion for Final Approval of Class Action Settlement. The New Settlement Agreement will also reimburse the Plaintiff’s opposing counsel $99,000 plus an administrative fee.

 

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Item 1A. Risk Factors

None

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3.Defaults Upon Senior Securities

None.

 

Item 4.Mine Safety Disclosures

None.

 

Item 5.Other Information

 

On November 2, 2018, the Company entered into a Securities Purchase Agreement (the “IIU SPA”) with IIU Inc. (“IIU”), a Virginia based travel insurance brokerage company controlled by Craven House N.A. (who owns approximately 27% of the Company’s outstanding stock as of November 13, 2018), pursuant to which IIU issued to the Company a Senior Convertible Promissory Note (“IIU Note”) in the original principal amount of $1,500,000 in exchange for a purchase price of $1,500,000.  The maturity date of the IIU Note is 360 dates after the date of issuance (subject to acceleration upon an event of default).  The Note carries a 3.0% interest rate, with accrued but unpaid interest being payable on the Note’s maturity date.  

 

The IIU Note allows the Company the right on or after the maturity date to convert any unpaid principal and accrued and unpaid interest of the IIU Note into shares of IIU based on a conversion amount which is the fair value of the common shares of IIU at the time. The conversion price will be reset if IIU issues or sells common shares, convertibles securities or options at a price per share that is less than the conversion price in effect immediately prior to such issue or sale or deemed issuance or sale of such dilutive issuance.

 

The foregoing is a summary description of certain terms of the IIU SPA and IIU Note, and by its nature, is incomplete. Such summary is qualified in its entirety by the full text of such agreements, copies of which are filed herewith and are incorporated herein by reference.

 

Item 6.  Exhibits

The following documents are filed as a part of this report or are incorporated herein by reference.

 


25


 

EXHIBIT
NUMBER

DESCRIPTION

 

 

 

 

1.1

Underwriting Agreement, dated as of October 30, 2018, by and between LM Funding America, Inc. and Maxim Group LLC (incorporated by reference to Exhibit 1.1 to the Form 8-K filed on November 5, 2018).

4.1

Form of Common Warrant (incorporated by reference to Exhibit 4.1 to the Form 8-K filed on November 5, 2018).

4.2

Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.2 to the Form 8-K filed on November 5, 2018).

4.3

Form of Underwriter’s Warrant (incorporated by reference to Exhibit 4.3 to the Form 8-K filed on November 5, 2018).

10.1

Senior Convertible Promissory Note, dated as of November 9, 2018 by and between the Company and IIU, Inc.

10.2

Securities Purchase Agreement, dated as of November 9, 2018 by and between the Company and IIU, Inc.

31.1

Rule 13a – 14(a) Certification of the Principal Executive Officer

31.2

Rule 13a – 14(a) Certification of the Principal Financial Officer

32.1

Written Statement of the Principal Executive Officer and Principal Financial Officer, Pursuant to 18 U.S.C. § 1350

 

 

101.INS

XBRL Instance Document.

 

 

101.SCH

XBRL Taxonomy Extension Schema.

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase.

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase.

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase.

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


26


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

 

 

 

LM FUNDING AMERICA, INC.

 

 

 

 

Date: November 14, 2018

 

By:

/s/ Bruce M. Rodgers

 

 

 

Bruce M. Rodgers

 

 

 

Chief Executive Officer and Chairman of the Board

 

 

 

(Principal Executive Officer)

 

 

 

 

Date: November 14, 2018

 

By:

/s/ Richard Russell

 

 

 

Richard Russell

 

 

 

Chief Financial Officer

 

 

 

(Principal Accounting Officer)

 

 

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