Forward-Looking Statements
This Annual Report on Form 10-K 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 Annual
Report on Form 10-K, 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, the following
risks, as well as other factors set forth under "Risk Factors" in this report.
•
our ability to retain the listing of our securities on the Nasdaq Capital
market,
•
our ability to obtain funds to purchase receivables,
•
the early stage of our cryptocurrency mining business and our lack of operating
history in such business,
•
volatility surrounding the value of Bitcoin and other cryptocurrencies,
•
the uncertainty surrounding the cryptocurrency mining business in general,
•
bankruptcy or financial problems of our hosting vendors in our mining business,
•
reliance to date on a single model of Bitcoin miner,
•
the ability to scale our mining business,
•
our ability to purchase defaulted consumer Association receivables at
appropriate prices,
•
competition to acquire such receivables,
•
our dependence upon third party law firms to service our accounts,
•
our ability to manage growth or declines in the business,
•
changes in government regulations that affect our ability to collect sufficient
amounts on our defaulted consumer Association receivables,
•
the impact of class action lawsuits and other litigation on our business or
operations,
•
our ability to keep our software systems updated to operate our business,
•
our ability to employ and retain qualified employees,
•
our ability to establish and maintain internal accounting controls,
•
changes in the credit or capital markets,
•
changes in interest rates,
•
deterioration in economic conditions,
•
negative press regarding the debt collection industry which may have a negative
impact on a debtor's willingness to pay the debt we acquire,
•
the spread of the novel coronavirus (COVID-19), its impact on the economy
generally and, more specifically, the specialty finance industry, and
•
other factors set forth under "Risk Factors" in this report.
Except as required by law, we assume no duty to update or revise any
forward-looking statements.
Overview
LM Funding America, Inc. ("we", "our", "LMFA", or the "Company") currently has
two lines of business: our recently commenced cryptocurrency mining business and
our historical specialty finance business.
On September 15, 2021, we announced our plan to operate in the Bitcoin mining
ecosystem, and we 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 developments 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 Mining and Hosting Co, LLC, a
Florida limited liability company (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 state of Florida. We offer incorporated nonprofit
community associations, which we
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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. corporate history.
COVID-19 Update
Although COVID-19 is currently not material to our results of operations, there
is uncertainty relating to the potential future impact on our business. While
our employees currently have the ability and are encouraged to work remotely,
such measures have and may continue to have an impact on employee attendance or
productivity, which, along with the possibility of employees' illness, may
adversely affect our operations.
The extent to which COVID-19 impacts our operations, or our ability to obtain
financing should we require it, will depend on future developments which are
uncertain and cannot be predicted, including new information which may emerge
concerning the severity of COVID-19 and the actions taken by governments and
private businesses to contain COVID-19 to treat its impact, among others. If the
disruptions posed by COVID-19 continue for an extended period of time, financial
markets may not be available to the Company for raising capital in order to fund
future growth. Should the Company not be able to obtain financing when required,
in the amounts necessary or under terms which are economically feasible, we may
be required to reduce planned future growth and/or the scope of our operations.
In addition, if there is another significant outbreak, it could impact the
manufacture and supply to the Company of Bitcoin mining machines.
Corporate History
The Company was originally organized in January 2008 as a Florida limited
liability company under the name LM Funding, LLC. Prior to our initial public
offering in 2015, all of our business was conducted through LM Funding, LLC and
its subsidiaries. Immediately prior to our initial public offering in October
2015, the members of the LM Funding, LLC contributed all of their membership
interests to LM Funding America, Inc., a Delaware corporation incorporated on
April 20, 2015 ("LMFA"), in exchange for shares of the common stock of LMFA.
Immediately after such contribution and exchange, the former members of LM
Funding, LLC became the holders of 100% of the issued and outstanding common
stock of LMFA, thereby making LM Funding, LLC a wholly-owned subsidiary of LMFA.
The Company organized two new subsidiaries in 2020: LMFA Financing LLC, a
Florida limited liability company, on November 21, 2020, and LMFAO Sponsor LLC,
a Florida limited liability company, on October 29, 2020. LMFAO Sponsor LLC
organized a subsidiary, LMF Acquisition Opportunities Inc., on October 29, 2020.
LM Funding America Inc. organized a subsidiary, US Digital Mining and Hosting
Co., LLC. (and 100% subsidiaries), on September 10, 2021. USDM has created
various 100% owned subsidiaries to engage in business in various states. The
Company also from time to time organizes other subsidiaries to serve a specific
purpose or hold a specific asset.
Results of Operations
The Year Ended December 31, 2022 compared with the Year Ended December 31, 2021
Revenues
During the year ended December 31, 2022, total revenues increased by
approximately $0.8 million, or 92.9%, to approximately $1.7 million from
approximately $0.9 million in the year ended December 31, 2021.
Digital mining revenues increased to approximately $0.9 million for the year
ended December 31, 2022 from nil for the year ended December 31, 2021, due to
the commencement of our digital mining operations in late September 2022.
Interest on delinquent association fees for the year ended December 31, 2022 was
approximately $359 thousand which represents a decrease of 23.9% as compared to
the approximately $472 thousand generated in the year ended December 31, 2021
due to a decrease in the number of units collected offset in part by an increase
in the average revenue collected per unit.
Underwriting and origination fees decreased by approximately $24 thousand or
19.6% due to a reduction in units submitted for collection.
Rental revenue (which includes sales of units) for the year ended December 31,
2022 was approximately $162 thousand as compared to approximately $142 thousand
for the year ended December 31, 2021 due to higher average rental revenue per
unit. There were 11 rental units in the portfolio as of December 31, 2022 and
December 31, 2021.
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Operating Costs and Expenses
During the year ended December 31, 2022, operating costs and expenses increased
by approximately $17.1 million, or 183%, to approximately $26.4 million from
approximately $9.3 million for the year ended December 31, 2021. The net
increase in operating expenses can be attributed primarily to the approximately
$13.2 million increase in staff costs and payroll, which includes a non-cash
expense increase of approximately $14.2 million related to the issuance of stock
options to management, and board members ($5.3 million of the increase is
associated with the cancellation of options for the CEO and CFO), offset in part
by a decrease in payroll of approximately $2.2 million related to decreased
bonuses.
The increase in depreciation and amortization expense of $0.5 million and
digital mining cost of revenues of $1.0 million is related to the commencement
of mining operations in late September 2022. The cost of mining includes the
cost of hosting site and installation fees of approximately $0.2 million.
Professional fees (excluding fees paid pursuant to our service agreement with
BLG and BLGAL), for the years ended December 31, 2022 and 2021 were
approximately $2.4 million and $1.3 million, respectively. In the ordinary
course of our specialty finance business, we are involved in numerous legal
proceedings and expenses associated with acquisitions and corporate initiatives.
We regularly initiate collection lawsuits, using our network of third party law
firms, against debtors. In addition, debtors occasionally initiate litigation
against us. Professional fees for the year ended December 31, 2022 included an
expense of $0.3 million related to the settlement of a legal claim. See Note 10
Commitments and Contingencies for discussion of the claim. This also includes an
increase of $0.7 million due to the amortization of prepaid annual consulting
fees paid in 2021 for digital strategy consultant work performed in 2022.
Legal fees for BLG and BLGAL for the year ended December 31, 2022 were
approximately $0.8 million compared to approximately $1.0 million for the year
ended December 31, 2021. Legal fees for 2022 include a $150 thousand termination
fee paid to BLG offset by a reduction in the service fee. See Note 12. Related
Party Transactions for further discussion regarding the service agreements with
BLG and BLGAL.
Further, the net increase in operating expenses was also caused in part by, a
decrease of $0.2 million relating to the recoupment of bad debt allowance from a
related party, a $1.1 million increase in Other operating costs as the result of
a $0.9 million increase in non-cash stock expense for consultants, and a $0.2
million increase in selling, general and administrative expenses due in part to
increased investor relations cost, higher state franchise fees and other fees.
Other Income and Loss
Realized loss on marketable securities - the Company recognized a $0.3 million
realized loss on marketable securities for the year ended December 31, 2022 as
compared to a $13.8 million gain for the year ended December 31, 2021. The prior
year gain was primarily due to a $5.7 million gain on a transaction with Borqs
in which the Company acquired debt of Borqs, converted the debt into Borqs
common stock, and subsequently sold such shares at a gain, and an $8.5 million
gain related to the exercise of Borqs warrants for common shares of Borqs which
were subsequently sold.
Realized gain on convertible debt securities - the Company incurred a realized
gain on convertible debt securities of $0.3 million for the year ended December
31, 2022 as compared to nil for the year ended December 31, 2021 due to the
conversion of Borqs convertible debt securities to common stock.
Unrealized loss on convertible debt securities - the Company incurred an
unrealized loss on convertible debt securities of nil for the year ended
December 31, 2022 as compared to $0.4 million for the year ended December 31,
2021 due to the fair value adjustment of Borqs convertible debt securities.
Unrealized loss on marketable securities - the company incurred an unrealized
loss on marketable securities of under $0.1 million for the year ended December
31, 2022 as compared to an unrealized loss on securities of $1.4 million for the
year ended December 31, 2021, primarily related to the fair value adjustment of
Borqs common stock.
Impairment loss on digital assets - during the year ended December 31, 2022, the
Company purchased and received an aggregate of approximately 32 Bitcoin for
approximately $1.0 million. During the year ended December 31, 2022, we recorded
approximately $0.5 million of impairment losses on such digital assets as
compared to an impairment loss of under $0.1 million for the year ended December
31, 2021.
Impairment loss on prepaid mining machine deposits - the Company incurred an
impairment loss on prepaid mining machine deposits of $3.15 million for the year
ended December 31, 2022 due to a $3.15 million impairment charge for deposits
held by Uptime Armory arising from the non-performance of Uptime Armory under
the Uptime Purchase Agreement.
Impairment loss on prepaid hosting deposits - the Company incurred an impairment
loss on prepaid hosting deposits of $1.8 million for the year ended December 31,
2022 due to a $1.0 million impairment charge on the deposits held by Compute
North, which is in bankruptcy, and a $0.8 million impairment charge for deposits
held by Uptime Hosting arising from the non-performance of Uptime Hosting under
the Uptime Purchase Agreement.
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Credit loss on debt securities - The Company recognized credit loss expense on
debt securities of approximately $1.1 million for the year ended December 31,
2022 as compared to nil for the year ended December 31, 2021 arising from
establishing a loss allowance on the Symbiont debt security.
Unrealized gain (loss) on investment and equity securities - The Company
recognized an unrealized gain on securities of approximately $4.4 million for
the year ended December 31, 2022 as compared to an unrealized gain of
approximately $0.9 million for the year ended December 31, 2021 from the
revaluation of Seastar Medical Holding Corporation. (formerly LMAO's) common
stock and warrants. The change was driven primarily by the impact of LMAO's
merger with Seastar Medical Holding Corporation.
The Company recognized a $20 thousand and $503 thousand realized gain on the
sale of digital assets for the years ended December 31, 2022 and 2021.
The Company recognized a non-recurring gain on the forgiveness of note payables
of nil and $0.1 million for years ended December 31, 2022 and 2021.
Interest (Income) Expense, net
During the year ended December 31, 2022, net interest income was approximately
$0.4 million as compared to $0.2 million of net interest expense for the year
ended December 31, 2021. The increase is related to the investment in notes
receivable.
Income Tax Expense
During the year ended December 31, 2022, the Company generated a $26.4 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 $1.4
million during the year ended December 31, 2022. The Company recognized net
income tax expense of $1.4 million for the twelve months ended December 31, 2022
and $0.3 million for the twelve months ended December 31, 2021 .
Under ASC 740-10-30-5, Income Taxes, deferred tax assets should be reduced by a
valuation allowance if, based on the weight of available evidence, it is
more-likely-than-not (i.e., a likelihood of more than 50%) that some portion or
all of the deferred tax assets will not be realized. The Company considers all
positive and negative evidence available in determining the potential
realization of deferred tax assets including, primarily, the recent history of
taxable earnings or losses. Based on operating losses reported by the Company
during 2022, 2020, 2019 and 2018, 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 continues to be necessary based on
the more-likely-than-not threshold noted above. The Company recorded a valuation
allowance of approximately $8.5 million and $3.2 million for the year ended
December 31, 2022 and 2021, respectively.
Net Income Attributable to Non-Controlling Interest
The Company owns 69.5% of LMFAO Sponsor LLC ("Sponsor"). As such, approximately
$1.4 million and $0.2 million of the $4.4 million and $0.9 million net
unrealized gain recognized by the Sponsor's ownership of Seastar Medical Holding
Corporation (formerly LMAO) is attributed to the Non-Controlling Interest for
the years ended December 31, 2022 and 2021, respectively.
Net Loss Attributable to LM Funding America, Inc.
During the year ended December 31, 2022, the Company generated a net loss
attributable to LM Funding America, Inc. of approximately $29.2 million as
compared to net income attributable to LM Funding America, Inc. of approximately
$4.8 million for the year ended December 31, 2021 for the reasons mentioned
above.
LIQUIDITY AND CAPITAL RESOURCES
General
As of December 31, 2022, we had cash and cash equivalents of $4.2 million and
digital assets of $0.9 million compared with $32.6 million of cash and cash
equivalents and nil digital assets at December 31, 2021. The Company also had $4
thousand of marketable securities as of December 31, 2022 compared with $2.1
million at December 31, 2021. The decrease in cash is due primarily to the use
of $17.9 million for the deposit for mining equipment purchases and hosting
services and $3.8 million of loans to Seastar Medical Holding Corporation.
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Recent Capital Raising Transactions
In October 2021, we raised approximately $31.5 million in net proceeds in a
registered public offering by issuing 7.3 million shares of common stock and 7.5
million warrants to purchase shares of common stock. Holders of the warrants
subsequently exercised such warrants for 140,500 shares of common stock for
approximately $702 thousand.
Holders of our warrants issued in our public offering from 2020 exercised
warrants for 2,330,536 shares for total consideration of approximately $9.5
million for the year ended December 31, 2021. No warrants were exercised during
the year ended December 31, 2022.
Cash from Operations
Net cash used in operations was approximately $9.1 million during the year ended
December 31, 2022 compared with net cash provided by operations of $2.7 million
during the year ended December 31, 2021. This change was primarily driven by
activity in 2021, which included a $5.7 million realized gain on securities
relating to a specialty finance transaction between us and Borqs and a $8.5
million realized gain on securities from selling the Borqs warrants, offset in
part by a $5 million investment in certain receivables of Borqs and a $3.7
million investment in marketable securities. During the year ended December 31,
2022, the Company paid $3.2 million as a deposit for hosting services compared
to $0.8 million for the year ended December 31, 2021.
Cash from Investing Activities
Net cash used in investing activities was $18.9 million during the year ended
December 31, 2022 as compared to net cash used in investing activities of $23.2
million during the year ended December 31, 2021. During the year ended December
31, 2022, the Company invested $14.7 million in deposits for mining equipment
and $3.7 million in a notes receivable for Seastar Medical Holding Corporation.
During the year ended December 31, 2021, the Company invested $5.7 million in
LMF Acquisition Opportunities Inc (a special purpose acquisition corporation), a
$1.4 million investment in digital assets, a $2.0 million investment in the
Symbiont note receivable and $16.0 million of deposits for mining equipment.
Cash from Financing Activities
Net cash used in financing activities was $0.3 million during the year ended
December 31, 2022 as compared to net cash provided by financing activities of
$41.5 million for the year ended December 31, 2021. During the year ended
December 31, 2021 the Company received $31.5 million from a public offering of
common stock and warrants and $10.2 million from the exercise of warrants offset
by $0.2 million of insurance loan repayments.
Outstanding Debt
Debt of the Company consisted of the following:
December 31, 2022 December 31, 2021
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 matures 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 FlatIron capital that
was unsecured. Down payment of $36,255 was
required upfront and equal installment payments
of $19,114 were made over a 10 month period.
The note matured on May 1, 2022. Annualized
interest was 3.95%. - 114,688
$ 475,775 $ 114,688
On April 30, 2020, the Company obtained a $185,785 Paycheck Protection Program
loan. These business loans were established by the 2020 US Federal government
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") to help certain
businesses, self-employed workers, sole proprietors, certain nonprofit
organizations, and tribal businesses continue paying their workers.
The Paycheck Protection Program allows entities to apply for low interest
private loans to pay for their payroll and certain other costs. The loan
proceeds were used to cover payroll costs, rent, interest, and utilities. The
loan was to be partially or fully forgiven if the
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Company kept its employee counts and employee wages stable. The program was
implemented by the U.S. Small Business Administration. The interest rate was
1.0% and had a maturity date of 2 years.
On May 6, 2021, we received notice from the Paycheck Protection Program that
$157,250 of our loan had been forgiven. As such, we paid the remaining balance
of $28,534 by September 30, 2021.
Minimum required principal payments on the Company's debt as of December 31,
2022 are as follows :
2023 $ 475,775
$ 475,775
Critical Accounting Estimates and Policies
Our financial statements are prepared in accordance with generally accepted
accounting principles in the United States, or GAAP. The preparation of the
consolidated financial statements in conformity with GAAP requires our
management to make a number 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 long-lived assets. We do not consider any of our estimates to be
critical. Refer to Note 1 - Significant Accounting Policies to our financial
statements for a complete discussion of the significant accounting policies and
methods used in the preparation of our financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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