LM Funding America(LMFA) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financials show increased assets from an acquisition, a widening net loss, and substantial doubt about its going concern status Condensed Consolidated Balance Sheets Total assets grew due to goodwill from the IIU acquisition, while liabilities surged and stockholders' equity declined Condensed Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | Sep 30, 2019 | Dec 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $9,608,174 | $6,059,568 | +58.6% | | Goodwill | $5,689,586 | $0 | N/A | | Cash | $2,826,408 | $3,520,753 | -19.7% | | Total Liabilities | $4,954,007 | $250,919 | +1874.4% | | Related party convertible note payable | $3,461,782 | $0 | N/A | | Total Stockholders' Equity | $4,654,167 | $5,808,649 | -19.9% | Condensed Consolidated Statements of Operations Revenues decreased while operating expenses rose significantly, leading to a substantial increase in the company's net loss Statements of Operations Summary (Unaudited) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $2,376,468 | $2,623,229 | -9.4% | | Net Commission Revenue | $501,244 | $0 | N/A | | Interest on delinquent association fees | $1,226,464 | $1,574,960 | -22.1% | | Total Operating Expenses | $3,459,979 | $2,696,748 | +28.3% | | Professional fees | $1,538,043 | $888,949 | +73.0% | | Net Loss | $(1,187,168) | $(140,482) | +745.1% | | Loss Per Share (Basic) | $(0.38) | $(0.22) | +72.7% | Condensed Consolidated Statements of Cash Flows Net cash used in operations increased significantly due to a larger net loss, resulting in a net decrease in cash for the period Cash Flow Summary (Unaudited) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(908,435) | $(459,916) | | Net cash provided by investing activities | $326,919 | $292,185 | | Net cash provided by (used in) financing activities | $(112,829) | $351,810 | | Net Decrease in Cash | $(694,345) | $184,079 | | Cash - End of Period | $2,826,408 | $774,473 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail the IIU acquisition, related party transactions, increased debt, and management's doubt about the company's ability to continue as a going concern - The company operates a diversified business with two main segments: Specialty Finance and Specialty Health Insurance[18][20][21] - On January 16, 2019, the company acquired 100% of IIU, Inc for approximately $4.97 million, paid via a canceled note and a $3.46 million convertible promissory note[44][45][75] - The company has experienced significant operating losses, with cumulative losses of approximately $12.7 million, raising substantial doubt about its ability to continue as a going concern[94] - Legal services are primarily performed by a related party, Business Law Group (BLG), for a fixed monthly fee of $82,000[84][86] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses decreased revenue, increased expenses driven by the IIU acquisition, a wider net loss, and strained liquidity Results of Operations Nine-month revenues fell while operating expenses surged due to acquisition costs, significantly increasing the net loss compared to the prior year Three-Month Performance Comparison (Q3 2019 vs Q3 2018) | Metric | Q3 2019 | Q3 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $773.7k | $781.5k | -1.0% | | Operating Expenses | $1,020k | $991k | +3.0% | | Net Loss | $(280k) | $(587k) | -52.3% | Nine-Month Performance Comparison (YTD 2019 vs YTD 2018) | Metric | YTD 2019 | YTD 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $2,376k | $2,623k | -9.4% | | Operating Expenses | $3,460k | $2,697k | +28.3% | | Net Loss | $(1,187k) | $(140k) | +747.9% | - The acquisition of IIU, Inc contributed $501,000 in net commission revenue and $276,000 in operating expenses during the first nine months of 2019[126][127] Liquidity and Capital Resources The company's cash position decreased while total debt increased dramatically due to a large convertible note maturing in January 2020 - Cash and cash equivalents decreased to $2.83 million as of September 30, 2019, from $3.52 million at December 31, 2018[133] - Net cash used in operations for the nine months ended September 30, 2019, was $908,435[134] - Total principal debt increased to $4.2 million, including a $3.46 million senior secured convertible note that matures in January 2020[136][137] Quantitative and Qualitative Disclosures About Market Risk The company is not required to provide disclosures under this item as a smaller reporting company - As a smaller reporting company, LM Funding is not required to provide disclosures about market risk[140] Controls and Procedures Management concluded that disclosure controls were not effective due to a material weakness in the segregation of accounting duties - Management concluded that disclosure controls and procedures were not effective as of September 30, 2019[142] - A material weakness was identified due to the company's failure to effectively segregate certain accounting duties[142] - Despite the material weakness, management believes the consolidated financial statements are fairly presented in all material respects[143] PART II. OTHER INFORMATION Legal Proceedings The company is not party to any material litigation but engages in legal actions as part of its ordinary course of business - The company is not a party to any material litigation proceedings but frequently becomes party to litigation in the ordinary course of business[147] Risk Factors No material changes have been made to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes have occurred from the risk factors previously disclosed in the Annual Report Form 10-K for the fiscal year ended December 31, 2018[149] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity and details the use of $9.0 million from its 2015 initial public offering - As of September 30, 2019, the company has used $9.0 million of the $9.6 million net proceeds from its 2015 IPO[154] - Use of IPO proceeds included debt repayment ($3.11 million), interest payments ($0.89 million), and various investments[154] Other Items The company reports no defaults upon senior securities, mine safety disclosures, or other required information - The company reported "None" for Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), and Item 5 (Other Information)[156] Exhibits This section lists the required CEO and CFO certifications and XBRL interactive data files filed with the report - Exhibits filed with the report include certifications from the Principal Executive Officer and Principal Financial Officer, as well as XBRL data files[158]