Powercompute, Inc 10-Q for FY2022 Q2
Powercompute, Inc. (PWCM)
About this 10-Q
Powercompute, Inc filed this 10-Q on August 17, 2022, covering the quarter ended June 30, 2022 (FY2022 Q2).
Headline figures
Quarter ended June 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $234.53K
- down 28.6% from $328.39K a year earlier
- Net income
- $2.84M
- down 74.4% from net income of $11.11M a year earlier
- Diluted EPS
- $0.22
- down 89.3% from $2.05 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
(Exact name of Registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) |
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(Address of principal executive offices) |
(Zip code) |
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: |
Trading symbol |
Name of each exchange on which registered |
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The |
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.
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).
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.:
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Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
The registrant had
LM FUNDING AMERICA, INC.
TABLE OF CONTENTS
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Page |
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PART I. |
3 |
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Item 1. |
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3 |
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4 |
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5 |
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6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 |
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Item 3. |
30 |
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Item 4. |
30 |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
33 |
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Item 5. |
33 |
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Item 6. |
34 |
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35 |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
LM Funding America, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
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June 30, 2022 |
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December 31, 2021 |
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(Unaudited) |
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ASSETS |
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Cash |
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$ |
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$ |
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Finance receivables: |
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Original product - net |
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Special product - New Neighbor Guaranty program, net of allowance for credit losses of |
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Short-term investments - convertible debt securities (Note 7) |
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- |
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Marketable securities (Note 7) |
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Short-term investments - debt security (Note 7) |
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Prepaid expenses and other assets |
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Income tax receivable (Note 4) |
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- |
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Note receivable from related party (Note 7) |
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- |
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Digital assets (Note 10) |
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- |
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Current assets |
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Fixed assets, net (Note 9) |
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Real estate assets owned |
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Operating lease - right of use assets (Note 5) |
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Long-term investments - equity securities (Note 7) |
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Investments in unconsolidated affiliates (Note 7) |
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Deposits on mining equipment and hosting (Note 8) |
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Other assets |
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Long-term assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Accounts payable and accrued expenses |
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$ |
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$ |
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Note payable - short-term (Note 3) |
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- |
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Due to related party (Note 2) |
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Current portion of lease liability (Note 5) |
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Income tax payable (Note 4) |
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- |
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Total current liabilities |
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Lease liability - long-term (Note 5) |
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- |
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Long-term liabilities |
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- |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity |
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Non-controlling interest |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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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)
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenues: |
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Interest on delinquent association fees |
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$ |
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$ |
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$ |
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$ |
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Administrative and late fees |
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Recoveries in excess of cost - special product |
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Underwriting and other revenues |
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Rental revenue |
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Total revenues |
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Operating Expenses: |
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Staff costs and payroll |
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Professional fees |
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Settlement costs with associations |
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- |
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- |
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- |
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Selling, general and administrative |
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Recovery of cost from related party receivable |
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- |
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( |
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- |
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Provision for credit losses |
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- |
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( |
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Real estate management and disposal |
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Depreciation and amortization |
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Collection costs |
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( |
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Other operating expenses |
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Total operating expenses |
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Operating loss |
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( |
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( |
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Realized gain (loss) on securities |
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( |
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Realized gain on convertible debt securities |
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- |
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- |
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Unrealized gain (loss) on convertible debt security |
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( |
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- |
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Unrealized loss on marketable securities |
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( |
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- |
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( |
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- |
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Impairment loss on digital assets |
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( |
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- |
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( |
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- |
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Unrealized gain on investment and equity securities |
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Digital assets other income |
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- |
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- |
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Interest income |
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Interest expense |
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- |
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( |
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- |
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Dividend income |
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- |
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- |
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Income before income taxes |
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Income tax expense |
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- |
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( |
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- |
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( |
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Net income |
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Less: Net income attributable to non-controlling interest |
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Net income (loss) attributable to LM Funding America Inc. |
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$ |
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$ |
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$ |
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$ |
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Earnings/(loss) per share: |
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Basic income (loss) per common share - net income (loss) - attributable to LM Funding |
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$ |
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$ |
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$ |
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$ |
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Diluted income (loss) per common share - net income (loss) - attributable to LM Funding |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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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)
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For the Six Months Ended June 30, |
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2022 |
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2021 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to cash used in operating activities |
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Depreciation and amortization |
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Right to use asset non cash lease expense |
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Stock compensation |
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- |
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Stock option expense |
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- |
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Debt forgiveness |
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- |
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Accrued investment income |
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Gain on deconsolidation of affiliate |
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- |
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Unrealized gain on convertible debt security |
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- |
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( |
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Unrealized loss on marketable securities |
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- |
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Impairment loss on digital assts |
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- |
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Unrealized gain on investment and equity securities |
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( |
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( |
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Realized (gain) loss on securities |
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Realized gain on convertible note securities |
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Investment in securities |
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- |
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Proceeds from securities |
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Investment in convertible note receivable |
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- |
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Convertible note receivable converted into marketable security |
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Investment in marketable Securities |
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( |
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( |
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Change in assets and liabilities |
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Prepaid expenses and other assets |
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Accounts payable and accrued expenses |
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( |
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Advances from related party |
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Lease liability payments |
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( |
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( |
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Income tax payable |
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( |
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- |
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Income tax receivable |
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( |
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- |
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Deferred taxes |
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- |
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Net cash provided by (used in) operating activities |
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( |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Net collections of finance receivables - original product |
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Net collections of finance receivables - special product |
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( |
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( |
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Payments for real estate assets owned |
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- |
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Capital expenditures |
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( |
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Deposits for mining equipment and hosting |
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( |
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- |
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Investments in digital assets |
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( |
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- |
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Loan to purchase securities |
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- |
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Investment in note receivable - related party |
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( |
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Repayment of loan to purchase securities |
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- |
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( |
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Investment in unconsolidated affiliate |
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- |
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( |
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Net cash (used in) investing activities |
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( |
) |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Principal repayments |
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- |
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( |
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Insurance financing repayments |
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( |
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( |
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Exercise of warrants |
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- |
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Net cash provided by (used in) financing activities |
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( |
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NET INCREASE (DECREASE) IN CASH |
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( |
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CASH - BEGINNING OF YEAR |
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CASH - END OF YEAR |
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$ |
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$ |
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SUPPLEMENTAL DISCLOSURES OF NON-CASHFLOW INFORMATION |
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|
|
|
|
|
|
|
|
ROU assets and operating lease obligation recognized |
|
$ |
|
|
|
$ |
- |
|
|
Reclassification of mining equipment deposit to fixed assets, net |
|
$ |
|
|
|
$ |
- |
|
|
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION |
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
- |
|
|
$ |
|
|
|
Cash paid for income taxes |
|
$ |
|
|
|
$ |
- |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
For the Three and Six Months Ended June 30, 2022 and 2021
(unaudited)
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Shares |
|
|
Amount |
|
|
Additional paid in capital |
|
|
Accumulated Deficit |
|
|
Non-Controlling Interest |
|
|
Total Equity |
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for warrants exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
Stock issued for services |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Stock compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Stock option expense |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
Balance - March 31, 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Stock option expense |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
LM FUNDING AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022
(UNAUDITED)
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
LM Funding America, Inc. (“we”, “our”, “LMFA” or the “Company”) was formed as a Delaware corporation on April 20, 2015. LMFA was formed for the purpose of completing a public offering and related transactions in order to carry on the business of LM Funding, LLC and its subsidiaries (the “Predecessor”). LMFA is the sole member of LM Funding, LLC and operates and controls all of its businesses and affairs.
LM Funding, LLC, a Florida limited liability company organized in January 2008 under the terms of an Operating Agreement effective January 8, 2008 as amended, had
The Company created
We are a specialty finance company that provides funding to nonprofit community associations primarily located in the state of Florida. We offer incorporated nonprofit community associations, which we refer to as “Associations,” a variety of financial products customized to each Association’s financial needs. Our original product offering consists of providing funding to Associations by purchasing their rights under delinquent accounts that are selected by the Associations arising from unpaid Association assessments. Historically, we provided funding against such delinquent accounts, which we refer to as “Accounts,” in exchange for a portion of the proceeds collected by the Associations from the account debtors on the Accounts. In addition to our original product offering, we have started purchasing Accounts on varying terms tailored to suit each Association’s financial needs, including under our New Neighbor Guaranty™ program.
During 2020, we began exploring other specialty finance business opportunities that are complementary to or that can leverage our historical business.
Specialty Finance Company
We purchase an Association’s right to receive a portion of the Association’s collected proceeds from owners that are not paying their assessments. After taking assignment of an Association’s right to receive a portion of the Association’s proceeds from the collection of delinquent assessments, we engage law firms to perform collection work on a deferred billing basis wherein the law firms receive payment upon collection from the account debtors or a predetermined contracted amount if payment from account debtors is less than legal fees and costs owed. Under this business model, we typically fund an amount equal to or less than the statutory minimum an Association could recover on a delinquent account for each Account, which we refer to as the “Super Lien Amount”. Upon collection of an Account, the law firm working on the Account, on behalf of the Association, generally distributes to us the funded amount, interest, and administrative late fees, with the law firm retaining legal fees and costs collected, and the Association retaining the balance of the collection. In connection with this line of business, we have developed proprietary software for servicing Accounts, which we believe enables law firms to service Accounts efficiently and profitably.
Under our New Neighbor Guaranty program, an Association will generally assign substantially all of its outstanding indebtedness and accruals on its delinquent units to us in exchange for payment by us of monthly dues on each delinquent unit. This simultaneously eliminates a substantial portion of the Association’s balance sheet bad debts and assists the Association to meet its budget by receiving guaranteed monthly payments on its delinquent units and relieving the Association from paying legal fees and costs to collect its bad debts. We believe that the combined features of the program enhance the value of the underlying real estate in an Association and the value of an Association’s delinquent receivables.
Because we acquire and collect on the delinquent receivables of Associations, the Account debtors are third parties about whom we have little or no information. Therefore, we cannot predict when any given Account will be paid off or how much it will yield. In assessing the risk of purchasing Accounts, we review the property values of the underlying units, the governing documents of the relevant Association, and the total number of delinquent receivables held by the Association.
7
Specialty Finance Products
Original Product
Our original product relies upon Florida statutory provisions that effectively protect the principal amount invested by us in each Account. In particular, Section 718.116(1), Florida Statutes, makes purchasers and sellers of a unit in an Association jointly and severally liable for all past due assessments, interest, late fees, legal fees, and costs payable to the Association. As discussed above, the Florida Statutes grants to Associations a so-called “super lien”, which is a category of lien that is given a statutorily higher priority than all other types of liens other than property tax liens. The amount of the Association’s priority over a first mortgage holder that takes title to a property through foreclosure (or deed in lieu), referred to as the Super Lien Amount, is limited to twelve months’ past due assessments or, if less, one percent (
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
In other states in which we have offered our original product, which are currently only in Washington, Colorado and Illinois, we rely on statutes that we believe are similar to the above-described Florida statutes in relevant respects.
New Neighbor Guaranty
In addition to our original product, we also offer an additional product, the New Neighbor Guaranty, wherein an Association assigns substantially all of its outstanding indebtedness and accruals on its delinquent units to us in exchange for payments in an amount equal to the regular ongoing monthly or quarterly assessments for delinquent units when those amounts would be due to the Association. We assume both the payment and collection obligations for these assigned Accounts under this product. This simultaneously eliminates an Association’s balance sheet bad debts and assists the Association to meet its budget by receiving guaranteed assessment payments on its delinquent units and relieving the Association from paying legal fees and costs to collect its bad debts. We believe that the combined features of the product enhance the value of the underlying real estate in an Association and the value of an Association’s delinquent receivables.
Before we implement the New Neighbor Guaranty program for an Association we are typically asked to conduct a review of its accounts receivable. After we have conducted the review, we inform the Association which Accounts we are willing to purchase and the terms of such purchase. Once we implement the New Neighbor Guaranty program, we begin making scheduled payments to the Association on the Accounts as if the Association had non-delinquent residents occupying the units underlying the Accounts. Our New Neighbor Guaranty contracts typically allow us to retain all collection proceeds on each Account other than special assessments and accelerated assessment balances. Thus, the Association foregoes the potential benefit of a larger future collection in exchange for the certainty of a steady stream of immediate payments on the Account.
Cryptocurrency Mining Business
On September 15, 2021, we announced that we plan to operate in the Bitcoin mining ecosystem. As of the date of this filing, we have not commenced Bitcoin mining operations. We aim to deploy the computing power that we will create to mine Bitcoin and validate transactions on the Bitcoin network. We believe that recent developments in Bitcoin mining have created an opportunity for us to deploy capital and conduct large-scale mining operations in the United States. We have formed a new wholly owned subsidiary, US Digital Mining and Hosting Co, LLC, a Florida limited liability company (US Digital), to develop and operate our cryptocurrency mining business.
We have committed to purchasing an aggregate of
8
to the equipment. Since the inception of our contract with Bitmain, we have paid an aggregate of approximately $
In October 2021, we also entered into a sale and purchase agreement (the “Uptime Purchase Agreement”) with Uptime Armory LLC (“Uptime”) pursuant to which US Digital agreed to purchase, and Uptime agreed to supply to US Digital, an aggregate of
On the same effective date,
On June 21, 2022, the “Company entered into a Master Agreement, dated effective as of June 20, 2022, with Compute North LLC (“Compute North”) under which Compute North has agreed to host up to
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
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 June 30, 2022 and for the Three and Six Months ended June 30, 2022 and June 30, 2021, respectively are unaudited. In the opinion of management, the interim condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods. The accompanying consolidated balance sheet as of December 31, 2021, is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for fiscal the year ended December 31, 2021.
Reclassifications
Certain prior period amounts on the balance sheet have been reclassified to conform to the current period presentation.
Digital Assets
When applicable, we account for all digital assets other than stablecoin as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. We have ownership of and control over our digital assets and use third-party custodial services to secure it. The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition. We account for stablecoin as financial assets in accordance with ASC 310, Receivables. The stablecoin are recorded at amortized cost, which approximates their fair value.
9
We determine the fair value of our digital assets that are accounted for as intangible assets in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for such assets (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances indicate that it is more likely than not that our digital assets are impaired. If the current carrying value of a digital asset exceeds the fair value so determined, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the price determined.
The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented separately from of any impairment losses.
There is currently no specific guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.
Fixed Assets, Net
The Company capitalizes all acquisitions of fixed assets in excess of $
The Company operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of mining machines. To the extent that any of the assumptions underlying management’s estimate of useful life of its mining machines are subject to revision in a future reporting period, either as a result of changes in circumstances or through the availability of greater quantities of data, then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets.
Impairment of Long-Lived Assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment amount is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. There was
Investment in Securities
Investment in Securities includes investments in common stocks, note receivables, and convertible notes receivables. Investments in securities are reported at fair value with changes in unrecognized gains or losses included in other income on the income statement. The fair value of the BORQ convertible note receivable is based on its classification as a trading security. The Symbiont note receivable is reported at amortized costs less impairment.
Fair Value of Financial Instruments
FASB ASC 825-10, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet.
Investments in Unconsolidated Entities
We account for investments in less than
Income (Loss) Per Share
Basic income (loss) per share is calculated as net income (loss) to common stockholders divided by the weighted average number of common shares outstanding during the period (as adjusted to give effect to the Reverse Stock Split).
10
The Company issued approximately
Diluted income (loss) per share for the period equals basic loss per share as the effect of any convertible notes, stock based compensation awards or stock warrants would be anti-dilutive.
The anti-dilutive stock based compensation awards consisted of:
|
|
|
As of June 30, |
||
|
|
|
2022 |
|
2021 |
|
Stock Options |
|
|
|
|
|
Stock Warrants |
|
|
|
|
|
|
|
|
|
|
Note 2. Due to Related Party
Legal services for the Company associated with the collection of delinquent assessments from property owners are performed by a law firm, Business Law Group (“BLG”), which was owned solely by Bruce M. Rodgers, the Chief Executive Officer of LMFA, until and through the date of the Company’s initial public offering in 2015. Following the offering in 2015, Mr. Rodgers transferred his interest in BLG to other attorneys at the firm through a redemption of his interest in the firm, and BLG became under control of those lawyers. The law firm has historically performed collection work primarily on a deferred billing basis wherein the law firm receives payment for services rendered upon collection from the property owners or at amounts ultimately subject to negotiations with the Company.
Under the agreement, the Company paid BLG a fixed monthly fee of $
On February 1, 2022, the Company consented to the assignment by BLG to the law firm BLG Association Law, PLLC (“BLGAL”) of the Services Agreement, dated April 15, 2015, previously entered into by the Company and Business Law Group, P.A. (the “Services Agreement”). The Services Agreement had set forth the terms under which Business Law Group, P.A. would act as the primary law firm used by the Company and its association clients for the servicing and collection of association accounts. The assignment of the Services Agreement was necessitated by the death of the principal attorney and owner of Business Law Group, P.A. In connection with the assignment, BLGAL agreed to amend the Services Agreement on February 1, 2022, to reduce the monthly compensation payable to the law firm from $
The Company had originally engaged BLG on behalf of many of its Association clients to service and collect the Accounts and to distribute the proceeds as required by Florida law and the provisions of the purchase agreements between LMF and the Associations. This engagement was subsequently assigned to BLGAL as described above. Ms. Gould who is one of our directors, worked as the General Manager of BLG and works as the General Manager of BLGAL .
Amounts collected from property owners and paid to BLG or BLGAL as applicable for the Three and Six Months ended June 30, 2022 and 2021 were approximately $
Under the Services Agreement in effect during the Six Months ended June 30, 2022 and 2021, the Company pays all costs (lien filing fees, process and serve costs) incurred in connection with the collection of amounts due from property owners. Any recovery of these collection costs is accounted for as a reduction in expense incurred. The Company incurred expenses related to these types of costs for the Three and Six Months ended June 30, 2022 and 2021 in the amounts of $
The Company also shares office space and related common expenses with BLGAL (and previously BLG). All shared expenses, including rent, are charged to BLG based on an estimate of actual usage. Any expenses of BLGAL and BLG paid by the Company that have not been reimbursed or settled against other amounts are reflected as due from related parties in the accompanying consolidated balance sheets. BLGAL and BLG, as applicable were charged a total of approximately $
11
In 2017, the Company assessed the collectability of the amount due from BLG and concluded that even though BLG had repaid $
Amounts payable to BLGAL and BLG, in aggregate as of June 30, 2022 and December 31, 2021 were approximately $
Note 3. Debt and Other Financing Arrangements
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
|
|
|
|
|
|
|
|
|
|
Financing agreement with FlatIron capital that was unsecured. Down payment of $ |
|
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
- |
|
|
$ |
|
|
Note 4. Income Taxes
Prior to the Company’s initial public offering in October 2015, the earnings of the Predecessor, which was a limited liability company taxed as a partnership, were taxable to its members. In connection with the contribution of membership interests to the Company (a C-Corporation formed in 2015), the net income or loss of the Company after the initial public offering is taxable to the Company and reflected in the accompanying consolidated financial statements.
The Company performs an evaluation of the realizability of its deferred tax assets on a quarterly basis. The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets, including the scheduled reversal of temporary differences, recent and projected future taxable income and prudent and feasible tax planning strategies. The estimates and assumptions used by the Company in computing the income taxes reflected in the accompanying consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year. Adjustments are recorded based on filed returns when finalized or the related adjustments are identified.
Under ASC 740-10-30-5, Income Taxes, deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not (i.e., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The Company considers all positive and negative evidence available in determining the potential realization of deferred tax assets including, primarily, the recent history of taxable earnings or losses. Based on operating losses reported by the Company during 2022 and 2021, the Company concluded there was not sufficient positive evidence to overcome this recent operating history. As a result, the Company believed that a valuation allowance was necessary based on the more-likely-than-not threshold noted above. The Company had recorded a valuation allowance of approximately $
12
Significant components of the tax expense (benefit) recognized in the accompanying consolidated statements of operations for the Three and Six Months ended June 30, 2022 and June 30, 2021 are as follows:
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||||
|
|
|
June 30, 2022 |
|
|
June 30, 2021 |
|
|
|
June 30, 2022 |
|
|
June 30, 2021 |
|
||||
|
Current tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
( |
) |
|
$ |
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
State |
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total current tax expense (benefit) |
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Deferred tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in tax rates |
|
|
( |
) |
|
|
- |
|
|
|
|
( |
) |
|
|
- |
|
|
Valuation allowance (expense) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|
Income tax (reduction) benefit |
|
$ |
- |
|
|
$ |
|
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the income tax computed at the combined federal and state statutory rate of
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
Six Months Ended |
|
Six Months Ended |
|
||||||||||||||||
|
|
|
June 30, 2022 |
|
June 30, 2021 |
|
|
June 30, 2022 |
|
June 30, 2021 |
|
||||||||||||||||
|
Benefit on net loss |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
|
$ |
|
|
|
|
||||
|
Nondeductible expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
||||
|
Valuation allowance (expense) |
|
|
( |
) |
( |
|
|
( |
) |
( |
|
|
|
|
|
( |
|
|
( |
) |
( |
|
||||
|
Tax rate change |
|
|
( |
) |
( |
|
|
- |
|
(—)% |
|
|
|
( |
) |
|
|
|
- |
|
(—)% |
|
||||
|
Tax benefit/effective rate |
|
$ |
- |
|
(—)% |
|
$ |
|
|
|
|
|
$ |
- |
|
(—)% |
|
$ |
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of the Company’s deferred tax liabilities and assets as of June 30, 2022 and December 31, 2021 are as follows:
13
|
|
|
As of June 30, 2022 |
|
|
As of December 31, 2021 |
|
||
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Right to Use asset |
|
$ |
( |
) |
|
$ |
- |
|
|
Deferred vendor stock compensation |
|
|
( |
) |
|
|
( |
) |
|
Total deferred tax liabilities |
|
|
( |
) |
|
|
( |
) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Loss carryforwards |
|
|
|
|
|
|
|
|
|
Step up in basis at contribution to C-Corp |
|
|
|
|
|
|
|
|
|
Stock option expense |
|
|
|
|
|
|
|
|
|
Step up in basis - purchase of non-controlling interest |
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
|
|
|
|
|
|
|
Right to Use assets |
|
|
|
|
|
|
- |
|
|
Digital asset impairment loss |
|
|
|
|
|
|
- |
|
|
Unrealized loss on securities |
|
|
( |
) |
|
|
|
|
|
Total deferred tax asset |
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
( |
) |
|
|
( |
) |
|
Net deferred tax asset (liability) |
|
$ |
- |
|
|
$ |
- |
|
During the Six Months ended June 30, 2022, the Company offset $
Note 5. Commitments and Contingencies
Leases
The Company leases certain office space, construction and office equipment, vehicles and temporary housing generally under non-cancelable operating leases. Leases with an initial term of one year or less are not recorded on the balance sheet, and the Company generally recognizes lease expense for these leases on a straight-line basis over the lease term. As of June 30, 2022, the Company’s operating leases have remaining lease terms ranging from less than
The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and current and long-term operating lease liabilities are separately stated on the consolidated balance sheet as of June 30, 2022. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The present value of future lease payments are discounted using either the implicit rate in the lease, if known, or the Company’s incremental borrowing rate for the specific lease as of the lease commencement date. The ROU asset is also adjusted for any prepayments made or incentives received. The lease terms include options to extend or terminate the lease only to the extent it is reasonably certain any of those options will be exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company accounts for lease components (e.g., fixed payments) separate from the non-lease components (e.g., common-area maintenance costs). The Company does not have any material financing leases
The Company’s office lease began
14
The Company shares this space and the related costs associated with this operating lease with a related party (see Note 2) that also performs legal services associated with the collection of delinquent assessments. The related party has a sub-lease for approximately $
Net rent expense recognized for the Three and Six Months ended June 30, 2022 and 2021 was approximately $
The following table presents supplemental balance sheet information related to operating leases as of June 30, 2022 and December 31, 2021:
|
|
|
Balance Sheet Line Item |
June 30, 2022 |
|
December 31, 2021 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
|
ROU assets |
|
Right of use asset, net |
$ |
|
|
$ |
|
|
|
Total lease assets |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Current lease liabilities |
|
Lease liability |
$ |
|
|
$ |
|
|
|
Long-term lease liabilities |
|
Lease liability |
|
|
|
|
- |
|
|
Total lease liabilities |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years) |
|
|
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
% |
|
|
% |
The following table presents supplemental cash flow information and non-cash activity related to operating leases for the Six Months ended June 30, 2022 and 2021:
|
|
|
|
Six Months Ended June 30, 2022 |
|
Six Months Ended June 30, 2021 |
|
|
|
||
|
Operating cash flow information |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
$ |
( |
) |
$ |
( |
) |
|
|
|
Non-cashflow information |
|
|
|
|
|
|
|
|
|
|
|
ROU assets and operating lease obligation recognized |
|
|
$ |
|
|
$ |
- |
|
|
|
The following table presents maturities of operating lease liabilities on an undiscounted basis as of June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
|
|
|
|
|
|
2022 (excluding the six months ended June 30, 2022) |
|
|
$ |
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
2025 |
|
|
|
|
|
|
|
|
|
|
(less: imputed interest) |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Legal Proceedings
Except as described below, we are not currently a party to material pending or known threatened 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.
15
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.
On March 9, 2022, legal counsel to a purported stockholder of the Company threatened to file a direct and derivative complaint alleging breaches of fiduciary duty by the Company’s officers and directors, primarily with respect to (i) the Amended and Restated Employment Agreements entered into by the Company with each of Mr. Rodgers and Mr. Russell in October 2021; (ii) the approval of actions taken at our 2021 annual meeting of stockholders in December 2021; (iii) payments made to Business Law Group, P.A. in exchange for services provided pursuant to the Services Agreement between the Company and Business Law Group; and (iv) strategic advisory agreements entered into by us in connection with our planned cryptocurrency mining business. On May 20, 2022, the Company and the purported stockholder agreed to a settlement of the stockholder’s alleged claims under which the Company is required to seek a new independent director to replace Joel Rodgers within six months of the settlement date, engage a compensation consultant to review certain sections of the Company’s executive employment agreements within ninety days of the settlement date, make changes in response to the consultant’s recommendation within six months of the settlement date and pay the attorney fees and other related legal costs incurred by the counterparty in an amount of $
Note 6. Stockholders’ Equity
Stock Options
The 2015 Omnibus Incentive Plan provides for the issuance of stock options, stock appreciation rights, performance shares,
performance units, restricted stock, restricted stock units, shares of our common stock, dividend equivalent units, incentive cash
awards or other awards based on our common stock. Awards may be granted alone or in addition to, in tandem with, or (subject to the
2015 Omnibus Incentive Plan’s prohibitions on repricing) in substitution for any other award (or any other award granted under
another plan of ours or of any of our affiliates).
The following is a summary of the stock option plan activity during the Six Months ended June 30, 2022 and 2021:
|
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
|
Number of |
|
|
Weighted Average |
|
|
Number of |
|
|
Weighted Average |
|
||||
|
|
|
Options |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
||||
|
Options Outstanding at Beginning of the year |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at June 30, |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at June 30, |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Stock compensation expense recognized for the Three and Six Months ended June 30, 2022 was approximately $
The aggregate intrinsic value of the outstanding common stock options as of each of June 30, 2022 and December 31, 2021 was approximately $
16
Stock Issuance
In the year ended December 31, 2021, the Company issued
Warrants
The following is a summary of the warrant activity during the Six Months ended June 30, 2022 and 2021:
|
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
|
Number of |
|
|
Weighted Average |
|
|
Number of |
|
|
Weighted Average |
|
||||
|
|
|
Warrants |
|
|
Exercise Price |
|
|
Warrants |
|
|
Exercise Price |
|
||||
|
Warrants outstanding at beginning of the year |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
( |
|
|
|
|
|
|
Terminated |
|
|
( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at June 30, |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the Six Months ended June 30, 2022,
Note 7. Investments
Short-term Investments – convertible debt securities
The Company entered into an agreement with BORQS Technologies Inc. (“Borqs”) (Nasdaq: BRQS) in February 2021 under which the Company agreed to purchase Senior Secured Convertible Promissory Notes (“Notes”) of Borqs up to an aggregate principal amount of $
As of June 30, 2021 the Company considered the fair value of the Borqs convertible note to be equal to the fair value of the stock on June 30, 2021 or $
During the year ended December 31, 2021, the Company converted $
17
2021 and classified the remaining shares as marketable securities. The remaining
Short-term investments in convertible debt securities consist of the following:
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
June 30, 2021 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note |
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
End of period |
$ |
- |
|
|
$ |
539,351 |
|
|
$ |
7,588,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
|
|
|
|
June 30, 2021 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
$ |
|
|
|
|
|
|
|
$ |
- |
|
|
Investment in convertible debt security |
|
- |
|
|
|
|
|
|
|
|
|
|
Accrued interest income on debt security |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on convertible debt security |
|
- |
|
|
|
|
|
|
|
|
|
|
Convertible debt and interest converted into marketable shares |
|
( |
) |
|
|
|
|
|
|
|
|
|
Realized gain on conversion into marketable shares |
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
$ |
- |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2020, the Company entered into a Loan Agreement (the “Investor Loan Agreement”) with a private investor (“Investor”) pursuant to which the Investor agreed to provide consulting services and make one or more non-recourse loans to the Company in a principal amount of up to the purchase price of the Borqs loan receivables purchased by the Company. The Investor Loan Agreement does not provide a fixed rate of interest, and the Company and Investor agreed to split the net proceeds from the Company sales of the settlement shares, with the Company receiving one-third of the net proceeds after a return of Investor’s principal and the Investor receiving return of principal plus two-thirds of the net proceeds thereafter.
As part of that transaction in which funding began in January 2021 and in which transactions occurred during the Six Months ended June 30, 2021, the Company recognized a $
Note Receivable – related party
On February 1, 2022, LMAO issued an unsecured promissory note to LMFAO Sponsor LLC, pursuant to which LMAO may borrow up to an aggregate principal amount of $
Short-term investments – debt securities
Short-term investments held to maturity in debt securities consist of the following:
The Company entered into a secured promissory note and loan agreement with Symbiont.IO, Inc. (“Symbiont”) on
18
and Purchase Option Agreement, dated December 1, 2021 (the “ROFR Agreement”), to provide the Company with certain rights relating to the potential purchase of the capital stock or assets of Symbiont. Pursuant to the terms of the ROFR Agreement, in the event that Symbiont expects to accept a third-party offer that would result in a sale of Symbiont, then the Company will have the first right and option to purchase, upon the same terms and conditions as the third-party offer, the assets or capital stock of Symbiont, subject to certain terms and exclusions as described in the ROFR Agreement. The Company’s rights under the ROFR Agreement are assignable to third parties. The ROFR Agreement will expire on
As part of a $
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
June 30, 2021 |
|
|||
|
Symbiont.IO Note Receivable |
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
End of period |
$ |
2,185,863 |
|
|
$ |
|
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
|
|
|
|
June 30, 2021 |
|
||
|
Beginning of year |
$ |
|
|
|
|
|
|
|
$ |
- |
|
|
Accrued interest income on debt security |
|
|
|
|
|
|
|
|
|
- |
|
|
Unrealized loss |
|
- |
|
|
|
|
|
|
|
- |
|
|
End of period |
$ |
|
|
|
|
|
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities
Our marketable equity securities are publicly traded stocks measured at fair value using quoted prices for identical assets in active markets and classified as Level 1 within the fair value hierarchy.
|
|
|
Cost |
|
|
Cost of Shares Sold |
|
|
Gross Unrealized Gain (Loss) |
|
|
Fair Value |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities, June 30, 2022 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities, December 31, 2021 |
|
|
|
|
|
$ |
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the Three and Six Months ended June 30, 2022, the Company sold
Long-term Investments
In connection with LMF Acquisition Opportunities Inc (“LMAO”) initial public offering in January 2021, the Company’s affiliate LMFA Sponsor LLC purchased an aggregate
19
forfeiture should no business combination occur. Subsequent changes in fair value will be recorded in the income statement during the period of the change. As of June 30, 2022 and 2021, our re-measurement resulted in an unrealized loss of approximately $
Long-term investments as of consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
June 30, 2021 |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LMF Acquisition Opportunities Inc. warrants |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
End of period |
$ |
516,420 |
|
|
$ |
1,973,413 |
|
|
$ |
2,295,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
|
|
|
|
June 30, 2021 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
$ |
|
|
|
|
|
|
|
$ |
- |
|
|
|
|
Investments in affiliate |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investment in affiliate |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
End of period |
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Unconsolidated Affiliates
LMF Acquisition Opportunities Inc.
The Company is the sponsor of LMF Acquisition Opportunities, Inc. (“LMAO”), a special purpose acquisition company that completed an initial public offering in January 2021. Prior to LMAO’s initial public offering, LMFA Sponsor LLC (“Sponsor”), a
The registration statement for LMAO’s initial public offering (the “LMAO IPO”) was declared effective on January 25, 2021 and on January 28, 2021, LMAO consummated the LMAO IPO with the sale of
As a result of the LMAO IPO, we ceased having a controlling financial interest in LMAO as of January 28, 2021. Additionally, as our retained investment in LMAO qualifies for equity-method accounting, we were required to remeasure our retained interest in LMAO at fair value and include any resulting adjustments as part of a gain or loss recognized on deconsolidation. The fair value calculation related to our retained interest in LMAO is dependent upon company-specific adjustments applied to the observable trading price of LMAO’s Class A common stock.
The Company’s investment in LMAO is held through a
20
Company, therefore, accounts for its interest in LMAO under the equity method of accounting. Additionally, as our retained investment in LMAO qualifies for equity-method accounting, we were required to remeasure our retained interest at fair value and include any resulting adjustments as part of a gain or loss recognized on deconsolidation. The fair value calculation related to our retained interest in LMAO is dependent upon company-specific adjustments applied to both the observable trading price of LMAO’s Class A common stock and the related risk of forfeiture should LMAO not consummate a business combination.
On April 21, 2022, LMF Acquisition Opportunities, Inc. (“LMAO”) entered into an Agreement and Plan of Merger with LMF Merger Sub, Inc., a Delaware corporation and direct, wholly owned subsidiary of LMAO, and SeaStar Medical, Inc., a Delaware corporation.
As of June 30, 2022 due to the progression of the pending merger with SeaStar Medical, Inc. the Company recalculated the fair value of our interest in LMAO which included a reassessment of the risk of forfeiture. Based on the work performed, we concluded that the risk of forfeiture has decreased and the value of our retained interest has increased. As a result of the remeasurement of our retained interest in LMAO, we recognized an unrealized gain on securities of $
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
June 30, 2021 |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LMF Acquisition Opportunities Inc. common stock |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
End of period |
$ |
17,362,125 |
|
|
$ |
4,676,130 |
|
|
$ |
4,615,583 |
|
|
|
|
|
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June 30, 2022 |
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June 30, 2021 |
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Beginning of year |
$ |
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$ |
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Unrealized gain on investment in affiliate |
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End of period |
$ |
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$ |
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The net unrealized gain on securities from the Company’s investment in LMAO’s Class B shares and warrants totaled $
Note 8. Deposits on Mining Equipment and Hosting
On September 8, 2021, the Company entered into a sale and purchase agreement (the “First Bitmain Purchase Agreement”) with Bitmain Technologies Limited (“Seller”) pursuant to which the Company agreed to purchase, and Seller agreed to supply to the Company, an aggregate of
On October 6, 2021, the Company entered into an additional sale and purchase agreement (the “Second Purchase Agreement” and, collectively with the First Bitmain Purchase Agreement, the Purchase Agreements) with Seller pursuant to which the Company agreed to purchase, and Seller agreed to supply to the Company, an aggregate of
21
On June 21, 2022, the “Company entered into a Master Agreement, dated effective as of June 20, 2022, with Compute North LLC (“Compute North”) under which Compute North has agreed to host up to
The Company classifies deposit payments within Deposits on mining equipment and hosting in the consolidated balance sheet. As mining machines are received, the respective cost of the mining machines plus the related shipping and customs fees are reclassified from Deposits on mining equipment and hosting to Fixed assets, net in the consolidated balance sheet. Refer to Note 9. As of June 30, 2022 and December 31, 2021, the Company has a total of approximately $
Note 9. Fixed Assets, net
The components of fixed assets as of June 30, 2022 and December 31, 2021 are as follows:
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Useful Life (Years) |
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June 30, 2022 |
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December 31, 2021 |
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Mining machines |
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$ |
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- |
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Furniture, computer and office equipment |
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3-5 |
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Gross fixed assets |
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Less: accumulated depreciation |
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Fixed assets, net |
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$ |
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As of June 30, 2022,
The Company’s depreciation expense related to furniture, computer and office equipment recognized for the Three and Six Months ended June 30, 2022 and 2021 was approximately $
22
Note 10. Digital Assets
Digital assets consist of the following:
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June 30, 2022 |
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December 31, 2021 |
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June 30, 2021 |
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Bitcoin |
$ |
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$ |
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End of period |
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June 30, 2022 |
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June 30, 2021 |
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Beginning of Year |
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Purchase of digital assets |
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GUSD Earned on digital assets |
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Sale of digital assets |
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Impairment loss |
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End of Period |
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During the Three and Six Months ended June 30, 2022, the Company purchased and received an aggregate of
During the Three and Six Months ended June 30, 2022, the Company purchased and received an aggregate of $
Note 11. Subsequent Events
On July 29, 2022, LMAO issued a press release announcing that its board of directors elected to extend the date by which LMAO has to consummate a business combination from July 29, 2022 to October 29, 2022 (the “Extension”), as permitted under LMAO’s Amended and Restated Certificate of Incorporation. In connection with the Extension, LMFAO Sponsor deposited an aggregate of $
23
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Management’s Discussion and Analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes for the Six Months ended June 30, 2022, and with the Annual Report on Form 10-K for the year ended December 31, 2021
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:
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our ability to retain the listing of our securities on the Nasdaq Capital market, |
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our ability to obtain funds to purchase receivables, |
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the early stage of our planned cryptocurrency mining business and our lack of operating history in such business, |
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the uncertainty surrounding the cryptocurrency mining business, |
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our ability to purchase defaulted consumer receivables at appropriate prices, |
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competition to acquire such receivables, |
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our dependence upon third party law firms to service our accounts, |
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our ability to manage growth or declines in the business, |
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changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, |
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the impact of class action suits and other litigation on our business or operations, |
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our ability to keep our software systems updated to operate our business, |
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our ability to employ and retain qualified employees, |
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our ability to establish and maintain internal accounting controls, |
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changes in the credit or capital markets, |
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changes in interest rates, |
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deterioration in economic conditions, |
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the spread of the novel coronavirus (COVID-19), its impact on the economy generally and, more specifically, the specialty finance industries, |
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negative press regarding the debt collection industry which may have a negative impact on a debtor’s willingness to pay the debt we acquire, and |
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other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 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
LM Funding America, Inc. (“we”, “our”, “LMFA” or the “Company”) is a specialty finance company that provides funding to nonprofit community associations primarily located in the state of Florida. We offer incorporated nonprofit community associations, which we refer to as “Associations,” a variety of financial products customized to each Association’s financial needs. Our original
24
product offering consists of providing funding to Associations by purchasing their rights under delinquent accounts that are selected by the Associations arising from unpaid Association assessments. Historically, we provided funding against such delinquent accounts, which we refer to as “Accounts,” in exchange for a portion of the proceeds collected by the Associations from the account debtors on the Accounts. In addition to our original product offering, we have started purchasing Accounts on varying terms tailored to suit each Association’s financial needs, including under our New Neighbor Guaranty™ program.
Specialty Finance Company
We purchase an Association’s right to receive a portion of the Association’s collected proceeds from owners that are not paying their assessments. After taking assignment of an Association’s right to receive a portion of the Association’s proceeds from the collection of delinquent assessments, we engage law firms to perform collection work on a deferred billing basis wherein the law firms receive payment upon collection from the account debtors or a predetermined contracted amount if payment from account debtors is less than legal fees and costs owed. Under this business model, we typically fund an amount equal to or less than the statutory minimum an Association could recover on a delinquent account for each Account, which we refer to as the “Super Lien Amount”. Upon collection of an Account, the law firm working on the Account, on behalf of the Association, generally distributes to us the funded amount, interest, and administrative late fees, with the law firm retaining legal fees and costs collected, and the Association retaining the balance of the collection. In connection with this line of business, we have developed proprietary software for servicing Accounts, which we believe enables law firms to service Accounts efficiently and profitably.
Under our New Neighbor Guaranty program, an Association will generally assign substantially all of its outstanding indebtedness and accruals on its delinquent units to us in exchange for payment by us of monthly dues on each delinquent unit. This simultaneously eliminates a substantial portion of the Association’s balance sheet bad debts and assists the Association to meet its budget by receiving guaranteed monthly payments on its delinquent units and relieving the Association from paying legal fees and costs to collect its bad debts. We believe that the combined features of the program enhance the value of the underlying real estate in an Association and the value of an Association’s delinquent receivables.
Because we acquire and collect on the delinquent receivables of Associations, the Account debtors are third parties about whom we have little or no information. Therefore, we cannot predict when any given Account will be paid off or how much it will yield. In assessing the risk of purchasing Accounts, we review the property values of the underlying units, the governing documents of the relevant Association, and the total number of delinquent receivables held by the Association.
Cryptocurrency Mining Business
On September 15, 2021, we announced that we plan to operate in the Bitcoin mining ecosystem. As of the date of this filing, we have not commenced operations. We aim to deploy the computing power that we will create to mine Bitcoin and validate transactions on the Bitcoin network. We believe that recent developments in Bitcoin mining have created an opportunity for us to deploy capital and conduct large-scale mining operations in the United States. We have formed a new wholly owned subsidiary, US Digital Mining and Hosting Co, LLC, a Florida limited liability company (US Digital), to develop and operate our cryptocurrency mining business.
We have committed to purchasing an aggregate of 5,046 Bitcoin S19J Pro Antminer cryptocurrency mining machines for an aggregate purchase price of $31.6 million (the “Mining Machines”). This contract allowed for a reduction in purchase price if Bitcoin price declined prior to shipment. We received approximately 2,521 Mining Machines as of June 30, 2022. We anticipate the remaining Mining Machines to be delivered in batches over an estimated delivery timeframe from July 2022 and continuing through October 2022. The Bitmain Purchase Agreements required us to pay $7.9 million or 25% of the total purchase price as a non-refundable deposit for the Mining Machines within 7 days of the date of the signing of the respective Bitmain Purchase Agreements, an additional 35% of the batch price at least 6 months prior to shipment of such batch, and the remaining 40% of each batch price one month prior to the shipment of the batch. During the Six Months ended June 30, 2022 the Company paid an additional $11.2 million to Bitmain Technologies Limited for deposits related to mining equipment, expect to pay an additional $1.0 million under the Bitmain contract through the completion of the delivery of the machines as a result of variable pricing described above and payments of $285 thousand were made to various shipping vendors for transportation and customs costs related to the equipment.
In October 2021, we also entered into a sale and purchase agreement (the “Uptime Purchase Agreement”) with Uptime Armory LLC (“Uptime”) pursuant to which US Digital agreed to purchase, and Uptime agreed to supply to US Digital, an aggregate of 18 modified 40-foot cargo containers (“POD5ive containers”) that will be designed to hold and operate 280 S19 Pro Antminers manufactured by Seller. The purchase price of the POD5ive containers totals $3.15 million of which $2.4 million or 75% was paid in 2021 as a non-refundable down payment and the remaining 25% is due within five business days after Uptime delivers a “notice of completion” of the equipment. None of the containers have been delivered as of June 30, 2022.
On the same effective date, US Digital also entered into a hosting agreement with Uptime Hosting LLC (the “Hosting Agreement”) to host the Company’s 18 POD5ive containers at a secure location and provide power, maintenance and other services specified in the contract for 6 cents per kilowatt with a term of one year. Under the Hosting Agreement we paid a deposit of $0.8 million in 2021 and will pay an additional deposit for each container three months prior to delivery at the hosting site of $44 thousand and a final deposit
25
for each container one month prior to arrival at the hosting site of $44 thousand. On June 29, 2022 the Company entered into a mutual termination agreement pursuant to which the parties agreed to terminate the Hosting Agreement. The deposits paid for hosting services under the agreement are refundable.
On June 21, 2022, the “Company entered into a Master Agreement, dated effective as of June 20, 2022, with Compute North LLC (“Compute North”) under which Compute North has agreed to host up to 4,200 of LMFA’s S19J Pro Antminer Machines (S19J) (100 TH/s) (“Bitmain Miner Machines”) and provide colocation, management and other services (the “Master Agreement”). The term of the Master Agreement is for 60 months, subject to earlier termination in specified circumstances. The Company paid a $1.3 million non-refundable co-location deposit on June 21, 2022 under the Master Agreement. The hosting cost under the Master Agreement is expected to be approximately $21,000 per day when all hosted machines become fully operational.
The Company classifies deposit payments within Deposits on mining equipment and hosting in the consolidated balance sheet. As mining machines are received, the respective cost of the mining machines plus the related shipping and customs fees are reclassified from Deposits on mining equipment and hosting to Fixed assets, net in the consolidated balance sheet. Refer to Note 9. As of June 30, 2022 and December 31, 2021, the Company has a total of approximately $14.5 and $16.8 million, respectively, classified as Deposits on mining equipment and hosting and approximately $15.1 million and $0, respectively, classified as Fixed assets, net in the consolidated balance sheet under these payment arrangements.
Recent Developments
COVID-19 Update
Although COVID-19 is currently not material to our results of operations, there is uncertainty relating to the potential future impact on our business. While our employees currently have the ability and are encouraged to work remotely, such measures have and may continue to have an impact on employee attendance or productivity, which, along with the possibility of employees’ illness, may adversely affect our operations. In addition to encouraging employees to work remotely, the Company has increased sanitation of its offices, provided hand gel and masks to its employees and has closed the offices during identified periods of high contagion.
The extent to which COVID-19 impacts our operations, or our ability to obtain financing should we require it, will depend on future developments which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken by governments and private businesses to contain COVID-19 to treat its impact, among others. If the disruptions posed by COVID-19 continue for an extended period of time, financial markets may not be available to the Company for raising capital in order to fund future growth. Should the Company not be able to obtain financing when required, in the amounts necessary or under terms which are economically feasible, we may be required to reduce planned future growth and/or the scope of our operations.
Corporate History and Reorganization
The Company was originally organized in January 2008 as a Florida limited liability company under the name LM Funding, LLC. Prior to our initial public offering in 2015, all of our business was conducted through LM Funding, LLC and its subsidiaries. Immediately prior to our initial public offering in October 2015, the members of the 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 shares of the common stock of LMFA. 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 LM Funding, LLC a wholly-owned subsidiary of LMFA.
The Company organized two new subsidiaries in 2020: LMFA Financing LLC, a Florida limited liability company, on November 21, 2020, and LMFAO Sponsor LLC, a Florida limited liability company, on October 29, 2020. LMFAO Sponsor LLC organized a subsidiary, LMF Acquisition Opportunities Inc., on October 29, 2020. LM Funding America Inc. organized a subsidiary, US Digital Mining and Hosting Co., LLC., on September 10, 2021.
Results of Operations
The Three Months Ended June 30, 2022 compared with the Three Months Ended June 30, 2021
Revenues
During the Three Months ended June 30, 2022, total revenues decreased by $94 thousand, to $234 thousand from $328 thousand in the Three Months ended June 30, 2021.
Interest on delinquent association fees for the Three Months ended June 30, 2022 increased $49 thousand due to the increase in payoff occurrences per unit to $3,128 per unit in 2022 from $3,060 per unit in 2021 even as the number of payoffs decreased to 62 payoff occurrences as compared to 96 payoff occurrences for the Three Months ended June 30, 2021.“Payoffs” consist of recovery of the
26
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 saw an increase in rental revenue in the Three Months ended June 30, 2022 of $6 thousand to $41 thousand from $35 thousand for the Three Months ended June 30, 2021.
Operating Expenses
During the Three Months ended June 30, 2022, operating expenses increased approximately $4,967 thousand, to $5,608 thousand from approximately $642 thousand for the Three Months ended June 30, 2021. The increase in operating expenses can be attributed to various factors, including $3,648 thousand increase in stock compensation, $671 thousand increase in professional fees and other operating expense increase of $137 thousand.
Professional fees, excluding fees from the BLG service agreement, for the Three Months ended June 30, 2022 were approximately $872 thousand compared with approximately $114 thousand for the Three Months ended June 30, 2021, due primarily to ordinary legal fees and costs associated with the settlement of a shareholder legal claim. In the ordinary course of our specialty finance business, we are involved in numerous legal proceedings and expenses associated with acquisitions and corporate initiatives. We regularly initiate collection lawsuits, using our network of third party law firms, against debtors. In addition, debtors occasionally initiate litigation against us. This included a settlement expense of $275 thousand during the Three Months ended June 30, 2022 related to the settlement of a legal claim. See Note 5 Commitments and Contingencies for discussion of the claim.
Legal fees to BLG for the Three Months ended June 30, 2022 were $159 thousand compared to $246 thousand for the Three Months ended June 30, 2021. This decrease is due in part to the lower service fee charge from BLG. See Note 2. Due to Related Party for further discussion regarding the service agreements with BLG.
Other Income
During the Three Months ended June 30, 2021, the Company classified the $5 million Borqs convertible note as a trading security which is subject to fair value remeasurement each quarter.
As part of its purchase of the Borqs $5 million convertible note, the Company received warrants that became registered on May 3, 2021. The Company exercised a cashless exercise of the Borqs warrants and received 5,956,544 common shares in Borqs. The Company subsequently sold those warrants and recognized $8.5 million in proceeds, all of which was recognized as gain in the Three Months ended June 30, 2021. The Company recognized an unrealized gain of $2.5 million for the Three Months ended June 30, 2021 from the revaluation of the Borqs convertible debt securities.
During the year ended December 31, 2021, the Company converted $4.1 million of the $5 million notes plus accrued interest into 5,960,829 shares of Borqs. The Company sold 1,064,935 shares in the year ending December 31, 2021 and classified the remaining 4,895,894 shares as marketable securities which were sold during the first quarter of 2022. The remaining principal amount of the Notes plus accrued interest through the date of conversion was converted into common shares of Borqs.
During the Three Months ended June 30, 2022 a realized gain of $288 thousand was recognized on the conversion of the convertible debt to common shares. On the conversion of the debt security, the unrealized gain of $288 thousand previously recognized in the prior quarter was reversed. Subsequent to the conversion, the 3,863,200 shares were sold which resulted in a realized gain of $45 thousand within the Three Months ended June 30, 2022.
The Company’s investment in LMAO changed due to the LMAO IPO on January 28, 2021. This resulted in LMAO’s deconsolidation from the Company and any changes in fair value will be recorded in the income statement during the period of the change. The Company recognized an unrealized gain on securities of $12.2 million for the Three Months ended June 30, 2022 as compared to a unrealized gain of $0.6 million for the Three Months ended June 30, 2021 from the revaluation of LMAO’s Class B common stock and Private Placement Warrants. The change was driven primarily by the impact of LMAO’s pending merger with Seastar Medical, Inc. on the valuation of LMAO’s common shares.
During the Three Months ended June 30, 2022, the Company purchased and received an aggregate of 21.5 Bitcoin for approximately $787 thousand. These digital assets are recorded at cost, net of any impairment losses incurred since acquisition. During the Three months ended June 30, 2022, a $378,000 impairment loss on such digital assets was recorded.
Interest (Income) Expense
During the Three Months ended June 30, 2022, the Company generated net interest income of $81 thousand as compared to $74 thousand of interest income for the Three Months ended June 30, 2021 due to interest bearing investments.
27
Income Tax Expense
During the Three Months ended June 30, 2022, the Company generated a $6.6 million net income before income taxes and the Company released $0.5 million of its tax valuation allowance, recognized a $0.2 million benefit for change in tax rate and a net income tax benefit of $1.2 million which offset a recognized $1.9 million deferred income tax expense. This net activity resulted in no recognized income tax expense for the Three Months ended June 30, 2022. The Company recognized $14 thousand of income tax expense for the Three Months ended June 30, 2021.
Net Income (Loss)
During the Three Months ended June 30, 2022, net income was $6.6 million as compared to net income of $11.3 million for the Three Months ended June 30, 2021.
Net Income Attributable to Non-Controlling Interest
The Company owns 69.5% of Sponsor. As such, there is $3.7 million net income for the Three Months ended June 30, 2022 attributable to the Non-Controlling Interest as compared to $147 thousand income for the Six Months ended June 30, 2021.
Net Income (Loss) Attributable to LM Funding America, Inc.
During the Three Months ended June 30, 2022, net income was $2.8 million as compared to net income of $11.1 million for the Three Months ended June 30, 2021.
Results of Operations
The Six Months Ended June 30, 2022 compared with the Six Months Ended June 30, 2021
Revenues
During the Six Months ended June 30, 2022, total revenues decreased by $80 thousand, to $425 thousand from $505 thousand in the Six Months ended June 30, 2021.
Interest on delinquent association fees for the Six Months ended June 30, 2022 increased $73 thousand due to the increase in payoff occurences per unit to $3,009 per unit in 2022 to $2,463 per unit in 2021 even as the number of payoffs decreased to 115 payoff occurrences as compared to 178 payoff occurrences for the Six Months ended June 30, 2021. “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 saw an increase in rental revenue in the Six Months ended June 30, 2022 of $13 thousand to $79 thousand from $66 thousand for the Six Months ended June 30, 2021.
Operating Expenses
During the Six Months ended June 30, 2022, operating expenses increased approximately $8,284 thousand, to $10,830 thousand from $2,546 thousand for the Six Months ended June 30, 2021. The increase in operating expenses can be attributed to various factors, including $7,296 thousand increase in stock compensation, $963 thousand increase in professional fees and other operating expense increase of $138 thousand offset in part by a $256 thousand decrease in compensation costs.
Professional fees, excluding fees from the BLG service agreement, for the Six Months ended June 30, 2022 were approximately $1,309 thousand compared with approximately $351 thousand for the Six Months ended June 30, 2021 due primarily to ordinary legal fees and costs associated with the settlement of a shareholder legal claim. In the ordinary course of our specialty finance business, we are involved in numerous legal proceedings and expenses associated with acquisitions and corporate initiatives. We regularly initiate collection lawsuits, using our network of third party law firms, against debtors. In addition, debtors occasionally initiate litigation against us. This included an expense of $275 thousand during the Six Months ended June 30, 2022 related to the settlement of a legal claim. See Note 5 Commitments and Contingencies for discussion of the claim.
Legal fees for BLG for the Six Months ended June 30, 2022 were $497 thousand compared to $492 thousand for the Six Months ended June 30, 2021. Legal fees for the Six Months ended June 30, 2022 include a $150 thousand termination fee offset by a reduction in the service fee. See Note 2. Due to Related Party for further discussion regarding the service agreements with BLG.
28
Other Income
The Company classified the $5 million Borqs convertible note as a trading security and as such is fair valued each quarter. The Company recognized a realized gain of $0.3 million for the Six Months ended June 30, 2022 on the conversion of the convertible debt to common shares.
The Company recognized a $350 thousand realized loss on marketable securities for the Six Months ended June 30, 2022 as compared to a $14,125 thousand gain for the Six Months ended June 30, 2021.
As part of its purchase of the Borqs $5 million convertible note, the Company received warrants that became registered on May 3, 2021. The Company exercised a cashless exercise of the Borqs warrants and received 5,956,544 common shares in Borqs. The Company subsequently sold those warrants and recognized $8.5 million in proceeds, all of which was recognized as gain in the Three Months ended June 30, 2021. The Company recognized an unrealized gain of $2.5 million for the Six Months ended June 30, 2021 from the revaluation of the Borqs convertible debt securities.
The Company’s investment in LMAO changed due to the LMAO IPO on January 28, 2021. This resulted in LMAO’s deconsolidation from the Company and any changes in fair value will be recorded in the income statement during the period of the change. The Company recognized an unrealized gain on securities of $11.2 million for the Six Months ended June 30, 2022 as compared to a unrealized gain of $1.1 million for the Six Months ended June 30, 2021 from the revaluation of LMAO’s Class B common stock and Private Placement Warrants. The change was driven primarily by the impact of LMAO’s pending merger with Seastar Medical, Inc. on the valuation of LMAO’s common shares.
During the Six Months ended June 30, 2022, the Company purchased and received an aggregate of 21.5 Bitcoin for approximately $787 thousand. These digital assets are recorded at cost, net of any impairment losses incurred since acquisition. During the Six months ended June 30, 2022, a $378,000 impairment losses on such digital assets was recorded.
Interest (Income) Expense
During the Six Months ended June 30, 2022, the Company earned net interest income of $179 thousand as compared to $87 thousand of interest income for the Six Months ended June 30, 2021 due to interest bearing investments.
Income Tax Expense
During the Six Months ended June 30, 2022, the Company generated a $0.5 million net income before income taxes and the Company increased its tax valuation allowance by $0.9 million and recognized a $0.9 million of deferred tax expense which offset a $0.2 million tax rate change and a net income tax benefit of $1.6 million. This net activity resulted in no recognized income tax expense for the Six Months ended June 30, 2022. The Company recognized $17.3 thousand of income tax expense for the Six Months ended June 30, 2021.
Net Income (Loss)
During the Six Months ended June 30, 2022, net income was $0.5 million as compared to net income of $15.8 million for the Six Months ended June 30, 2021.
Net Income Attributable to Non-Controlling Interest
The Company owns 69.5% of Sponsor. As such, there is $3,433 thousand net income for the Six Months ended June 30, 2022 attributable to the Non-Controlling Interest as compared to $319 thousand net income for the Six Months ended June 30, 2021.
Net Income (Loss) Attributable to LM Funding America, Inc.
During the Six Months ended June 30, 2022, the net loss was $2.9 million as compared to net income of $15.5 million for the Six Months ended June 30, 2021.
Liquidity and Capital Resources
General
As of June 30, 2022, we had cash and cash equivalents of $17.0 million compared with $32.6 million at December 31, 2021. The Company also had $37 thousand of marketable securities as of June 30, 2022 compared with $2.1 million at December 31, 2021.
Cash from Operations
Net cash used by operations was $0.2 million during the Six Months ended June 30, 2022 compared with net cash provided by operations of $7.0 million during the Six Months ended June 30, 2021. This change in cash provided by operating activities was primarily driven by a $5.7 million realized gain on securities from the Borqs Note transactions during the Six Months ended June 30, 2021.
29
Cash from Investing Activities
For the Six Months ended June 30, 2022 net cash used in investing activities was $15.2 million as compared to net cash used in investing activities of $5.8 million for the Six Months ended June 30, 2021. The Company invested $12.7 million in deposits for mining equipment, $787 thousand for digital assets and $910 thousand in related party notes receivable during the Six Months ended June 30, 2022 as compared to the investment of $5.7 million in LMF Acquisition Opportunities Inc (a special purpose acquisition corporation) during the Six Months ended June 30, 2021. The Company reclassified approximately $15.1 million from Deposits on mining equipment and hosting to Fixed assets, net in the consolidated balance sheet due to the receipt of 2,521 mining machines during the Six Months ended June 30, 2022.
Cash from Financing Activities
Net cash used in financing activities was $0.1 million for the Six Months ended June 30, 2022 compared to $9.4 million provided by financing activities for the Six Months ended June 30, 2021. At June 30, 2022, the Company paid $115 thousand in repayments of debt. During the Six Months ended June 30, 2021 the Company received $9.5 million from the exercise of warrants and paid $125 thousand in repayments of debt.
Shareholders’ Equity
During the Six Months ended June 30, 2021, holders of our warrants exercised such warrants for approximately 2.3 million shares of common stock for an aggregate of $9.5 million.
Debt
Debt of the Company consisted of the following at June 30, 2022 and December 31, 2021:
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June 30, 2022 |
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December 31, 2021 |
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Financing agreement with FlatIron capital that was unsecured. Down payment of $36,255 was required upfront and equal installment payments of $19,114 were made over a 10 month period. The note matured on May 1, 2022. Annualized interest was 3.95% |
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$ |
- |
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$ |
114,688 |
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$ |
- |
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$ |
114,688 |
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to make disclosures under this item.
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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 Securities Exchange Act of 1934, as amended, 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 June 30, 2022. 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 June 30, 2022 due to the following material weakness in internal control over financial reporting that existed as of December 31, 2021 and that continued to exist through June 30, 2022:
The Company did not effectively segregate certain accounting duties nor have a proper multi-level review process due to the small size of its accounting staff.
30
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 there was a material weakness as identified in this Quarterly Report, we believe that our 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.
Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. To date, the remediation actions include the following:
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• |
appointment of additional qualified staff; |
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• |
implementation of additional monitoring of controls to improve documentation of internal control procedures; and |
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• |
expanding the management and governance over IT system controls, |
While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period, we are committed to continuous improvement and will continue to diligently review our internal control over financial reporting.
(b) Changes in internal control over financial reporting.
Other than remediation actions related to the material weaknesses in our internal controls described above, there has been no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
31
PART II. OTHER INFORMATION
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Item 1. |
Legal Proceedings |
Legal Proceedings are set forth under Note 5 "Commitments and Contingencies" included in Part I, Item 1 of this Quarterly Report on Form 10-Q and are incorporated herein by reference.
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Item 1A. |
Risk Factors |
There have been no material changes from the risk factors previously disclosed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, except as follows:
We will be exposed to risks and potential unexpected costs related to disruptions or other failures in the supply chain for cryptocurrency hardware and difficulties in obtaining new hardware.
Manufacture, assembly and delivery of certain components and products for mining operations could be complex and long processes, in the course of which various problems could arise, including disruptions or delays in the supply chain, product quality control issues, as well other external factors, over which we have no control.
Our mining operations can only be successful and ultimately profitable if the costs associated with Bitcoin mining, including hardware costs, are lower than the price of Bitcoin itself. In the course of the normal operation of our cryptocurrency mining facilities, our miners and other critical equipment and materials related to datacenter construction and maintenance, such as containers, switch gears, transformers and cables, will experience ordinary wear and tear and may also face more significant malfunctions caused by a number of extraneous factors beyond our control. Declines in the condition of our miners and other hardware will require us, over time, to repair or replace those miners. Additionally, as the technology evolves, we may be required to acquire newer models of miners to remain competitive in the market. Any upgrading process may require substantial capital investment, and we may face challenges in doing so on a timely and cost-effective basis.
Our mining business will be subject to limitations inherent within the supply chain of certain of our components, including competitive, governmental, and legal limitations, and other events. For example, we expect that we will significantly rely on foreign imports to obtain certain equipment and materials. Any global trade disruption, introductions of tariffs, trade barriers and bilateral trade frictions, together with any potential downturns in the global economy resulting therefrom, could adversely affect our necessary supply chains. Our third-party manufacturers, suppliers and subcontractors may also experience disruptions by worker absenteeism, quarantines, restrictions on employees’ ability to work, office and factory closures, disruptions to ports and other shipping infrastructure, border closures, or other travel or health-related restrictions, such as those that were triggered by the COVID-19 pandemic, for example. Depending on the magnitude of such effects on our supply chain, shipments of parts for our miners, or any new miners that we order, may be delayed or may be more expensive than anticipated.
Furthermore, the global supply chain for cryptocurrency miners is currently heavily dependent on China. In September 2021, China declared all transactions in and mining of cryptocurrencies, including Bitcoin, illegal. China has also in the past limited the shipment of products in and out of its borders, which could negatively impact our ability to receive mining equipment from China-based suppliers. Further, Chinese-origin merchandise is currently subject to an additional duty rate of 25% ad valorem. Should it be determined that cryptocurrency mining equipment purchased from and delivered by Bitmain under the Bitmain Service Agreements are of Chinese origin, we may be required to pay the additional ad valorem duty, penalties and interest in order to receive such equipment. Should additional disruptions to the China-based global supply chain for cryptocurrency hardware occur, we may not be able to obtain adequate equipment from the supplier on a timely basis or the cost to obtain such equipment may be greater than anticipated. Such events could have a material adverse effect on our business, prospects, financial condition, and operating results.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities.
None.
(b) Use of Proceeds.
None.
(c) Repurchase of Securities.
None.
32
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Item 3. |
Defaults Upon Senior Securities |
None.
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Item 4. |
Mine Safety Disclosures |
None.
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Item 5. |
Other Information |
None
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Item 6. |
Exhibits |
The following documents are filed as a part of this report or are incorporated herein by reference.
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EXHIBIT NUMBER |
DESCRIPTION |
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3.2 |
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4.1 |
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10.1 |
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10.2 |
Order Form dated as of June 20, 2022, between US Digital Mining Texas and Compute North LLC (incorporated by reference to Exhibit 10.2 to Form 8-K filed on June 27, 2022) |
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31.1* |
Rule 13a – 14(a) Certification of the Principal Executive Officer |
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31.2* |
Rule 13a – 14(a) Certification of the Principal Financial Officer |
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32.1* |
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101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* Filed herewith.
34
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:
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LM FUNDING AMERICA, INC. |
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Date: August 17, 2022 |
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By: |
/s/ Bruce M. Rodgers |
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Bruce M. Rodgers |
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Chief Executive Officer and Chairman of the Board |
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(Principal Executive Officer) |
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Date: August 17, 2022 |
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By: |
/s/ Richard Russell |
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Richard Russell |
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Chief Financial Officer |
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(Principal Accounting Officer) |
35
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Bruce Rodgers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LM Funding America, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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/s/ Bruce Rodgers |
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August 17, 2022 |
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Bruce Rodgers |
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Chief Executive Officer |
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(Principal Executive Officer) |
A signed original of this document has been provided to LM Funding America, Inc. and will be retained by LM Funding America, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard Russell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LM Funding America, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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/s/ Richard Russell |
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August 17, 2022 |
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Richard Russell |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
A signed original of this document has been provided to LM Funding America, Inc. and will be retained by LM Funding America, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.1
Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Executive Officer of LM Funding America, Inc. (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2022 as filed with the Securities and Exchange Commission on August 17, 2022 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Bruce Rodgers |
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Bruce Rodgers |
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Chief Executive Officer |
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(Principal Executive Officer) August 17, 2022 |
A signed original of this document has been provided to LM Funding America, Inc. and will be retained by LM Funding America, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.1
Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Chief Financial Officer of LM Funding America, Inc. (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2022 as filed with the Securities and Exchange Commission on August 17, 2022 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Richard Russell |
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Richard Russell |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) August 17, 2022 |
A signed original of this document has been provided to LM Funding America, Inc. and will be retained by LM Funding America, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.