UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-37605
LM FUNDING AMERICA, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 47-3844457 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) |
Suite Tampa, FL |
|
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: 813-222-8996813-222-8996
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: | Trading symbol | Name of each exchange on which registered |
Common Stock par value $0.001 per share | LMFA | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer |
| Smaller reporting company | ☑ | |
| ||||
Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The registrant had 3.3 million14,651,883 shares of Common Stock, par value $0.001 per share, outstanding as of November 14, 2017.8, 2023.
LM FUNDING AMERICA, INC.
TABLE OF CONTENTS
Page | ||
PART I. | 3 | |
Item 1. | 3 | |
3 | ||
4 | ||
5 | ||
6 | ||
7 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3. |
| |
Item 4. |
| |
PART II. |
| |
Item 1. |
| |
Item 1A. |
| |
Item 2. |
| |
Item 3. |
| |
Item 4. |
| |
Item 5. |
| |
Item 6. |
| |
|
2
PART I. FINANCIALFINANCIAL INFORMATION
ITEM 1. Financial Statements
LM FUNDING AMERICA, INC. AND SUBSIDIARIESFunding America, Inc. and Subsidiaries Consolidated Balance Sheets
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| September 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (Unaudited) |
|
|
|
| ||
Assets |
|
|
|
|
|
| ||
Cash |
| $ | 469,007 |
|
| $ | 4,238,006 |
|
Digital Assets (Note 2) |
|
| 2,256,500 |
|
|
| 888,026 |
|
Finance receivables |
|
| 21,558 |
|
|
| 26,802 |
|
Marketable securities (Note 5) |
|
| 198,094 |
|
|
| 4,290 |
|
Notes receivable from Seastar Medical Holding Corporation (Note 5) |
|
| 2,277,012 |
|
|
| 3,807,749 |
|
Less: Allowance for credit loss reserve on notes receivable from Seastar Medical Holding Corporation (Note 5) |
|
| (22,344 | ) |
|
| - |
|
Notes receivable from Seastar Medical Holding Corporation, net |
|
| 2,254,668 |
|
|
| 3,807,749 |
|
Prepaid expenses and other assets |
|
| 1,463,094 |
|
|
| 1,233,322 |
|
Income tax receivable |
|
| 293,466 |
|
|
| 293,466 |
|
Current assets |
|
| 6,956,387 |
|
|
| 10,491,661 |
|
|
|
|
|
|
|
| ||
Fixed assets, net (Note 3) |
|
| 25,917,390 |
|
|
| 27,192,317 |
|
Deposits on mining equipment (Note 4) |
|
| 282,233 |
|
|
| 525,219 |
|
Hosting services deposits (Note 4) |
|
| 2,218,452 |
|
|
| 2,200,452 |
|
Real estate assets owned |
|
| 80,057 |
|
|
| 80,057 |
|
Long-term investments - debt security (Note 5) |
|
| - |
|
|
| 2,402,542 |
|
Less: Allowance for losses on debt security (Note 5) |
|
| - |
|
|
| (1,052,542 | ) |
Long-term investments - debt security, net (Note 5) |
|
| - |
|
|
| 1,350,000 |
|
Long-term investments - equity securities (Note 5) |
|
| 72,815 |
|
|
| 464,778 |
|
Investment in Seastar Medical Holding Corporation (Note 5) |
|
| 683,100 |
|
|
| 10,608,750 |
|
Symbiont intangible assets, net (Note 11) |
|
| 2,000,000 |
|
|
| - |
|
Operating lease - right of use assets (Note 8) |
|
| 214,574 |
|
|
| 265,658 |
|
Other assets |
|
| 10,726 |
|
|
| 10,726 |
|
Long-term assets |
|
| 31,479,347 |
|
|
| 42,697,957 |
|
Total assets |
| $ | 38,435,734 |
|
| $ | 53,189,618 |
|
|
|
|
|
|
|
| ||
Liabilities and stockholders' equity |
|
|
|
|
|
| ||
Accounts payable and accrued expenses |
|
| 2,253,311 |
|
|
| 1,570,906 |
|
Note payable - short-term (Note 6) |
|
| 63,208 |
|
|
| 475,775 |
|
Due to related parties (Note 7) |
|
| 44,398 |
|
|
| 75,488 |
|
Current portion of lease liability (Note 8) |
|
| 106,689 |
|
|
| 90,823 |
|
Total current liabilities |
|
| 2,467,606 |
|
|
| 2,212,992 |
|
|
|
|
|
|
|
| ||
Lease liability - net of current portion (Note 8) |
|
| 114,855 |
|
|
| 179,397 |
|
Long-term liabilities |
|
| 114,855 |
|
|
| 179,397 |
|
Total liabilities |
|
| 2,582,461 |
|
|
| 2,392,389 |
|
|
|
|
|
|
|
| ||
Stockholders' equity (Note 9) |
|
|
|
|
|
| ||
Preferred stock, par value $.001; 150,000,000 shares authorized; no shares issued and outstanding as of September 30, 2023 and December 31, 2022 |
|
| - |
|
|
| - |
|
Common stock, par value $.001; 350,000,000 shares authorized; 14,651,883 shares issued and outstanding as of September 30, 2023 and 13,091,883 as of December 31, 2022 |
|
| 14,652 |
|
|
| 13,092 |
|
Additional paid-in capital |
|
| 94,722,633 |
|
|
| 92,195,341 |
|
Accumulated deficit |
|
| (57,369,694 | ) |
|
| (43,017,207 | ) |
Total LM Funding America stockholders' equity |
|
| 37,367,591 |
|
|
| 49,191,226 |
|
Non-controlling interest |
|
| (1,514,318 | ) |
|
| 1,606,003 |
|
Total stockholders' equity |
|
| 35,853,273 |
|
|
| 50,797,229 |
|
Total liabilities and stockholders’ equity |
| $ | 38,435,734 |
|
| $ | 53,189,618 |
|
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
|
| (Unaudited) |
|
|
|
|
| |
ASSETS |
|
|
|
|
|
|
|
|
Cash |
| $ | 602,579 |
|
| $ | 2,268,180 |
|
Finance receivables: |
|
|
|
|
|
|
|
|
Original product |
|
| 883,022 |
|
|
| 1,035,832 |
|
Special product - New Neighbor Guaranty program, net of allowance for credit losses of $51,230 and $125,000, respectively |
|
| 333,785 |
|
|
| 491,597 |
|
Deferred tax asset |
|
| - |
|
|
| 3,509,401 |
|
Due from related party (Note 2) |
|
| 1,661,266 |
|
|
| 1,661,360 |
|
Other Assets (Note 3) |
|
| 653,299 |
|
|
| 1,048,403 |
|
Total assets |
| $ | 4,133,951 |
|
| $ | 10,014,773 |
|
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY |
|
|
|
|
|
|
|
|
Notes payable (Note 4) |
|
|
|
|
|
|
|
|
Principal amount |
| $ | 4,782,719 |
|
| $ | 5,260,274 |
|
Less unamortized debt issuance costs |
|
| (25,474 | ) |
|
| (99,396 | ) |
Long-term debt less unamortized debt issuance costs |
|
| 4,757,245 |
|
|
| 5,160,878 |
|
Other liabilities and obligations |
|
| 1,086,730 |
|
|
| 684,437 |
|
Total liabilities |
|
| 5,843,975 |
|
|
| 5,845,315 |
|
Stockholders’ (deficit) equity: |
|
|
|
|
|
|
|
|
Common stock, par value $.001; 10,000,000 shares authorized; 3,300,000 shares issued and outstanding |
|
| 3,300 |
|
|
| 3,300 |
|
Additional paid-in capital |
|
| 6,578,506 |
|
|
| 6,556,704 |
|
Accumulated deficit |
|
| (8,291,830 | ) |
|
| (2,390,546 | ) |
Total stockholders’ (deficit) equity |
|
| (1,710,024 | ) |
|
| 4,169,458 |
|
Total liabilities and stockholders’ (deficit) equity |
| $ | 4,133,951 |
|
| $ | 10,014,773 |
|
The accompanying notes are an integral part of these condensedunaudited consolidated financial statements.
3
LM FUNDING AMERICA, INC. AND SUBSIDIARIESFunding America, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Digital mining revenues |
| $ | 3,283,473 |
|
| $ | 42,157 |
|
| $ | 8,342,646 |
|
| $ | 42,157 |
|
Specialty finance revenue |
|
| 101,535 |
|
|
| 104,835 |
|
|
| 474,544 |
|
|
| 450,920 |
|
Rental revenue |
|
| 34,500 |
|
|
| 40,788 |
|
|
| 111,486 |
|
|
| 120,240 |
|
Total revenues |
|
| 3,419,508 |
|
|
| 187,780 |
|
|
| 8,928,676 |
|
|
| 613,317 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Digital mining cost of revenues (exclusive of depreciation and amortization shown below) |
|
| 2,708,672 |
|
|
| 38,960 |
|
|
| 6,738,170 |
|
|
| 38,960 |
|
Staff costs and payroll |
|
| 1,340,665 |
|
|
| 4,297,540 |
|
|
| 4,736,940 |
|
|
| 12,886,432 |
|
Professional fees |
|
| 419,173 |
|
|
| 714,730 |
|
|
| 1,228,503 |
|
|
| 2,520,981 |
|
Settlement costs with associations |
|
| - |
|
|
| - |
|
|
| 10,000 |
|
|
| 160 |
|
Selling, general and administrative |
|
| 201,151 |
|
|
| 209,328 |
|
|
| 683,174 |
|
|
| 446,519 |
|
Real estate management and disposal |
|
| 26,453 |
|
|
| 22,558 |
|
|
| 127,611 |
|
|
| 76,453 |
|
Depreciation and amortization |
|
| 1,516,873 |
|
|
| 38,617 |
|
|
| 3,487,866 |
|
|
| 43,718 |
|
Collection costs |
|
| 8,098 |
|
|
| 5,037 |
|
|
| 17,533 |
|
|
| (6,689 | ) |
Impairment loss on mined digital assets |
|
| 383,497 |
|
|
| 870 |
|
|
| 822,650 |
|
|
| 870 |
|
Realized gain on sale of mined digital assets |
|
| (261,191 | ) |
|
| - |
|
|
| (1,331,982 | ) |
|
| - |
|
Other operating costs |
|
| 246,536 |
|
|
| 124,405 |
|
|
| 704,390 |
|
|
| 274,298 |
|
Total operating costs and expenses |
|
| 6,589,927 |
|
|
| 5,452,045 |
|
|
| 17,224,855 |
|
|
| 16,281,702 |
|
Operating loss |
|
| (3,170,419 | ) |
|
| (5,264,265 | ) |
|
| (8,296,179 | ) |
|
| (15,668,385 | ) |
Realized gain (loss) on securities |
|
| 1,788 |
|
|
| - |
|
|
| 1,788 |
|
|
| (349,920 | ) |
Realized gain on convertible debt securities |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 287,778 |
|
Unrealized gain (loss) on marketable securities |
|
| 2,058 |
|
|
| (13,000 | ) |
|
| 6,436 |
|
|
| (36,900 | ) |
Impairment loss on hosting deposits |
|
| - |
|
|
| - |
|
|
| (36,691 | ) |
|
| - |
|
Impairment loss on Symbiont assets |
|
| (750,678 | ) |
|
| - |
|
|
| (750,678 | ) |
|
| - |
|
Unrealized gain (loss) on investment and equity securities |
|
| (778,078 | ) |
|
| (194,174 | ) |
|
| (10,317,613 | ) |
|
| 11,034,828 |
|
Impairment loss on digital assets |
|
| - |
|
|
| (25,764 | ) |
|
| - |
|
|
| (403,471 | ) |
Realized gain on sale of purchased digital assets |
|
| - |
|
|
| - |
|
|
| 1,917 |
|
|
| - |
|
Digital assets other income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,658 |
|
Other income - coupon sales |
|
| 10,160 |
|
|
| - |
|
|
| 639,472 |
|
|
| - |
|
Credit loss on Seastar Medical Holding Corporation notes receivable |
|
| (22,344 | ) |
|
| - |
|
|
| (22,344 | ) |
|
| - |
|
Gain on adjustment of note receivable allowance |
|
| - |
|
|
| - |
|
|
| 1,052,543 |
|
|
| - |
|
Other income - finance revenue |
|
| - |
|
|
| - |
|
|
| 37,660 |
|
|
| - |
|
Dividend income |
|
| - |
|
|
| 1,125 |
|
|
| - |
|
|
| 3,875 |
|
Interest income |
|
| 39,657 |
|
|
| 85,602 |
|
|
| 210,881 |
|
|
| 264,947 |
|
Loss before income taxes |
|
| (4,667,856 | ) |
|
| (5,410,476 | ) |
|
| (17,472,808 | ) |
|
| (4,861,590 | ) |
Income tax expense |
|
| - |
|
|
| (1,311,678 | ) |
|
| - |
|
|
| (1,311,678 | ) |
Net Loss |
| $ | (4,667,856 | ) |
| $ | (6,722,154 | ) |
| $ | (17,472,808 | ) |
| $ | (6,173,268 | ) |
Less: loss (income) attributable to non-controlling interest |
|
| 250,880 |
|
|
| 59,298 |
|
|
| 3,120,321 |
|
|
| (3,373,299 | ) |
Net loss attributable to LM Funding America Inc. |
| $ | (4,416,976 | ) |
| $ | (6,662,856 | ) |
| $ | (14,352,487 | ) |
| $ | (9,546,567 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic loss per common share |
| $ | (0.33 | ) |
| $ | (0.51 | ) |
| $ | (1.08 | ) |
| $ | (0.73 | ) |
Diluted loss per common share |
| $ | (0.33 | ) |
| $ | (0.51 | ) |
| $ | (1.08 | ) |
| $ | (0.73 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 13,480,470 |
|
|
| 13,091,883 |
|
|
| 13,237,121 |
|
|
| 13,081,591 |
|
Diluted |
|
| 13,480,470 |
|
|
| 13,091,883 |
|
|
| 13,237,121 |
|
|
| 13,081,591 |
|
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on delinquent association fees |
| $ | 593,613 |
|
| $ | 709,090 |
|
| $ | 1,888,205 |
|
| $ | 3,010,428 |
|
Administrative and late fees |
|
| 64,959 |
|
|
| 91,833 |
|
|
| 218,883 |
|
|
| 330,030 |
|
Recoveries in excess of cost - special product |
|
| 134,787 |
|
|
| 806 |
|
|
| 219,160 |
|
|
| 115,967 |
|
Underwriting and other revenues |
|
| 87,286 |
|
|
| 97,824 |
|
|
| 221,065 |
|
|
| 332,549 |
|
Rental revenue |
|
| 161,726 |
|
|
| 107,369 |
|
|
| 496,614 |
|
|
| 229,910 |
|
Total revenues |
|
| 1,042,371 |
|
|
| 1,006,922 |
|
|
| 3,043,927 |
|
|
| 4,018,884 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Staff costs and payroll |
|
| 470,056 |
|
|
| 996,515 |
|
|
| 1,479,232 |
|
|
| 2,649,688 |
|
Professional fees |
|
| 533,591 |
|
|
| 462,804 |
|
|
| 1,639,278 |
|
|
| 1,585,046 |
|
Settlement costs with associations |
|
| 101,175 |
|
|
| 231,062 |
|
|
| 257,256 |
|
|
| 603,396 |
|
Other operating expenses |
|
| 384,579 |
|
|
| 619,926 |
|
|
| 1,257,867 |
|
|
| 1,613,642 |
|
Total operating expenses |
|
| 1,489,401 |
|
|
| 2,310,307 |
|
|
| 4,633,633 |
|
|
| 6,451,772 |
|
Operating loss |
|
| (447,030 | ) |
|
| (1,303,385 | ) |
|
| (1,589,706 | ) |
|
| (2,432,888 | ) |
Interest expense |
|
| 122,406 |
|
|
| 143,859 |
|
|
| 375,042 |
|
|
| 463,634 |
|
Loss on litigation |
|
| - |
|
|
| - |
|
|
| 505,000 |
|
|
| - |
|
Loss before income taxes |
|
| (569,436 | ) |
|
| (1,447,244 | ) |
|
| (2,469,748 | ) |
|
| (2,896,522 | ) |
Income tax expense (benefit) |
|
| 4,134,436 |
|
|
| (533,064 | ) |
|
| 3,431,536 |
|
|
| (1,050,491 | ) |
Net loss |
| $ | (4,703,872 | ) |
| $ | (914,180 | ) |
| $ | (5,901,284 | ) |
| $ | (1,846,031 | ) |
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (1.43 | ) |
| $ | (0.28 | ) |
| $ | (1.79 | ) |
| $ | (0.56 | ) |
Diluted |
|
| (1.43 | ) |
|
| (0.28 | ) |
|
| (1.79 | ) |
|
| (0.56 | ) |
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 3,300,000 |
|
|
| 3,300,000 |
|
|
| 3,300,000 |
|
|
| 3,300,000 |
|
Diluted |
|
| 3,300,000 |
|
|
| 3,300,000 |
|
|
| 3,300,000 |
|
|
| 3,300,000 |
|
The accompanying notes are an integral part of these condensedunaudited consolidated financial statements.
4
LM FUNDING AMERICA, INC. AND SUBSIDIARIESFunding America, Inc. and Subsidiaries Consolidated Statements of Cash Flows
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)
| Nine Months ended September 30, |
| ||||||
| 2023 |
| 2022 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
| ||
Net loss |
| $ | (17,472,808 | ) |
| $ | (6,173,268 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 3,487,866 |
|
|
| 43,718 |
|
Noncash lease expense |
|
| 70,545 |
|
|
| 71,288 |
|
Stock compensation |
|
| 917,057 |
|
|
| 988,498 |
|
Stock option expense |
|
| 1,611,795 |
|
|
| 9,956,219 |
|
Accrued investment income |
|
| (130,990 | ) |
|
| (259,867 | ) |
Impairment loss on digital assets |
|
| 822,650 |
|
|
| 404,341 |
|
Impairment loss on hosting deposits |
|
| 36,691 |
|
|
| - |
|
Impairment loss on Symbiont assets |
|
| 750,678 |
|
|
| - |
|
Unrealized loss (gain) on marketable securities |
|
| (6,436 | ) |
|
| 36,900 |
|
Unrealized loss (gain) on investment and equity securities |
|
| 10,317,613 |
|
|
| (11,034,828 | ) |
Realized loss (gain) on securities |
|
| (1,788 | ) |
|
| 349,920 |
|
Realized gain on convertible note receivable |
|
| - |
|
|
| (287,778 | ) |
Realized gain on sale of digital assets |
|
| (1,333,899 | ) |
|
| - |
|
Proceeds from securities |
|
| 554,036 |
|
|
| 2,565,893 |
|
Convertible debt and interest converted into marketable securities |
|
| - |
|
|
| 844,882 |
|
Investments in marketable securities |
|
| (739,616 | ) |
|
| (844,882 | ) |
Credit loss on Seastar Medical Holding Corporation notes receivable |
|
| 22,344 |
|
|
| - |
|
Reversal of allowance loss on debt security |
|
| (1,052,543 | ) |
|
| - |
|
Change in operating assets and liabilities: |
|
|
|
|
|
| ||
Prepaid expenses and other assets |
|
| (123,221 | ) |
|
| 807,352 |
|
Hosting deposits |
|
| (54,691 | ) |
|
| - |
|
Repayments to related party |
|
| (31,090 | ) |
|
| (45,605 | ) |
Accounts payable and accrued expenses |
|
| 682,405 |
|
|
| 172,723 |
|
Mining of digital assets |
|
| (8,352,805 | ) |
|
| (42,157 | ) |
Proceeds from sale of digital assets |
|
| 7,487,058 |
|
|
| - |
|
Lease liability payments |
|
| (70,563 | ) |
|
| (75,574 | ) |
Deferred taxes and taxes payable |
|
| - |
|
|
| 841,678 |
|
Net cash used in operating activities |
|
| (2,609,712 | ) |
|
| (1,680,547 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
| ||
Net collections of finance receivables - original product |
|
| (8,765 | ) |
|
| 19,049 |
|
Net collections of finance receivables - special product |
|
| 14,009 |
|
|
| (11,565 | ) |
Capital expenditures |
|
| (1,913,303 | ) |
|
| (15,380 | ) |
Investment in note receivable |
|
| (100,000 | ) |
|
| (350,000 | ) |
Investment in note receivable - related party |
|
| - |
|
|
| (2,785,000 | ) |
Collection of note receivable |
|
| 1,761,727 |
|
|
| - |
|
Investment in digital assets |
|
| (35,157 | ) |
|
| (978,441 | ) |
Proceeds from sale of purchased digital assets |
|
| 43,678 |
|
|
| - |
|
Symbiont asset acquisition |
|
| (402,359 | ) |
|
| - |
|
Deposits for mining equipment |
|
| - |
|
|
| (16,467,402 | ) |
Net cash used in investing activities |
|
| (640,170 | ) |
|
| (20,588,739 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
| ||
Insurance financing repayments |
|
| (499,453 | ) |
|
| (114,688 | ) |
Insurance financing |
|
| 86,886 |
|
|
| - |
|
Issue costs from the issuance of common stock |
|
| (106,550 | ) |
|
| - |
|
Net cash used in financing activities |
|
| (519,117 | ) |
|
| (114,688 | ) |
NET DECREASE IN CASH |
|
| (3,768,999 | ) |
|
| (22,383,974 | ) |
CASH - BEGINNING OF PERIOD |
|
| 4,238,006 |
|
|
| 32,559,185 |
|
CASH - END OF PERIOD |
| $ | 469,007 |
|
| $ | 10,175,211 |
|
|
|
|
|
|
|
| ||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
| ||
ROU assets and operating lease obligation recognized |
| $ | 21,887 |
|
| $ | 300,787 |
|
Reclassification of mining equipment deposit to fixed assets, net |
| $ | 1,177,226 |
|
| $ | 21,986,382 |
|
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION |
|
|
|
|
|
| ||
Cash paid for interest |
| $ | - |
|
| $ | - |
|
Cash paid for taxes |
| $ | - |
|
| $ | 470,000 |
|
(Unaudited)
|
| Nine Months Ended September 30, 2017 |
|
| Nine Months Ended September 30, 2016 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
| $ | (1,718,235 | ) |
| $ | (2,650,498 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
| 627,151 |
|
|
| 130,468 |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
| (574,517 | ) |
|
| (2,835,027 | ) |
NET DECREASE IN CASH |
|
| (1,665,601 | ) |
|
| (5,355,057 | ) |
CASH - BEGINNING OF PERIOD |
|
| 2,268,180 |
|
|
| 8,997,798 |
|
CASH - END OF PERIOD |
| $ | 602,579 |
|
| $ | 3,642,741 |
|
The accompanying notes are an integral part of these condensedunaudited consolidated financial statements.
5
LM Funding America, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity
For the Three and Nine Months Ended September 30, 2023 and 2022
|
| Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Additional paid-in capital |
|
| Accumulated Deficit |
|
| Non-Controlling Interest |
|
| Total Equity |
| ||||||
Balance - December 31, 2021 |
|
| 13,017,943 |
|
| $ | 13,018 |
|
| $ | 74,525,106 |
|
| $ | (13,777,006 | ) |
| $ | 249,089 |
|
| $ | 61,010,207 |
|
Stock issued for services |
|
| 73,940 |
|
|
| 74 |
|
|
| (74 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Stock compensation |
|
| - |
|
|
| - |
|
|
| 329,500 |
|
|
| - |
|
|
| - |
|
|
| 329,500 |
|
Stock option expense |
|
| - |
|
|
| - |
|
|
| 3,318,737 |
|
|
| - |
|
|
| - |
|
|
| 3,318,737 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,728,051 | ) |
|
| (291,200 | ) |
|
| (6,019,251 | ) |
Balance - March 31, 2022 |
|
| 13,091,883 |
|
| $ | 13,092 |
|
| $ | 78,173,269 |
|
| $ | (19,505,057 | ) |
| $ | (42,111 | ) |
| $ | 58,639,193 |
|
Stock compensation |
|
| - |
|
| $ | - |
|
| $ | 329,499 |
|
| $ | - |
|
| $ | - |
|
| $ | 329,499 |
|
Stock option expense |
|
| - |
|
|
| - |
|
|
| 3,318,742 |
|
|
| - |
|
|
| - |
|
|
| 3,318,742 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,844,340 |
|
|
| 3,723,797 |
|
|
| 6,568,137 |
|
Balance - June 30, 2022 |
|
| 13,091,883 |
|
| $ | 13,092 |
|
| $ | 81,821,510 |
|
| $ | (16,660,717 | ) |
| $ | 3,681,686 |
|
| $ | 68,855,571 |
|
Stock compensation |
|
| - |
|
| $ | - |
|
| $ | 329,499 |
|
| $ | - |
|
| $ | - |
|
| $ | 329,499 |
|
Stock option expense |
|
| - |
|
|
| - |
|
|
| 3,318,740 |
|
|
| - |
|
|
| - |
|
|
| 3,318,740 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (6,662,856 | ) |
|
| (59,298 | ) |
|
| (6,722,154 | ) |
Balance - September 30, 2022 |
|
| 13,091,883 |
|
| $ | 13,092 |
|
| $ | 85,469,749 |
|
| $ | (23,323,573 | ) |
| $ | 3,622,388 |
|
| $ | 65,781,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance - December 31, 2022 |
|
| 13,091,883 |
|
| $ | 13,092 |
|
| $ | 92,195,341 |
|
| $ | (43,017,207 | ) |
| $ | 1,606,003 |
|
| $ | 50,797,229 |
|
Stock option expense |
|
| - |
|
|
| - |
|
|
| 194,356 |
|
|
| - |
|
|
| - |
|
|
| 194,356 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,386,332 | ) |
|
| (1,776,264 | ) |
|
| (7,162,596 | ) |
Balance - March 31, 2023 |
|
| 13,091,883 |
|
| $ | 13,092 |
|
| $ | 92,389,697 |
|
| $ | (48,403,539 | ) |
| $ | (170,261 | ) |
| $ | 43,828,989 |
|
Stock option expense |
|
| - |
|
|
| - |
|
|
| 1,147,739 |
|
|
| - |
|
|
| - |
|
|
| 1,147,739 |
|
Issuance of restricted stock |
|
| 1,560,000 |
|
|
| 1,560 |
|
|
| 563,370 |
|
|
| - |
|
|
| - |
|
|
| 564,930 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4,549,179 | ) |
|
| (1,093,177 | ) |
|
| (5,642,356 | ) |
Balance - June 30, 2023 |
|
| 14,651,883 |
|
| $ | 14,652 |
|
| $ | 94,100,806 |
|
| $ | (52,952,718 | ) |
| $ | (1,263,438 | ) |
| $ | 39,899,302 |
|
Stock option expense |
|
| - |
|
|
| - |
|
|
| 269,700 |
|
|
| - |
|
|
| - |
|
|
| 269,700 |
|
Stock compensation |
|
| - |
|
|
| - |
|
|
| 352,127 |
|
|
| - |
|
|
| - |
|
|
| 352,127 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4,416,976 | ) |
|
| (250,880 | ) |
|
| (4,667,856 | ) |
Balance - September 30, 2023 |
|
| 14,651,883 |
|
| $ | 14,652 |
|
| $ | 94,722,633 |
|
| $ | (57,369,694 | ) |
| $ | (1,514,318 | ) |
| $ | 35,853,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
LM FUNDING AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023
(UNAUDITED)
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
LM Funding America, Inc. (“LMFA”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 several entities including LM Funding, LLC, and operates and controls all of its businesses and affairs.
LM Funding, LLC, a Florida limited liability companywhich was organized in January 2008, US Digital Mining and Hosting Co., LLC, which was formed on September 10, 2021 (“US Digital”); LMFA Financing LLC, formed on November 23, 2020, and LMFAO Sponsor LLC, formed on October 29, 2020 (LMFA is a majority member of LMFAO Sponsor LLC). Additionally, US Digital has formed various 100% owned subsidiaries to engage in business in various states in connection with its Bitcoin mining business. LMFAO Sponsor LLC formed a majority owned subsidiary LMF Acquisition Opportunities Inc. ("LMAO") on October 29, 2020 which was organized as a special purpose acquisition company that that completed an initial public offering in January 2021, whereupon the company ceased to be majority owned by LMFA. LMF Acquisition Opportunities Inc. was subsequently merged with Seastar Medical Holding Corporation on October 28, 2022.
The Company also from time to time organizes other subsidiaries to serve a specific purpose or hold a specific asset.
The Company currently has two lines of business: our recently commenced cryptocurrency mining business and a historical specialty finance business.
On September 15, 2021, we announced our plan to operate in the Bitcoin mining ecosystem, and we subsequently commenced Bitcoin mining operations in late September 2022. This business operation deploys our computing power to mine Bitcoin and validate transactions on the Bitcoin network. We conduct this business through a wholly owned subsidiary, US Digital, which we formed in 2021 to develop and operate our cryptocurrency mining business.
Cryptocurrency Mining Business
We obtain Bitcoin as a result of our mining operations, and we sell Bitcoin from time to time to support our operations and strategic growth. We plan to convert some of our Bitcoin to U.S. dollars. We may engage in regular trading of Bitcoin or engage in hedging activities related to our holding of Bitcoin. However, our decisions to hold or sell Bitcoin at any given time may be impacted by the Bitcoin market, which has been historically characterized by significant volatility. Currently, we do not use a formula or specific methodology to determine whether or when we will sell Bitcoin that we hold, or the number of Bitcoins we will sell. Rather, decisions to hold or sell Bitcoins are currently determined by management by monitoring the market in real time.
Specialty Finance Company
The Company has historically engaged in the business of providing 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 also purchase Accounts on varying terms tailored to suit each Association’s financial needs, including under our New Neighbor Guaranty™ program.
In our specialty finance business, 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 Operating Agreement dated effective January 8, 2008 as amended, had two members: BRR Holding, LLC and CGR 63, LLC. The members contributed their equity interestAssociation’s right to LMFA prior to the closing of its initial public offering.
The Company isreceive a specialty finance company that provides funding principally to community associations that are almost exclusively located in Florida. The businessportion of the Company is conducted pursuantAssociation’s proceeds from the collection of delinquent assessments, we engage law firms to relevant state statutes (the “Statutes”), principally Florida Statute 718.116. The Statutes provide each community association lien rights to secureperform 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 unit owners (property owners)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 assessments,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, reasonable attorneys’with the law firm retaining legal fees and collection costs.costs collected, and the Association retaining the balance of the collection. In addition, the lien rights granted under the Statutes are given a higher priority (a “Super Lien”) thanconnection 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 other lien holders except property tax liens. The Company provides fundingof its outstanding indebtedness and accruals on its delinquent units to associations for their delinquent assessments from property ownersus in exchange for an assignmentpayment by us of monthly dues on each delinquent unit. This simultaneously eliminates a substantial portion of the association’s rightAssociation’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 proceeds pursuant to the Statutes. The Company derives its revenues from the proceeds of association collections.bad
The Statutes specify7
debts. We believe that the ratecombined features of interestthe program enhance the value of the underlying real estate in an association (or its assignor) may chargeAssociation and the value of an Association’s delinquent receivables.
Because we acquire and collect on the delinquent assessments is equal toreceivables of Associations, the rate set forth inAccount 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 association’s declaration or bylaws. In Florida, if a rate is not specified,risk of purchasing Accounts, we review the statutory rate is equal to 18% but may not exceedproperty values of the maximum rate allowed by law. Similarlyunderlying units, the Statutes in Florida also stipulate that administrative late fees cannot be charged ongoverning documents of the relevant Association, and the total number of delinquent assessments unless so providedreceivables held by the association’s declaration or bylaws and may not exceed the greater of $25 or 5% of each delinquent assessment.Association.
The Statutes limit the liability of a first mortgage holder for unpaid assessments and related charges and fees (as set forth above) in the event of title transfer by foreclosure or acceptance of deed in lieu of foreclosure. This liability is limited to the lesser of twelve months of regular periodic assessments or one percent of the original mortgage debt on the unit (the “Super Lien Amount”).
Principles of Consolidation
The condensed consolidated financial statements include the accounts of LMFA and its wholly-owned subsidiaries: LM Funding, LLC; LMF October 2010 Fund, LLC; REO Management Holdings, LLC;LLC (including all 100% owned subsidiary limited liability companies); LM Funding of Colorado, LLC; LM Funding of Washington, LLC; LM Funding of Illinois, LLC; US Digital (includes all 100% owned subsidiary limited liability companies) and LMF SPE #2, LLC;LLC and LM Funding Florida, LLC.various single purpose limited liability corporations owned by REO Management Holdings, LLC which own various properties. It also includes LMFA Sponsor, LLC (a 69.5% owned subsidiary). All significant intercompany balances have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim condensed consolidated financial statements as of September 30, 20172023 and for the three and nine months ended September 30, 20172023 and September 30, 2016,2022, respectively are unaudited. In the opinion of management, the interim condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods. The accompanying condensed consolidated balance sheet as of December 31, 2016,2022, 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, 2016.2022.
Certain prior period amounts on the consolidated balance sheets have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported results of Estimatesoperations.
Segment and Reporting Unit Information
Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The preparationChief Executive Officer and Chief Financial Officer of the Company comprise the CODM, as a group. The Company has two operating segments as of September 30, 2023, which we refer to as Specialty Finance and Mining Operations. Our corporate oversight function and other components that may earn revenues that are only incidental to the activities of the Company are aggregated and included in the “All Other” category. See Note 10, “Segment Information".
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. Digital assets that are purchased are initially recorded at cost and digital assets that are received in exchange for services provided are recognized at fair value as of the date received. Digital assets are measured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition. We account for stablecoin as financial statementsassets in conformityaccordance with GAAP requires managementASC 310, Receivables. The stablecoin are recorded at cost less impairment, which approximates their fair value.
We determine the fair value of our digital assets that are accounted for as intangible assets in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for such assets (Level 1 inputs). We perform an analysis each month 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 fair value determined on lowest intra-day price.
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. When applicable, any impairment loss on digital assets held for investment would be recognized during the period incurred within "Impairment loss on digital assets" in other income/expense in the Consolidated Statements of Operations. Impairment loss on mined digital assets would be recognized during the period incurred within "Impairment loss on mined digital assets" in operating costs and expenses in the Consolidated Statements of Operations.
8
Gains or losses are not recorded until realized upon sale, at which point they are presented separately from any impairment losses. Any realized gain or loss from the sale of digital assets that were purchased as an investment is recorded in other income (loss), while any realized gain or loss from the sale of digital assets that were earned through mining operations would be recognized within operating costs and expenses. The Company accounts for its gains or losses in accordance with the first in first out (“FIFO”) method of accounting.
Digital assets earned by the Company through its mining activities, proceeds from the sale of mined digital assets, realized gain (loss) from the sale of digital assets and the loss on impairment of digital assets are included within operating activities on the Consolidated Statements of Cash Flows, where applicable. Purchases of digital assets and proceeds from the sale of purchased digital assets and included within investing activities in the Consolidated Statements of Cash Flows.
Equipment Purchases
We ordered 125 S19 XP machines in January 2023 from Bitmain for an aggregate purchase price of approximately $0.5 million which were delivered in April 2023. We also paid $0.3 million to acquire an additional 101 S19 XP machines from Bitmain which were delivered in May 2023.
Fixed Assets
The Company capitalizes all acquisitions of fixed assets in excess of $500. Fixed assets are stated at cost, net of accumulated depreciation. State and local use tax for equipment shipped from overseas is generally accrued on a quarterly basis at the time equipment is placed in service and is paid to the state in which the equipment is being utilized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and commences once the assets are ready for their intended use. Fixed assets are comprised of furniture, computer, office equipment and mining machines with assigned useful lives of 3 to 5 years.
The Company classifies mining machine deposit payments within "Deposits on mining equipment" in the consolidated balance sheets. 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" to "Fixed assets, net" in the consolidated balance sheet. Refer to Note 4.
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 assumptions that affecthave a prospective impact on depreciation expense and the reportedcarrying amounts of these assets.
Intangible Symbiont Assets
The Company capitalizes acquisition of intangible assets such as trade name and liabilitiespatent portfolio, in excess of $1,000. Intangible assets (such as patent portfolio and disclosuretrade names) are stated at cost, net of contingentaccumulated amortization. Amortizable intangible assets are amortized over their assigned useful lives. The assets acquired from Symbiont were capitalized at approximately $2.8 million. Refer to Note 11.
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 liabilities at the dateused is measured by a comparison of the consolidated financial statements andcarrying amount of an asset to undiscounted future cash flows expected to be generated by the reported amountsasset. If such assets are considered to be impaired, the impairment amount is measured by the amount by which the carrying amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates includeassets exceeds the evaluation of any probable losses on amounts funded under the Company’s New Neighbor Guaranty program as disclosed below, the evaluation of probable losses on balances due from a related party, the realization of deferred tax assets, the evaluation of contingent losses related to litigation, and fair value estimates of real estate assets owned.
Revenue Recognition
Accounting Standards Codification (“ASC”) 605-10-25-1 of the Financial Accounting Standards Board (“FASB”) states revenuesassets.
Coupon Sales
From time to time the Company receives coupons from Bitmain to incentivize purchases of equipment. Coupons have a stated face value in dollars and can be applied against future invoices for purchased machines. Coupons are realizedtransferable and there are not restrictions on the sale to third parties. Occasionally, the Company sells coupons to third parties in exchange for cash consideration or realizable when related assets received or held are readily convertible into known amounts of cash. In those cases wheredigital assets. As there is currently no reasonable basisactive market for estimating the “known amount”buying and selling of cash to be collected,Bitmain coupons, the cash basis or cost recovery method of recognizing revenues may be used. The Company provides funding to community associations by purchasing their rights under delinquent accounts from unpaid assessments due from property owners (the “accounts”). Collections on the accounts may vary greatly in both the timing and amount ultimately recovered compared with the total revenues earned on the accounts because of a variety of economic and social factors affecting the real estate environment in general. The Company has determined that the known amount of cash to be realized or realizable on its revenue generating activities cannot be reasonably estimated and as such, classifies its finance receivables as nonaccrual and recognizes revenues in the accompanying statements of income on the cash basis or cost recovery method in accordance with ASC 310-10, Receivables. The Company applies the cash basis method to its original product and the cost recovery method to its special product as follows:
Finance Receivables—Original Product: Under the Company’s original product, delinquent assessments are funded only up to the Super Lien Amount as discussed above. Recoverability of funded amounts is generally assured because of the protection of the Super Lien Amount. As such, payments by unit owners on the Company’s original product are recorded to income when received in accordance with the provisions of Florida Statute 718.116(3) and the provisions of the purchase agreements entered into between the Company and community associations. Those provisions require that all payments be applied in the following order: first to interest, then to late fees, then to costs of collection, then to legal fees expended by the Company and then to assessments owed. In accordance with the cash basis method of recognizing revenue and the provisions of the statute, the Company records revenues for interest and late fees when cash is received. In the event the Company determines the ultimate collectability of amounts funded under its original product are in doubt, payments are applied to first reduce the funded or principal amount.
Finance Receivables—Special Product (New Neighbor Guaranty program): During 2012, the Company began offering associations an alternative product under the New Neighbor Guaranty program where the Company will fund amounts in excess of the Super Lien Amount. Under this special product, the Company purchases substantially all of the delinquent assessments owed to the association, in addition to all accrued interest and late fees, in exchange for payment by the Company of (i) a negotiated amount or (ii) on a going forward basis, all monthly assessments due for a period up to 48 months. Under these arrangements, the Company considers the collection of amounts funded is not assured and under the cost recovery method, cash collected is applied to first reduce the carrying value of the funded or principal amount with any remaining proceeds applied next to interest, late fees, legal fees, collection costs and any amounts due to the community association. Any excess proceeds still remaining are recognized as revenues. If the future proceeds collected are lower than the Company’s funded or principal amount, then a loss is recognized.
Cash
The Company maintains cash balances at several financial institutions that are insured under the Federal Deposit Insurance Corporation’s (“FDIC”) Transition Account Guarantee Program. Balances with the financial institutions may exceed federally insured limits.
Finance receivables are recorded at the amount funded or cost (by unit). The Company evaluates its finance receivables at each period end for losses that are considered probable and can be reasonably estimated in accordance with ASC 450-20. As discussed above, recoverability of funded amounts under the Company’s original product is generally assured because of the protection of the Super Lien Amount. As such, the Company did not have any allowance for credit losses related to its original product at September 30, 2017 and December 31, 2016.
Under the New Neighbor Guaranty program (special product), the Company funds amounts in excess of the Super Lien Amount. When evaluating the carrying value of its finance receivables, the Company looks at the likelihood of future cash flows based on historical payoffs, the fair value of coupons received is nil at the underlying real estate,time of receipt therefore revenue associated with the general condition of the community association in which the unit exists, and the general economic real estate environment in the local area. During 2015 the Company purchased credit insurance covering all funded amounts in excess of a deductible amount (equal to six months of delinquent assessments). This insurance product was not renewed and only claims filed related to foreclosures occurring on or before January 28, 2016 will be covered under this policy. Recoveries under this credit insurance program for the nine months ended September 30, 2016 were $59,000. There were no recoveries for the three months ended September 30, 2016. In addition, there were no recoveries for the three and nine months ended September 30, 2017, and no significant remaining recoveries expected in the future. The Company estimated an allowance for credit losses of $51,230 and $125,000, respectively, as of September 30, 2017 and December 31, 2016 under ASC 450-20 related to its New Neighbor Guaranty program.
The Company will charge any receivable against the allowance for credit losses when management believes the uncollectibility of the receivable is confirmed. The Company considers writing off a receivable when (i) a first mortgage holder who names the association in a foreclosure suit takes title and satisfies an estoppel letter for amounts owed which are less than amounts the Company funded to the association; (ii) a tax deed is issued with insufficient excess proceeds to pay amounts the Company funded to the association; or (iii) an association settles an account for less than amounts the Company funded to the association. Upon the occurrence of any of these events, the Company evaluates the potential recovery via a deficiency judgment against the prior owner and the ability to collect upon the deficiency judgment within the statute of limitations period or whether the deficiency judgment can be sold. If the Company determines that collection through a deficiency judgment or sale of a deficiency judgmentsuch coupons is not feasible,recognized until the Company writes offsale transaction has been completed and consideration has been received from the unrecoverable receivable amount.third party. During the three and nine months ended September 30, 2017, write offs charged against2023, the allowanceCompany sold Bitmain coupons for approximately $10 thousand and $639 thousand respectively, which was recognized as other income within "Other income - coupon sales" in the Consolidated Statements of Operations. The coupons sold during the three months ended September 30, 2023 were exchanged for digital assets (Tether) which had a fair value of approximately $10 thousand at the time of receipt.
Hosting Contracts
On September 5, 2022, the Company, through its wholly-owned subsidiary US Digital, entered into a hosting agreement (the “Core Hosting Agreement”) with Core Scientific Inc. (“Core”) pursuant to which Core, under various additional orders, agreed to host
9
approximately 3,000 of the Company's Bitcoin miner machines at a secure location and provide power, maintenance and other services specified in the contract with a term of one year, with automatic renewals unless either party notifies the other party in writing not less than ninety (90) calendar days before such renewal of its desire for the order not to renew unless terminated sooner pursuant to the terms of the Core Hosting Agreement. In April 2023, the Company subsequently added approximately 1,400 machines under this agreement for Core to host a total of approximately 4,400 machines. The Company installed all of the approximately 4,400 machines at the Core site as of September 30, 2023. The Company entered into a supplemental agreement on August 4, 2023 to host 500 machines that were moved from the Longbow Host Co LLC site as of September 30, 2023.
As required under the Core Hosting Agreement, the Company has paid approximately $2.2 million as of September 30, 2023 and December 31, 2022 as a deposit. In December 2022, Core filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas. Core's bankruptcy filing has not negatively impacted our mining ability at their sites as of the date of this filing.
On January 26, 2023, the Company entered into a hosting agreement (the “Phoenix Hosting Agreement”) with Phoenix Industries Inc. (“Phoenix”) pursuant to which Phoenix agreed to host 228 of the Company's Bitcoin Miner S19J Pro machines at a secure location and provide power, maintenance and other services specified in the contract with a term of two years. This Phoenix Hosting Agreement would renew automatically for an additional two years if the Company were to provide written notice to Phoenix of our desire of renewal at least sixty (60) days in advance of the conclusion of the initial term of two years, unless terminated sooner pursuant to the terms of the Phoenix Hosting Agreement. As required under the Phoenix Hosting Agreement, the Company paid approximately $36 thousand as a deposit in January 2023. The Company and Phoenix mutually terminated this agreement effective April 18, 2023 and the Company's S19J Pro machines were returned to the Company in May 2023. The Company fully impaired the $36 thousand deposit during the nine months ended September 30, 2023.
On March 9, 2023, the Company entered into a hosting agreement (the “Longbow Hosting Agreement”) with Longbow Host Co LLC (“Longbow”) pursuant to which Longbow agreed to host 500 of the Company's Bitcoin Miner S19J Pro machines at a secure location and provide power, maintenance and other services specified in the contract with a term of two years. Upon written request from the Company at least ninety (90) days prior to the conclusion of the then current term and approval by Longbow, the term shall renew for successive one year periods with a three percent (3%) increase as of the commencement of each renewal term unless terminated sooner pursuant to the terms of the Longbow Hosting Agreement. As required under the Longbow Hosting Agreement, the Company paid approximately $157 thousand as a refundable deposit in March 2023. The Company had 500 machines installed at the Longbow site as of June 30, 2023. The Company terminated this agreement on August 1, 2023 and expensed 50% of the $157 thousand deposit during the three and nine months ended September 30, 2023 and applied the remainder to outstanding invoices.
On May 5, 2023, the Company entered into a hosting agreement (the “GIGA Hosting Agreement”) with GIGA Energy Inc. (“GIGA”) pursuant to which GIGA agreed to host 1,080 of the Company's Bitcoin Miner S19J Pro machines at a secure location and provide power, maintenance and other services specified in the contract with a term of one year. As required under the GIGA Hosting Agreement, the Company paid approximately $173 thousand as a pre-payment in May 2023 and paid a refundable deposit of $173 thousand in August 2023. The Company had 1,080 machines installed at the GIGA site as of September 30, 2023.
Revenue Recognition – Bitcoin Mining
We recognize revenue for Bitcoin mining operations in accordance with ASC 606. The Company has entered into contracts with Bitcoin mining pool operators to provide computing power to the mining pools. Contract inception occurs daily and the contracts are terminable at any time by either party. The Company’s enforceable right to compensation only begins when the Company starts providing computing power to the mining pool operator. When participating in ratable share pools, in exchange for providing computing power the Company is entitled to a fractional share of the Bitcoin award the mining pool operator receives for successfully adding a block to the blockchain, plus a fractional share of the transaction fees attached to that blockchain. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. When participating in a Full Pay Per Share (“FPPS”) mining pool, in exchange for providing computing power to the pool the Company is entitled to compensation, calculated on a daily basis, at an amount that approximates the total Bitcoin that could have been mined using the Company’s computing power, calculated on a look-back basis across previous blocks using the pools hash rate index.
The transaction consideration the Company receives is noncash consideration, in the form of Bitcoin, which the Company measures at fair value on the date received in our wallet which is not materially different than the fair value at contract inception or time the Company has earned the award from the mining pools. Fair value of the Bitcoin award received is determined using the spot price of Bitcoin on the date received. The Company cannot determine, during the course of providing computing power, that a reversal of revenue is not probable and therefore revenue is recognized when the Company receives consideration from the mining pool operator.
Cost of Revenues
The Company includes energy costs and external co-location mining hosting fees in cost of revenues. Depreciation of mining machines is included within "Depreciation and amortization" in the Consolidated Statements of Operations.
10
Investment in Note Receivables
Investment in Note Receivables are reported at fair value subject to allowances for credit losses were $30,438 and $73,770, respectively. There were no write offs charged against theunder ASU 2016-13Credit Losses (CECL). The Company recognized a $22 thousand allowance for credit losses for the three and nine months ended September 30, 2016. Any2023. See Footnote 5.
Investment in Securities
Investment in Securities includes investments in common stocks and convertible notes receivables. Investments in securities are reported at fair value with changes in unrecognized gains or losses greater thanincluded in other income on the recorded allowance will be recognized as expenses. Under the Company’s revenue recognition policies, all finance receivables (original product and special product) are classified as nonaccrual.
Real Estate Assets Owned
In the event collectionincome statement. The Symbiont convertible note receivable is reported at amortized costs less impairment. As a result of a delinquent assessment resultsbankruptcy judgment against Symbiont, the Symbiont convertible note receivable was used to purchase Symbiont's intangible assets which include software coding, customer contracts, trademarks, and other intangible assets. See Footnote 11.
Investments in a unit being soldUnconsolidated Entities
We account for investments in a foreclosure auction,less than 50% owned and more than 20% owned entities using the Company hasequity method of accounting. Because we have elected the right to bid (on behalffair value option for these securities, unrealized holding gains and losses during the period are included in other income within the Consolidated Statements of the community association) for the delinquent unit as attorney in fact, applying any amounts owed for the delinquent assessment to the foreclosure price as well as any additional funds that the Company, in its sole discretion, decides to pay. If a delinquent unit becomes owned by the community association by acquiring title through an association lien foreclosure auction, by accepting a deed-in-lieuOperation.
Fair Value of foreclosure,Financial Instruments
FASB ASC 825-10, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or by any other way, the Company in its sole discretion may direct the community association to quitclaim title of the unit to the Company.
Properties quitclaimed to the Company are in most cases acquired subject to a first mortgage or other liens, and arenot recognized in the accompanying consolidated balance sheets solely at costs incurred by the Company in excess of original funding. At times, the Company will acquire properties through foreclosure actions free and clear of any mortgages or liens. In these cases, the Company records the estimated fair value of the properties in accordance with ASC 820-10, Fair Value Measurements. Any real estate held for sale is adjusted to fair value less the cost to dispose in the event the carrying value of a unit or property exceeds its estimated net realizable value.sheet.
The Company capitalizes costs incurred to acquire real estate owned properties and any costs incurred to get the units in a condition to be rented. These costs include, but are not limited to, renovation/rehabilitation costs, legal costs, and delinquent taxes. These costs are depreciated over the estimated minimum time period the Company expects to maintain possession of the units. Costs incurred for unencumbered units are depreciated over 20 years and costs for units subject to a first mortgage are depreciated over 3 years. As of September 30, 2017, capitalized real estate costs, net of accumulated depreciation, were approximately $281,000. During the three and nine months ended September 30, 2017 depreciation expense was $8,000 and $34,000, respectively. During the three and nine months ended September 30, 2016, depreciation expense was $10,000 and $23,000, respectively.
If the Company elects to take a quitclaim title to a unit or property held for sale, the Company is responsible to pay all future assessments on a current basis, until a change of ownership occurs. The community association must allow the Company to lease or sell the unit to satisfy obligations for delinquent assessments of the original debt. All proceeds collected from any sale of the unit shall be first applied to all amounts due the Company plus any additional funds paid by the Company to purchase the unit, if applicable. Rental revenues and sales proceeds related to real estate assets held for sale are recognized when earned and realizable. Expenditures for current assessments owed to associations, repairs and maintenance, utilities, etc. are expensed when incurred.
If the community association elects (prior to the Company obtaining title through its own election) to maintain ownership and not quitclaim title to the Company, the community association must pay the Company all interest, late fees, collection costs, and legal fees expended, plus the original funding on the unit, which have accrued according to the purchase agreement entered into by the community association and the Company. In this event, the unit will be reassigned to the community association.
Fixed Assets
The Company capitalizes all acquisitions of fixed assets in excess of $500. Fixed assets are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Fixed assets are comprised of furniture, computers and office equipment with an assigned useful life of 3 to 5 years. Fixed assets also include capitalized software costs. Capitalized software costs include costs to develop software to be used solely to meet the Company’s internal needs, employee salaries and benefits, and fees paid to outside consultants during the application development stage, and such costs are amortized over their estimated useful life of 5 years. As of September 30, 2017 and December 31, 2016, capitalized software costs, net of accumulated amortization, was $51,025 and $68,470, respectively. Amortization expense for capitalized software costs for the three and nine months ended September 30, 2017 were $5,814 and $17,444, respectively. During the three and nine months ended September 30, 2016, amortization expense was $5,814 and $17,444, respectively.
Debt Issue Costs
The Company capitalizes all debt issue costs and amortizes them on a method that approximates the effective interest method over the remaining term of the note payable. Unamortized debt issue costs of $25,474 at September 30, 2017 and $99,396 at December 31, 2016 are presented in the accompanying condensed consolidated balance sheets as a direct deduction from the carrying amount of that debt liability in accordance with ASU 2015-03 (see below). The Company adopted this new standard in the first quarter of fiscal year 2016. The adoption of this standard did not have a material impact on the Company's consolidated financial position and had no impact on its consolidated income or cash flows. In addition, the amortization of debt issuance costs is to be reported as interest expense under ASU 2015-03 (ASC 835-30-45-3). During the three and nine months ended September 30, 2017, the amortization of debt issuance costs was $24,641 and $73,922, respectively. Amortization of debt issuance costs was $24,641 and $73,922, respectively, for the three and nine months ended September 30, 2016.
Settlement Costs with Associations
Community associations working with the Company will at times incur costs in connection with litigation initiated by the Company against property owners and/or mortgage holders. These costs include settlement agreements whereby the community association agrees to pay some monetary compensation to the opposing party or judgments against the community associations for fees of opposing legal counsel or other damages awarded by the courts. The Company indemnifies the community association for these costs pursuant to the provisions of the agreement between the Company and the community association. Costs incurred by the Company for these indemnification obligations for the three and nine months ended September 30, 2017 were approximately $101,000 and $257,000, respectively. For the three and nine months ended September 30, 2016 settlement costs incurred by the Company were $231,000 and $603,000, respectively. The Company does not limit its indemnification based on amounts ultimately collected from property owners.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes resulting primarily from the tax effects of temporary differences between financial and income tax reporting. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Under ASC 740-10-30-5, Income Taxes, deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not (i.e., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The Company considers all positive and negative evidence available in determining the potential realization of deferred tax assets including, primarily, the recent history of taxable earnings or losses. Based on operating losses reported by the
Company during 2017 and 2016, the Company concluded there was not sufficient positive evidence to overcome this recent operating history. As a result, the Company believes that a valuation allowance is necessary based on the more-likely-than-not threshold noted above. The Company recorded a valuation allowance of approximately of $4,300,000 during the quarter ended September 30, 2017 equal to its net deferred tax asset at that date.
Prior to the initial public offering in October 2015, the taxable earnings of the Predecessor were included in the tax returns of its members (separate limited liability companies) and taxed depending on personal tax situations. In connection with the initial public offering, the members contributed ownership interests to the Company (a newly formed C-corporation) and all earnings subsequent to that date (October 23, 2015) are subject to Company-level taxes and reflected in the Company’s condensed consolidated financial statements.
Loss(Loss) Per Share
Basic lossincome (loss) per share is calculated as net lossincome (loss) to common stockholders divided by the weighted average number of common shares outstanding during the period.
The Company issued approximately nil and 1,560 thousand restricted shares during the three and nine months ended September 30, 2023. The weighted average shares used in calculating loss per share for the three and nine months ended September 30, 2023 includes 390 thousand and 650 thousand, respectively, of restricted shares that were fully vested as of September 30, 2023 based on their respective vesting date and excludes 910 thousand restricted shares that were legally issued but not vested as of September 30, 2023. During the three and nine months ended September 30, 2022, the Company issued nil and approximately 74 thousand shares at various times has weighted averaged these shares in calculating income (loss) per share includes the issued shares in calculating income (loss) per share for the relevant period.
Diluted lossincome (loss) per share for the period equals basic loss per share as the effect of any stock-basedconvertible notes, stock based compensation awards or stock warrants would be anti-dilutive.
The anti-dilutive stock based compensation awards consisted of:
| | As of September 30, |
| |||||
| | 2023 |
| | 2022 |
| ||
Stock Options | |
| 3,597,578 |
| |
| 3,956,827 |
|
Stock Warrants | |
| 7,677,441 |
| |
| 7,677,441 |
|
Restricted Shares | |
| 910,000 |
|
|
| - |
|
Stock-Based Compensation11
Income Taxes
The Company’s calculation of its tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. The Company recordsrecognizes tax liabilities for uncertain tax positions based on management’s estimate of whether it is more likely than not that additional taxes will be required. The Company had no uncertain tax positions as of September 30, 2023 and December 31, 2022.
Deferred income taxes are recognized in the consolidated financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, differences in depreciation methods of archived images, and property and equipment, stock-based and other compensation, and other accrued expenses. A valuation allowance is established when it is determined that it is more likely than not that some or all equity-based incentive grants to employees and non-employee members of the Company’s Boarddeferred tax assets will not be realized.
The application of Directorstax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in operating expensesfiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S., or the various state jurisdictions, may be materially different from managements estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities. Interest and penalties are included in tax expense.
The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of September 30, 2023 and December 31, 2022, the Company had no accrued interest or penalties related to the underpayment of income taxes.
Income tax expense/(benefit) from operations was nil for the three and nine months ended September 30, 2023 which resulted primarily from maintaining a full valuation allowance against the Company's deferred tax assets. Income tax expense from operations was $1.3 million for the three and nine months ended September 30, 2022 which resulted from a change in estimate related to our ability to utilize certain net operating (“NOL”) tax losses from prior periods for 2021.
12
Note 2. Digital Assets
Digital assets are as follows:
|
| September 30, 2023 |
|
| December 31, 2022 |
|
| September 30, 2022 |
| |||
Bitcoin | $ |
| 2,246,340 |
| $ |
| 888,026 |
| $ |
| 408,879 |
|
Tether |
|
| 10,160 |
|
|
| - |
|
|
| - |
|
Total digital assets |
|
| 2,256,500 |
|
|
| 888,026 |
|
|
| 408,879 |
|
|
|
|
|
|
|
|
|
|
| |||
Bitcoin |
|
|
|
|
|
|
|
|
| |||
|
| September 30, 2023 |
|
|
|
|
| September 30, 2022 |
| |||
Beginning of Year | $ |
| 888,026 |
|
|
|
| $ | - |
| ||
Purchase of Bitcoin |
|
| 35,157 |
|
|
|
|
|
| 786,586 |
| |
Production of Bitcoin |
|
| 8,342,646 |
|
|
|
|
|
| - |
| |
Impairment loss on mined Bitcoin |
|
| (822,650 | ) |
|
|
|
|
| (377,707 | ) | |
Carrying amount of Bitcoin sold |
|
| (6,196,839 | ) |
|
|
|
|
| - |
| |
End of Period | $ |
| 2,246,340 |
|
|
|
| $ |
| 408,879 |
| |
|
|
|
|
|
|
|
|
|
| |||
GUSD |
|
|
|
|
|
|
|
|
| |||
|
| September 30, 2023 |
|
|
|
|
| September 30, 2022 |
| |||
Beginning of Year | $ |
| - |
|
|
|
| $ |
| - |
| |
Purchase of GUSD |
|
| - |
|
|
|
|
|
| 500,000 |
| |
GUSD Earned on digital assets |
|
| - |
|
|
|
|
|
| 5,658 |
| |
Sale of GUSD |
|
| - |
|
|
|
|
|
| (505,658 | ) | |
End of Period | $ |
| - |
|
|
|
| $ |
| - |
|
The Company mined 117.1 and 315.4 Bitcoin for the three and nine months ended September 30, 2023, respectively. The Company sold 106.1 and 282.0 Bitcoin for the three and nine months ended September 30, 2023, respectively. The Company mined 2.2 Bitcoin for the three and nine months ended September 30, 2022. The Company sold nil Bitcoin for the three and nine months ended September 30, 2022.
| September 30, 2023 |
| December 31, 2022 |
| September 30, 2022 |
| |||
|
|
|
|
|
|
| |||
Bitcoin Balance |
| 90.1 |
|
| 54.9 |
|
| 33.2 |
|
|
|
|
|
|
|
| |||
| September 30, 2023 |
|
|
| September 30, 2022 |
| |||
Beginning of Year |
| 54.9 |
|
|
|
| - |
| |
Production of Bitcoin |
| 315.4 |
|
|
|
| 2.2 |
| |
Purchase of Bitcoin |
| 2.0 |
|
|
|
| 31.0 |
| |
Sale of Bitcoin |
| (282.0 | ) |
|
|
| - |
| |
Fees |
| (0.2 | ) |
|
|
| - |
| |
End of Period |
| 90.1 |
|
|
|
| 33.2 |
|
13
Note 3. Fixed Assets, net
The components of fixed assets as of September 30, 2023 and December 31, 2022 are as follows:
|
| Useful Life (Years) |
| September 30, 2023 |
|
| December 31, 2022 |
| ||||
Mining machines |
| 5 |
| $ |
| 29,781,573 |
|
| $ |
| 27,637,041 |
|
Furniture, computer and office equipment |
| 3-5 |
|
|
| 228,516 |
|
|
|
| 216,312 |
|
Gross fixed assets |
|
|
|
|
| 30,010,089 |
|
|
|
| 27,853,353 |
|
Less: accumulated depreciation |
|
|
|
|
| (4,092,699 | ) |
|
|
| (661,036 | ) |
Fixed assets, net |
|
|
| $ | $ | 25,917,390 |
|
| $ | $ | 27,192,317 |
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2023, there were approximately 5,954 mining machines in service at various hosting sites. At December 31, 2022, there were approximately 2,700 mining machines in services at a Core location, approximately 2,700 machines at a Compute North LLC location which were awaiting transfer to storage as of December 31, 2022 and approximately 200 machines in transit. The Company’s Condenseddepreciation expense recognized for the three and nine months ended September 30, 2023 was approximately $1.5 million and $3.4 million, respectively, and approximately $39 thousand and $44 thousand, for the three and nine months ended September 30, 2022, respectively.
There was no impairment loss recorded on fixed assets during the three and nine months ended September 30, 2023 and 2022.
Note 4. Deposits on Mining Equipment and Hosting Services
As further described in Note 1, the Company has entered into a series of mining machine purchase agreements, hosting and colocation service agreements in connection with our cryptocurrency mining operations which required deposits to be paid in advance of the respective asset or service being received.
As of September 30, 2023 and December 31, 2022, the Company has a total of approximately $0.3 million and approximately $0.5 million, respectively, classified as "Deposits on mining equipment".
The Company classifies hosting deposit payments within "Hosting services deposits" in the consolidated balance sheets. As of each of September 30, 2023 and December 31, 2022 the Company has a total of approximately $2.2 million and $2.2 million, respectively, classified as "Hosting services deposits". The Company impaired approximately $37 thousand of the hosting deposit with Phoenix upon the termination of their agreement and $78 thousand of the hosting deposit with ACDC upon the termination of their agreement during the nine months ended September 30, 2023 with the remaining $78 thousand of the ACDC deposit applied to outstanding invoices.
Note 5. Investments
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. Marketable equity securities as of September 30, 2023 and December 31, 2022 are as follows:
|
| Cost |
|
| Cost of Shares Sold |
|
| Gross Unrealized Gain (Loss) |
|
| Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Marketable equity securities, September 30, 2023 |
| $ | 743,902 |
|
| $ | (552,244 | ) |
| $ | 6,436 |
|
| $ | 198,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Marketable equity securities, December 31, 2022 |
| $ | 2,976,933 |
|
| $ | (2,915,813 | ) |
| $ | (56,830 | ) |
| $ | 4,290 |
|
During the three and nine months ended September 30, 2022, the Company sold nil and 8,759,094 shares, respectively, of Borqs shares for approximately nil and $2.3 million, respectively. The Company realized a net gain (loss) of approximately nil and ($350) thousand for the three and nine months ended September 30, 2022, respectively. The net gain (loss) is included within "Realized gain (loss) on securities" within the Consolidated StatementStatements of Operations.
14
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 $5 million. The Company’s purchase of the Notes was a part of a larger transaction in which an aggregate of $20 million in Notes were sold by Borqs in a private transaction to several institutional and individual investors, including the Company. The Notes became due in February 2023, had an annual interest rate of 8%, were convertible into ordinary shares of Borqs at a 10% discount from the market price, and had 90% warrant coverage (with the warrants exercisable at 110% of the conversion price). The Company received 2,922,078 warrants which had a nominal value on the grant date. One-third of the Notes ($1,666,667) were funded by the Company at the execution of definitive agreements for the transaction, and two-thirds of the Notes ($3,333,333) were purchased and funded upon the satisfaction of certain conditions, including effectiveness of a registration statement that was deemed effective on May 3, 2021.
The Company sold the remaining 4,895,894 shares during the first quarter of 2022 which resulted in a realized loss of $395 thousand which is reflected in ‘Realized gain on securities’ in the Consolidated Statements of Operations based on their fair values determined onfor the nine months ended September 30, 2022. The remaining principal amount of the Notes plus accrued interest through the date of grant. Stock-basedconversion ($965,096) was converted into common shares of Borqs at a conversion price of $0.25 per share or 3,863,200 shares. A gain of approximately nil and $288 thousand was recognized on the conversion of the convertible debt to common shares and is included within “Realized gain on convertible debt securities” in the Consolidated Statements of Operations for the three and nine months ended September 30, 2022. Subsequent to the conversion, the 3,863,200 shares were sold which resulted in a realized gain of nil and $45 thousand which is included within "Realized gain on securities" in the Consolidated Statements of Operations for the three and nine months ended September 30, 2022.
| September 30, 2023 |
|
| December 31, 2022 |
|
| September 30, 2022 |
| |||
|
|
|
|
|
|
|
|
| |||
Convertible note | $ | - |
|
| $ | - |
|
| $ | - |
|
End of period | $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
| |||
| September 30, 2023 |
|
|
|
|
| September 30, 2022 |
| |||
|
|
|
|
|
|
|
|
| |||
Beginning of year | $ | - |
|
|
|
|
| $ | 539,351 |
| |
Accrued interest income on convertible debt security |
| - |
|
|
|
|
|
| 17,753 |
| |
Convertible debt and interest converted into marketable shares |
| - |
|
|
|
|
|
| (844,882 | ) | |
Realized gain on conversion into marketable shares |
| - |
|
|
|
|
|
| 287,778 |
| |
End of period | $ | - |
|
|
|
|
| $ | - |
|
Note receivable - LMFAO and SeaStar Medical
On February 1, 2022, LMAO issued an unsecured promissory note to LMFAO Sponsor LLC ("Sponsor"), pursuant to which LMAO may borrow up to an aggregate principal amount of $500,000 to be used for a portion of LMAO’s expenses. As of September 30, 2022, LMAO had drawn down $310,000 under the promissory note with LMFAO Sponsor LLC to pay for offering expenses. On July 28, 2022 (effective as of September 30, 2022), the aggregate principal limit was increased to $1,750,000. The loan was non-interest bearing, unsecured and due at the earlier of the 24-month anniversary of LMAO’s initial public offering or the closing of its initial business combination.
On April 21, 2022, LMAO entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among LMAO, LMF Merger Sub, Inc., a Delaware corporation and direct, wholly owned subsidiary of LMAO (“Merger Sub”), and SeaStar Medical, Inc., a Delaware corporation (“SeaStar Medical”).
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 $1,035,000 (representing $0.10 per public share of LMAO) into LMAO’s trust account on July 29, 2022. This deposit was made in respect of a non-interest bearing loan to LMAO (the “Extension Loan”).
On October 28, 2022, LMAO through the Sponsor, consummated the previously announced business combination transaction (the “LMAO Business Combination”) contemplated by the Merger Agreement. Pursuant to the Merger Agreement, upon the closing of the LMAO Business Combination, SeaStar Medical was merged with and into Merger Sub, with SeaStar Medical continuing as the surviving entity in the merger as a wholly-owned subsidiary of LMAO and with LMAO subsequently changing its name in connection with the merger to SeaStar Medical Holding Corporation (“SMHC”).
15
In connection with the closing of the LMAO Business Combination, on October 28, 2022, Sponsor and SMHC amended, restated, and consolidated (i) the original Promissory Note, dated July 29, 2022, issued by LMAO to Sponsor in the principal amount of $1,035,000 and (ii) the original Amended and Restated Promissory Note, effective September 30, 2022, issued by LMAO to Sponsor in the principal amount of $1,750,000 (collectively, the “Original Sponsor Notes”), by entering into one consolidated amended and restated promissory note with an aggregate principal amount of $2,785,000 (the “Amended Sponsor Note”). During the three and nine months ended September 30, 2023, approximately nil and $1,104 thousand, respectively of repayments were received from Seastar under the Amended Sponsor Note. As of September 30, 2023 and December 31, 2022, there was $1.8 million and $2.8 million of principal, respectively and $53 thousand and $35 thousand of accrued interest, respectively, on the Amended Sponsor Note included in "Notes receivable from Seastar Medical Holding Corporation" on the consolidated balance sheets.
On September 9, 2022, the Company entered into a Credit Agreement with SeaStar Medical pursuant to which the Company agreed to make advances to SeaStar Medical of up to $700,000 for general corporate purposes at an interest rate equal to 15% per annum. All advances made to SeaStar Medical under the Credit Agreement ("Original LMFA Note) and accrued interest were due and payable to LMFA on the maturity date. The agreement was modified on October 28, 2022 to reduce the interest rate to 7% per annum and the maturity date of the loan to October 30, 2023 ("amended LMFA Note"). As of December 31, 2022, SeaStar Medical had borrowed $700,000 under the amended LMFA Note. During the three and nine months ended September 30, 2023, approximately nil and $273 thousand, respectively of repayments were received from Seastar for the Amended LMFA Note. As of September 30, 2023 and December 31, 2022, there was $453 thousand and $700 thousand of principal, respectively, and $14 thousand and $19 thousand of accrued interest, respectively, on the amended LMFA Note in "Notes receivable from Seastar Medical Holding Corporation" included in the consolidated balance sheets.
The Amended Sponsor Note and the Amended LMFA Note (collectively, the “Notes”) extended the maturity date of the Original Sponsor Notes and Original LMFA Note, respectively, from the closing date of the Business Combination to October 30, 2023, subject to mandatory prepayments equal to a specified percentage of funds raised by SMHC prior to maturity. The Notes both bear interest at a per annum rate equal to seven percent (7%), simple interest, and pursuant to Security Agreements entered into by the parties (the “Security Agreements”), are secured by all of the assets of SMHC and SeaStar Medical (excluding certain intellectual property rights). On March 15, 2023, the Company extended the due date of the notes to June 15, 2024 as part of an agreement to allow SeaStar Medical to incur certain debt to accelerate the partial repayment of part of this loan.
On November 2, 2022 the Company advanced $268 thousand to SeaStar Medical for working capital needs, which was repaid on January 18, 2023. As of September 30, 2023 and December 31, 2022 there was nil and $268 thousand of the advance included in "Notes receivable from Seastar Medical Holding Corporation (formerly LMAO)" on the consolidated balance sheets. As of September 30, 2023 and December 31, 2022 there was also approximately nil and $12 thousand in amounts payable from the Company to Seastar Medical included in "Due to related parties" on the consolidated balance sheets.
| September 30, 2023 |
|
| December 31, 2022 |
|
| September 30, 2022 |
| |||
|
|
|
|
|
|
|
|
| |||
Notes receivable from Seastar Medical Holding Corporation (formerly LMAO) | $ | 2,254,668 |
|
| $ | 3,807,749 |
|
| $ | 352,771 |
|
End of period | $ | 2,254,668 |
|
| $ | 3,807,749 |
|
| $ | 352,771 |
|
|
|
|
|
|
|
|
|
| |||
September 30, 2023 |
|
|
|
|
| September 30, 2022 |
| ||||
|
|
|
|
|
|
|
|
| |||
Beginning of year | $ | 3,807,749 |
|
|
|
|
| $ | - |
| |
Investment (repayment) in Seastar Medical Holding Corporation notes receivable (formerly LMAO) |
| (1,661,727 | ) |
|
|
|
|
| 350,000 |
| |
Accrued interest income |
| 130,990 |
|
|
|
|
|
| 2,771 |
| |
Allowance for losses on Seastar Medical Holding Corporation notes receivable |
| (22,344 | ) |
|
|
|
|
| - |
| |
End of period | $ | 2,254,668 |
|
|
|
|
| $ | 352,771 |
|
Investment in Note Receivables are reported at fair value subject to allowances for losses under ASU 2016-13 Credit Losses (CECL). The Company recognized a $22 thousand allowance for losses for the three and nine months ended September 30, 2023.
Long-term Investments
Long-term investments held to maturity in debt securities consist of the following:
16
Symbiont.IO
The Company entered into a secured promissory note and loan agreement with Symbiont.IO, Inc. (“Symbiont”) on December 1, 2021 under which the Company loaned Symbiont an aggregate principal amount of $2 million. The outstanding principal amount under the note bears interest at a rate of 16% per annum. The outstanding principal, plus any accrued and unpaid interest, became due and payable on December 1, 2022 but was not paid. The Symbiont note was secured by a first priority perfected security interest in the assets of Symbiont.
Symbiont filed for bankruptcy on December 1, 2022. Symbiont agreed to assign a Chief Restructuring Officer on April 18, 2023 to facilitate the sale of all of its assets. On June 2, 2023, the Company acquired substantially all of the assets of Symbiont in a sale under Section 363 of the Bankruptcy Code and are recorded as intangible assets (see Footnote 11). A $1.1 million loss allowance was previously recorded against the Symbiont debt security for the year ended December 31, 2022 which was subsequently reversed upon the purchase of the Symbiont assets for total consideration of $2.8 million, which approximates the fair value of such assets. Refer to Note 11.
As of December 31, 2022, there was $347 thousand of accrued interest on the Symbiont security and $55 thousand of accrued reimbursement of legal fees incurred by the Company included in "Long-term investments - debt security".
| September 30, 2023 |
|
| December 31, 2022 |
|
| September 30, 2022 |
| |||
|
|
|
|
|
|
|
|
| |||
Symbiont.IO Note Receivable | $ | - |
|
| $ | 1,350,000 |
|
| $ | 2,266,521 |
|
End of period | $ | - |
|
| $ | 1,350,000 |
|
| $ | 2,266,521 |
|
|
|
|
|
|
|
|
|
| |||
| September 30, 2023 |
|
|
|
|
| September 30, 2022 |
| |||
|
|
|
|
|
|
|
|
| |||
Beginning of year | $ | 1,350,000 |
|
|
|
|
| $ | 2,027,178 |
| |
Accrued interest income on debt securities |
| - |
|
|
|
|
|
| 239,343 |
| |
Reclassification to intangible assets (Note 11) |
| (2,402,542 | ) |
|
|
|
|
| - |
| |
Reversal of allowance for losses on debt security |
| 1,052,542 |
|
|
|
|
|
| - |
| |
End of period | $ | - |
|
|
|
|
| $ | 2,266,521 |
|
LMF Acquisition Opportunities Inc. and SeaStar Medical - Warrants
Pursuant to the Merger Agreement, the 5,738,000 private placement warrants of LMAO held by Sponsor automatically converted into 5,738,000 warrants of SMHC on a one-for-one basis at the time of the LMAO business combination and are subject to certain transfer restrictions (the "Private Placement Warrants").
The fair value of the Private Placement Warrants is classified as Level 3 in the fair value hierarchy as the calculation is dependent upon company specific adjustments to the observable trading price of SMHC (formerly LMAO) public warrants for lack of marketability. Subsequent changes in fair value will be recorded in the income statement during the period of the change.
During the three and nine months ended September 30, 2023 and 2022, our re-measurement resulted in an unrealized loss of $0.1 million and $0.4 million, respectively for 2023 and an unrealized loss of $0.2 million and $1.7 million, respectively for 2022 and is included within "Unrealized gain (loss) on investment and equity securities" within our Consolidated Statements of Operations.
17
Long-term investments for the SMHC (formerly LMAO) warrants consist of the following:
| September 30, 2023 |
|
| December 31, 2022 |
|
| September 30, 2022 |
| |||
|
|
|
|
|
|
|
|
| |||
Seastar Medical Holding Corporation (formerly LMAO) warrants | $ | 72,815 |
|
| $ | 464,778 |
|
| $ | 322,246 |
|
End of period | $ | 72,815 |
|
| $ | 464,778 |
|
| $ | 322,246 |
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
| |||
| September 30, 2023 |
|
|
|
|
| September 30, 2022 |
| |||
|
|
|
|
|
|
|
|
| |||
Beginning of year | $ | 464,778 |
|
|
|
|
| $ | 1,973,413 |
| |
Unrealized loss on equity securities |
| (391,963 | ) |
|
|
|
|
| (1,651,167 | ) | |
End of period | $ | 72,815 |
|
|
|
|
| $ | 322,246 |
|
LMF Acquisition Opportunities Inc. and SeaStar Medical - Common Stock
Pursuant to the Merger Agreement, the 2,587,500 shares of Class B common stock of LMAO held by Sponsor automatically converted into 2,587,500 shares of LMAO’s Class A common stock on a one-for-one basis and the Class A Common Stock and Class B Common Stock of LMAO was reclassified as Common Stock of SMHC at the time of the LMAO business combination and are subject to certain transfer restrictions. As of September 30, 2023, Sponsor holds 2,587,500 shares, or approximately 20% of the total common shares of SMHC, along with 5,738,000 private placement warrants. Taking into consideration the approximately 30% minority interest in Sponsor, the percentage of ownership in the total common shares of SMHC that is attributable to the Company is approximately 14%.
Our investment in SMHC (formerly LMAO) common stock qualifies for equity-method accounting, for which we have elected the fair value option which requires the Company to remeasure our retained interest in SMHC (formerly LMAO) at fair value and include any resulting adjustments as part of a gain or loss on investment. Prior to the closing of the LMAO business combination, the calculation of fair value of our retained interest in LMAO included company-specific adjustments applied to the observable trading price of LMAO’s Class A common stock related risk of forfeiture should LMAO not consummate a business combination. Subsequent to the LMAO business combination, the fair value calculation related to our retained interest in SMHC is based upon the observable trading price of SMHC's Class A common stock.
As part of the merger, Sponsor agreed that it will not transfer its shares of SMHC common stock until the date that is the earlier of (1) the twelve month anniversary of the closing of the merger and (2) the last sale price of the Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the close of the merger.
As a result of the remeasurement of our retained interest in SMHC (formerly LMAO), we recognized an unrealized loss on securities of $0.6 million and $9.9 million for the three and nine months ended September 30, 2023, respectively, and an unrealized loss on securities of nil and an unrealized gain of $12.7 million for three and nine months ended September 30, 2022, respectively, within our Consolidated Statements of Operations.
Long-term investments for the SMHC (formerly LMAO) common stock consist of the following:
| September 30, 2023 |
|
| December 31, 2022 |
|
| September 30, 2022 |
| |||
|
|
|
|
|
|
|
|
| |||
Seastar Medical Holding Corporation common stock | $ | 683,100 |
|
| $ | 10,608,750 |
|
| $ | - |
|
Investment in unconsolidated affiliate |
| - |
|
|
| - |
|
|
| 17,362,125 |
|
End of period | $ | 683,100 |
|
| $ | 10,608,750 |
|
| $ | 17,362,125 |
|
|
|
|
|
|
|
|
|
| |||
| September 30, 2023 |
|
|
|
|
| September 30, 2022 |
| |||
|
|
|
|
|
|
|
|
| |||
Beginning of year | $ | 10,608,750 |
|
|
|
|
| $ | 4,676,130 |
| |
Unrealized gain (loss) on equity investment |
| (9,925,650 | ) |
|
|
|
|
| 12,685,995 |
| |
End of period | $ | 683,100 |
|
|
|
|
| $ | 17,362,125 |
|
18
Note 6. Debt and Other Financing Arrangements
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Financing agreement with Imperial PFS that is unsecured. Down payment of $78,000 was required upfront and equal installment payments of $45,672 to be made over a 10 month period. The note matured on August 1, 2023. Annualized interest is 7.35%. |
| $ | - |
|
| $ | 365,379 |
|
|
|
|
|
|
|
| ||
Financing agreement with Imperial PFS that is unsecured. Down payment of $15,000 was required upfront and equal installment payments of $13,799 to be made over an 8 month period. The note matures on August 1, 2023. Annualized interest is 7.35%. |
| - |
|
|
| 110,396 |
| |
|
|
|
|
|
|
| ||
Financing agreement with Imperial PFS that is unsecured. Down payment of $119,646 was required upfront and equal installment payments of $15,145 to be made over a 3 month period. The note matures on November 19, 2023. Annualized interest is 12.3%. |
| 32,918 |
|
|
| - |
| |
|
|
|
|
|
|
| ||
Financing agreement with Imperial PFS that is unsecured. Down payment of $3,435 was required upfront and equal installment payments of $3,657 to be made over an 11 month period. The note matures on July 1, 2024. Annualized interest is 12.05%. |
|
| 30,290 |
|
|
| - |
|
|
|
|
|
|
|
| ||
|
| $ | 63,208 |
|
| $ | 475,775 |
|
Minimum required principal payments on the Company's debt as of September 30, 2023 are as follows:
Maturity |
| Amount |
| |
2023 (excluding the nine months ended September 30, 2023) |
| $ | 49,093 |
|
2024 |
| $ | 14,115 |
|
| $ | 63,208 |
| |
|
|
|
|
19
Note 7. Due to Related Party
Legal services for the Company associated with the collection of delinquent assessments from property owners were performed by a law firm, Business Law Group, P.A. (“BLG”), which was owned solely by Bruce M. Rodgers, the chairman and CEO of the Company, until and through the date of its initial public offering in 2015. Following the initial public offering, Mr. Rodgers transferred his interest in BLG to other attorneys at the firm through a redemption of his interest in the firm. The law firm 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 its agreement with BLG, the Company paid BLG a fixed monthly fee of $82,000 for services rendered. The Company paid BLG a minimum per unit fee of $700 in any case where there is a collection event and BLG received no payment from the property owner. This provision was expanded to also include any unit where the Company has taken title to the unit or where the Association has terminated its contract with either BLG or the Company.
On February 1, 2022, the Company consented to the assignment by BLG to the law firm BLG Association Law, PLLC (“BLGAL”) of the Services Agreement, dated April 15, 2015, previously entered into by the Company and BLG (the “Services Agreement”). The Services Agreement had set forth the terms under which BLG 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 BLG. In connection with the assignment, BLGAL agreed to amend the Services Agreement on February 1, 2022, to reduce the monthly compensation payable to the law firm from $82,000 to $53,000 (the “Amendment”). Bruce M. Rodgers is a 50% owner of BLGAL, and the assignment and Amendment was approved by the independent directors of the Company. A $150 thousand termination fee was also paid to BLG in association with the assignment.
The Company had originally engaged BLG on behalf of many of its Association clients to service and collect the Accounts and to distribute the proceeds as required by Florida law and the provisions of the purchase agreements between the Company and the Associations. This engagement was subsequently assigned to BLGAL as described above. Carollinn Gould, who is a Director of the Company, worked as the General Manager of BLG and works as the General Manager of BLGAL.
Amounts paid to BLG or BLGAL for the three and nine months ended September 30, 2023 were approximately $159 thousand and $477 thousand, respectively, and three and nine months ended 2022 were approximately $159 thousand and $506 thousand, respectively.
Under the Services Agreement in effect during the three and nine months ended September 30, 2023 and 2022, 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 reducedincurred. The Company incurred expenses related to collection costs for estimated forfeitures,the three and nine months ended September 30, 2023 in the amounts of approximately $17 thousand and $47 thousand, respectively and for the three and nine months ended September 30, 2022 in the amounts of $14 thousand and $48 thousand, respectively. Recoveries during the three and nine months ended September 30, 2023 were $8 thousand and $29 thousand, respectively and for 2022 were approximately $9 thousand and $55 thousand for 2022, respectively.
The Company also shares office space, personnel and related common expenses with BLGAL. All shared expenses, including rent, are charged to BLGAL based on an estimate of actual usage. Any expenses of BLGAL or BLG paid by the Company that have not been reimbursed or settled against other amounts are reflected as due from related parties in the accompanying consolidated balance sheet. BLGAL and BLG, as applicable, were charged a total of approximately $15 thousand and $45 thousand for the office sub-lease during the three and nine months ended September 30, 2023 and $15 thousand and $45 thousand for 2022, respectively.
Amounts payable to BLGAL and BLG, in aggregate as of September 30, 2023 and December 31, 2022 were approximately $44 thousand and $63 thousand, respectively.
Note 8. Commitments and Contingencies
Leases
The Company leases certain office space and office equipment 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 September 30, 2023, the Company’s long term operating leases have a remaining lease term of between 23 and 32 months and include options to renew the leases. The exercise of lease renewal options is generally at the Company’s sole discretion. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants. The Company does not have any material financing leases.
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use ("ROU") assets and current and long-term operating lease liabilities are separately stated on the Consolidated Balance Sheet. 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
20
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 requisitelease term. The Company accounts for lease components (e.g., fixed payments) separate from the non-lease components (e.g., common-area maintenance costs) for its building lease. For office equipment, the company does not separate lease components (e.g., fixed payments) from the non-lease components (e.g., service periodcosts).
The Company’s office lease began July 15, 2019 and was due to expire on July 31, 2022. During the first quarter of 2022 the Company exercised its option to extend its office lease to July 31, 2025. The Company accounted for the lease extension as a lease modification under ASC 842. Due to the lease extension, the Company remeasured the lease liability and ROU asset associated with the lease. As of the award,effective date of modification, the Company recorded an adjustment to the right-of-use asset and lease liability in the amount of $300,787 based on the net present value of lease payments discounted using an estimated incremental borrowing rate of 7.5%. Subsequent renewal options were not considered probable of being exercised as of lease commencement. This office space is in a building owned by a board member.
The Company shares this space and the related costs associated with this operating lease with a related party (see Note 7) that also performs legal services associated with the collection of delinquent assessments. The related party has a sub-lease for approximately $4,800 per month plus operating expenses.
Lease expense recognized for the three and nine months ended September 30, 2023 and 2022 was approximately $29 thousand and $87 thousand for 2023 and $28 thousand and $80 thousand for 2022, respectively. Sub-lease income for the three and nine months ended September 30, 2023 and 2022 was approximately $15 thousand and $44 thousand for 2023 while it was $15 thousand and $44 thousand for 2022, respectively.
On February 27, 2023, the Company executed a lease for office equipment which has been classified as an operating lease. The lease term is generally the vesting term39 months. As of the outstanding equity awards.effective date of the lease, the Company recorded an adjustment to the right-of-use asset and lease liability in the amount of approximately $22 thousand based on the net present value of lease payments discounted using an estimated incremental borrowing rate of 7.35%.
The following table presents supplemental balance sheet information related to operating leases as of September 30, 2023 and December 31, 2022:
|
| Balance Sheet Line Item | September 30, 2023 |
| December 31, 2022 |
| ||
Assets |
|
|
|
|
|
| ||
ROU assets |
| Right of use asset, net | $ | 214,574 |
| $ | 265,658 |
|
Total lease assets |
|
| $ | 214,574 |
| $ | 265,658 |
|
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
|
| ||
Current lease liabilities |
| Lease liability | $ | 106,689 |
| $ | 90,823 |
|
Long-term lease liabilities |
| Lease liability |
| 114,855 |
|
| 179,397 |
|
Total lease liabilities |
|
| $ | 221,544 |
| $ | 270,220 |
|
|
|
|
|
|
|
| ||
Weighted-average remaining lease term (in years) |
|
|
| 2.0 |
|
| 2.7 |
|
Weighted-average discount rate |
|
|
| 7.49 | % |
| 7.50 | % |
|
|
|
|
|
|
|
The following table presents supplemental cash flow information and non-cash activity related to operating leases for the nine months ended September 30, 2023 and 2022:
|
|
| For the Nine Months Ended September 30, |
| ||||
|
|
| 2023 |
| 2022 |
| ||
Operating cash flow information |
|
|
|
|
|
| ||
Cash paid for amounts included in the measurement of lease liabilities |
|
| $ | (70,563 | ) | $ | (75,574 | ) |
Non-cashflow information |
|
|
|
|
|
| ||
ROU assets and operating lease obligation recognized |
|
| $ | 21,887 |
| $ | 300,787 |
|
Contingencies21
The following table presents maturities of operating lease liabilities on an undiscounted basis as of September 30, 2023:
Lease Maturity Table |
|
|
|
| |
|
|
| Operating Leases |
| |
2023 (excluding the nine months ended September 30, 2023) |
|
|
| 29,374 |
|
2024 |
|
|
| 121,385 |
|
2025 |
|
|
| 85,324 |
|
2026 |
|
|
| 3,163 |
|
(less: imputed interest) |
|
|
| (17,701 | ) |
|
|
| $ | 221,544 |
|
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.
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. Solaris at Brickell Bay Condominium Association, Inc. v. LM Funding,
In October 2021, we entered into a sale and purchase agreement (the “Uptime Purchase Agreement”) with Uptime Armory LLC Case No: 2014-20043-C, was brought before the Circuit Court(“Uptime”) pursuant to which US Digital agreed to purchase, and Uptime agreed to supply to US Digital, an aggregate of 18 modified 40-foot cargo containers (“POD5ive containers”) that will be designed to hold and operate 280 S19 Pro Antminers manufactured by Bitmain. The purchase price of the Eleventh Judicial Circuit, Miami-Dade Civil Division on JulyPOD5ive 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% was paid after Uptime delivered a “notice of completion” of the equipment in 2022. However, no containers were delivered as of December 31, 2014. 2022.
On August 4, 2017,November 8, 2022, LMFA filed an orderaction in Florida circuit court against Uptime and Bit5ive, LLC in a case styled US Digital Mining and Hosting Co. LLC v. Uptime Amory, LLC and Bit5ive, LLC (Fla. 11thCir. Ct., November 8, 2022). In that action, we alleged breach of contract and violation of the Florida Deceptive and Unfair Trade Practices Act and are seeking, among other things, damages of $3.15 million for non-delivery of the 18 POD5ive containers. The Defendants in this action filed a motion to compel confidential arbitration action. The court has now stayed the action in the Florida circuit court, and ordered the parties to confidential arbitration governed by the American Arbitration Association and the case is proceeding to arbitration. We recorded an impairment charge of $3.15 million on our mining machine deposit in the fourth quarter of 2022 and is reported on our Consolidated Statements of Operations as Impairment loss on prepaid mining machine deposits.
In October 2021, 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 were required to pay an additional deposit for each container three months prior to delivery at the hosting site of $44 thousand and a final deposit for each container one month prior to arrival at the hosting site of $44 thousand. The deposits paid for hosting services under the Hosting Agreement are refundable. On June 29, 2022, the Company and Uptime Hosting LLC entered into a Release and Termination Agreement in which the Hosting Agreement was terminated and Uptime Hosting LLC agreed to pay the $0.8 million. We recorded an impairment charge of $0.8 million on our prepaid hosting deposit in the fourth quarter of 2022 as an impairment loss on prepaid hosting deposits within our Consolidated Statements of Operations.
On September 2, 2022, we filed in Florida circuit court was entered on Plaintiff’s Motiona legal action against Uptime Hosting LLC in an action styled US Digital Mining and Hosting Co, LLC v. Uptime Hosting, LLC (Fla. 13th Cir. Ct. Sept. 2, 2022) for Preliminary Approval of Class Action Settlement Agreement. The motionthe return of the Plaintiff, Solaris at Brickell Bay Condominium Association, Inc., individuallydeposit and on behalfother damages, alleging breach of contract and violation of the certified plaintiff classFlorida Deceptive and Unfair Trade Practices Act. On May 5, 2023 US Digital Mining and Hosting Co. amended our complaint adding parties Bit5ive, LLC, Block Consulting Services, LLC., 6301 Southwest Ranches, LLC., Robert D Collazo Jr. individually, Elyam Moral-Collazo individually, the Unknown Partners of Uptime Hosting LLC, Unknown Partners of Bit5ive, LLC, Unknown Partners of 6301 Southwest Ranches, LLC and adding counts for (i) breach of contract against Uptime and Bit5ive, (ii) violation of Florida’s Uniform Fraudulent Transfer Act against Uptime; (iii) violation of Florida’s Uniform Fraudulent Transfer Act against Bit5ive; (iv) violation of Florida’s Uniform Fraudulent Transfer Act against Block Consulting and Robert Collazo (v) violation of Florida Fraudulent Asset Conversion against Block Consulting Services, 6301 Southwest Ranches, LLC, Robert D Collazo, Jr. and Elyam Moral-Collazo; (vi) violation of Florida Deceptive and Unfair Trade Practices Act (“Plaintiffs”FDUTPA”) against all Defendants, (vii) equitable lien against Robert D Collazo, Jr., Elyam Moral-Collazo and 6301 Southwest Ranches, LLC., and (viii) equitable lien against Defendants Robert D Collazo, Jr., Elyam Moral-Collazo and 6301
22
Southwest Ranches, LLC. The Court has entered an Order compelling arbitration with a final arbitration hearing set for approval of the Class Action Settlement Agreement with Defendant LM Funding, LLC was granted. LMF, despite its belief that it is not liableFebruary 27, 2024 to February 29, 2024
Note 9. Stockholders’ Equity
Stock Options
The 2015 Omnibus Incentive Plan provided for the claims asserted and has good defenses thereto, has nevertheless agreedissuance 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. This plan was terminated when the Company adopted the new 2021 Omnibus Incentive Plan (the “2021 Omnibus Plan”). The 2021 Omnibus Plan was intended to enter into this Agreement in order to: (1) avoid any further expense, inconvenience, and distraction of burdensome and protracted litigation and its consequential negative financial effects to LMF’s operations; (2) obtain the releases, orders, and final judgment contemplated by this Agreement; and (3) put to rest and terminate with finality all claims that have been or could have been asserted against LMF by the Class arising from the facts alleged in the Lawsuit and allow LMFus to continue its operational model helping associations. In the Court of the Eleventh Judicial Circuit in and for Miami-Dade County, pursuant to the agreement subsequently reached between counsel, all required actions and deadlines set forth in the Parties’ Class Action Settlement Agreement, approved of by the Court in its Order Granting Preliminary Approval of same, dated August 3, 2017, are currently stayed and again extended for thirty (30) more days, effective October 18, 2017. On October 5, a continuation of the abatement was granted for sixty (60) days from the date of the order in the District Court of Appeal of Florida Third District. The Company has accrued the costs of $505,000use equity awards as part of our ongoing compensation strategy for our key employees. Awards under the class action settlement agreement. Plan will support the creation of long-term value and returns for our stockholders.
The settlement amountfollowing is contingent upon the Company obtaining financing within the allotted timeframea summary of the settlement agreement.
Risks and Uncertainties
Funding amounts are secured by a priority lien position provided under Florida law (see discussion above regarding Florida Statute 718.116). However, in the event the first mortgage holder takes title to the property, the amount payable by the mortgagee to satisfy the priority lien is capped under this same statute and would generally only be sufficient to reimburse the Company for funding amounts noted above for delinquent assessments. Amounts paid by the mortgagee would not generally reimburse the Company for interest, administrative late fees, and collection costs. Even though the Company does not recognize these charges as revenues until collected, its business model and long-term viability is dependent on its ability to collect these charges.
In the event a delinquent unit owner files for bankruptcy protection, the Company may at itsstock option be reimbursed by the association for the amounts funded (i.e., purchase price) and all collection rights are re-assigned to the association.
Non-cash Operating and Investing Activities
During the three and nine months ended September 30, 2016, the Company acquired unencumbered title to certain properties as a result of foreclosure proceedings. Properties were recorded at fair value less cost to dispose of approximately $135,000, forplan activity during the nine months ended September 30, 2016. There were no unencumbered properties acquired2023 and 2022:
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
| ||||
|
| Options |
|
| Exercise Price |
|
| Options |
|
| Exercise Price |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options outstanding at beginning of the year |
|
| 1,121,262 |
|
| $ | 3.26 |
|
|
| 3,956,827 |
|
| $ | 6.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Granted |
|
| 2,486,500 |
|
|
| 0.75 |
|
|
| - |
|
|
| - |
|
Cancelled |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Forfeited |
|
| 10,184 |
|
|
| 12.03 |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options outstanding at September 30, |
|
| 3,597,578 |
|
| $ | 1.50 |
|
|
| 3,956,827 |
|
| $ | 6.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options exercisable at September 30, |
|
| 1,869,194 |
|
| $ | 1.94 |
|
|
| 37,794 |
|
| $ | 34.60 |
|
On April 20, 2023 (the “Grant Date”), the board of directors of the Company approved the grant of options to purchase 2,486,500 shares of common stock of the Company (“Options”) to management and employees. The Company used the Black-Scholes model to value these options using a 10 year life, annualized volatility of 118%, annual risk free interest rate of 3.54% and a strike price of $0.7513 per share which resulted a total fair value for these options of approximately $1.8 million.
The Options grant each recipient the right to purchase shares of Company common stock at a price of $0.7513 per share, the fair market value of the Company’s common stock on the Grant Date. The Options vest as to 50% of the total amount of the award on the one-year anniversary of the Grant Date and 50% of the total amount of the award on the two-year anniversary of the Grant Date (subject to accelerated vesting upon a change of control of the Company), provided that the executive is in continuous employment or service to the Company through the applicable vesting date. The Options are subject to accelerated vesting as follows: (a) the portion of the Options that are scheduled to vest during the three months ended Septemberfirst year after the Grant Date vest instead as of June 30, 2016. The fair value of these properties was first applied to recover2023, if the Company’s initial investment with any remaining proceeds appliedBitcoin mining operations achieve 500 petahash of computing power as of June 30, 2023, and (b) the portion of the Options that are scheduled to interest, late fees, and other amounts owed byvest during the property owner. Theresecond year after the Grant Date will vest as of June 30, 2024, if the Company’s Bitcoin mining operations achieve 1,000 petahash of computing power as of June 30, 2024. As of June 30, 2023, the Company's Bitcoin mining operations achieved 500 petahash of computing power therefore the 1,243,250 options scheduled to vest during the first year vested as of June 30, 2023. The stock based compensation expense attributable to the portion of options that were no unencumbered properties acquired and recorded at fair valuescheduled to vest during the first year was recognized during the three and nine months ended September 30, 2017.
New Accounting Pronouncements
Revenue Recognition - On May 28, 2014, the FASB issued ASU 2014-09—Revenue from Contracts with Customers (Topic 606), which provided new accounting guidance regarding revenue recognition, and is effective for annual periods beginning after December 15, 2017. The Company has not yet evaluated the impact of this new guidance on its condensed consolidated financial statements.
Debt Issue Costs - In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amended guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet2023 as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015. Debt issue costs deducted from the carrying amountresult of the related debt liability in the accompanying consolidated condensed balance sheets were $25,474 and $99,396, respectively, asaccelerated vesting of September 30, 2017, and December 31, 2016.such options.
Leases – In February 2016, the FASB issued ASU 2016-02, Leases, which requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of additional information about leasing arrangements. Under the new guidance, for all leases, interestStock compensation expense and amortization of the right to use assets will be recorded for leases determined to be financing leases and straight-line lease expense will be recorded for leases determined to be operating leases. Lessees will initially recognize assets for the right to use the leased assets and liabilities for the obligations created by those leases. The new accounting standard must be adopted using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The accounting standard is effective for the Company beginning January 1, 2019, with early adoption permitted. The Company is currently in the process of assessing what impact this new standard may have on its condensed consolidated financial statements.
Credit Losses – In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses which establishes a new approach for credit impairment based on an expected loss model rather than an incurred loss model. The standard requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. The guidance is effective January 1, 2020 with a one-year early adoption permitted. The Company is evaluating the impact of the new guidance.
Subsequent Events
The Company has evaluated subsequent events through the date which the condensed consolidated financial statements were issued. Refer to Note 6. Subsequent Events, for further discussion.
2. DUE FROM RELATED PARTY
A substantial portion of the 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 initial public offering. Following the offering, Mr. Rodgers transferred his interest in BLG to other attorneys at the firm through a redemption of his interest in the firm, and BLG is now under control of those lawyers. BLG 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.
Amounts collected from property owners and paid to BLGrecognized for the three and nine months ended September 30, 2017 were approximately $291,000 and $841,000, respectively. Amounts collected from property owners and paid to BLG for the three and nine months ended September 30, 2016 were approximately $281,000 and $946,000, respectively. BLG also recognizes revenue through
its general counsel activities it performs for various associations. For the three and nine months ended September 30, 2017, BLG recognized revenue of approximately $6,000 and $34,000, respectively,2023 related to general counsel work. For the threestock options was approximately $0.3 million and nine months ended September 30, 2016, BLG recognized revenue of$1.6 million, respectively, and approximately $2,000$3.6 million and 20,000, respectively, related to general counsel work. As of September 30, 2017 and December 31, 2016, receivables from property owners for charges ultimately payable to BLG approximate $3,920,000 and $4,385,000, respectively.
Under the related party agreement with BLG in effect during 2017 as well as the previous related party agreement, 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 are accounted for as a reduction in expense incurred. The Company incurred expenses related to these types of costs of approximately $128,000 and $394,000, respectively, during the three and nine months ended September 30, 2017. The Company incurred expenses of $188,000 and $381,000,$10.9 million, respectively, for the three and nine months ended September 30, 2016, related to collection costs. Recoveries during three and nine months ended2022. There was approximately $0.8 million of unrecognized compensation cost associated with unvested stock options as of September 30, 2017 related to those costs were2023.
The aggregate intrinsic value of the outstanding common stock options as of September 30, 2023 and December 31, 2022 was approximately $91,000$0 and $258,000,$0, respectively. The remaining weighted average life of the options as of September 30, 2023 was 9.3 years.
23
Stock Issuance
In the year ended December 31, 2021, the Company recognized collection costs recoveriesissued 73,940 shares to management as part of $80,000their employment contracts of which $229,500 was expensed. The shares were physically issued in February 2022.
The Company issued 200,000 shares on November 4, 2021 pursuant to an agreement that is for one year with two vendors who provide consulting in the blockchain and $265,000, respectivelycrypto currency field. The total fair value of the stock at the time of issuance was approximately $1.3 million thousand of which we expensed approximately nil for the three and nine months ended September 30, 2016. Following2023 and $329 thousand and $659 thousand for 2022, respectively.
On April 20, 2023 (the “Grant Date”), the change in ownershipboard of BLG discussed above,directors of the Company began paying BLGapproved the grant of 1,560,000 shares of restricted stock (“Restricted Shares”) to management and employees.
The Restricted Shares vest in twelve substantially equal installments on each monthly anniversary of the Grant Date for twelve months following the Grant Date (subject to accelerated vesting upon a monthly feechange of $7,000 per month plus a minimum feecontrol of $700 per unitthe Company), provided that the employee is in those payoff events where the collection amount was limited to the Super Lien Amount. Effective January 1, 2017, the Company entered into a new services agreement with BLG which partially alters the traditional deferred billing arrangement noted above. Under the new agreement, the Company pays BLG a fixed monthly fee of $82,000 per month for services rendered. The Company continues to pay BLG a minimum per unit fee of $700 in any case where there is a collection event and BLG receives no payment from the property owner. This provision has been expanded to also include any unit where the Company has taken title to the unitcontinuous employment or where the association has terminated its contract with either BLG or the Company. Legal fees chargedservice to the Company by BLG in excessthrough the applicable vesting date.
The total fair value of amounts collected from property ownersthe stock at the time of issuance was approximately $1.2 million which was based on the closing market price on the Grant Date of $.7513. The Company expensed approximately $352 thousand and $917 thousand for the three and nine months ended September 30, 20172023. There was approximately $255 thousand of unrecognized compensation cost associated with unvested restricted stock as of September 30, 2023.
The following is a summary of the restricted share activity during the nine months ended September 30, 2023 and 2022:
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| Number of |
|
| Weighted Average |
|
| Number of |
|
| Weighted Average |
| ||||
|
| Restricted Shares |
|
| Award Price |
|
| Restricted Shares |
|
| Award Price |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Restricted Shares outstanding at beginning of the year |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Granted |
|
| 1,560,000 |
|
|
| 0.75 |
|
|
| - |
|
|
| - |
|
Vested |
|
| (650,000 | ) |
|
| 0.75 |
|
|
| - |
|
|
| - |
|
Restricted Shares outstanding at September 30, |
|
| 910,000 |
|
| $ | 0.75 |
|
|
| - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
The following is a summary of the warrant activity during the nine months ended September 30, 2023 and 2022:
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| Number of Warrants |
|
| Weighted Average Exercise Price |
|
| Number of Warrants |
|
| Weighted Average Exercise Price |
| ||||
Warrants outstanding at beginning of the year |
|
| 7,677,441 |
|
| $ | 5.00 |
|
|
| 7,702,441 |
|
| $ | 5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Granted |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Exercised |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Forfeited |
|
| - |
|
|
| - |
|
|
| (25,000 | ) |
|
| 4.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Warrants outstanding and exercisable at September 30, |
|
| 7,677,441 |
|
| $ | 5.00 |
|
|
| 7,677,441 |
|
| $ | 5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the outstanding common stock warrants as of September 30, 2023 and December 31, 2022 was approximately $0 and $0 respectively. The remaining weighted average life of the warrants as of September 30, 2023 was 3 years.
24
At the Market Program
On June 26, 2023, the Company entered into an Equity Distribution Agreement (the “Distribution Agreement”) with Maxim Group LLC (the “Agent”), pursuant to which the Company may, from time to time, at the Company's discretion, offer and sell shares of the Company’s common stock, having an aggregate offering price of up to $4,700,000 (the “Shares”), through the Agent, acting as sales agent. The Shares to be sold under the Distribution Agreement, if any, will be issued and sold pursuant to the Company’s shelf registration statement which was filed with the Securities and Exchange Commission (“SEC”) on July 30, 2021 (the “Registration Statement”) and was declared effective on August 16, 2021. A prospectus supplement related to the Company’s at the market offering ("ATM") program with the Agent under the Distribution Agreement was filed with the SEC on June 26, 2023. The ATM program is expected to remain in effect until June 26, 2024. As of September 30, 2023, an aggregate gross sales limit of $4,700,000 remains available for issuance under the ATM program. Approximately $107 thousand of legal and professional fees incurred related to the establishment of the ATM program as of September 30, 2023 were deferred and recorded within "Prepaid expenses and other assets" on the Consolidated Balance Sheets and will be amortized ratably as stock is issued under the program.
Note 10. Segment Information
The Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has two reportable segments: Specialty Finance and Mining Operations. The guidance requires that segment disclosures present the measure(s) used by the CODM to decide how to allocate resources and for purposes of assessing such segments’ performance. The Company’s CODM uses revenue, income from operations and income before taxes of our reporting segments to assess the performance of the business of our reportable operating segments.
No operating segments have been aggregated to form the reportable segments. The corporate oversight function, and other components that may earn revenues that are only incidental to the activities of the Company are aggregated and included in the “All Other” category.
The Specialty Finance segment generates revenue from providing funding to nonprofit community associations. The Mining Operations segment generates revenue from the Bitcoin the Company earns through its mining activities.
| Three Months Ended September 30, 2023 |
| ||||||||||
| Specialty Finance |
| Mining Operations |
| All Other |
| Total |
| ||||
Revenue, net | $ | 136,035 |
| $ | 3,283,473 |
| $ | - |
| $ | 3,419,508 |
|
Depreciation and amortization |
| 1,473 |
|
| 1,457,272 |
|
| 58,128 |
|
| 1,516,873 |
|
Operating loss |
| (270,842 | ) |
| (1,291,909 | ) |
| (1,607,668 | ) |
| (3,170,419 | ) |
Realized gain on securities |
| - |
|
| - |
|
| 1,788 |
|
| 1,788 |
|
Unrealized loss on investment and equity securities |
| - |
|
| - |
|
| (778,078 | ) |
| (778,078 | ) |
Impairment loss on Symbiont assets |
| - |
|
| - |
|
| (750,678 | ) |
| (750,678 | ) |
Unrealized gain on marketable securities |
| - |
|
| - |
|
| 2,058 |
|
| 2,058 |
|
Credit loss on Seastar Medical Holding Corporation notes recievable |
| - |
|
| - |
|
| (22,344 | ) |
| (22,344 | ) |
Other income - coupon sales |
| - |
|
| 10,160 |
|
| - |
|
| 10,160 |
|
Interest income |
| - |
|
| - |
|
| 39,657 |
|
| 39,657 |
|
Loss before income taxes |
| (270,842 | ) |
| (1,281,749 | ) |
| (3,115,265 | ) |
| (4,667,856 | ) |
Fixed Asset Additions |
| 1,711 |
|
| 165,054 |
|
| 1,929 |
|
| 168,694 |
|
25
| Nine Months Ended September 30, 2023 |
| ||||||||||
| Specialty Finance |
| Mining Operations |
| All Other |
| Total |
| ||||
Revenue, net | $ | 586,030 |
| $ | 8,342,646 |
| $ | - |
| $ | 8,928,676 |
|
Depreciation and amortization |
| 3,998 |
|
| 3,423,383 |
|
| 60,485 |
|
| 3,487,866 |
|
Operating loss |
| (679,056 | ) |
| (2,214,895 | ) |
| (5,402,228 | ) |
| (8,296,179 | ) |
Realized gain on securities |
| - |
|
| - |
|
| 1,788 |
|
| 1,788 |
|
Unrealized loss on investment and equity securities |
| - |
|
| - |
|
| (10,317,613 | ) |
| (10,317,613 | ) |
Realized gain on sale of purchased digital assets |
| - |
|
| - |
|
| 1,917 |
|
| 1,917 |
|
Unrealized gain on marketable securities |
| - |
|
| - |
|
| 6,436 |
|
| 6,436 |
|
Impairment loss on prepaid hosting deposits |
| - |
|
| (36,691 | ) |
| - |
|
| (36,691 | ) |
Impairment loss on Symbiont assets |
| - |
|
| - |
|
| (750,678 | ) |
| (750,678 | ) |
Symbiont credit reserve reversal |
| - |
|
| - |
|
| 1,052,543 |
|
| 1,052,543 |
|
Credit loss on Seastar Medical Holding Corporation notes recievable |
| - |
|
| - |
|
| (22,344 | ) |
| (22,344 | ) |
Other income - coupon sales |
| - |
|
| 639,472 |
|
| - |
|
| 639,472 |
|
Other income - finance revenue |
| - |
|
| - |
|
| 37,660 |
|
| 37,660 |
|
Interest income |
| - |
|
| - |
|
| 210,881 |
|
| 210,881 |
|
Loss before income taxes |
| (679,033 | ) |
| (1,575,422 | ) |
| (15,218,353 | ) |
| (17,472,808 | ) |
Fixed Asset Additions |
| 2,939 |
|
| 1,901,099 |
|
| 9,265 |
|
| 1,913,303 |
|
| Three Months Ended September 30, 2022 |
| ||||||||||
| Specialty Finance |
| Mining Operations |
| All Other |
| Total |
| ||||
Revenue, net | $ | 145,623 |
| $ | 42,157 |
| $ | - |
| $ | 187,780 |
|
Depreciation and amortization |
| 1,191 |
|
| 36,697 |
|
| 729 |
|
| 38,617 |
|
Operating loss |
| (290,899 | ) |
| (122,875 | ) |
| (4,850,491 | ) |
| (5,264,265 | ) |
Unrealized loss on investment and equity securities |
| - |
|
| - |
|
| (194,174 | ) |
| (194,174 | ) |
Unrealized loss on marketable securities |
| - |
|
| - |
|
| (13,000 | ) |
| (13,000 | ) |
Impairment loss on purchased digital assets |
| - |
|
| - |
|
| (25,764 | ) |
| (25,764 | ) |
Interest income |
| - |
|
| - |
|
| 85,602 |
|
| 85,602 |
|
Dividend income |
| - |
|
| - |
|
| 1,125 |
|
| 1,125 |
|
Income (loss) before income taxes |
| (290,899 | ) |
| (122,875 | ) |
| (4,996,702 | ) |
| (5,410,476 | ) |
Fixed Asset Additions |
| 1,612 |
|
| 3,354,895 |
|
| - |
|
| 3,356,507 |
|
| Nine Months Ended September 30, 2022 |
| ||||||||||
| Specialty Finance |
| Mining Operations |
| All Other |
| Total |
| ||||
Revenue, net | $ | 571,160 |
| $ | 42,157 |
| $ | - |
| $ | 613,317 |
|
Depreciation and amortization |
| 4,746 |
|
| 36,697 |
|
| 2,275 |
|
| 43,718 |
|
Operating loss |
| (926,114 | ) |
| (161,418 | ) |
| (14,580,853 | ) |
| (15,668,385 | ) |
Realized loss on securities |
| - |
|
| - |
|
| (349,920 | ) |
| (349,920 | ) |
Unrealized gain on investment and equity securities |
| - |
|
| - |
|
| 11,034,828 |
|
| 11,034,828 |
|
Realized gain on convertible debt security |
| - |
|
| - |
|
| 287,778 |
|
| 287,778 |
|
Unrealized loss on marketable securities |
| - |
|
| - |
|
| (36,900 | ) |
| (36,900 | ) |
Impairment loss on purchased digital assets |
| - |
|
| - |
|
| (403,471 | ) |
| (403,471 | ) |
Digital assets other income |
| - |
|
| - |
|
| 5,658 |
|
| 5,658 |
|
Interest income |
| - |
|
| - |
|
| 264,947 |
|
| 264,947 |
|
Dividend income |
| - |
|
| - |
|
| 3,875 |
|
| 3,875 |
|
Income (loss) before income taxes |
| (926,114 | ) |
| (162,288 | ) |
| (3,773,188 | ) |
| (4,861,590 | ) |
Fixed Asset Additions |
| 1,612 |
|
| 21,994,846 |
|
| 6,916 |
|
| 22,003,374 |
|
26
Note 11. Intangible Assets
On June 2, 2023, the United States Bankruptcy Court for the Southern District of New York entered an order (the “Symbiont Bankruptcy Order”) approving the sale of substantially all of the assets of Symbiont.io, LLC, as debtor in possession (“Symbiont”), to LM Funding America, Inc. (the “Company”) pursuant to a form of Asset Purchase Agreement attached to the Symbiont Bankruptcy Sale Order (the “Asset Purchase Agreement”) free and clear of all liens, claims and encumbrances. The Company and Symbiont signed the Asset Purchase Agreement on June 5, 2023, and the purchase and sale of the Symbiont assets pursuant to the Asset Purchase Agreement closed on June 5, 2023.
Pursuant to the Asset Purchase Agreement, the Company purchased substantially all of the assets of Symbiont for a purchase price of $2.6 million, which was paid by means of a credit bid of the full amount of the note payable owed by Symbiont to the Company. The $2.6 million comprises of $2.0 million of principal, $425 thousand of accrued interest, and $164 thousand of legal fees. The Company did not assume any liabilities of Symbiont in the transaction. The Company incurred an additional $238 thousand of expenses acquiring these assets which was accounted for as an asset acquisition.
The Company capitalized $2.8 million for the Symbiont assets which consist principally of intellectual property, customer contracts, customer base and software code relating to Symbiont’s financial services blockchain enterprise platform. During the three months ended September 30, 2023 management received offers related to the sale of the Symbiont assets which was considered a triggering event for potential impairment as of September 30, 2023. As part of its impairment testing management considered the possible cashflows and probabilities associated with the continuing use of the Symbiont assets and the potential sale of such assets to a third party. Based on the assessment performed, management concluded an impairment of approximately $266,000 and $787,000, respectively. For$0.8M on the Symbiont assets was necessary as of September 30, 2023. The net balance of the Symbiont intangible assets as of September 30, 2023 was as follows:
|
| Useful Life (Years) |
| September 30, 2023 |
|
| December 31, 2022 |
| ||||
Trade Names |
| 17 |
| $ |
| 263,276 |
|
| $ |
| - |
|
Patent Portfolio |
| 20 |
|
|
| 2,541,626 |
|
|
|
| - |
|
Gross intangible assets |
|
|
|
|
| 2,804,902 |
|
| �� |
| - |
|
Less: impairment |
|
|
|
|
| (750,678 | ) |
|
|
|
| |
Less: accumulated amortization |
|
|
|
|
| (54,224 | ) |
|
|
| - |
|
Total intangible assets, net |
|
|
| $ |
| 2,000,000 |
|
| $ | $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $54 thousand of amortization expense during the three and nine months ended September 30, 2016, the Company incurred legal fees charged by BLG in the amount of $31,000 and $107,000, respectively. 2023.
Note 12. Subsequent Events
The Company also shares office spacereceived approximately $800 thousand in loan principal and related common expensesaccrued interest payments from Seastar Medical Holding Corporation during October 2023.
27
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 BLG. All shared expenses, including rent, are charged to the legal firm based on an estimate of actual usage. Any expenses of BLG paid byConsolidated Financial Statements and Notes for the Company that have not been reimbursed or settled against other amounts are reflected as due from related parties in the accompanying consolidated balance sheet. Amounts receivable from BLG as of September 30, 2017three and December 31, 2016 were approximately $1,661,000 and $1,661,000, respectively.
During 2016, the Company experienced a decline in collection events that affected revenues both to the Company and BLG. The significant balance in the receivable noted above reflects the decision by the Company to advance funds to BLG based on the amount of their unpaid legal fees due from property owners. The Company expects repayment of the receivable amount as collection events return to historical levels.
3. OTHER ASSETS
The following table summarizes the Company’s other assets.
|
| September 30, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Real estate assets owned |
| $ | 281,200 |
|
| $ | 734,727 |
|
Fixed assets, net |
|
| 83,849 |
|
|
| 109,938 |
|
Prepaid expenses and other assets |
|
| 288,250 |
|
|
| 203,738 |
|
|
| $ | 653,299 |
|
| $ | 1,048,403 |
|
4. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Financing agreement with Premium Assignment Corporation. Down payment of $19,000 was required upfront and equal installment payments of approximately $7,806 to be made over a 10 month period. Annualized interst is 5.09%. |
| $ | 62,445 |
|
| $ | - |
|
Promissory note issued to a financial institution, bearing interest at 8%, interest payable monthly, and principal payments due quarterly. Secured by all of the Company’s rights, title, interest, claims, and demands associated with certain condominium units held in LMF SPE #2, LLC and all cash held in LMF SPE #2, LLC. Accrued interest is due monthly beginning January 29, 2015. Under the amended debt agreement, principal payments recommence in July, 2017. Principal payments have not been paid as management is in the process of obtaining new financing as well as in discussions with the lender regarding alternative payment schedules. Note matures on April 30, 2018 and can be prepaid at any time without penalty. Principal balances for this promissory note were $4,540,274 and $4,540,274, respectively, as of September 30, 2017 and December 31, 2016. Unamortized debt issuance costs were $24,224 and $96,896, respectively, as of September 30, 2017 and December 31, 2016. |
|
| 4,516,050 |
|
|
| 4,443,378 |
|
Promissory note issued to a financial institution, bearing interest at 6% plus one month Libor, principal payments of $60,000 per month plus interest due through maturity on February 1, 2018. This loan is collateralized by all of the accounts receivable, contract rights, and lien rights arising from or relating to collection of Association payments made by the Company relating to certain accounts as well as all deposit accounts and cash of LMF October 2010 Fund, LLC. LM Funding, LLC and its members guaranteed this loan. Principal balances for this promissory note were $180,000 and $720,000, respectively, as of September 30, 2017 and December 31, 2016. Unamortized debt issuance costs were $1,250 and $2,500, respectively, as of September 30, 2017 and December 31, 2016. |
|
| 178,750 |
|
|
| 717,500 |
|
|
| $ | 4,757,245 |
|
| $ | 5,160,878 |
|
Minimum required principal payments on the Company’s debt as of September 30, 2017 are as follows:
Years Ending |
|
|
|
|
December 31, |
|
|
|
|
2017 |
| $ | 1,105,947 |
|
2018 |
|
| 3,676,772 |
|
|
|
| 4,782,719 |
|
Unamortized debt issue costs |
|
| (25,474 | ) |
|
| $ | 4,757,245 |
|
Under the amended debt agreement with Heartland Bank, principal payments recommenced in July 2017. See Note 5 below and Note 6. Subsequent events for further discussion.
5. MANAGEMENT’S PLANS
On August 27, 2014, the FASB issued ASU 2014-05, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires management to assess a Company’s ability to continue as a going concern within one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.
The Company has debt obligations arising within one year that if not refinanced will raise substantial doubt about the Company’s ability to continue as a going concern as defined by ASU 2014-05. Management has performed its assessment as required by ASU 2014-05 and has concluded that it is probable that its plans as discussed below will mitigate the conditions that raise substantial doubt.
The Company did not pay its quarterly principal payments to its senior lender due on or around July 1, 2017 and October 1, 2017 and is presently in discussion regarding alternative payment schedules. Presently the senior lender has to date not demanded payment or issued the Company any kind of letter regarding default. The Company has a history of refinancing debt and management is confident that it will be able to successfully refinance the current debt obligations and/or obtain new financing to pay off the existing debt obligations. Management is confident that it will be able to obtain new financing mainly due to the value of its collateral base, real estate owned properties that are unencumbered by a first mortgage, as well as the unsecured claims still owed to LMF and its clients. See Note. 6 Subsequent Events for further discussion regarding obtaining new financing. If management is not able to finalize a financing agreement, this will increase the likelihood of the Company’s inability to continue as a going concern. If the financing agreement is not completed in a timely manner, management has alternative plans in place that would assist with mitigating the risk of its inability to continue as a going concern. The Company has sufficient liquidity resources available for operations while management obtains a new financing agreement. Although the Company experienced significant operating losses in 2016 and through September 30, 2017, management believes that there have been positive financial trends in 2017. Management has realized significant expense reductions starting in September 2016 particularly within staff costs and payroll, as well as settlement costs with associations. Management also expects a significant reduction in legal expenses going forward as there has been a significant decrease in the number of outstanding claims against the Company compared to prior years. Management intends to undertake additional expense reduction measures until financing is finalized in order to preserve liquidity. In addition, Management has also implemented new sales programs that are resulting in increases in unit acquisitions. For the nine months ended September 30, 2017 and September 30, 2016 new unit acquisitions were 312 and 298, respectively. The Company has also acquired a large real estate base which management has elected to sell a portion of units to increase our liquidity. For the three months ended September 30, 2017, the Company sold six real estate properties for a net amount of approximately $369,000 which assisted with providing additional liquidity for operations. In October 2017, the Company sold one real estate property for a net of approximately $29,000. The Company currently owns six properties with an approximate value of $296,000 that it can sell as necessary. We expect to generate additional liquidity through the monetization of additional real estate as deemed necessary2023, and with additional debt financing actions. We expect these actions will be executed in alignment with the anticipated timing of our liquidity needs. We also continue to explore ways to unlock value across a range of assets, including exploring ways to maximizeAnnual Report on Form 10-K for the value of our unsecured claims.year ended December 31, 2022.
We believe that the actions discussed above mitigate the substantial doubt raised by our recent operating losses and refinancing needs and satisfy our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. The inability to obtain financing would raise substantial doubt about the Company’s ability to continue as a going concern. Additionally, a failure to generate additional liquidity could negatively impact our ability to acquire units.
6. SUBSEQUENT EVENTS
Management is in negotiations with several entities to provide financing to assist with the Company’s liquidity needs and debt obligations. Management expects to have a new financing agreement in place by the end of the year. The Company expects its current liquidity resources available for operations to be sufficient while management completes a new financing agreement.
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, limitation:
28
Except as required by law, we assume no duty to update or revise any forward-looking statements.
Overview
We are aLM Funding America, Inc. (“we”, “our”, “LMFA”, or the “Company”) currently has two lines of business: our recently commenced cryptocurrency mining business and our historical specialty finance companybusiness.
On September 15, 2021, we announced our plan to operate in the Bitcoin mining ecosystem, and subsequently commenced Bitcoin mining operations in late September 2022. This business operation deploys our computing power to mine Bitcoin and validate transactions on the Bitcoin network. We believe that providesdevelopments in Bitcoin mining have created an opportunity for us to deploy capital and conduct large-scale mining operations in the United States. We conduct this business through a wholly owned subsidiary, US Digital, which we formed in 2021 to develop and operate our cryptocurrency mining business.
With respect to our specialty finance business, the Company has historically engaged in the business of providing funding to nonprofit community associations primarily located in the stateState of Florida and, to a lesser extent, nonprofit community associations in the states of Washington, Colorado, and Illinois.Florida. We offer incorporated nonprofit community associations, which we refer to as “Associations,”“Associations”, a variety of financial products customized to each Association’s financial needs. Our original product offering consists of providing funding to Associations by purchasing their rights under delinquent accounts that are selected by the Associations arising from unpaid Association assessments. We provideHistorically, we provided funding against such delinquent accounts, which we refer to as “Accounts,”“Accounts”, in exchange for a portion of the proceeds collected by the Associations from the account debtors on the Accounts. More recently,In addition to our original product offering, we have started to engage in the business of purchasingalso purchase Accounts on varying terms tailored to suit each Association’s financial needs, including under our New Neighbor Guaranty program. We believe that revenues from the New Neighbor GuarantyGuaranty™ program as well as other similar products we may develop in the future, will comprise an increasingly larger piece of our business during future quarters. We intend to leverage these products to expand our business activities and grow both in and outside of the states in which we currently operate.corporate history.
Because of our role as a trusted advisor to our Association clients, we are exploring a potential product line which resembles a more traditional consulting model for Associations desirous of this relationship. Areas of our consultancy may include purchase money mortgage qualification consulting, accounts receivable management, reserve study recommendations, and property tax assessed value analysis. In the event we move forward with this new product line, we will seek to provide services and advice inside of our core competency of community association finance in an effort to drive demand for our financial products.
In our original product offering, we typically purchase an Association’s right to receive a portion of the proceeds collected from delinquent unit owners. Once under contract, we engage law firms, typically on behalf of our Association clients pursuant to a power of attorney, to perform collection work on delinquent unit accounts. Our law firms typically handle collection matters on a deferred billing basis whereby payment is received upon collection from the delinquent unit account debtors or at a predetermined contractual rate if amounts collected from delinquent unit account debtors are less than legal fees and costs incurred. We typically fund an amount less than or equal to the statutory “Super Lien Amount” an Association would recover at some point in the future based on the Association’s statutory lien priority. Upon collection of an Account, the law firm retained for the collection matter distributes proceeds pursuant to the terms of the agreement by and between the Association and us. Not all agreements are the same, but our typical payoff distribution will result in us first recovering amounts advanced to the Association, interest, late fees, and costs advanced, with legal fees kept by the retained law firm, and assessment amounts remitted to the Association client. In connection with our business, we have developed proprietary software for servicing Accounts, which we believe enables law firms to service Accounts efficiently and profitably.
Under the New Neighbor Guaranty program, an Association will generally assign substantially all of its outstanding receivables and accruals on its delinquent units to us in exchange for payment by us of an amount less than or equal to the monthly assessment payment for each assigned delinquent unit account. This simultaneously eliminates a substantial portion of the Association’s balance sheet bad debts and assists the Association in meeting its budget by both guaranteeing periodic revenues and relieving the Association of its legal fee and cost burdens typically incurred to collect bad debts.
In our initial underwriting of an Association and its individual Accounts, we review the property values of the underlying units, the governing documents of the Association, the total number of delinquent receivables held by the Association, the legal proceedings instituted, and many other factors. While we are relatively certain of the actions necessary to produce a revenue event, we cannot predict when an individual delinquent unit account will have a revenue event or payoff.
Corporate History and Reorganization
The Company was originally organized in January 2008 as a Florida limited liability company under the name LM Funding, LLC. Historically,Prior to our initial public offering in 2015, all of our business was conducted through LM Funding, LLC and its subsidiaries (the “Predecessor”).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 an aggregate of 2,100,000 shares of the common stock of LMFA (the “Corporate Reorganization”).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 the LM Funding, LLC a wholly-owned subsidiary of LMFA. As used
The Company organized two new subsidiaries in this discussion and analysis, unless the context requires otherwise, references to “LMF,” “LM Funding,” “we,” “us,” “our,” “the Company,” “our company,” and similar references refer to (i) following the date of the Corporate Reorganization, LM Funding America, Inc., a Delaware corporation, and its consolidated subsidiaries, and (ii) prior to the date of the Corporate Reorganization, LM Funding,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 (and 100% subsidiaries), on September 10, 2021. US Digital has formed 100% owned subsidiaries to engage in business in various states in connection with its consolidated subsidiaries.Bitcoin mining business. The Company also from time to time organizes other subsidiaries to serve a specific purpose or hold a specific asset. LMF Acquisition Opportunities Inc. was merged with Seastar Medical Holding Corporation on October 28, 2022.
Cryptocurrency Mining Business
Bitcoin was introduced in 2008 with the goal of serving as a digital means of exchanging and storing value. Bitcoin is a form of digital currency that depends upon a consensus-based network and a public ledger called a “blockchain”, which contains a record of every Bitcoin transaction ever processed. The Bitcoin network is the first decentralized peer-to-peer payment network, powered by users participating in the consensus protocol, with no central authority or middlemen, that has wide network participation. The authenticity of each Bitcoin transaction is protected through digital signatures that correspond with addresses of users that send and receive Bitcoin. Users have full control over remitting Bitcoin from their own sending addresses. All transactions on the Bitcoin blockchain are transparent, allowing those running the appropriate software to confirm the validity of each transaction. To be recorded on the blockchain, each Bitcoin transaction is validated through a proof-of-work consensus method, which entails solving complex mathematical problems to validate transactions and post them on the blockchain. This process is called mining. Miners are rewarded with Bitcoins, both in the form of newly-created Bitcoins and transaction fees in Bitcoin, for successfully solving the mathematical problems and providing computing power to the network.
We obtain Bitcoin as a result of our mining operations, and we sell Bitcoin from time to time to support our operations and strategic growth. We plan to convert some of our Bitcoin to U.S. dollars. We may engage in regular trading of Bitcoin or engage in hedging activities related to our holding of Bitcoin. However, our decisions to hold or sell Bitcoin at any given time may be impacted by the Bitcoin market, which has been historically characterized by significant volatility. Currently, we do not use a formula or specific methodology to determine whether or when we will sell Bitcoin that we hold, or the number of Bitcoins we will sell. Rather, decisions to hold or sell Bitcoins are currently determined by management by monitoring the market in real time.
29
Factors such as access to computer processing capacity, interconnectivity, electricity cost, environmental factors (such as cooling capacity) and location play important roles in mining. In Bitcoin mining, “hashrate” is a measure of the computing and processing power and speed by which a mining computer mines and processes transactions on the Bitcoin network. We expect to continue increasing our computing power through 2023 and beyond as we expand the number of active mining machines. A company’s computing power measured in hashrate is generally considered to be one of the most important metrics for evaluating Bitcoin mining companies.
Results of Operations
Summarized Consolidated Statements of Operations |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ | 3,419,508 |
|
| $ | 187,780 |
|
| $ | 8,928,676 |
|
| $ | 613,317 |
|
Operating costs and expenses |
|
| 6,589,927 |
|
|
| 5,452,045 |
|
|
| 17,224,855 |
|
|
| 16,281,702 |
|
Operating loss |
|
| (3,170,419 | ) |
|
| (5,264,265 | ) |
|
| (8,296,179 | ) |
|
| (15,668,385 | ) |
Other income (loss) |
|
| (1,497,437 | ) |
|
| (146,211 | ) |
|
| (9,176,629 | ) |
|
| 10,806,795 |
|
Loss before income taxes |
|
| (4,667,856 | ) |
|
| (5,410,476 | ) |
|
| (17,472,808 | ) |
|
| (4,861,590 | ) |
Income tax expense |
|
| - |
|
|
| (1,311,678 | ) |
|
| - |
|
|
| (1,311,678 | ) |
Net loss |
|
| (4,667,856 | ) |
|
| (6,722,154 | ) |
|
| (17,472,808 | ) |
|
| (6,173,268 | ) |
Less: loss (income) attributable to non-controlling interest |
|
| 250,880 |
|
|
| 59,298 |
|
|
| 3,120,321 |
|
|
| (3,373,299 | ) |
Net loss attributable to LM Funding America Inc. |
| $ | (4,416,976 | ) |
| $ | (6,662,856 | ) |
| $ | (14,352,487 | ) |
| $ | (9,546,567 | ) |
The Three Months Ended September 30, 2023 compared with the Three Months Ended September 30, 2022
Revenues
During the three months ended September 30, 2023, total revenues increased by $3.2 million, to $3.4 million from $188 thousand for the three months ended September 30, 2022.
Digital mining revenue increased in the three months ended September 30, 2023 by $3.2 million to $3.3 million from $42 thousand for the three months ended September 30, 2022 due to the mining of 117.1 Bitcoin during the three months ended September 30, 2023 compared to 2.2 Bitcoin for the three months ended September 30, 2022 since Bitcoin mining operations did not begin until late September 2022.
Operating Expenses
During the three months ended September 30, 2023, operating expenses increased approximately $1.1 million to $6.6 million from $5.5 million for the three months ended September 30, 2022. The increase in operating expenses is attributed to various factors including: (i) an increase of $2.7 million for digital mining costs of revenues arising from an increased number of Bitcoin mining machines earning Bitcoins; (ii) a $1.5 million increase in depreciation and amortization arising from an increased number of Bitcoin mining machines placed in service; (iii) a $121 thousand increase in other expenses including selling, general and administrative costs arising from increased general business insurance and investor relations services; (iv) a $383 thousand increase in the impairment of mined Bitcoin and (v) a $70 thousand increase in compensation costs arising in part from merit and inflationary pay increases. These increases were partially offset by a $3.0 million decrease in stock compensation and option expense and a $296 thousand decrease in professional fees. The Company also recognized a realized gain on the sale of mined digital assets of $261 thousand for the three months ended September 30, 2023 compared to nil for the three months ended September 30, 2022.
Other Income (Expense)
The Company recognized an unrealized loss on securities of $778 thousand for the three months ended September 30, 2023 as compared to an unrealized loss of $194 thousand for the three months ended September 30, 2022 from the revaluation of Seastar's (formerly LMAO’s) common stock and private placement warrants.
The Company recognized $10 thousand on the sale of Bitmain coupons received from the purchase of Bitcoin mining equipment for the three months ended September 30, 2023 compared to nil for the three months ended September 30, 2022.
30
The Company recognized an impairment of nil and $26 thousand for the three months ended September 30, 2023 and 2022, respectively, from the impairment of purchased digital assets. See Footnote 2.
The Company recognized an impairment of $750 thousand and nil for the three months ended September 30, 2023 and 2022, respectively, from the impairment of Symbiont assets. See Footnote 11.
The Company recognized a $22 thousand valuation allowance and nil for the three months ended September 30, 2023 and 2022, respectively, from the credit loss allowance for the SeaStar note receivable.
Income Tax Expense
During the three months ended September 30, 2023, the Company generated a $4.7 million net loss before income taxes and the Company increased its income tax valuation allowance by $1.4 million, which offset the Company’s incurred net income tax expense of $1.4 million which resulted in no income tax expense being recognized during this period. This net activity resulted in no recognized income tax expense for the three months ended September 30, 2023. During the three months ended September 30, 2022, the Company generated a $5.4 million net loss before income taxes. However, due to a change in estimate from the twelve months ended December 31, 2021 that resulted in a limitation on the use of its net operating loss carryforwards, the Company's income tax due was $1.3 million. The Company recognized a net income tax expense of $1.3 million for the three months ended September 30, 2022.
Net Loss
During the three months ended September 30, 2023, the net loss was $4.7 million as compared to net loss of $6.7 million for the three months ended September 30, 2022.
Net Loss Attributable to Non-Controlling Interest
The Company owns 69.5% of Sponsor. As such, there is an approximate $251 thousand net loss for the three months ended September 30, 2023 attributable to the Non-Controlling Interest as compared to a $59 thousand net loss for the three months ended September 30, 2022.
Net Loss Attributable to LM Funding America, Inc.
During the three months ended September 30, 2023, the net loss was approximately $4.4 million as compared to net loss of $6.7 million for the three months ended September 30, 2022.
The Nine Months Ended September 30, 20172023 compared with the Nine Months Ended September 30, 20162022
Revenues
During the nine months ended September 30, 2017,2023, total revenues decreasedincreased by $0.98approximately $8.3 million, or 24.4%, to $3.04$8.9 million from $4.02 million in$613 thousand for the nine months ended September 30, 2016. There was a decrease2022.
Digital mining revenue increased in payoffs of approximately 27.3% as the Company recorded approximately 579 payoff occurrences for the nine monthsMonths ended September 30,, 2017 compared with 796 payoff occurrences 2023 by $8.3 million to $8.4 million from $42 thousand for the nine months ended September 30, 2016. “Payoffs” consist of recovery of the entire legally collectible portion, or a settlement thereof, of our principal investment, accrued interest, and late fees owed to us from the proceeds of the Accounts collected by the Associations in accordance with our contracts with Associations. We believe the decrease in payoff occurrences is attributed to a change in the overall real estate markets where the Company operates. We believe the year over year decrease in the number of foreclosures in the Florida market has affected the number of payoff occurrences we experienced in 2016 and has continued into 2017. The decrease in revenue is also attributed to a decrease in revenue per unit. The average revenue per unit per the Statement of Operations, excluding rental revenue decreased to $4,400 for the nine months ended September 30, 2017 compared with $4,800 for the nine months ended September 30, 2016.
We saw an increase in rental revenue in the nine months ended September 30, 20172022 due to the mining of $0.27 million315.4 Bitcoin during the nine Months ended September 30, 2023 as compared to $0.502.2 Bitcoin for the nine months ended September 30, 2022.
Operating Expenses
During the nine months ended September 30, 2023, operating expenses increased approximately $943 thousand to $17.2 million from $0.23$16.3 million for the nine months ended September 30, 2016. This was due to a continued emphasis to2022. The increase our rental base.
Operating Expenses
During the nine months ended September 30, 2017,in operating expenses decreased $1.82is attributed to various factors including: (i) an increase of $6.7 million or 28.2%for digital mining costs of revenues arising from an increased number of Bitcoin mining machines earning Bitcoins; (ii), to $4.63a $3.4 million increase in depreciation and amortization arising from $6.45an increased number of Bitcoin mining machines placed in service; (iii), a $752 thousand increase in other operating costs and selling, general and administrative expenses arising from increased general business insurance and investor relations services; (iv), a $821 thousand increase in the impairment of mined Bitcoin and (v) a $266 thousand increase in compensation costs arising in part from merit and inflationary pay increases. These increases were offset by a $8.4 million decrease in stock compensation and option expense and a $1.3 million decrease in professional fees. The Company also recognized a realized gain on the sale of mined digital assets of $1.3 million for the nine months ended September 30, 2016. The decrease in operating expenses can be attributed2023 compared to various factors, including the Company’s cost savings initiative, which was implemented beginning on October 1, 2016. There were significant savings within payroll, professional fees and settlements with associations. The Company also experienced a decrease in legal fees related to ongoing litigation cases listed within Item 1. Legal Proceedings of Part II of this report. Legal fees, excluding fees from the BLG service agreement,nil for the nine months ended September 30, 2017 were approximately $383,000 compared with approximately $741,0002022.
Other Income (Expense)
The Company recognized no realized gain or loss on marketable securities for the nine months ended September 30, 2016. In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using our network of third party law firms, against debtors. In addition, debtors occasionally initiate litigation against us. The settlement costs of these lawsuits decreased by approximately $346,0002023 as compared to approximately $257,000 compared with approximately $603,000a $350 thousand loss for the nine months ended September 30, 2016.2022.
These savings were partially offset with the new service agreement with BLG which resulted in an additional expense31
The Company recognized a realized gain of approximately $680,000. See Note 3. Due From Related Partynil and $288 thousand for further discussion regarding the service agreements with BLG.
Interest Expense
During the nine months ended September 30, 2017, interest expense decreased $0.08 million, or 17.4%, to $0.38 million2023 and 2022, respectively, from $0.46the conversion of the Borqs convertible debt securities.
The Company recognized an unrealized loss on securities of $10.3 million for the nine months ended September 30, 2016. The overall decrease in interest expense is due2023 as compared to the balancesan unrealized gain of the debt decreasing as a result of the principal payments being made throughout the year. This trend should continue as we continue to repay the principal balances of the Company loans. In addition, the amortization of debt issuance costs is to be reported as interest expense under ASU 2015-03 (ASC 835-30-45-3), which is included in the interest expense amount listed above. During the nine months ended September 30, 2017 and 2016, the amortization of debt issuance costs was $73,922 and $73,922, respectively.
Net Loss
During the nine months ended September 30, 2017, net loss increased $4.05 million to ($5.90 million) from ($1.85 million) for the nine months ended September 30, 2016. The cost savings listed above were offset by a one-time contingent loss expense recorded in the second quarter of 2017 and the deferred tax asset valuation allowance recorded in the third quarter of 2017. The Company expects the cost savings initiative described above to positively impact results for future periods.
Liquidity and Capital Resources
General
As of September 30, 2017, we had cash and cash equivalents of $0.6 million compared with $2.3 million at December 31, 2016 and $3.6 million at September 30, 2016. This decrease was primarily driven by operating losses recorded in 2016 through the first three quarters of 2017. Cash from operations and financing activities decreased by $1.72 million and $0.57 million, respectively, for the nine months ended September 30, 2017. Cash from investing activities increased by $0.63$11.0 million for the nine months ended September 30, 2017.2022 from the revaluation of Seastar's (formerly LMAO’s) common stock and private placement warrants.
The Company recognized $639 thousand on the sale of Bitmain coupons received from the purchase of Bitcoin mining equipment for the nine months ended September 30, 2023 compared to nil for the nine months ended September 30, 2022.
The Company recognized an impairment of nil and $404 thousand for the nine months ended September 30, 2023 and 2022, respectively, from the impairment of purchased digital assets. See Footnote 2.
The Company recognized a $22 thousand valuation allowance and nil for the nine months ended September 30, 2023 and 2022, respectively, from the credit loss allowance for the SeaStar note receivable.
The Company recognized a reversal of a valuation allowance of $1.0 million and nil for the nine months ended September 30, 2023 and 2022, respectively, from the revaluation of the Symbiont note receivable and subsequent acquisition of the Symbiont assets. The Company also recognized an impairment of $750 thousand and nil for the nine months ended September 30, 2023 and 2022, respectively, from the impairment of Symbiont assets. See Footnote 11.
Income Tax Expense
During the nine months ended September 30, 2023, the Company generated a $17.5 million net loss before income taxes and the Company increased its income tax valuation allowance by $2.1 million, which offset the Company’s incurred net income tax expense of $2.1 million which resulted in no income tax expense being recognized during this period. This net activity resulted in no recognized income tax expense for the nine months ended September 30, 2023. During the nine months ended September 30, 2022, the Company generated a $4.9 million net loss before income taxes. However, due to a change in estimate from the twelve months ended December 31, 2021 that resulted in a limitation on the use of its net operating loss carryforwards, the Company'ss income tax due was $1.3 million. The Company recognized a net income tax expense of $1.3 million for the three months ended September 30, 2022.
Net Loss
During the nine months ended September 30, 2023, the net loss was $17.5 million as compared to a net loss of $6.2 million for the nine months ended September 30, 2022.
Net Loss Attributable to Non-Controlling Interest
The Company owns 69.5% of Sponsor. As such, there is $3.1 million net loss for the nine months ended September 30, 2023 attributable to the Non-Controlling Interest as compared to $3.4 million net income for the nine months ended September 30, 2022.
Net Loss Attributable to LM Funding America, Inc.
During the nine months ended September 30, 2023, the net loss was $14.4 million as compared to a net loss of $9.5 million for the nine months ended September 30, 2022.
Liquidity and Capital Resources
General
We have recurring losses from operations. Our primary sources of liquidity are our cash and cash equivalents, Bitcoin generated from our digital mining operations, and cash from our note receivables. At September 30, 2023, we had cash, cash equivalents and BTC of $2.7 million compared to cash, cash equivalents and BTC of $5.1 million at December 31, 2022. As of September 30, 2023, we had working capital of $4.5 million reflecting a decrease of $3.8 million since December 31, 2022. Cash management continues to be a top priority. We expect to incur negative operating cash flows as we work to increase our digital mining revenue and maintain operational efficiencies.
32
Our working capital needs may increase in the future as we continue to expand and enhance our operations. Our ability to raise additional funds for working capital through equity or debt financings or other sources may depend on the financial success of our then current business and successful implementation of our key strategic initiatives, financial, economic and market conditions and other factors, some of which are beyond our control. No assurance can be given that we will be successful in raising the required capital at a reasonable cost and at the required times, or at all. Further equity financings may have a dilutive effect on shareholders and any debt financing, if available, may require restrictions to be placed on our future financing and operating activities. If we require additional capital and are unsuccessful in raising that capital, we may not be able to continue our business operations in the cryptocurrency mining industry which could adversely impact our business, financial condition and results of operations.
As of September 30, 2023 and December 31, 2022, our liquidity was comprised of:
|
| September 30, 2023 |
|
|
| December 31, 2022 |
| ||
Cash and cash equivalents | $ |
| 469,007 |
|
| $ |
| 4,238,006 |
|
Bitcoin |
|
| 2,256,500 |
|
|
|
| 888,026 |
|
Marketable securities |
|
| 198,094 |
|
|
|
| 4,290 |
|
End of Period | $ |
| 2,923,601 |
|
| $ |
| 5,130,322 |
|
|
|
|
|
|
|
|
|
The Company's Bitcoin balance as of September 30, 2023, and December 31, 2022, and September 31, 2022 was as follows:
| September 30, 2023 |
| December 31, 2022 |
| September 30, 2022 |
| |||
|
|
|
|
|
|
| |||
Bitcoin Balance |
| 90.1 |
|
| 54.9 |
|
| 33.2 |
|
The Company's Bitcoin activity during the nine months ended September 30, 2023 and 2022 was as follows:
| September 30, 2023 |
|
| September 30, 2022 |
| ||
Beginning of Year |
| 54.9 |
|
|
| - |
|
Production of Bitcoin |
| 315.4 |
|
|
| 2.2 |
|
Purchase of Bitcoin |
| 2.0 |
|
|
| 31.0 |
|
Sale of Bitcoin |
| (282.0 | ) |
|
| - |
|
Fees |
| (0.2 | ) |
|
| - |
|
End of Period |
| 90.1 |
|
|
| 33.2 |
|
The Company's cash flow summary for the nine months ended September 30, 2023 and 2022 are as follows:
| Nine Months Ended September 30, |
| ||||||
| 2023 |
| 2022 |
| ||||
Cash Flows used in Operating Activities |
| $ | (2,609,712 | ) |
| $ | (1,680,547 | ) |
Cash Flows used in Investing Activities |
|
| (640,170 | ) |
|
| (20,588,739 | ) |
Cash Flows (used in) provided by Financing Activities |
|
| (519,117 | ) |
|
| (114,688 | ) |
Net Decrease in Cash |
|
| (3,768,999 | ) |
|
| (22,383,974 | ) |
Cash - Beginning of Year |
|
| 4,238,006 |
|
|
| 32,559,185 |
|
Cash - End of Period |
| $ | 469,007 |
|
| $ | 10,175,211 |
|
The Company received approximately $818 thousand from the SeaStar loan receivable in October 2023.
Contractual Obligations
The Company has digital mining hosting contracts that expire between May 2024 and December 2024. These contracts currently require total monthly payments of approximately $700 thousand to $800 thousand monthly.
Cash from Operations
Net cash used inby operations was ($1.72)$2.6 million during the nine months ended September 30, 20172023 compared with ($2.65)net cash used in operations of $1.7 million during the nine months ended September 30, 2016.2022. This change in cash used in operating activities was primarily driven by athe difference between Bitcoin mining revenue received in noncash consideration (i.e. Bitcoin) as compared to the amount of mined Bitcoin liquidated to support operations during the nine months ended September 30, 2023 plus in part to an increase in the net loss (before income taxes)arising from increased professional fees.
Cash from Investing Activities
For the nine months ended September 30, 2023 net cash used in investing activities was $0.6 million as compared to net cash used in investing activities of approximately $2.44$20.6 million for the nine months ended September 30, 20172022. For the nine months ended September 30, 2023, the Company received net payments of approximately $1.7 million from SeaStar Medical (formerly LMAO) related to the payment of outstanding notes receivable while investing $1.9 million for capital expenditures including Bitcoin mining equipment. For the nine
33
months ended September 30, 2022 the Company invested $16.5 million in capital expenditures including Bitcoin mining equipment and $1 million in digital assets and loaned $3.1 million to SeaStar Medical (formerly LMAO).
Cash from Financing Activities
Net cash used in financing activities was $0.5 million for the nine months ended September 30, 2023 compared with a net lossto $0.1 million used in financing activities for the nine months ended September 30, 2022. During the nine months ended September 30, 2023 and 2022, the Company repaid debt of $2.90$0.5 million and $0.2 million, respectively.
Stockholders’ Equity
The Company had no cash infusion from equity financing transactions during the nine months ended September 30, 2016.2023 or 2022.
Cash from Investing ActivitiesDebt
For the nine months ended September 30, 2017 our finance receivables fell by $0.31 million. This was due to the Company collecting more Accounts than were invested in for the period. Our primary business relies on our ability to invest in Accounts, and during the nine months ended September 30, 2017, the number of active Accounts has decreased compared with the nine months ended September 30, 2016. This balance has been in consistent decline since 2012. This balance is very susceptible to housing market fluctuations, but as we believe our current market penetration is less than 1% in Florida, we believe there is still a large, untapped market for our product offerings to grow in Florida and elsewhere. Regarding our original product, for the nine months ended September 30, 2017, we acquired 264 Accounts (52 HOA Accounts and 212 COA Accounts) for approximately $196,000 compared with 246 Accounts (146 HOA Accounts and 104 COA Accounts) for approximately $109,000 for the nine months ended September 30, 2016. Generally, HOA Accounts under the original product do not have any associated initial cash outlays as we choose to limit our funding amounts for those units. Regarding our New Neighbor Guaranty product, for the nine months ended September 30, 2017, we made a total investment of $155,000 compared with a total investment of $376,000 in the nine months ended September 30, 2016.
Cash from Financing Activities
At September 30, 2017, the principal indebtedness of the Company was $4.8 million compared with $5.8 million at September 30, 2016. On March 31, 2017, LM Funding executed an amendment, effective as of March 15, 2017, to its note payable with Heartland Bank, see Note 4. Long-Term Debt and Other Financing Arrangements. This amendment deferred all principal payments from January 1, 2017 through July 1, 2017. During this period, the note was paid on an interest only basis. In July 2017, scheduled principal payments recommenced but were not paid by the Company pending the anticipated refinancing discussed at Note 6. This amendment extended the term of the loan to April 30, 2018 with a principal payment due on that date of $3,173,172.
Debt of the Company consisted of the following at September 30, 20172023 and September 30, 2016:December 31, 2022:
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||
Financing agreement with Premium Assignment Corporation. Down payment of $19,000 was required upfront and equal installment payments of approximately $7,806 to be made over a 10 month period. Annualized interst is 5.09%. |
| $ | 62,445 |
|
| $ | - |
|
Promissory note issued to a financial institution, bearing interest at 8%, interest payable monthly, and principal payments due quarterly. Secured by all of the Company’s rights, title, interest, claims, and demands associated with certain condominium units held in LMF SPE #2, LLC and all cash held in LMF SPE #2, LLC. Accrued interest is due monthly beginning January 29, 2015. Under the amended debt agreement, principal payments recommence in July, 2017. Principal payments have not been paid as management is in the process of obtaining new financing as well as in discussions with the lender regarding alternative payment schedules. Note matures on April 30, 2018 and can be prepaid at any time without penalty. Principal balances for this promissory note were $4,540,274 and $4,978,280, respectively, as of September 30, 2017 and 2016. Unamortized debt issuance costs were $24,224 and $121,120, respectively, as of September 30, 2017 and 2016. |
|
| 4,516,050 |
|
|
| 4,857,160 |
|
Promissory note issued to a financial institution, bearing interest at 6% plus one month Libor, principal payments of $60,000 per month plus interest due through maturity on February 1, 2018. This loan is collateralized by all of the accounts receivable, contract rights, and lien rights arising from or relating to collection of Association payments made by the Company relating to certain accounts as well as all deposit accounts and cash of LMF October 2010 Fund, LLC. LM Funding, LLC and its members guaranteed this loan. Principal balances for this promissory note were $180,000 and $900,000, respectively, as of September 30, 2017 and 2016. Unamortized debt issuance costs were $1,250 and $2,917 respectively, as of September 30, 2017 and 2016. |
|
| 178,750 |
|
|
| 897,083 |
|
|
| $ | 4,757,245 |
|
| $ | 5,754,243 |
|
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Financing agreement with Imperial PFS that is unsecured. Down payment of $78,000 was required upfront and equal installment payments of $45,672 to be made over a 10 month period. The note matured on August 1, 2023. Annualized interest is 7.35%. |
| $ | - |
|
| $ | 365,379 |
|
|
|
|
|
|
|
| ||
Financing agreement with Imperial PFS that is unsecured. Down payment of $15,000 was required upfront and equal installment payments of $13,799 to be made over an 8 month period. The note matures on August 1, 2023. Annualized interest is 7.35%. |
| - |
|
|
| 110,396 |
| |
|
|
|
|
|
|
| ||
Financing agreement with Imperial PFS that is unsecured. Down payment of $119,646 was required upfront and equal installment payments of $15,145 to be made over a 3 month period. The note matures on November 19, 2023. Annualized interest is 12.3%. |
| 32,918 |
|
|
| - |
| |
|
|
|
|
|
|
| ||
Financing agreement with Imperial PFS that is unsecured. Down payment of $3,435 was required upfront and equal installment payments of $3,657 to be made over an 11 month period. The note matures on July 1, 2024. Annualized interest is 12.05%. |
|
| 30,290 |
|
|
| - |
|
|
|
|
|
|
|
| ||
|
| $ | 63,208 |
|
| $ | 475,775 |
|
AsThe following table presents maturities of September 30, 2017, minimum required principal paymentsdebt on notes payable are $1,105,947 in 2017, and $3,676,772 in 2018. Under the amended debt agreement with Heartland Bank, principal payments recommenced in July 2017. These debt obligations, if not refinanced, will raise substantial doubt about the Company’s ability to continue as a going concern. See Note 5. Management’s Plans and Note 6. Subsequent events for further discussion.
In addition, the Company’s related party balance has remained relatively flat at $1.66 millionan undiscounted basis as of September 30, 2017 compared with $1.66 million as of December 31, 2016. The Company expects this balance to decrease in the future in direct correlation with our expectation for payouts to increase. The revision of the BLG service agreement will also assist with the repayment of this related party balance. See Note 2. Due From Related Party Related Party Transactions for further discussion on the Company’s related party receivable balance and new BLG service agreement.2023:
Maturity |
| Amount |
| |
2023 (excluding the nine months ended September 30, 2023) |
| $ | 49,093 |
|
2024 |
| $ | 14,115 |
|
| $ | 63,208 |
| |
|
|
|
|
Non-GAAP Financial Measures
Results of Operations
The Three Months Ended September 30, 2017 compared with the Three Months Ended September 30, 2016
Revenues
During the three months ended September 30, 2017, total revenues increased by $0.03 million, or 3.0%, to $1.04 million from $1.01 million in the three months ended September 30, 2016. Payoffs were relatively flat as there was a decrease of approximately 1.4% as the Company recorded approximately 214 payoff occurrences for the three months ended September 30, 2017 compared with 217 payoff occurrences for the three months ended September 30, 2016. “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 AssociationsOur reported results are presented in accordance with our contracts with Associations.U.S. generally accepted accounting principles (“GAAP”). We also disclose Earnings before Interest, Tax, Depreciation and Amortization ("EBITDA") and Core Earnings before Interest, Tax, Depreciation and Amortization ("Core EBITDA") which adjusts for unrealized loss on investment and equity securities, unrealized gain on convertible debt securities, impairment loss on mined digital assets, impairment of intangible long-lived assets gain on adjustment of note receivable allowance, and stock compensation expense and option expense, all of which are non-GAAP financial measures. We believe these non-GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the consistencyoperating performance of Bitcoin miners.
The following tables reconcile net loss, which we believe is the most comparable GAAP measure, to EBITDA and Core EBITDA:
34
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | (4,667,856 | ) |
| $ | (6,722,154 | ) |
| $ | (17,472,808 | ) |
| $ | (6,173,268 | ) |
Income tax expense |
|
| - |
|
|
| 1,311,678 |
|
|
| - |
|
|
| 1,311,678 |
|
Interest expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Depreciation and amortization |
|
| 1,516,873 |
|
|
| 38,617 |
|
|
| 3,487,866 |
|
|
| 43,718 |
|
Income (loss) before interest, taxes & depreciation |
| $ | (3,150,983 | ) |
| $ | (5,371,859 | ) |
| $ | (13,984,942 | ) |
| $ | (4,817,872 | ) |
Unrealized loss (gain) on investment and equity securities |
|
| 778,078 |
|
|
| 194,174 |
|
|
| 10,317,613 |
|
|
| (11,034,828 | ) |
Realized gain on convertible debt securities |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (287,778 | ) |
Impairment loss on mined digital assets |
|
| 383,497 |
|
|
| 870 |
|
|
| 822,650 |
|
|
| 870 |
|
Impairment loss on Symbiont assets |
|
| 750,678 |
|
|
| - |
|
|
| 750,678 |
|
|
| - |
|
Gain on adjustment of note receivable allowance |
|
| - |
|
|
| - |
|
|
| (1,052,543 | ) |
|
| - |
|
Stock compensation and option expense |
|
| 621,827 |
|
|
| 3,648,239 |
|
|
| 2,528,852 |
|
|
| 10,944,717 |
|
Core income (loss) before interest, taxes & depreciation |
| $ | (616,903 | ) |
| $ | (1,528,576 | ) |
| $ | (617,692 | ) |
| $ | (5,194,891 | ) |
Critical Accounting Estimates
Our financial statements are prepared in payoff occurrences is attributedaccordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a stabilizationnumber of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure or inclusion of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, the evaluation of the impairment of fixed assets and income tax provisions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We consider our critical accounting policies to be those related to long-lived assets. We do not consider any of our estimates to be critical. Refer to Note 1 - Significant Accounting Policies included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for a complete discussion of the significant accounting policies and methods used in the overall real estate markets where the Company operates. We believe the year-over-year decrease in the number of foreclosures in the Florida market has affected the number of payoff occurrences we experienced in 2016 and has continued into 2017. The evenness in revenue is also attributed to a symmetry in revenue per unit. The average revenue
per unit per the Statement of Operations, excluding rental revenue was relatively consistent at $4,100 for the three months ended September 30, 2017 compared with $4,100 for the three months ended September 30, 2016.
We saw an increase in rental revenue in the three months ended September 30, 2017 of $0.05 million to $0.16 million from $0.11 million for the three months ended September 30, 2016. This was due to a continued emphasis to increase our rental base.
Operating Expenses
During the three months ended September 30, 2017, operating expenses decreased $0.82 million, or 35.5%, to $1.49 million from $2.31 million for the three months ended September 30, 2016. The decrease in operating expenses can be attributed to various factors, including the Company’s cost savings initiative, which was implemented beginning on October 1, 2016. There were significant savings within payroll, professional fees and settlements with associations. The Company also experienced a decrease in legal fees related to ongoing litigation cases listed within Item 1. Legal Proceedings of Part II of this report. For the three months ended September 30, 2017, legal fees excluding fees from the BLG service agreement were approximately $88,000 compared with approximately $234,000 for the three months ended September 30, 2016. In the ordinary coursepreparation of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using our network of third-party law firms, against debtors. In addition, debtors occasionally initiate litigation against us. The settlement costs of these lawsuits decreased by approximately $130,000 to approximately $101,000 compared with approximately $231,000 for the three months ended September 30, 2016.financial statements.
These savings were partially offset with the new service agreement with Business Law Group (BLG) which resulted in an additional expense of approximately $235,000. See Note 3. Due From Related Party for further discussion regarding the service agreements with BLG.
Interest Expense
During the three months ended September 30, 2017, interest expense decreased $0.02 million, or 14.3%, to $0.12 million from $0.14 million for the three months ended September 30, 2016. The overall decrease in interest expense is due to the balances of the debt decreasing due to the principal payments being made throughout the year. This trend should continue as we continue to repay the principal balances of the Company loans. In addition, the amortization of debt issuance costs is to be reported as interest expense under ASU 2015-03 (ASC 835-30-45-3), which is included in the interest expense amount listed above. During the three months ended September 30, 2017 and 2016, the amortization of debt issuance costs was $24,641 and $24,640, respectively.
Net Loss
During the three months ended September 30, 2017, net loss increased $3.78 million to ($4.70 million) from ($0.92 million) for the three months ended September 30, 2016. The cost savings listed above were partially offset by a one-time contingent loss expense recorded in the second quarter of 2017 and the deferred tax asset valuation allowance recorded in the third quarter of 2017. The Company expects the cost savings initiative described above to positively impact results for future periods.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
WeAs a smaller reporting company, we are not required to make disclosures under this item.
Evaluation of Disclosure Controls and Procedures
We maintain(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 that are designedpursuant to ensure that information required to be disclosed in our reports filed pursuant toRule 13a-15 under the Securities Exchange Act of 1934, is recorded, processed, summarized,as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and reported withinevaluating the time periods specified indisclosure 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 SEC’s rules, regulations,desired control objectives. In addition, the design of disclosure controls and related forms,procedures must reflect the fact that there are resource constraints and that such informationmanagement is accumulatedrequired to apply its judgment in evaluating the benefits of possible controls and communicatedprocedures relative to their costs.
Management, with the participation of our principal executive officerChief Executive Officer and principal financial officer,Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as appropriate,of September 30, 2023. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of September 30, 2023 due to allow timely decisions regarding required disclosure.
Changesthe following material weakness in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter endedexisted as of December 31, 2022 and that continued to exist through September 30, 2017 that2023:
The Company did not effectively segregate certain accounting duties nor have materially affected,a proper multi-level review process due to the small size of its accounting staff.
35
A material weakness is a deficiency, or are reasonably likely to materially affect, oura combination of control deficiencies, in internal control over financial reporting.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.
Part(b) Changes in internal control over financial reporting.
The Company implemented new controls that utilized additional accounting and finance staff to allow for effective segregation of certain accounting duties and provide for a proper multi-level review process.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than the lawsuits described below, we are not currently a party to material litigation proceedings. However, we frequently become party to litigationset forth under Note 5 "Commitments and Contingencies" included in the ordinary coursePart I, Item 1 of business, including either the prosecution or defense of claims arising from contractsthis Quarterly Report on Form 10-Q and are incorporated herein by and between us and client Associations. Regardlessreference.
Item 1A. Risk Factors
As of the outcome, litigation can have andate of this Quarterly Report on Form 10-Q, we supplement the risk factors in our Annual Report on Form 10-K that was filed with the SEC on September 30, 2023 with the following risk factors. Any of these factors disclosed in our Annual Report on Form 10-K or herein could result in a significant or material adverse impacteffect on our results of operations or financial condition. Additional risk factors not presently known to us becauseor that we currently deem immaterial may also impair our business or results of prosecution, defense, and settlement costs, diversionoperations. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.
Risks Relating to Our Securities
Our common shares could be delisted from the Nasdaq Capital Market.
Nasdaq’s listing standards provide that a company may be delisted if the bid price of management resources and other factors.
Solaris at Brickell Bay Condominium Association, Inc. v. LM Funding,its stock drops below $1.00 for a period of 30 consecutive business days. On April 13, 2023, we received a Notification Letter from The Nasdaq Stock Market LLC, Case No: 2014-20043-C, was brought before (“Nasdaq”) notifying the Circuit Court of the Eleventh Judicial Circuit, Miami-Dade Civil Division on July 31, 2014. On August 4, 2017, an order by the court was entered on Plaintiff’s Motion for Preliminary Approval of Class Action Settlement Agreement. The motion of the Plaintiff, Solaris at Brickell Bay Condominium Association, Inc., individually and on behalf of the certified plaintiff class (“Plaintiffs”), for approval of the Class Action Settlement Agreement with Defendant LM Funding, LLC was granted. LMF, despite its beliefCompany that it iswas not liable forin compliance with the claims asserted and has good defenses thereto, has nevertheless agreed to enter into this Agreement in order to: (1) avoid any further expense, inconvenience, and distraction of burdensome and protracted litigation and its consequential negative financial effects to LMF’s operations; (2) obtain the releases, orders, and final judgment contemplated by this Agreement; and (3) put to rest and terminate with finality all claims that have been or could have been asserted against LMF by the Class arising from the facts alleged in the Lawsuit and allow LMF to continue its operational model helping associations. In the Court of the Eleventh Judicial Circuit in and for Miami-Dade County, pursuant to the agreement subsequently reached between counsel, all required actions and deadlinesminimum bid price requirements set forth in NASDAQ Listing Rule 5550(a)(2) for continued listing on the Parties’ Class Action Settlement Agreement, approvedNasdaq Capital Market, due to the bid price of by the Court in its Order Granting Preliminary Approval of same, dated August 3, 2017, are currently stayed and again extendedCompany’s common stock closing below the minimum $1 per share for the thirty (30) moreconsecutive business days effective October 18, 2017. On October 5, a continuation of the abatement was granted for sixty (60) days fromprior to the date of the orderNotification Letter. In accordance with listing rules, the Company was afforded 180 days, or until October 11, 2023, to regain compliance.
The Company was unable to regain compliance with the bid price requirement by October 11, 2023. However, on October 12, 2023, the Company received a notice from Nasdaq granting the Company an additional 180 calendar days, or until April 8, 2024, to regain compliance with the minimum $1.00 bid price per share requirement for continued listing on the Nasdaq Capital Market. Nasdaq determined that the Company is eligible for the second compliance period due to the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Nasdaq Capital Market, with the exception of the bid price requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.
To regain compliance during the additional time period, the closing bid price of the Company’s security must be at least $1.00 per share for a minimum of ten (10) consecutive business days. If the Company does not regain compliance within the allotted additional 180-day compliance period, the Company’s common stock would be subject to delisting unless it requested a hearing before an independent Nasdaq Hearings Panel. A request for a hearing would stay any suspension or delisting action pending the hearing and any additional extension period granted by the Panel.
The Company intends to monitor the closing bid price of the Company’s common stock and consider its available options to resolve the non-compliance with the minimum bid price requirement. The Company’s receipt of the notice does not affect the Company’s business, operations or reporting requirements with the Securities and Exchange Commission. However, there can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria.
If a suspension or delisting were to occur, there would be significantly less liquidity in the District Courtsuspended or delisted securities. In addition, our ability to raise additional necessary capital through equity or debt financing would be greatly impaired. Furthermore, with respect to any suspended or delisted common shares, we would expect decreases in investor demand, market making activity and information available concerning trading prices and volume. Additionally, fewer broker-dealers would be willing to execute trades with respect to such common shares. A suspension or delisting would likely decrease the attractiveness of Appealour common shares to investors and cause the trading volume of Florida Third District.
There have been no material changes from the risk factors previously disclosedour common shares to decline, which could result in a further decline in the section entitled “Risk Factors” inmarket price of our Annual Report Form 10-K for the fiscal year ended December 31, 2016.common shares.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities.
None.
37
(b) Use of Proceeds.
On October 23, 2015, we closed the initial public offering of our units, each consisting of one share of common stock and one warrant to purchase one share of common stock. We issued and sold the minimum of 1,200,000 units at a public offering price of $10.00 per unit.None.
The offer and sale of up to 2,000,000 units in the offering was registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File No. 333-205232), which was declared effective by the SEC on October 21, 2015. Following the sale of the shares in connection with the closing of our initial public offering, the offering was terminated. International Assets Advisory, LLC acted as the lead placement agent in the offering.
We received aggregate gross proceeds from the offering of $12 million, or aggregate net proceeds of $9.6 million after deducting placement agent fees of $0.9 million and related offering costs of $1.5 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates.
As of September 30, 2017, we have used $9.0 million of the net proceeds, to repurchase a non-controlling interest ($0.25 million), repay a debt ($3.11 million), make interest payments ($0.89 million), fund our original product ($0.34 million), fund our New Neighbor Guaranty program ($0.71 million) and make real estate owned investments ($0.57 million). The remainder of the funds have been invested in accordance with our investment policy as well as used in normal operations of the Company.
(c) Repurchase of Securities.
None.
None.Item 3. Defaults Upon Senior Securities
None.
None.Item 4. Mine Safety Disclosures
None.
NoneItem 5. Other Information
None
38
Item 6. Exhibits
The following documents are filed as a part of this report or are incorporated herein by reference.
EXHIBIT NUMBER | DESCRIPTION | |
3.1 | ||
3.2 | ||
| ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
4.6 | ||
4.7 | ||
31.1* | Rule 13a – 14(a) Certification of the Principal Executive Officer | |
| Rule 13a – 14(a) Certification of the Principal Financial Officer | |
| Written Statement of the Principal Executive Officer, | |
32.2* | Written Statement of the Principal Financial Officer, Pursuant to 18 U.S.C. § 1350 | |
101.INS | Inline XBRL Instance | |
101.SCH | Inline XBRL Taxonomy Extension | |
101.CAL | Inline XBRL Taxonomy Extension Calculation | |
101.DEF | Inline XBRL Taxonomy Extension Definition | |
101.LAB | Inline XBRL Taxonomy Extension Label | |
101.PRE | Inline XBRL Taxonomy Extension Presentation | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
#Indicates a management contract or compensatory arrangement.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
LM FUNDING AMERICA, INC. | |||
Date: November 14, | By: | /s/ Bruce M. Rodgers | |
Bruce M. Rodgers | |||
Chief Executive Officer and Chairman of the Board | |||
(Principal Executive Officer) | |||
Date: November 14, | By: | /s/ | |
| |||
| |||
(Principal Accounting Officer) |
2440