LM Funding America(LMFA) - 2020 Q4 - Annual Report

PART I Business LM Funding America, Inc. provides funding to nonprofit community associations by purchasing delinquent accounts, primarily in Florida, through its Original Product and New Neighbor Guaranty™ program - The company's core business is providing funding to nonprofit community associations by purchasing rights to their delinquent accounts, primarily in Florida[8] - The "Original Product" involves funding an amount up to the statutory "Super Lien Amount", which protects the principal investment, with the company receiving collected interest and late fees upon collection[10][13][14] - The "New Neighbor Guaranty" program involves the company taking assignment of substantially all of an Association's delinquent unit debt in exchange for making guaranteed monthly payments on those units[11][17] - In March 2020, the company entered into a Share Exchange Agreement with Hanfor, which was subsequently terminated in July 2020 due to Hanfor's failure to provide audited financial statements, leading to a dispute[19][21] - In August 2020, the company raised approximately $8.2 million in net proceeds through an underwritten public offering of common stock and warrants[28] - In January 2021, the company sponsored a special purpose acquisition company (SPAC), LMF Acquisition Opportunities, Inc., which closed a $103.5 million IPO, with the company, through its subsidiary, investing $5.7 million in the sponsor[29][30] - The company engaged in specialty finance transactions with Borqs Technologies, including purchasing loan receivables and Senior Secured Convertible Promissory Notes[31][33] Risk Factors The company faces numerous risks, including business-related fluctuations, potential unprofitability of acquisitions, COVID-19 impacts, and a legal dispute with Hanfor Owner - A potential legal dispute with Hanfor Owner over the terminated Share Exchange Agreement could materially adversely affect the business, with Hanfor demanding $1.25 million plus interest[45][46] - The business is highly dependent on third-party law firms, particularly Business Law Group, P.A. (BLG), which serviced over 98% of the company's accounts as of December 31, 2020[55] - All of the company's accounts are located in Florida, creating a significant concentration risk where an economic downturn or adverse market conditions in Florida could materially harm financial results[73] - The company has made a significant investment of $5.7 million in a subsidiary that sponsors a SPAC (LMF Acquisition Opportunities, Inc.) and could lose its entire investment if the SPAC fails to complete a business combination within the specified timeframe[88][89] - The company has previously received non-compliance notices from Nasdaq regarding the minimum bid price rule, and a future delisting could impair liquidity and the ability to raise capital[90][91] - The business model is subject to extensive government regulation, including the Fair Debt Collection Practices Act and potential oversight by the Consumer Financial Protection Bureau (CFPB), which could limit recovery efforts and increase costs[61][62] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[98] Properties The company's principal executive and administrative offices are located in Tampa, Florida, where they lease approximately 5,600 square feet of office space under a lease agreement expiring on July 31, 2022 - The company leases approximately 5,600 square feet of office space in Tampa, Florida, for about $8,100 per month, with the lease expiring in July 2022[99] Legal Proceedings The company is not currently a party to any material litigation, with the exception of a potential dispute with Hanfor Owner, and frequently engages in litigation as a normal part of its business operations for collecting on accounts - The company is not currently a party to material litigation other than a potential dispute with Hanfor Owner over a terminated agreement[100] - The company frequently becomes a party to litigation in the ordinary course of business, including prosecuting or defending claims related to its contracts with client Associations[100][101] Mine Safety Disclosures This item is not applicable to the company's business - None[102] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is traded on the Nasdaq Capital Market under the ticker symbol "LMFA", with 3 holders of record as of December 31, 2020, and no recent sales of unregistered securities or purchases of its own equity securities - The company's common stock is quoted on the Nasdaq Capital Market under the symbol "LMFA"[104] - As of December 31, 2020, there were 3 holders of record of the common stock[104] Selected Financial Data This item is not applicable for a smaller reporting company - Not applicable[108] Management's Discussion and Analysis of Financial Condition and Results of Operations For the year ended December 31, 2020, total revenues decreased by 47% to $1.3 million from $2.4 million in 2019, operating expenses remained relatively flat at $5.3 million, and the company reported a net loss of $4.0 million compared to $3.0 million in 2019, with cash and cash equivalents increasing significantly to $11.6 million from $1.1 million due to capital raises that alleviated going concern doubts Results of Operations Comparing 2020 to 2019, total revenues fell by $1.1 million (47%) to $1.3 million due to fewer account payoffs and reduced rental revenue, while operating expenses decreased slightly by $0.1 million to $5.3 million due to offsetting effects of goodwill impairment and increased staff costs, widening the net loss from continuing operations to $4.1 million in 2020 from $3.0 million in 2019 Comparison of Operations (2020 vs. 2019) | Financial Metric | 2020 | 2019 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1.3 million | $2.4 million | -$1.1 million | -47% | | Operating Expenses | $5.3 million | $5.4 million | -$0.1 million | -1.0% | | Net Loss from Continuing Operations | $4.1 million | $3.0 million | -$1.1 million | -36.7% | | Net Loss | $4.0 million | $3.0 million | -$1.0 million | -33.3% | - The decrease in revenue was primarily due to a 30% decrease in account payoffs (351 in 2020 vs. 502 in 2019) and a lower average revenue collected per unit[146] - Operating expenses in 2020 included a $2.1 million increase in staff costs due to severance ($450k), bonuses ($630k), and a contract buyout ($819k), which was offset by a $1.65 million goodwill impairment that occurred in 2019, making the net change minimal[148][149] Liquidity and Capital Resources As of December 31, 2020, the company had $11.6 million in cash, a substantial increase from $1.1 million at year-end 2019, primarily driven by $12.6 million in net cash from financing activities, including $8.2 million net proceeds from a public offering and $3.1 million from warrant exercises, while total debt decreased significantly from $4.1 million to $282,042 due to the forgiveness of a $3.5 million related-party convertible note Cash and Cash Equivalents | Date | Cash and Cash Equivalents | | :--- | :--- | | December 31, 2020 | $11.6 million | | December 31, 2019 | $1.1 million | Cash Flow Summary (Year Ended Dec 31) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Used in Operations | ($3.5 million) | ($1.2 million) | | Net Cash Used in Investing | ($1.5 million) | ($1.1 million) | | Net Cash Provided by (Used in) Financing | $12.6 million | ($0.2 million) | - The company raised approximately $12.6 million from financing activities in 2020, including $8.2 million from a public offering, $1.3 million from a stock subscription, and $3.1 million from warrant exercises[163] Outstanding Debt | Date | Total Debt | | :--- | :--- | | December 31, 2020 | $282,042 | | December 31, 2019 | $4,149,578 | Liquidity Outlook Despite a history of significant operating losses, management believes the substantial doubt about the company's ability to continue as a going concern has been alleviated by raising approximately $14.0 million in capital during 2020, resulting in a cash balance of $11.6 million at year-end, deemed sufficient for at least 12 months - The company raised approximately $14.0 million in 2020 through various financing activities, including warrant exercises and a public offering[170] - With $11.6 million in cash as of December 31, 2020, management believes the previously reported going concern issue has been alleviated and that it has sufficient liquidity for the next 12 months[170][171] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable for a smaller reporting company - Not applicable[174] Financial Statements and Supplementary Data This section indicates that the company's Financial Statements, Notes, and the Report of Independent Registered Public Accounting Firm are located starting on page F-1 of the Annual Report on Form 10-K - The Financial Statements required by this item begin on page F-1 of the report[174] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports that there have been no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[175] Controls and Procedures Management concluded that as of December 31, 2020, the company's disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting, specifically a lack of effective segregation of certain accounting duties because of the small size of the accounting staff, though management believes the financial statements are fairly presented - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020[176] - A material weakness was identified in internal control over financial reporting: the company did not effectively segregate certain accounting duties due to the small size of its accounting staff[179] - As a smaller reporting company, the management's report on internal control was not subject to attestation by the independent registered public accounting firm[180] Other Information The company reports no other information for this item - None[183] PART III Directors, Executive Officers and Corporate Governance The information required for this item, concerning directors, executive officers, and corporate governance, will be provided in the company's definitive proxy statement for its 2021 annual meeting of stockholders and is incorporated by reference - Information is incorporated by reference from the definitive proxy statement for the 2021 annual meeting of stockholders[184] Executive Compensation The information required for this item, concerning executive compensation, will be provided in the company's definitive proxy statement for its 2021 annual meeting of stockholders and is incorporated by reference - Information is incorporated by reference from the definitive proxy statement for the 2021 annual meeting of stockholders[185] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item, concerning security ownership, will be provided in the company's definitive proxy statement for its 2021 annual meeting of stockholders and is incorporated by reference - Information is incorporated by reference from the definitive proxy statement for the 2021 annual meeting of stockholders[186] Certain Relationships and Related Transactions, and Director Independence The information required for this item, concerning related party transactions and director independence, will be provided in the company's definitive proxy statement for its 2021 annual meeting of stockholders and is incorporated by reference - Information is incorporated by reference from the definitive proxy statement for the 2021 annual meeting of stockholders[187] Principal Accounting Fees and Services The information required for this item, concerning accounting fees and services, will be provided in the company's definitive proxy statement for its 2021 annual meeting of stockholders and is incorporated by reference - Information is incorporated by reference from the definitive proxy statement for the 2021 annual meeting of stockholders[188] PART IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the report, including the financial statements (located at F-1) and an index of all exhibits filed with or incorporated by reference into the report - This item lists the financial statements and exhibits filed as part of the Form 10-K[190] Form 10-K Summary The company reports no summary for this item - None[191] Financial Statements Report of Independent Registered Public Accounting Firm The independent auditor, MaloneBailey, LLP, issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2020, and 2019, concluding that they are presented fairly in conformity with U.S. GAAP, with no critical audit matters identified - The auditor, MaloneBailey, LLP, issued an unqualified opinion on the financial statements for the years ended December 31, 2020 and 2019[196] - The financial statements are deemed to present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[196] - The auditor identified no critical audit matters[200] Consolidated Financial Statements The consolidated financial statements show a significant increase in total assets to $12.3 million in 2020 from $7.6 million in 2019, primarily due to a rise in cash from $0.8 million to $11.6 million, while total liabilities decreased from $4.8 million to $0.8 million due to a $3.5 million related-party note forgiveness, and total stockholders' equity grew from $2.8 million to $11.5 million, with a net loss of $4.0 million on revenues of $1.3 million in 2020 compared to a net loss of $3.0 million on revenues of $2.4 million in 2019 Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash | $11,553 | $823 | | Total Current Assets | $12,121 | $1,773 | | Total Assets | $12,317 | $7,641 | | Liabilities & Equity | | | | Total Current Liabilities | $492 | $4,116 | | Total Liabilities | $849 | $4,806 | | Total Stockholders' Equity | $11,468 | $2,835 | | Total Liabilities & Equity | $12,317 | $7,641 | Consolidated Statement of Operations Data (in thousands) | | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Total Revenues | $1,264 | $2,386 | | Total Operating Expenses | $5,316 | $5,369 | | Operating Loss | ($4,052) | ($2,983) | | Net Loss | ($4,043) | ($3,005) | | Basic & Diluted Loss Per Share | ($0.50) | ($0.96) | Notes to Consolidated Financial Statements The notes detail accounting policies and financial figures, including the disposal of the IIU subsidiary in January 2020, the termination of the Hanfor share exchange agreement, and subsequent capital raises that alleviated previous going-concern doubts, with revenue recognized on a cash or cost-recovery basis, and subsequent events including the Borqs transaction yielding $5.7 million and the sponsorship of a SPAC - On January 8, 2020, the company sold its subsidiary IIU, Inc. back to Craven House Capital, which is now treated as a discontinued operation, with the purchase price paid via cancellation of a ~$3.5 million convertible note owed to Craven[215][222][348] - The company's legal services for collections are primarily performed by Business Law Group (BLG), a related party, with approximately $1.0 million paid to BLG in 2020[335][337] - The company raised significant capital in 2020, including ~$8.2 million from a public offering and ~$3.1 million from warrant exercises, which increased cash to $11.6 million and alleviated prior 'going concern' issues[233][321][353] - Subsequent to year-end, the company completed its transaction with Borqs, realizing approximately $5.7 million in proceeds, and also loaned $5.7 million to its subsidiary to sponsor the LMF Acquisition Opportunities Inc. SPAC[357][358] Stock Warrant Activity (2020) | | Number of Warrants | Weighted Avg. Exercise Price | | :--- | :--- | :--- | | Beginning Balance | 3,959,287 | $5.45 | | Granted | 11,200,000 | $0.90 | | Exercised | 1,377,700 | $2.24 | | Forfeited/Adjusted | (191,528) | - | | Ending Balance | 13,590,059 | $0.84 |