Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expects," "intends," "plans," "projects," "estimates," "anticipates," "believes," or the negative thereof or any variation thereon or similar terminology or expressions.

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties, and assumptions about us that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect our results and our future performance include, without limitation:



  • 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 suits 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 industries,


   •  negative press regarding the debt collection industry which may have a
      negative impact on a debtor's willingness to pay the debt we acquire, and


   •  other factors set forth under "Item 1A. Risk Factors" in our Annual Report
      on Form 10-K for the fiscal year ended December 31, 2020 and Item 1A of this
      Quarterly Report on Form 10-Q.

Except as required by law, we assume no duty to update or revise any forward-looking statements.

Overview

LM Funding America, Inc. ("we", "our", "LMFA" or the "Company") is a specialty finance company that provides funding to nonprofit community associations primarily located in the state of Florida. We offer incorporated nonprofit community associations, which we refer to as "Associations," a variety of financial products customized to each Association's financial needs. Our original product offering consists of providing funding to Associations by purchasing their rights under delinquent accounts that are selected by the Associations arising from unpaid Association assessments. Historically, we provided funding against such delinquent accounts, which we refer to as "Accounts," in exchange for a portion of the proceeds collected by the Associations from the account debtors on the Accounts. In addition to our original product offering, we have started purchasing Accounts on varying terms tailored to suit each Association's financial needs, including under our New Neighbor Guaranty™ program.



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Specialty Finance Company

We purchase an Association's right to receive a portion of the Association's collected proceeds from owners that are not paying their assessments. After taking assignment of an Association's right to receive a portion of the Association's proceeds from the collection of delinquent assessments, we engage law firms to perform collection work on a deferred billing basis wherein the law firms receive payment upon collection from the account debtors or a predetermined contracted amount if payment from account debtors is less than legal fees and costs owed. Under this business model, we typically fund an amount equal to or less than the statutory minimum an Association could recover on a delinquent account for each Account, which we refer to as the "Super Lien Amount". Upon collection of an Account, the law firm working on the Account, on behalf of the Association, generally distributes to us the funded amount, interest, and administrative late fees, with the law firm retaining legal fees and costs collected, and the Association retaining the balance of the collection. In connection with this line of business, we have developed proprietary software for servicing Accounts, which we believe enables law firms to service Accounts efficiently and profitably.

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

Specialty Finance Products

Original Product

Our original product relies upon Florida statutory provisions that effectively protect the principal amount invested by us in each Account. In particular, Section 718.116(1), Florida Statutes, makes purchasers and sellers of a unit in an Association jointly and severally liable for all past due assessments, interest, late fees, legal fees, and costs payable to the Association. As discussed above, the Florida Statutes grants to Associations a so-called "super lien", which is a category of lien that is given a statutorily higher priority than all other types of liens other than property tax liens. The amount of the Association's priority over a first mortgage holder that takes title to a property through foreclosure (or deed in lieu), referred to as the Super Lien Amount, is limited to twelve months' past due assessments or, if less, one percent (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 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.



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Before we implement the New Neighbor Guaranty program for an Association, the Associaiton 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

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 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. On May 6, 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, par value $0.001 per share which resulted in a decrease in outstanding common stock to 5,414,296 shares. The reverse stock split was effected by the filing of an amendment to our Certificate of Incorporation on May 5, 2021 which provided that the reverse stock split become effective at 12:01 a.m. Eastern time on May 7, 2021. The amendment provides that any fraction of a share of common stock that would be created as a result of the reverse stock split is to be cashed out at price equal to the product of the closing price of the Company's common stock on May 6, 2021 and the amount of the fractional share. 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 Reverse Stock Split.

COVID-19 Update

Although COVID-19 is currently not material to our results of operations, there is uncertainty relating to the potential future impact on our business. While our employees currently have the ability and are encouraged to work remotely, such measures have and may continue to have an impact on employee attendance or productivity, which, along with the possibility of employees' illness, may adversely affect our operations. In addition to encouraging employees to work remotely, the Company has increased sanitation of its offices, provided hand gel and masks to its employees and has closed the offices during identified periods of high contagion.

The extent to which COVID-19 impacts our operations, or our ability to obtain financing should we require it, will depend on future developments which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken by governments and private businesses to contain COVID-19 to treat its impact, among others. If the disruptions posed by COVID-19 continue for an extended period of time, financial markets may not be available to the Company for raising capital in order to fund future growth. Should the Company not be able to obtain financing when required, in the amounts necessary or under terms which are economically feasible, we may be required to reduce planned future growth and/or the scope of our operations.

Corporate History and Reorganization

The Company was originally organized in January 2008 as a Florida limited liability company under the name LM Funding, LLC. Historically, all of our business was conducted through LM Funding, LLC and its subsidiaries (the "Predecessor"). Immediately prior to our initial public offering in October 2015, the members of the LM Funding, LLC contributed all of their membership interests to LM Funding America, Inc., a Delaware corporation incorporated on April 20, 2015 ("LMFA"), in exchange for an aggregate of 2,100,000 shares of the common stock of LMFA (the "Corporate Reorganization"). 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. As used in this discussion and analysis, unless the context requires otherwise, references to "LMF," "LM Funding," "we," "us," "our," "the Company," "our company," and similar references refer to (i) following the date of the Corporate Reorganization, LM Funding America, Inc., a Delaware corporation, and its consolidated subsidiaries, and (ii) prior to the date of the Corporate Reorganization, LM Funding, LLC, a Florida limited liability company, and its consolidated subsidiaries.

Results of Operations - Three Months

The Three Months Ended March 31, 2021 compared with the Three Months Ended March 30, 2020

Revenues

During the Three Months ended March 31, 2021, total revenues decreased by $165 thousand, to $177 thousand from $341 thousand in the Three Months ended March 31, 2020.



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Interest on delinquent association fees for the Three Months ended March 31, 2021 decreased $142 thousand even as the number of payoffs increased to 82 payoff occurrences as compared to 78 payoff occurrences for the Three Months ended March 31, 2020. We believe these payoffs were impacted in part by the negative impact COVID-19 has had on the general economy. "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. The decrease in payoff occurrences was due to a decrease in revenue per unit. The average revenue per unit per the Statement of Operations, excluding rental revenue and net commission revenue decreased to $1,765 for the Three Months ended March 31, 2021 compared with $3,758 for the Three Months ended March 31, 2020.

We saw a decrease in rental revenue in the Three Months ended March 31, 2021 of $16 thousand to $32 thousand from $48 thousand for the Three Months ended March 31, 2020. This was due to a reduced number of rental units in 2021 as compared to 2020.

Operating Expenses

During the Three Months ended March 31, 2021, operating expenses increased approximately $1.0 million, to $1.9 million from $902 thousand for the Three Months ended March 31, 2020. The increase in operating expenses can be attributed to various factors, including $986 thousand increase in compensation relating to bonuses of $800 thousand and board compensation of $150 thousand offset in part due to a reduction in real estate management expenses of $67 thousand.

Professional fees, excluding fees from the BLG service agreement, for the Three Months ended March 31, 2021 were approximately $237,000 compared with approximately $248,000 for the Three Months ended March 31, 2020. In the ordinary course of our 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. The collection costs of these lawsuits increased by approximately $10,000 to $2,000 compared with a credit of approximately $8,000 for the Three Months ended March 31, 2020. The settlements costs with associations decreased by approximately $12,000 to nil for the Three Months ended March 31, 2021 as compared to approximately $12,000 for the Three Months ended March 31, 2020.

Legal fees for BLG for the Three Months ended March 31, 2021 were $246 thousand compared to $259 thousand for the Three Months ended March 31, 2020. See Note 4. Due to Related Party for further discussion regarding the service agreements with BLG.

Other Income

The Company's investment in LMF Acquisition Opportunities Inc. ("LMAO") changed due to the LMAO IPO on January 28, 2021. This resulted in LMAO's deconsolidation from the Company and resulted in the recognition of a unrealized gain on securities of $4.5 million which was offset in part by an unrealized loss of $3.9 million on the Company's $5.8 million investment in the Private Placement Warrants. The Company recognized a $5.7 million gain on a transaction with BORQS Technologies Inc. (Borqs") in which we acquired debt of Borqs and converted the debt into Borqs common stock and subsequently sold such shares at a gain.

Interest (Income) Expense

During the Three Months ended March 31, 2021, the Company incurred net interest income of $13 thousand as compared to $7 thousand of interest expense for the Three Months ended March 31, 2020.

Income Tax Expense

During the Three Months ended March 31, 2021, the Company incurred net income tax expense of $3 thousand. Due to the Company generating $4.5 million before income taxes, the Company released $1.1 million of its income tax valuation allowance while also recognizing $1.1 million income tax expense. The Company did not recognize any income tax expense for the three months ended March 31, 2020 since it was in a loss situation.

Net Income (Loss) from Continuing Operations

During the Three Months ended March 31, 2021, the net income from continuing operations was $4.5 million as compared to a net loss of $568 thousand for the Three Months ended March 31, 2020.

Income from Discontinued Operations

During the Three Months ended March 31, 2021, the income from discontinued operations was $0 as compared to net income of $16 thousand for the Three Months ended March 31, 2020.



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Net Income Attributable to Non-Controlling Interest

The Company owns 70.5% of LMFA Sponsor LLC ("Sponsor"). As such, $172 thousand of the $595 thousand net unrealized gain recognized by the Sponsor's ownership of LMAO is attributed to the Non-Controlling Interest.

Net Income (Loss)

During the Three Months ended March 31, 2021, the net income was $4.4 million as compared to net loss of $551 thousand for the Three Months ended March 31, 2020.

Liquidity and Capital Resources

General

As of March 31, 2021, we had cash and cash equivalents of $17.8 million compared with $11.5 million at December 31, 2020.

Cash from Operations

Net cash used in operations was $701 thousand during the Three Months ended March 31, 2021 compared with net cash used in operations of $321 thousand during the Three Months ended March 31, 2020. This change in cash used in operating activities was primarily driven by the investment income generated by BORQ transaction.

Cash from Investing Activities

For the Three Months ended March 31, 2021 net cash used in investing activities was $1,782 thousand as compared to $192 thousand for the Three Months ended March 31, 2020. The increase was due to the investment of $5.8 million in LMF Acquisition Opportunities Inc (a special purpose acquisition corporation) and a $1.6 million investment in a convertible note with BORQ corporation. This was offset by the Borqs transaction in which we purchased $18 million of Borqs debt for $15.5 million and exchanged those shares for $21.2 million and realizing a $5.7 million gain.

Cash from Financing Activities

Net cash provided by financing activities was $8,733 thousand for the Three Months ended March 31, 2021 compared to $215 thousand during the Three Months ended March 31, 2020. At March 31, 2021, the Company received $9.5 million from the exercise of warrants and paid $812 thousand repayments of debt. During the Three Months ended March 31, 2020 the Company received $250 thousand from a stock subscription agreement.

Shareholders' Equity

During the three months ended March 31, 2021, holders of our warrants exercised such warrants for approximately 2.3 million shares of common stock for $9.5 million.

On March 23, 2020, the Company entered into a Share Exchange Agreement, dated March 23, 2020 (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 104,168 shares of the Company's common stock at a price of $12.00 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 104,168 shares.

Debt of the Company consisted of the following at March 31, 2021 and December 31, 2020:



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                                                                               December 31,
                                                         March 31, 2021       2020 (Audited)
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%                                                   $         38,503     $         96,257

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              185,785


                                                        $        224,288     $        282,042

As of March 31, 2021, minimum annual principal payments are as follows:






                                 2021        224,288
                                 2022              -
                                 2023              -
                                 2024              -
                                 2025              -
                              After 2025           -
                                           $ 224,288

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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