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, our ability to
purchase defaulted consumer receivables at appropriate prices, competition to
acquire such receivables, our dependence upon third party law firms to service
our accounts, our ability to obtain funds to purchase receivables, 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
receivables, the impact of class action suits and other litigation, 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, and negative press
regarding the debt collection industry which may have a negative impact on a
debtor's willingness to pay the debt we acquire, 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 purchase defaulted consumer receivables at appropriate prices,
• competition to acquire such receivables,
• our dependence upon third party law firms to service our accounts,
• our ability to obtain funds to purchase receivables,
• 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 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,
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• 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
The Company is a specialty finance company that is engaged primarily in the
business of providing funding to nonprofit community associations, with a focus
on associations 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 addition to the foregoing business, we are exploring other
specialty finance business opportunities that are complementary to or that can
leverage our historical 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 Association's right to receive a portion of the
Association's proceeds from the collection of delinquent assessments, we engage
law firms to perform collection work on a deferred billing basis wherein the law
firms receive payment upon collection from the account debtors or a
predetermined contracted amount if payment from account debtors is less than
legal fees and costs owed. Under this business model, we typically fund an
amount equal to or less than the statutory minimum an Association could recover
on a delinquent account for each Account, which we refer to as the "Super Lien
Amount". Upon collection of an Account, the law firm working on the Account, on
behalf of the Association, generally distributes to us the funded amount,
interest, and administrative late fees, with the law firm retaining legal fees
and costs collected, and the Association retaining the balance of the
collection. In connection with this line of business, we have developed
proprietary software for servicing Accounts, which we believe enables law firms
to service Accounts efficiently and profitably.
Under our New Neighbor Guaranty program, an Association will generally assign
substantially all of its outstanding indebtedness and accruals on its delinquent
units to us in exchange for payment by us of monthly dues on each delinquent
unit. This simultaneously eliminates a substantial portion of the Association's
balance sheet bad debts and assists the Association to meet its budget by
receiving guaranteed monthly payments on its delinquent units and relieving the
Association from paying legal fees and costs to collect its bad debts. We
believe that the combined features of the program enhance the value of the
underlying real estate in an Association and the value of an Association's
delinquent receivables. We intend to leverage our proprietary software platform,
as well as our industry experience and knowledge gained from our original line
of business, to expand the New Neighbor Guaranty program in certain situations
and to potentially develop other new products in the future.
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.
Original Product
Our original product relies upon Florida statutory provisions that effectively
protect the principal amount invested by us in each Account. In particular,
Section 718.116(1), Florida Statutes, makes purchasers and sellers of a unit in
an Association jointly and severally liable for all past due assessments,
interest, late fees, legal fees, and costs payable to the Association. As
discussed above, the Florida Statutes grants to Associations a so-called "super
lien", which is a category of lien that is given a statutorily higher priority
than all other types of liens other than property tax liens. The amount of the
Association's priority over a first mortgage holder that takes title to a
property through foreclosure (or deed in lieu), referred to as the Super Lien
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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 receive all collected interest and late fees
on Accounts purchased from the 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.
In other states in which we have offered our original product, which are
currently only in Washington, Colorado and Illinois, we rely on statutes that we
believe are similar to the above-described Florida statutes in relevant
respects. A total of approximately 22 U.S. states, Puerto Rico and the District
of Columbia have super lien statutes that give Association assessments super
lien status under some circumstances, and of these states, we believe that all
of these jurisdictions other than Alaska have a regulatory and business
environment that would enable us to offer our original product to Associations
in those states on materially the same basis.
New Neighbor Guaranty
In 2012, we developed an additional product, the New Neighbor Guaranty, wherein
an Association assigns substantially all of its outstanding indebtedness and
accruals on its delinquent units to us in exchange for payments in an amount
equal to the regular ongoing monthly or quarterly assessments for delinquent
units when those amounts would be due to the Association. We assume both the
payment and collection obligations for these assigned Accounts under this
product. This simultaneously eliminates an Association's balance sheet bad debts
and assists the Association to meet its budget by receiving guaranteed
assessment payments on its delinquent units and relieving the Association from
paying legal fees and costs to collect its bad debts. We believe that the
combined features of the product enhance the value of the underlying real estate
in an Association and the value of an Association's delinquent receivables.
Before we implement the New Neighbor Guaranty program for an Association
typically asks us 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.
Recent Developments
Entry into and Termination of Hanfor Share Exchange Agreement
On March 23, 2020, the Company entered into a Share Exchange Agreement (the
"Share Exchange Agreement") with Hanfor (Cayman) Limited, a Cayman Islands
exempted company ("Hanfor"), and BZ Industrial Limited, a British Virgin Islands
business company and the sole stockholder of Hanfor ("Hanfor Owner"). The Share
Exchange Agreement contemplated a business combination transaction in which
Hanfor Owner would transfer and assign to the Company all of the share capital
of Hanfor in exchange for a number of shares of the Company's common stock that
would result in Hanfor Owner owning 86.5% of the outstanding common stock of the
Company.
Under the agreement, Hanfor Owner was required to deliver to the Company audited
financial statements for Hanfor for the 2019 and 2018 fiscal years, and such
audited financial statements were required to be delivered by May 31, 2020
(subject to extension to June 30, 2020 under specified circumstances). In
connection with the execution of the Share Exchange Agreement, the Company and
Hanfor Owner entered into a Stock Purchase Agreement, dated March 23, 2020,
pursuant to which Hanfor Owner purchased from the Company an aggregate of
520,838 shares of the Company's common stock at a price of $2.40 per share.
Hanfor Owner paid $250,000 cash on March 23, 2020 and the Company received an
additional $1,000,000 in April 2020 at which time the Company issued the 520,838
shares.
On July 14, 2020, the Company notified Hanfor and Hanfor Owner that the Company
had elected to terminate the Share Exchange Agreement due to Hanfor's inability
to provide audited financial statements by June 30, 2020. Although the Company
believes that it properly terminated the Share Exchange Agreement, on July 21,
2020, former counsel to Hanfor Owner informed the Company that Hanfor Owner
believes that the Company's termination of the Share Exchange Agreement was not
effected in accordance with the terms of the Share Exchange Agreement
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In addition, on October 23, 2020, an amended Schedule 13D was filed by Xueyuan
Han, the principal owner of Hanfor, with respect to his beneficial ownership of
shares of common stock of the Company. In the amended Schedule 13D, Mr. Han
alleged, among other things, that the Company misinterpreted the termination
provisions of the Share Exchange Agreement, that Hanfor is still within a cure
period under the Share Exchange Agreement, and that Hanfor is purporting to
appoint a director to the Company's Board of Directors. Following the filing of
the amended Schedule 13D, the Company continued to believe that its termination
of the Share Exchange Agreement was proper and therefore took no action in
response to the Schedule 13D.
On January 11, 2021, the Company received a letter from newly engaged outside
counsel to Hanfor and Hanfor Owner alleging that the Company's termination of
the Share Exchange Agreement constituted a breach of contract and/or was invalid
and further alleging breach of fiduciary duty by the Company's Chief Executive
Officer and Chief Financial Officer. Such letter demanded $1,250,000 (the amount
of Hanfor Owner's investment in common stock of the Company) plus interest and
threatened legal action against the Company and the Company's Chief Executive
Officer and Chief Financial Officer. Following the receipt of that letter, on or
around January 27, 2021, the Company assisted Hanfor Owner with the removal of
the restrictive legend from the shares of Company common stock owned by Hanfor
Owner in accordance with SEC Rule 144 to enable the sale thereof by Hanfor
Owner, at which time Hanfor Owner's counsel indicated in writing that Hanfor
Owner may have remaining damages. However, there have been no further
communications from Hanfor, Hanfor Owner, or their counsel subsequent to the
communications that occurred on or around January 27, 2021.
Nasdaq Listing
On March 27, 2020, the Company received a notification letter from the Nasdaq
Listing Qualifications department of The Nasdaq Stock Market LLC ("Nasdaq")
stating that the Company has not regained compliance with Nasdaq Continued
Listing Rule 5550(a)(2), which requires the Company's listed securities to
maintain a minimum bid price of $1.00 per share (the "Minimum Bid Price Rule").
The notification stated that the Company's securities would be delisted from the
Nasdaq Capital Market on April 7, 2020 unless the Company timely requested a
hearing before a Nasdaq Hearing Panel. The Company has timely requested a
hearing. However, on April 16, 2020, Nasdaq suspended any enforcement actions
relating to bid price issues through June 30, 2020. On July 1, 2020, the Company
received a letter from Nasdaq stating that the Company regained compliance with
the Minimum Bid Price Rule because the closing price for the Company's common
stock was $1.00 per share or greater for ten (10) consecutive business days.
Additionally, on January 3, 2020, the Company received a deficiency letter from
Nasdaq, indicating that it was in violation of Listing Rules 5620(a) and
5810(c)(2)(G) by virtue of passing the applicable deadline for holding of its
annual general meeting of shareholders for the financial year ended December 31,
2018. The Company resolved this issue by having its annual general meeting of
shareholders on May 11, 2020.
On September 28, 2020, the Company received a notification letter from the
Nasdaq Listing Qualifications department of Nasdaq stating that the Company was
not in compliance with the Minimum Bid Price Rule. The notification stated that
the Company's securities would be delisted from the Nasdaq Capital Market on
March 29, 2021 unless the Company timely requests a hearing before a Nasdaq
Hearing Panel. Nasdaq stating that the Company was not in compliance with the
Minimum Bid Price Rule. The notification stated that the Company's securities
would be delisted from the Nasdaq Capital Market on March 29, 2021 unless the
Company timely requested a hearing before a Nasdaq Hearing Panel. On February 5,
2021, the Company received a letter from Nasdaq stating that the Company had
regained compliance with the Minimum Bid Price Rule because the closing price
for the Company's common stock was $1.00 per share or greater for ten (10)
consecutive business days.
Reverse Stock Split Approval
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 Directors, 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 the Board of Directors. However,
a reverse stock split has not yet been effected pursuant to such approval.
Public Share Offering
In connection with an underwritten public offering on August 18, 2020, the
Company issued (i) 8,300,000 units (the "Units") with each Unit consisting of
one share of common stock, par value $0.001 per share (the "Common Stock") and
one warrant to purchase one share of common stock (the "Common Warrants"), and
(ii) 1,700,000 pre-funded units (the "Pre-Funded Units"), with each pre-funded
unit being comprised of one pre-funded warrant to purchase one share of common
stock at an exercise price of $.01 per share (the "Pre-Funded Warrants") and one
warrant to purchase one share of common stock. Each
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Unit was sold for a price of $0.90 per Unit, and each Pre-Funded Unit was sold
for a price of $0.89 per Pre-Funded Unit. Pursuant to an over-allotment option
in the underwriting agreement, the Company sold an additional 200,000 shares of
Common Stock. The gross proceeds of the offering were approximately $8,198,000.
During the twelve months ended December 31, 2020, Common Warrants to purchase
150,000 shares were exercised for $135,000.
Sponsorship of LMF Acquisition Opportunities, Inc.
On January 28, 2021, LMF Acquisition Opportunities, Inc. ("LMF Acquisition"), a
special purpose acquisition company organized by the Company, announced the
closing of an initial public offering of units ("Units"). In the initial public
offering, LMF Acquisition sold an aggregate of 10,350,000 Units at a price of
$10.00 per unit, resulting in total gross proceeds of $103,500,000. Each Unit
consisted of one share of Class A common stock and one redeemable warrant, with
each warrant entitling the holder thereof to purchase one share of Class A
common stock of LMF Acquisition at a price of $11.50 per share. LMFAO Sponsor,
LLC ("Sponsor"), a subsidiary in which the Company owns approximately 70% of the
equity and for which the Company is the sole manager, served as the sponsor for
LMF Acquisition's initial public offering.
Sponsor was organized by, and its initial capital contribution was contributed
by, the Company and the Company's executive officers. The Company's executive
officers and LMF Acquisition's directors collectively own an approximately 30%
nonvoting equity interest in Sponsor, and LMF Acquisition is managed by the
Company's management team. In connection with the initial public offering of LMF
Acquisition, the Company loaned $5.7 million to Sponsor in an intercompany loan,
which Sponsor used to purchase an aggregate of approximately 5.7 warrants of LMF
Acquisition. Prior to a business combination by LMF Acquisition, Sponsor holds
100% of the shares of Class B common stock outstanding of LMF Acquisition. The
Class B shares equal approximately 20% of the outstanding common stock of LMF
Acquisition. Upon the successful completion of a business combination by LMF
Acquisition, the proforma ownership of the new company will vary depending on
the business combination terms. If LMF Acquisition does not successfully
complete a business combination in 18 months from its initial public offering
(subject to potential extension of up to 21 months) or if the business
combination is not successful, the Company can lose its entire investment in
Sponsor.
Transactions with Borqs
On December 14, 2020, the Company entered into a Master Loan Receivables
Purchase and Assignment Agreement (the "Purchase Agreement") under which the
Company agreed to purchase up to $18 million of loan receivables of Borqs
Technologies, Inc. (NASDAQ: BRQS), a British Virgin Islands company ("Borqs"),
from Borqs' senior lenders, Partners for Growth IV, L.P. and Partners for Growth
V. L.P. As a part of the transaction, the Company entered into a Settlement
Agreement, dated December 14, 2020 (the "Settlement Agreement"), with Borqs
pursuant to which Borqs was obligated to issue shares of Borqs common stock to
the Company (the "Settlement Shares"), in one or more tranches, in settlement of
the loan receivables acquired by the Company under the Purchase Agreement. This
transaction was completed on February 11, 2021 and the Company realized $5.7
million from the transaction.
In a separate transaction that was funded after December 31, 2020 and as
previously disclosed, on December 16, 2020, LMFA and Esousa Holdings, LLC, a
private investor (the "Investor") entered into a Loan Agreement (the "Loan
Agreement") pursuant to which the Investor agreed to provide consulting services
and make one or more non-recourse loans to the Company in a principal amount of
up to the purchase price of the Borqs loan receivables purchased by LMFA. The
Loan Agreement does not provide a fixed rate of interest, and the Company and
Investor agreed to split the net proceeds from the Company's sale of the
Settlement Shares, with the Company receiving one-third of the net proceeds
after a return of Investor's principal and the Investor receiving return of
principal plus two-thirds of the net proceeds thereafter.
In an additional transaction on February 24, 2021, the Company entered into a
specialty finance transaction with Borqs, under which the Company agreed to
purchase Senior Secured Convertible Promissory Notes of Borqs (the "Borqs
Notes") up to an aggregate principal amount of $5 million. The Borqs Notes are
due in two years, have an annual interest rate of 8%, are convertible into
ordinary shares of Borqs at a 10% discount from the market price, and have 90%
warrant coverage (with the warrants exercisable at 110% of the conversion
price. One-third of the Borqs Notes ($1,666,500) were funded by the Company at
the execution of definitive agreements for the transaction, and two-thirds of
the Borqs Notes ($3,333,500) to be purchased by the Company are required to be
purchased and funded upon the satisfaction of certain conditions, including
effectiveness of a registration statement to be filed by Borqs by April 15,
2021.
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
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have and may continue to have an impact on employee attendance or productivity,
which, along with the possibility of employees' illness, may adversely affect
our operations. In addition to encouraging employees to work remotely, the
Company has increased sanitation of its offices, provided hand gel and masks to
its employees and has closed the offices during identified periods of high
contagion.
The extent to which COVID-19 impacts our operations, or our ability to obtain
financing should we require it, will depend on future developments which are
uncertain and cannot be predicted, including new information which may emerge
concerning the severity of COVID-19 and the actions taken by governments and
private businesses to contain COVID-19 to treat its impact, among others. If the
disruptions posed by COVID-19 continue for an extended period of time, financial
markets may not be available to the Company for raising capital in order to fund
future growth. Should the Company not be able to obtain financing when required,
in the amounts necessary or under terms which are economically feasible, we may
be required to reduce planned future growth and/or the scope of our operations.
Paycheck Protection Program Loan
On April 30, 2020, the Company obtained a $185,785 Paycheck Protection Program
loan ("PPP 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 will be used to cover payroll costs, rent, interest, and utilities. The
loan may be partially or fully forgiven if the Company keeps its employee counts
and employee wages stable. The program was implemented by the U.S. Small
Business Administration. The interest rate is 1.0% and has a maturity date of 2
years. We applied for loan and interest forgiveness in the fourth quarter of
2020.
Corporate History and Reorganization
The Company was originally organized in January 2008 as a Florida limited
liability company under the name LM Funding, LLC. Prior to our initial public
offering in 2015, all of our business was conducted through LM Funding, LLC and
its subsidiaries. Immediately prior to our initial public offering in October
2015, the members of the LM Funding, LLC contributed all of their membership
interests to LM Funding America, Inc., a Delaware corporation incorporated on
April 20, 2015 ("LMFA"), in exchange for shares of the common stock of LMFA.
Immediately after such contribution and exchange, the former members of LM
Funding, LLC became the holders of 100% of the issued and outstanding common
stock of LMFA, thereby making LM Funding, LLC a wholly-owned subsidiary of LMFA.
The Company organized two new subsidiaries in 2020: LMFA Financing LLC, a
Florida limited liability company, on November 21, 2020, and LMFAO Sponsor LLC,
a Florida limited liability company, on October 29, 2020. LMFAO Sponsor LLC
organized a subsidiary, LMF Acquisition Opportunities Inc., on October 29, 2020.
Results of Operations
The Year Ended December 31, 2020 compared with the Year Ended December 31, 2019
Revenues
During the year ended December 31, 2020, total revenues decreased by $1.1
million, or 47%, to $1.3 million from $2.4 million in the year ended December
31, 2019. The decrease is due in part to a decrease in interest, administrative
and late fees collected during the year along with a reduction in rental
revenues resulting from a reduced number of rental properties offset in part by
a $0.1 million increase in recoveries in excess of cost revenue.
The decrease in interest, administrative and late fees was the result of a
decrease in the average revenue collected per unit. The average revenue per unit
was down to $3,011 for the year ended December 31, 2020 compared with $5,195 for
the year ended December 31, 2019. There was also a 30% decrease in payoffs as
the Company recorded approximately 351 payoff occurrences for the year ended
December 31, 2020 compared with 502 payoff occurrences for the year ended
December 31, 2019. "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.
Rental revenue (which includes sales of units) for the year ended December 31,
2020 was $0.2 million as compared to $0.4 million for the year ended December
31, 2019. There were 9 rental units in the portfolio as December 31, 2020
compared with 13 rental units as of December 31, 2019.
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Operating Expenses
During the year ended December 31, 2020, operating expenses decreased by only
$0.1 million, or 1.0%, to $5.3 million from $5.4 million for the year ended
December 31, 2019. The net decrease increase in operating expenses can be
attributed to various factors including a $1.65 million goodwill impairment that
occurred in 2019, a $250 thousand reduction in real estate expenses and a $500
thousand recoupment of related party bad debt written off in 2017 offset in part
by a $2.1 million increase in staff costs & payroll resulting from severance of
$450 thousand, bonus of $630 thousand and a contract buyout of $819 thousand.
There was also an increase in general and administrative expenses of $148
thousand as the result of the addition of increased D&O insurance and higher
professional fees of $134 thousand. The charges for certain shared personnel
totaled $240 thousand in 2020 versus $185 thousand in 2019.
During the year ended December 31, 2019, the Company assessed the goodwill
attached to the purchase of IIU, Inc. in light of the subsequent sale of that
entity to Craven House Capital North America for approximately $3.6 million in
January 2020. As such, we determined that goodwill was negatively impacted and
reduced goodwill by $1.65 million during the fourth quarter of 2019.
Legal fees (excluding fees paid pursuant to our service agreement with BLG), for
the years ended December 31, 2020 and 2019 were approximately $0.8 million. 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. Legal fees for BLG for the year ended December
31, 2020 were $1.0 million compared to $1.1 million for the year ended December
31, 2019. See Note 11. Related Party Transactions for further discussion
regarding the service agreements with BLG.
Interest Expense
During the year ended December 31, 2020, interest expense was $7 thousand
compared to $103 thousand for the year ended December 31, 2019. The decrease
related to the payment of the $3.4 million Craven Convertible Note in early
2020.
Income Tax Provision (Benefit)
The Company did not record an income tax benefit or expense for the year ended
December 31, 2020 or 2019 due to continuing losses.
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 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 $4.6 million and $3.6 million for the year ended
December 31, 2020 and 2019, respectively.
Net Loss from Continuing Operations
During the year ended December 31, 2020, the Company generated a net loss from
continuing operations of $4.1 million as compared to a net loss of $3.0 million
for the year ended December 31, 2019 for the reasons mentioned above.
Income from Discontinued Operations
During the year ended December 31, 2020, the income from discontinued operations
was $0 as compared to net income of $75 thousand for the year ended December 31,
2019.
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Net Loss
During the year ended December 31, 2020, the Company generated a net loss of
$4.0 million as compared to a net loss of $3.0 million for the year ended
December 31, 2019 for the reasons mentioned above.
Liquidity and Capital Resources
General
As of December 31, 2020, we had cash and cash equivalents of $11.6 million
compared with $1.1 million at December 31, 2019. The increase in cash is due
primarily to $3.1 million of proceeds from the exercise of warrants and $9.5
million of proceeds from our August 2020 public offering.
Recent Capital Raising Transactions
On March 23, 2020, the Company entered into a Share Exchange Agreement (the
"Share Exchange Agreement"), with Hanfor (Cayman) Limited, a Cayman Islands
exempted company ("Hanfor"), and BZ Industrial Limited, a British Virgin Islands
business company and the sole stockholder of Hanfor ("Hanfor Owner"). In
connection with the execution of the Share Exchange Agreement, the Company and
Hanfor Owner entered into a Stock Purchase Agreement, dated March 23, 2020,
pursuant to which Hanfor Owner purchased from Company an aggregate of 520,838
shares of the Company's common stock at a price of $2.40 per share. Hanfor Owner
paid $250,000 cash on March 23, 2020 and the Company received the remaining $1.0
million in April 2020 at which time the Company issued the 520,838 shares.
Holders of our warrants exercised such warrants for 1,277,700 shares for total
consideration of $2,946,480 in June 2020.
On August 18, 2020, we raised approximately $8.2 million in net proceeds in a
registered public offering by issuing 10.2 million shares of common stock and
11.2 million warrants to purchase shares of common stock. Holders of the
warrants subsequently exercised such warrants for 150,000 shares of common stock
for $135 thousand.
Cash from Operations
Net cash used in operations was $3.5 million during the year ended December 31,
2020 compared with $1.2 million during the year ended December 31, 2019. This
change was primarily driven by a $1.0 million increase in net loss offset in
part by $583 thousand improvement in the advances to related parties and stock
compensation of $0.1 million. In 2019, the Company incurred a $1.65 million
non-cash goodwill impairment described above.
Cash from Investing Activities
Net cash used in investing activities was $1.5 million during the year ended
December 31, 2020 as compared to net cash used in investing activities of $1.1
million during the year ended December 31, 2019. The increase in cash from
investing activities was due to the receipt of a $1.5 million note receivable
from related party offset in part by a decrease from the disposal of IIU, Inc.
in January 2020 and the reduced sale of real estate. Net collections from our
finance receivables in 2020 was $0.2 million compared to $0.3 million for 2019.
Cash from Financing Activities
Net cash provided by financing activities was $12.6 million during the year
ended December 31, 2020 as compared to net cash used by financing activities of
$0.2 million for the year ended December 31, 2019. During 2020 the Company
received $1.3 million from a stock subscription agreement, $8.2 million from a
public offering of common stock (or common stock equivalents) and warrants, and
$3.1 million from the exercise of warrants. During 2019, the Company repaid $0.2
million in principal repayments. For 2020 the Company repaid $166 thousand of
principal repayments compared to $194 thousand principal repayments for 2019.
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Outstanding Debt
Debt of the Company consisted of the following:
Year ended December 31,
2020 2019
Promissory note issued by a financial institution,
bearing interest at 1.0%, interest and no principal
payments. The note matures April 30, 2022.
Annualized interest is 1.0%. This is a U.S. Small
Business Administration's Paycheck Protection Program
(the "PPP Loan") $ 185,785 $ -
Financing agreement with FlatIron capital that is
unsecured. Down payment of $19,170 was required
upfront and equal installment payments of $11,590 to
be made over a 11 month period. The note matured on
June 1, 2020. Annualized interest is 6.8% - 69,540
Financing agreement with FlatIron capital that is
unsecured. Down payment of $20,746 was required
upfront and equal installment payments of $19,251 to
be made over a 10 month period. The note matures on
May 1, 2021. Annualized interest is
5.95% 96,257 -
Senior secured convertible note to Craven House
Capital North America LLC (Related Party), bearing
interest at 3.0%. Note was issued on January 16, 2019
and either matured on January 14, 2020 or became
convertible into 1,436,424 shares of the Company's
common stock. The value of the beneficial conversion
feature as of January 16, 2019 was zero.* - 3,461,782
Promissory note issued by a financial institution,
bearing interest at 9.09%, interest and principal
payments due monthly of $323. Note is secured by an
automobile and was issued on July 26, 2019 with
original borrowings of $12,892. The note matures on
August 26, 2023. - 11,802
Promissory note issued by a financial institution,
bearing interest at 5.85%, interest and principal
payments due monthly of $10,932. Note was issued on
May 31, 2018 with original borrowings of $608,000 and
subsequent borrowings of $141,000 and repayments of
$51,000. The note matures on May 30, 2025 and can be
prepaid at any time without penalty. This note is
secured by the Company's inventory, chattel paper,
accounts, equipment and general intangible
intangibles and deposit accounts. - 606,454
$ 282,042 $ 4,149,578* The $3.5 million due to Craven was forgiven in connection with Craven's
repurchase of IIU on January 8, 2020 pursuant to the terms of the Craven SPA.
Minimum required principal payments on the Company's debt as of December 31,
2020 are as follows :
Years Ending December 31
2021 $96,257
2022 185,785
2023 -
2024 -
After 2024 -
$282,042
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.
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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 will be used to cover payroll costs, rent, interest, and utilities. The
loan may be partially or fully forgiven if the Company keeps its employee counts
and employee wages stable. The program was implemented by the U.S. Small
Business Administration. The interest rate is 1.0% and has a maturity date of 2
years. We applied for loan and interest forgiveness in December 2020.
Liquidity Outlook
The Company's financial statements are prepared in accordance with GAAP
applicable to a going concern, which contemplates realization of assets and the
satisfaction of liabilities in the normal course of business within one year
after the date the consolidated financial statements are issued.
In accordance with Financial Accounting Standards Board, or the FASB, Accounting
Standards Update No. 2014-15, Presentation of Financial Statements - Going
Concern (Subtopic 205-40), our management evaluates whether there are conditions
or events, considered in aggregate, that raise substantial doubt about our
ability to continue as a going concern within one year after the date that the
financial statements are issued.
The Company has experienced significant operating losses over the past 4 years
(2016 through December 30, 2020) with cumulative losses of approximately
$18,538,000 and negative cashflows from operations. These losses resulted in the
usage of all cash proceeds from the Company's initial public offering in 2015.
For the year ended December 31, 2019, the Company disclosed the substantial
doubt about the Company's ability to continue as a going concern
The Company received a total of approximately $14.0 million during the twelve
months ended December 31, 2020 due to a number of factors including:
• Holders of our warrants exercised such warrants for 1.2 million shares in
June 2020 which resulted in the Company receiving approximately $2.9
million.
• The Company was repaid approximately $1.5 million on a related party
receivable.
• The Company received $1.25 million for the issuance of 520,838 common shares.
• The Company received $8.3 million for the issuance of 10,200,000 common
shares.
• Holders of our warrants exercised such warrants for 150 thousand in August
2020 which resulted in the Company receiving approximately $0.1 million.
As such, we have $11.6 million of cash as of December 31, 2020 which we believe
will be enough to satisfy our estimated liquidity needs for the 12 months from
the issuance of our financial statements for the year ended December 31, 2020.
However, there is no assurance that management's plan will be successful due to
the current economic climate in the United States and globally. At the time of
issuance of our consolidated financial statements, management believes that the
previously reported going concern has been alleviated based on the reasons
above, and management does not have substantial doubt of the Company's ability
to continue as a going concern.
These financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event that the
Company cannot continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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LM FUNDING AMERICA, INC. 
