UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2017March 31, 2022

OR

For the transition period from                  to                 

Commission file number 001-37605

LM FUNDING AMERICA, INC.

(Exact name of Registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

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):

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 million13,091,883 shares of Common Stock, par value $0.001 per share, outstanding as of November 14, 2017.May 9, 2022.

LM FUNDING AMERICA, INC.

TABLE OF CONTENTS

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PartPART I. FINANCIALFINANCIAL INFORMATION

LM FUNDING AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETSFunding America, Inc. and Subsidiaries Condensed Consolidated Balance Sheets

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

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LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (unaudited)

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

LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows

(unaudited)

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

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LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2022 and 2021

(unaudited)

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

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LM FUNDING AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

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LM FUNDING AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

LM FUNDING AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022

(Unaudited)(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 LM Funding, LLC and operates and controls all of its businesses and affairs.

LM Funding, LLC, a Florida limited liability company organized in January 2008 under the terms of an Operating Agreement dated effective January 8, 2008 as amended, had two2 members: BRR Holding, LLC and CGR 63, LLC. The members contributed their equity interest to LMFA prior to the closing of its initial public offering.

The Company iscreated 2 subsidiaries, LMFA Financing LLC on November 21, 2020 and LMFAO Sponsor LLC on October 29, 2020. LMFAO Sponsor LLC created a majority owned subsidiary LMF Acquisition Opportunities Inc. on October 29, 2020. The LM Funding America Inc. organized another subsidiary, US Digital Mining and Hosting Co., LLC., on September 10, 2021.

We are a specialty finance company that provides funding principally 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 almost exclusively locatedselected by the Associations arising from unpaid Association assessments. Historically, we provided funding against such delinquent accounts, which we refer to as “Accounts,” in Florida. The businessexchange for a portion of the Company is conducted pursuantproceeds collected by the Associations from the account debtors on the Accounts. In addition to relevant state statutes (the “Statutes”), principally Florida Statute 718.116. The Statutes provideour original product offering, we have started purchasing Accounts on varying terms tailored to suit each community association lien rightsAssociation’s financial needs, including under our New Neighbor Guaranty™ program.

During 2020, we began exploring other specialty finance business opportunities that are complementary to secureor that can leverage our historical business.

Specialty Finance Company

We purchase an Association’s right to receive a portion of the Association’s collected proceeds from owners that are not paying their assessments. After taking assignment of an Association’s right to receive a portion of the Association’s proceeds from the collection of delinquent assessments, we engage law firms to perform collection work on a deferred billing basis wherein the law firms receive payment upon collection from the account debtors or a predetermined contracted amount if payment from 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,connection with this line of business, we have developed proprietary software for servicing Accounts, which we believe enables law firms to service Accounts efficiently and profitably.

Under our New Neighbor Guaranty program, an Association will generally assign substantially all of its outstanding indebtedness and accruals on its delinquent units to us in exchange for payment by us of monthly dues on each delinquent unit. This simultaneously eliminates a substantial portion of the Association’s balance sheet bad debts and assists the Association to meet its budget by receiving guaranteed monthly payments on its delinquent units and relieving the Association from paying legal fees and costs to collect its bad debts. We believe that the combined features of the program enhance the value of the underlying real estate in an Association and the value of an Association’s delinquent receivables.

Because we acquire and collect on the delinquent receivables of Associations, the Account debtors are third parties about whom we have little or no information. Therefore, we cannot predict when any given Account will be paid off or how much it will yield. In assessing the risk of purchasing Accounts, we review the property values of the underlying units, the governing documents of the relevant Association, and the total number of delinquent receivables held by the Association.

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Specialty Finance Products

Original Product

Our original product relies upon Florida statutory provisions that effectively protect the principal amount invested by us in each Account. In particular, Section 718.116(1), Florida Statutes, makes purchasers and sellers of a unit in an Association jointly and severally liable for all past due assessments, interest, late fees, legal fees, and costs payable to the Association. As discussed above, the Florida Statutes grants to Associations a so-called “super lien”, which is a category of lien rights granted under the Statutes arethat is given a statutorily higher priority (a “Super Lien”) than all other lien holders excepttypes of liens other than property tax liens. The Company provides funding to associations for their delinquent assessments from property owners in exchange for an assignmentamount of the association’sAssociation’s priority over a first mortgage holder that takes title to a property through foreclosure (or deed in lieu), referred to as the Super Lien Amount, is limited to twelve months’ past due assessments or, if less, one percent (1.0%) of the original mortgage amount. Under our contracts with Associations for our original product, we pay Associations an amount up to the Super Lien Amount for the right to collect proceeds pursuant to the Statutes. The Company derives its revenuesreceive all collected interest and late fees on Accounts purchased from the proceeds of association collections.Associations.

The Statutes specify that the rate of interest an association (or its assignor) may charge on delinquent assessments is equal to the rate set forth in the association’s declaration or bylaws. In Florida if a rate is not specified, the statutory rate is equal to 18% but may not exceed the maximum rate allowed by law. Similarly, the Statutes in Florida also stipulate that administrative late fees cannot be charged on delinquent assessments unless so provided by the association’s declaration or bylaws and may not exceed the greater of $25 or 5% of each delinquent assessment.

The Statutes limitIn other states in which we have offered our original product, which are currently only in Washington, Colorado and Illinois, we rely on statutes that we believe are similar to the liabilityabove-described Florida statutes in relevant respects.

New Neighbor Guaranty

In 2012, we developed a new product, the New Neighbor Guaranty, wherein an Association assigns substantially all of its outstanding indebtedness and accruals on its delinquent units to us in exchange for payments in an amount equal to the regular ongoing monthly or quarterly assessments for delinquent units when those amounts would be due to the Association. We assume both the payment and collection obligations for these assigned Accounts under this product. This simultaneously eliminates an Association’s balance sheet bad debts and assists the Association to meet its budget by receiving guaranteed assessment payments on its delinquent units and relieving the Association from paying legal fees and costs to collect its bad debts. We believe that the combined features of the product enhance the value of the underlying real estate in an Association and the value of an Association’s delinquent receivables.

Before we implement the New Neighbor Guaranty program for an Association we are typically asked to conduct a review of its accounts receivable. After we have conducted the review, we inform the Association which Accounts we are willing to purchase and the terms of such purchase. Once we implement the New Neighbor Guaranty program, we begin making scheduled payments to the Association on the Accounts as if the Association had non-delinquent residents occupying the units underlying the Accounts. Our New Neighbor Guaranty contracts typically allow us to retain all collection proceeds on each Account other than special assessments and accelerated assessment balances. Thus, the Association foregoes the potential benefit of a larger future collection in exchange for the certainty of a steady stream of immediate payments on the Account.

Cryptocurrency Mining Business

On September 15, 2021, we announced that we plan to operate in the Bitcoin mining ecosystem. As of the date of this filing, we have not commenced operations. We aim to deploy the computing power that we will create to mine Bitcoin and validate transactions on the Bitcoin network. We believe that recent developments in Bitcoin mining have created an opportunity for us to deploy capital and conduct large-scale mining operations in the United States.  We have formed a new wholly owned subsidiary, US Digital Mining and Hosting Co, LLC, a Florida limited liability company (US Digital), to develop and operate our cryptocurrency mining business.

We have committed to purchasing an aggregate of 5,046 Bitcoin S19J Pro Antminer cryptocurrency mining machines for an aggregate purchase price of $31.6 million (the “Mining Machines”). We received 841 Mining Machines during the first mortgage holderhalf of May 2022. We anticipate receiving the remaining Mining Machines to be delivered in batches over an estimated delivery timeframe starting in June 2022 and continuing through October 2022.  The Bitmain Purchase Agreements required us to pay $7.9 million or 25% of the total purchase price as a non-refundable deposit for unpaid assessmentsthe Mining Machines within 7 days of the date of the signing of the respective Bitmain Purchase Agreements, and related chargesadditional 35% of the batch price at least 6 months prior to shipment of such batch, and fees (as set forth above)the remaining 40% of each batch price one month prior to the shipment of the batch.  

In October 2021, we also entered into a sale and purchase agreement (the “Uptime Purchase Agreement”) with Uptime Armory LLC (“Uptime”) pursuant to which US Digital agreed to purchase, and Uptime agreed to supply to US Digital, an aggregate of 18 modified 40-foot cargo containers (“POD5ive containers”) that will be designed to hold and operate 280 S19 Pro Antminers manufactured by Bitmain. The purchase price of the POD5ive containers totals $3.15 million of which $2.4 million or 75% was paid in 2021 as a non-refundable down payment and the remaining 25% is due within five business days after Uptime delivers a “notice of completion” of the equipment. On the same effective date, US Digital also entered into a hosting agreement with Uptime Hosting LLC to host the Company’s 18 POD5ive containers at a secure location and provide power, maintenance and other services specified in the contract for 6 cents per kilowatt with a term of one year. Under the hosting agreement we paid a deposit of $0.8 million in 2021 and will pay an additional deposit for each container three months prior to delivery at the hosting site of $44 thousand and a final deposit for each container one month prior to arrival at the hosting site of $44 thousand.

Reverse Stock Split

On May 11, 2020, our shareholders voted in favor of the approval of an amendment to our Certificate of Incorporation, in the event it is deemed advisable by our Board of title transferDirectors, to effect an additional reverse stock split of the Company’s issued and outstanding common stock at a ratio within the range of one-for-two (1:2) and one-for-ten (1:10), as determined by foreclosure or acceptancethe Board of deedDirectorsOn April 21, 2021, our Board of Directors approved a one-for-five reverse split of the Company’s common stock. As a result, on May 7, 2021, the Company effected a common share consolidation (“Reverse Stock Split”) by means of a one-for-five (1:5) reverse split of its outstanding common stock, which resulted in lieu of foreclosure. This liability is limiteda decrease in outstanding common stock to 5,414,296 shares.  The Reverse Stock Split became effective on May 7, 2021 and the Company’s common stock began trading on The Nasdaq Capital Market on a split-adjusted basis on May 7, 2021.  The Company has retroactively adjusted all share amounts and per share data herein to give effect 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”).Reverse Stock Split.

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 Mining Hosting Co., LLC; LMF SPE #2, LLC;LLC. LMFAO Sponsor 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 70.5% 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, 2017March 31, 2022 and for the threeThree Months ended March 31, 2022 and nine months ended September 30, 2017 and September 30, 2016,March 31, 2021, respectively are unaudited. In the opinion of management, the interim condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods. The accompanying condensed consolidated balance sheet as of December 31, 2016,2021, is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for fiscal the year ended December 31, 2016.2021.

Use

Reclassifications

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

Digital Assets, net

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 Estimatesand control over our digital assets and use third-party custodial services to secure it. The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition. We account for stablecoin as financial assets in accordance with ASC 310, Receivables. The stablecoin are recorded at amortized cost, which approximates their fair value.

We determine the fair value of our digital assets that are accounted for as intangible assets in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for such assets (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances indicate that it is more likely than not that our digital assets are impaired. If the current carrying value of a digital asset exceeds the fair value so determined, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the price determined.

The preparationimpaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented separately from of any impairment losses.

During the three months ended March 31, 2022, the Company purchased an aggregate of $500,000 in stablecoin issued by Gemini Trust Company, LLC, (“GUSD”) that is backed by dollar denominated assets held by the issuer in segregated accounts with U.S.

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regulated financial institutions.  The Company earns additional Gemini dollars on GUDS holdings, which we earned approximately $4 thousand in Gemini dollars during the period which is recognized as digital assets income.

As of March 31, 2022 we had $504,366 of GUSD. The GUSD is redeemable at a 1:1 exchange for USD at any time. The Company’s GUSD holdings are classified as Level 1 within the fair value hierarchy and carried at amortized cost, which approximates their fair value.

There is currently no specific guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial statementsposition and results from operations.

Investment in conformitySecurities

Investment in Securities includes investments in common stocks, note receivables, and convertible notes receivables. Investments in securities are reported at fair value with GAAPchanges in unrecognized gains or losses included in other income on the income statement.  The fair value of the BORQ convertible note receivable is based on its classification as a trading security. The Symbiont note receivable is reported at amortized costs less impairment.

Fair Value of Financial Instruments

FASB ASC 825-10, Financial Instruments, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assetsfair value information about financial instruments, whether or not recognized in the balance sheet.

Investments in Unconsolidated Entities

We account for investments in less than 50% owned and liabilitiesmore than 20% owned entities using the equity method of accounting. Because we have elected the fair value option for these securities, unrealized holding gains and losses during the period are included in earnings.

Income (Loss) Per Share

Basic income (loss) per share is calculated as net income (loss) to common stockholders divided by the weighted average number of common shares outstanding during the period (as adjusted to give effect to the Reverse Stock Split).

The Company issued approximately 74 thousand shares and 2.3 million shares at various times during the Three Months ended March 31, 2022 and March 31, 2021, respectively, and has weighted averaged these new shares in calculating income (loss) per share for the relevant period.

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

Diluted income (loss) per share for the period equals basic loss per share as the effect of any convertible notes, stock based compensation awards or stock warrants would be anti-dilutive.  

The anti-dilutive stock based compensation awards consisted of:

Note 2. Due to Related Party

Legal services for the Company associated with the collection of delinquent assessments from property owners are performed by a law firm, Business Law Group (“BLG”), which was owned solely by Bruce M. Rodgers, the Chief Executive Officer of LMFA, until and through the date of the consolidated financial statementsCompany’s filing initial public offering in 2015. Following the offering in 2015, Mr. Rodgers transferred his interest in BLG to other attorneys at the firm through a redemption of his interest in the firm, and BLG became under control of those lawyers. The law firm has historically performed collection work primarily on a deferred billing basis wherein the reportedlaw firm receives payment for services rendered upon collection from the property owners or at amounts ultimately subject to negotiations with the Company.

Under the agreement, the Company paid BLG a fixed monthly fee of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the evaluation$82,000 for services rendered. The Company paid BLG a minimum per unit fee of $700 in 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 revenues are realized or realizable when related assets received or held are readily convertible into known amounts of cash. In those casescase where there is a collection event and BLG receives no reasonable basispayment from the property owner.  This provision has been expanded to also include any unit where the Company has taken title to the unit or where the association has terminated its contract with either BLG or the Company.  

On February 1, 2022, the Company consented to the assignment by BLG to the law firm BLG Association Law, PLLC (“BLGAL”) of the Services Agreement, dated April 15, 2015, previously entered into by the Company and Business Law Group, P.A. (the “Services Agreement”).  The Services Agreement had set forth the terms under which Business Law Group, P.A. would act as the primary law firm used by the Company and its association clients for estimating the “known amount”servicing and collection of cashassociation accounts.  The assignment of the Services Agreement was necessitated by the death of the principal attorney and owner of Business Law Group, P.A.  In connection with the assignment, BLGAL agreed to be collected,amend the cash basis or cost recovery methodServices 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, the chairman and CEO of recognizing revenues may be used. the Company, 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 provides fundinghad originally engaged BLG on behalf of many of its Association clients to community associationsservice and collect the Accounts and to distribute the proceeds as required 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)law and the provisions of the purchase agreements entered into between LMF and the Associations. This engagement was subsequently assigned to BLGAL as described above. Ms. Gould who is one of our directors, worked as the General Manager of BLG and works as the General Manager of BLGAL.

Amounts collected from property owners and paid to BLG or BLGAL as applicable for the Three Months ended March 31, 2022 and 2021 were approximately $188,000 and $246,000, respectively.  As of March 31, 2022 and December 31, 2021, receivables from property owners for charges ultimately payable to BLGAL or BLGAL were approximately $643,000 and $677,000, respectively.

Under the Services Agreement in effect during the Three Months ended March 31, 2022 and 2021, the Company pays all costs (lien filing fees, process and community associations. Those provisions require that all payments be appliedserve costs) incurred 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 accordanceconnection 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 costdue from property owners.  Any 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,these collection costs is accounted for as a reduction in expense incurred.  The Company incurred expenses related to these types of costs for the Three Months ended March 31, 2022 and any2021 in the amounts dueof $24,000 and $22,000, respectively. Recoveries during the Three Months ended March 31, 2022 and 2021, related 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.

Cashthose costs were approximately $20,000 for 2022 and $ 19,000  for 2021, respectively.  

The Company maintains cash balances at several financial institutions thatalso shares office space and related common expenses with BLGAL (and previously BLG).  All shared expenses, including rent, are insured under the Federal Deposit Insurance Corporation’s (“FDIC”) Transition Account Guarantee Program. Balances with the financial institutions may exceed federally insured limits.

Finance Receivables

Finance receivables are recorded at the amount funded or cost (by unit). The Company evaluates its finance receivables at each period end for losses that are considered probablecharged to BLG based on an estimate of actual usage.  Any expenses of BLGAL 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,BLG paid by the Company didthat have not have any allowance for credit lossesbeen reimbursed or settled against other amounts are reflected as due from 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 the underlying real estate, the general condition of the community association in which the unit exists, and the general economic real estate environment in the local area.  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 judgment is not feasible, the Company writes off the unrecoverable receivable amount. During the three and nine months ended September 30, 2017, write offs charged against the allowance for credit losses were $30,438 and $73,770, respectively. There were no write offs charged against the allowance for credit losses for the three and nine months ended September 30, 2016. Any losses greater than the recorded allowance will be recognized as expenses. Under the Company’s revenue recognition policies, all finance receivables (original product and special product) are classified as nonaccrual.

Real Estate Assets Owned

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

Properties quitclaimed to the Company are in most cases acquired subject to a first mortgage or other liens, and are recognizedparties in the accompanying consolidated balance sheets solelysheets.  BLGAL and BLG, as applicable were charged a total of approximately $15,000 and $17,000 for the office sub-lease during the Three Months ended March 31, 2022 and 2021, respectively.

In 2017, the Company assessed the collectability of the amount due from BLG and concluded that even though BLG had repaid $252,771 during 2017, it did not have the ability to repay the remaining balance at costs incurredthe end of 2017 and as such took a reserve of approximately $1.4 million for the balance due as of December 31, 2017. In 2021 and 2020, the Company subsequently recouped $200,000 and $500,000, respectively, of this write-off. Additional recoveries of the reserve are not expected. No amounts were recouped in 2022.

Amounts payable to BLGAL and BLG, in aggregate as of March 31, 2022 and December 31, 2021 were approximately $373,800 and $121,200, respectively.

Note 3. Debt and Other Financing Arrangements

Note 4. Income Taxes

Prior to the Company’s initial public offering in October 2015, the earnings of the Predecessor, which was a limited liability company taxed as a partnership, were taxable to its members.  In connection with the contribution of membership interests to the Company (a C-Corporation formed in 2015), the net income or loss of the Company after the initial public offering is taxable to the Company and reflected in the accompanying consolidated financial statements.

The Company performs an evaluation of the realizability of its deferred tax assets on a quarterly basis.  The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets, including the scheduled reversal of temporary differences, recent and projected future taxable income and prudent and feasible tax planning strategies.  The estimates and assumptions used by the Company in excess of original funding. At times,computing the Company will acquire properties through foreclosure actions free and clear of any mortgages or liens. In these cases, the Company records the estimated fair value of the properties in accordance with ASC 820-10, Fair Value Measurements. Any real estate held for sale is adjusted to fair value less the cost to dispose in the event the carrying value of a unit or property exceeds its estimated net realizable value.

The Company capitalizes costs incurred to acquire real estate owned properties and any costs incurred to get the units in a condition to be rented.  These costs include, but are not limited to, renovation/rehabilitation costs, legal costs, and delinquent taxes.  These costs are depreciated over the estimated minimum time period the Company expects to maintain possession of the units.  Costs incurred for unencumbered units are depreciated over 20 years and costs for units subject to a first mortgage are depreciated over 3 years.  As of September 30, 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 presentedincome taxes reflected 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 primarilycould differ from the tax effects of temporary differences between financial andactual results reflected in the income tax reporting. Deferred tax assets and liabilitiesreturns filed during the subsequent year. Adjustments are measured using enacted tax rates expected to apply to taxable income inrecorded based on filed returns when finalized or the years in which those temporary differencesrelated adjustments are expected to be recovered or settled.identified.

Under ASC 740-10-30-5, Income Taxes, deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not (i.e., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The Company considers all positive and negative evidence available in determining the potential realization of deferred tax assets including, primarily, the recent history of taxable earnings or losses. Based on operating losses reported by the

Company during 20172022 and 2016,2021, the Company concluded there was not sufficient positive evidence to overcome this recent operating history. As a result, the Company believesbelieved that a valuation allowance iswas necessary based on the more-likely-than-not threshold noted above. The Company had recorded a valuation allowance of approximately $4,677,000 as of $4,300,000 duringMarch 31, 2022 and $3,246,000 as of December 31, 2021.

Significant components of the quartertax expense (benefit) recognized in the accompanying consolidated statements of operations for the Three Months ended September 30, 2017 equalMarch 31, 2022 and March 31, 2021 are as follows:

The reconciliation of the income tax computed at the combined federal and state statutory rate of 23.8% for the Three Months ended March 31, 2022 and 24.3% for the Three Months ended March 31, 2021 to its netthe income tax benefit is as follows:

The significant components of the Company’s deferred tax asset at that date.liabilities and assets as of March 31, 2022 and December 31, 2021 are as follows: 

Prior to

During the initial public offering in October 2015,Three months ended March 31, 2022, the taxable earningsCompany offset $1.4 million of the Predecessor were included in theit’s tax returnsrecovery with $1.4 million of its members (separate limited liability companies) and taxed depending on personal tax situations. In connection withvaluation allowance. During the initial public offering, the members contributed ownership interests toThree Months ended March 31, 2021, the Company (a newly formed C-corporation)offset $1.1 million of it’s tax expense with $1.1 million of its valuation allowance.

Note 5. Commitments 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.Contingencies

Loss Per Share

Basic loss per share is calculated as net loss to common stockholders divided by the weighted average number of common shares outstanding during the period.  Diluted loss per share for the period equals basic loss per share as the effect of any stock-based compensation awards or stock warrants would be anti-dilutive.

Stock-Based CompensationLeases

The Company records all equity-based incentive grantsleases certain office space, construction and office equipment, vehicles and temporary housing generally under non-cancelable operating leases. Leases with an initial term of one year or less are not recorded on the balance sheet, and the Company generally recognizes lease expense for these leases on a straight-line basis over the lease term. As of March 31, 2022, the Company’s operating leases have remaining lease terms ranging from less than one year to employeesthree years, some of which 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 determines if an arrangement is a lease at inception. Operating lease ROU assets and non-employee memberscurrent and long-term operating lease liabilities are separately stated on the Consolidated Balance Sheet as of March 31, 2022. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The present value of future lease payments are discounted using either the implicit rate in the lease, if known, or the Company’s incremental borrowing rate for the specific lease as of the Company’s Boardlease 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 Directors in operating expenses in the Company’s Condensed Consolidated Statement of Operations based on their fair values determined on the date of grant. Stock-based compensationthose options will be exercised. Lease expense reduced for estimated forfeitures, is recognized on a straight-line basis over the requisite service periodlease term. The Company accounts for lease components (e.g., fixed payments) separate from the non-lease components (e.g., common-area maintenance costs).The Company does not have any material financing leases

The Company’s office lease began July 15, 2019 and was due to expire on July 31, 2022. During the three months ended March 31, 2022 the Company exercised its option to extend its office lease to July 31, 2025. Due to the lease extension, the Company remeasured the lease liability and ROU asset associated with the lease. The Company accounted for the lease extension as a lease modification under ASC 842. At the 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 borrowing rate of 7.5%.

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A related party has a sub-lease for approximately $4,900 per month plus operating expenses.

The Company shares this space and the related costs associated with this operating lease with a related party (see Note 2) that also performs legal services associated with the collection of delinquent assessments.  Net rent expense recognized for the Three Months ended March 31, 2022 and 2021 were approximately $23,400 and $24,900, respectively.

The following table presents supplemental balance sheet information related to operating leases as of March 31, 2022 and December 31, 2021:

The following table presents supplemental cash flow information and non-cash activity related to operating leases for the Three Months ended March 31, 2022 and 2021:

The following table presents maturities of operating lease liabilities on an undiscounted basis as of March 31, 2022:

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 award, which is generally the vesting termoutcome, litigation can have an adverse impact on us because of the outstanding equity awards.prosecution, defense, and settlement costs, diversion of management resources and other factors.

Contingencies

The Company accrues for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, the Company reassesses its position and makes appropriate adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters. Solaris at Brickell Bay Condominium Association, Inc. v. LM Funding, LLC, Case No: 2014-20043-C, was brought before the Circuit Court

On March 9, 2022, legal counsel to a purported stockholder of the Eleventh Judicial Circuit, Miami-Dade Civil Division on July 31, 2014. On August 4, 2017, an orderCompany threatened to file a direct and derivative complaint  alleging breaches of fiduciary duty by the court wasCompany’s officers and directors, primarily with respect to (i) the Amended and Restated Employment Agreements entered on Plaintiff’s Motion for Preliminary Approvalinto by the Company with each of Class Action Settlement Agreement.   The motion ofMr. Rodgers and Mr. Russell in October 2021; (ii) 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 belief that it is not liableactions taken at our 2021 annual meeting of stockholders in December 2021; (iii) payments made to Business Law Group, P.A. in exchange for 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,services provided pursuant to the agreement subsequently reachedServices Agreement between counsel, all required actionsthe Company and deadlines set forthBusiness Law Group; and (iv) strategic advisory agreements entered into by us in the Parties’ Class Action Settlement Agreement, approvedconnection with our planned cryptocurrency mining business. As 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 filing of this quarterly report on Form 10-Q, the orderCompany and the purported stockholder have agreed in principle to a settlement of the District Courtstockholder’s alleged claims under which the Company would be required to seek a new independent director to replace Joel Rodgers, would be required to engage a compensation consultant to review certain sections of Appealthe Company’s executive employment agreements and to make changes in response to the consultant’s recommendation, and to pay certain attorney fees in an amount to be agreed upon.  There is no assurance that the agreement in principle will result in a final settlement.

Note 6. Stockholders’ Equity

Stock Options

The 2015 Omnibus Incentive Plan provides for the issuance of Florida Third District. stock options, stock appreciation rights, performance shares,

performance units, restricted stock, restricted stock units, shares of our common stock, dividend equivalent units, incentive cash

awards or other awards based on our common stock. Awards may be granted alone or in addition to, in tandem with, or (subject to the

2015 Omnibus Incentive Plan’s prohibitions on repricing) in substitution for any other award (or any other award granted under

another plan of ours or of any of our affiliates).

The following is a summary of the stock option plan activity during the Three Months ended March 31, 2022 and 2021: