ITEM 1. Financial Statements
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
LM Funding America, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (unaudited)
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
LM FUNDING AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS SEPTEMBER 30, 2021
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
LM Funding America, Inc. (“we”, “our”, “LMFA” or the “Company”) was formed as a Delaware corporation on April 20, 2015. LMFA was formed for the purpose of completing a public offering and related transactions in order to carry on the business of LM Funding, LLC and its subsidiaries (the “Predecessor”). LMFA is the sole member of LM Funding, LLC and operates and controls all of its businesses and affairs.
LM Funding, LLC, a Florida limited liability company organized in January 2008 under the terms of an Operating Agreement effective January 8, 2008 as amended, had two members: BRR Holding, LLC and CGR 63, LLC. The members contributed their equity interest to LMFA prior to the closing of its initial public offering.
The Company created two subsidiaries, LMFA Financing LLC on November 21, 2020 and LMFAO Sponsor LLC on October 29, 2020. LMFAO Sponsor LLC created a majority owned subsidiary LMF Acquisition Opportunities Inc. on October 29, 2020.
We are 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.
During 2020, we began exploring other specialty finance business opportunities that are complementary to or that can leverage our historical business.
Specialty Finance Company
We purchase an Association’s right to receive a portion of the Association’s collected proceeds from owners that are not paying their assessments. After taking assignment of an Association’s right to receive a portion of the Association’s proceeds from the collection of delinquent assessments, we engage law firms to perform collection work on a deferred billing basis wherein the law firms receive payment upon collection from the account debtors or a predetermined contracted amount if payment from 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.
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
7
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.
New Neighbor Guaranty
In 2012, we developed a new product, the New Neighbor Guaranty, wherein an Association assigns substantially all of its outstanding indebtedness and accruals on its delinquent units to us in exchange for payments in an amount equal to the regular ongoing monthly or quarterly assessments for delinquent units when those amounts would be due to the Association. We assume both the payment and collection obligations for these assigned Accounts under this product. This simultaneously eliminates an Association’s balance sheet bad debts and assists the Association to meet its budget by receiving guaranteed assessment payments on its delinquent units and relieving the Association from paying legal fees and costs to collect its bad debts. We believe that the combined features of the product enhance the value of the underlying real estate in an Association and the value of an Association’s delinquent receivables.
Before we implement the New Neighbor Guaranty program for an Association 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.
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 April 21, 2021, our Board of Directors approved a one-for-five reverse split of the Company’s common stock. As a result, on May 7, 2021, the Company effected a common share consolidation (“Reverse Stock Split”) by means of a one-for-five (1:5) reverse split of its outstanding common stock, which resulted in a decrease in outstanding common stock to 5,414,296 shares. The Reverse Stock Split became effective on May 7, 2021 and the Company’s common stock began trading on The Nasdaq Capital Market on a split-adjusted basis on May 7, 2021. The Company has retroactively adjusted all share amounts and per share data herein to give effect to the Reverse Stock Split.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of LMFA and its wholly-owned subsidiaries: LM Funding, LLC; LMF October 2010 Fund, LLC; REO Management Holdings, LLC (including all 100% owned subsidiary limited liability companies); LM Funding of Colorado, LLC; LM Funding of Washington, LLC; LM Funding of Illinois, LLC; and LMF SPE #2, LLC and various single purpose limited liability corporations owned by REO Management Holdings, LLC which own various properties. It also includes LMFA Sponsor LLC (a 70.5% owned subsidiary). All significant intercompany balances have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in the annual
8
consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim condensed consolidated financial statements as of September 30, 2021 and for the Three and Nine Months ended September 30, 2021 and September 30, 2020, respectively are unaudited. In the opinion of management, the interim condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods. The accompanying condensed consolidated balance sheet as of December 31, 2020, is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for fiscal the year ended December 31, 2020.
Digital Assets, net
We account for all digital assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. We have ownership of and control over our digital assets and use third-party custodial services to secure it. The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition.
We determine the fair value of our digital assets in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for such assets (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances indicate that it is more likely than not that our digital assets are impaired. If the current carrying value of a digital asset exceeds the fair value so determined, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the price determined.
The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses.
There is currently no specific guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue or held, and management has exercised significant judgement in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.
Investment in Securities
Investment in Securities includes investments in common stocks and convertible notes receivables. Investments in securities are reported at fair value with changes in unrecognized gains or losses included in other income on the income statement. The fair value of the convertible notes receivables are based on their classification as trading securities and as such are reported at fair value.
Investments in Unconsolidated Entities
We account for investments in less than 50% owned and more than 20% owned entities using the equity method of accounting. Because we have elected the fair value option for these securities, unrealized holding gains and losses during the period are included in earnings.
Income (Loss) Per Share
Basic income (loss) per share is calculated as net income (loss) to common stockholders divided by the weighted average number of common shares outstanding during the period (as adjusted to give effect to the Reverse Stock Split).
The Company issued approximately 2.3 million shares at various times during the Nine Months ended September 30, 2021 and has weighted average these new shares in calculating income (loss) per share. The Company also issued approximately 2.5 million shares at various times during the Nine Months ended September 30, 2020 and has weighted average these new shares in calculating income (loss) per share.
The Company has restated all share amounts to reflect the Reverse Stock Split.
Diluted income (loss) per share for the period equals basic loss per share as the effect of any convertible notes, stock based compensation awards or stock warrants would be anti-dilutive.
The anti-dilutive stock based compensation awards and convertible notes consisted of:
|
|
|
As of September 30,
|
|
|
|
2021
|
|
2020
|
|
Stock Options
|
|
3,860
|
|
3,860
|
|
Stock Warrants
|
|
391,900
|
|
2,958,011
|
|
|
|
|
|
|
Note 2. Finance Receivables – Original Product
The Company’s original funding product provides financing to community associations only up to the secured or “Super Lien Amount” as discussed in Note 1. Finance receivables for the original product as of September 30, 2021 and December 31, 2020 based on the year of funding are approximately as follows:
|
|
|
September 30, 2021
|
|
|
December 31,
2020 (Audited)
|
|
|
Funded during the current year
|
|
$
|
16,000
|
|
|
$
|
25,000
|
|
|
1-2 years outstanding
|
|
|
6,000
|
|
|
|
12,000
|
|
|
2-3 years outstanding
|
|
|
4,000
|
|
|
|
9,000
|
|
|
3-4 years outstanding
|
|
|
5,000
|
|
|
|
12,000
|
|
|
Greater than 4 years outstanding
|
|
|
137,000
|
|
|
|
200,000
|
|
|
|
|
|
168,000
|
|
|
|
258,000
|
|
|
Reserve for credit losses
|
|
|
(90,000
|
)
|
|
|
(142,000
|
)
|
|
|
|
$
|
78,000
|
|
|
$
|
116,000
|
|
Note 3. Finance Receivables – Special Product (New Neighbor Guaranty program)
The Company typically funds amounts equal to or less than the “Super Lien Amount”. During 2012 the Company began offering Associations an alternative product under the New Neighbor Guaranty program where the Company funds amounts in excess of the “Super Lien Amount”.
Under this special product, the Company purchases substantially all of the outstanding past due assessments due from delinquent property owners, in addition to all interest, late fees and other charges in exchange for the Company’s commitment to pay monthly assessments on a going forward basis up to 48 months.
As of September 30, 2021, maximum future contingent payments under these arrangements were approximately $20,900.
Delinquent assessments and accrued charges under these arrangements as of September 30, 2021 and December 31, 2020, are as follows:
|
|
|
September 30, 2021
|
|
|
December 31,
2020 (Audited)
|
|
|
Finance receivables, net
|
|
$
|
44,000
|
|
|
$
|
53,000
|
|
|
Delinquent assessments
|
|
|
150,000
|
|
|
|
148,000
|
|
|
Accrued interest and late fees
|
|
|
67,000
|
|
|
|
57,000
|
|
|
Number of active units with delinquent assessments
|
|
|
10
|
|
|
|
20
|
|
Allowance for credit losses are recorded for expected losses based on historical experience, current conditions and reasonable and supportable forecasts that may affect collectability. Recoverability of the Company’s Original Product is generally assured because of the protection of the Super Lien under Florida statute and as such no allowance is recorded.
Credit losses on the NNG product were estimated by the Company based on analyzing the investment in each unit and comparing that balance to the average payout for completed units for the past 12 months. The allowance for losses based on these analyses, had a remaining balance of $0 and $6,500 as of September 30, 2021 and December 31, 2020, respectively.
Note 4. Due to Related Party
Legal services for the Company associated with the collection of delinquent assessments from property owners are performed by a law firm, Business Law Group (“BLG”), which was owned solely by Bruce M. Rodgers, the Chief Executive Officer of LMFA, until and through the date of the initial public offering. Following the offering, Mr. Rodgers transferred his interest in BLG to other attorneys at the firm through a redemption of his interest in the firm, and BLG is now under control of those lawyers. The law firm has historically performed collection work primarily on a deferred billing basis wherein the law firm receives payment for services rendered upon collection from the property owners or at amounts ultimately subject to negotiations with the Company.
9
The Company pays BLG a fixed monthly fee of $82,000 for services rendered. The Company will continue to pay BLG a minimum per unit fee of $700 in any case where there is a collection event and BLG receives no payment from the property owner. This provision has been expanded to also include any unit where the Company has taken title to the unit or where the association has terminated its contract with either BLG or the Company.
Amounts expensed by the Company to BLG for the Three and Nine Months ended September 30, 2021 and 2020 were approximately $246,000 and $738,000 for 2021 and $247,000 and $756,000 for 2020, respectively. As of September 30, 2021 and December 31, 2020, receivables from property owners for charges ultimately payable to BLG approximately $1,026,000 and $1,332,000, respectively.
Under the related party agreement with BLG in effect during 2021 and 2020, the Company pays all costs (lien filing fees, process and serve costs) incurred in connection with the collection of amounts due from property owners. Any recovery of these collection costs is accounted for as a reduction in expense incurred. The Company incurred expenses related to these types of costs for the Three and Nine Months ended September 30, 2021 and 2020 in the amounts of $26,000 and $76,000 for 2021 and $28,000 and $95,000 for 2020, respectively. Recoveries during the Three and Nine Months ended September 30, 2021 and 2020, related to those costs were approximately $27,000 and $72,000 for 2021 and $ 28,000 and $124,000 for 2020, respectively.
The Company also shares office space and related common expenses with BLG. All shared expenses, including rent, are charged to BLG based on an estimate of actual usage. Any expenses of BLG paid by the Company that have not been reimbursed or settled against other amounts are reflected as due from related parties in the accompanying consolidated balance sheet. BLG was charged approximately $17,000 and $51,000 for the office sub-lease during the Three and Nine Months ended September 30, 2021.
Amounts payable to BLG as of September 30, 2021 and December 31, 2020 were approximately $135,900 and $158,400, respectively. In the first Nine Months of September 30, 2021, the Company subsequently recouped $200,000 of previously written-off amounts to BLG.
Note 5. Debt and Other Financing Arrangements
|
|
|
September 30, 2021
|
|
|
December 31,
2020 (Audited)
|
|
|
The note payable as of December 31, 2020 required an upfront payment of $20,746 and monthly payments of $19,251 over a ten month period. The notes matured on May 1, 2021. Annualized interest was 5.95%.
|
|
$
|
-
|
|
|
$
|
96,257
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured financing agreement with commercial premium financing company. Down payment of $36,255 was required upfront and equal installment payments of $19,115 to be made over an 11 month period. The note will mature on June 1, 2022 with annualized interest of 3.95%.
|
|
$
|
172,032
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note issued by a financial institution, bearing interest at 1.0%, interest and no principal payments. The note matured April 30, 2022. Annualized interest was 1.0%. This is a U.S. Small Business Administration’s Paycheck Protection Program (the “PPP Loan”)
|
|
|
-
|
|
|
|
185,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
172,032
|
|
|
$
|
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.
10
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 have applied for loan and interest forgiveness in the fourth quarter of 2020.
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.
Note 6. Income Taxes
Prior to the Company’s initial public offering in October 2015, the earnings of the Predecessor, which was a limited liability company taxed as a partnership, were taxable to its members. In connection with the contribution of membership interests to the Company (a C-Corporation formed in 2015), the net income or loss of the Company after the initial public offering is taxable to the Company and reflected in the accompanying consolidated financial statements.
The Company performs an evaluation of the realizability of its deferred tax assets on a quarterly basis. The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets, including the scheduled reversal of temporary differences, recent and projected future taxable income and prudent and feasible tax planning strategies. The estimates and assumptions used by the Company in computing the income taxes reflected in the accompanying consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year. Adjustments are recorded based on filed returns when finalized or the related adjustments are identified.
Under ASC 740-10-30-5, Income Taxes, deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not (i.e., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The Company considers all positive and negative evidence available in determining the potential realization of deferred tax assets including, primarily, the recent history of taxable earnings or losses. Based on operating losses reported by the Company during 2020 and 2019, the Company concluded there was not sufficient positive evidence to overcome this recent operating history. As a result, the Company believed that a valuation allowance was necessary based on the more-likely-than-not threshold noted above. The Company had recorded a valuation allowance of approximately $2,432,000 as of September 30, 2021 and $4,658,000 as of December 31, 2020.
Significant components of the tax expense (benefit) recognized in the accompanying consolidated statements of operations for the Three and Nine Months ended September 30, 2021 and September 30, 2020 are as follows:
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
Current tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,159,524
|
)
|
|
$
|
(712,977
|
)
|
|
|
$
|
2,078,774
|
|
|
$
|
(861,234
|
)
|
|
State
|
|
|
(321,397
|
)
|
|
|
(147,519
|
)
|
|
|
|
348,622
|
|
|
|
(178,194
|
)
|
|
Total current tax benefit
|
|
|
(1,480,921
|
)
|
|
|
(860,496
|
)
|
|
|
|
2,427,396
|
|
|
|
(1,039,428
|
)
|
|
Deferred tax expense
|
|
|
12,619
|
|
|
|
53,114
|
|
|
|
|
34,614
|
|
|
|
92,371
|
|
|
Valuation allowance (expense)
|
|
|
1,480,921
|
|
|
|
807,382
|
|
|
|
|
(2,432,127
|
)
|
|
|
947,057
|
|
|
Income tax (reduction) benefit
|
|
$
|
12,619
|
|
|
$
|
-
|
|
|
|
$
|
29,883
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the income tax computed at the combined federal and state statutory rate of 24.5% for the Three and Nine Months ended September 30, 2021 and 2020 to the income tax benefit is as follows:
11
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
September 30, 2020
|
|
|
Benefit on net loss
|
|
$
|
(1,469,827
|
)
|
26.9%
|
|
$
|
(808,436
|
)
|
29.4%
|
|
|
$
|
2,458,947
|
|
24.5%
|
|
$
|
(948,111
|
)
|
25.3%
|
|
|
Nondeductible expenses
|
|
|
1,525
|
|
0.0%
|
|
|
1,054
|
|
0.0%
|
|
|
|
3,063
|
|
0.0%
|
|
|
1,054
|
|
0.0%
|
|
|
Valuation allowance (expense)
|
|
|
1,480,921
|
|
(27.1)%
|
|
|
807,382
|
|
(29.3)%
|
|
|
|
(2,432,127
|
)
|
(24.3)%
|
|
|
947,057
|
|
(25.3)%
|
|
|
Other items
|
|
|
-
|
|
0.0%
|
|
|
-
|
|
0.0%
|
|
|
|
-
|
|
0.0%
|
|
|
-
|
|
0.0%
|
|
|
Tax benefit/effective rate
|
|
$
|
12,619
|
|
(0.20)%
|
|
$
|
-
|
|
0.1%
|
|
|
$
|
29,883
|
|
0.2%
|
|
$
|
-
|
|
(—)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of the Company’s deferred tax liabilities and assets as of September 30, 2021 and December 31, 2020 are as follows:
|
|
|
As of September 30, 2021
|
|
|
As of December 31, 2020
(Audited)
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Tax expense for internally developed software
|
|
$
|
-
|
|
|
$
|
(1,814
|
)
|
|
Tax depreciation in excess of book
|
|
|
-
|
|
|
|
(2,916
|
)
|
|
Total deferred tax liabilities
|
|
|
-
|
|
|
|
(4,730
|
)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
|
1,359,074
|
|
|
|
3,913,579
|
|
|
Step up in basis at contribution to C-Corp
|
|
|
487,692
|
|
|
|
511,052
|
|
|
Stock option expense
|
|
|
120,820
|
|
|
|
124,876
|
|
|
Step up in basis - purchase of non-controlling interest
|
|
|
44,956
|
|
|
|
49,950
|
|
|
Allowance for credit losses
|
|
|
32,378
|
|
|
|
33,466
|
|
|
Accrued liabilities
|
|
|
-
|
|
|
|
20,573
|
|
|
Total deferred tax asset
|
|
|
2,044,920
|
|
|
|
4,653,496
|
|
|
Tax rate change
|
|
|
151,296
|
|
|
|
-
|
|
|
Valuation allowance
|
|
|
(2,226,099
|
)
|
|
|
(4,658,226
|
)
|
|
Net deferred tax asset (liability)
|
|
$
|
(29,883
|
)
|
|
$
|
-
|
|
During the Three months ended September 30, 2021, the Company offset $1.5 million of it’s tax recovery with $1.5 million of its valuation allowance. During the Nine Months ended September 30, 2021, the Company offset $2.4 million of it’s tax expense with $2.2 million of its valuation allowance.
Note 7. Commitments and Contingencies
Leases
The Company leases certain office space, construction and office equipment, vehicles and temporary housing generally under non-cancelable operating leases. Leases with an initial term of one year or less are not recorded on the balance sheet, and the Company generally recognizes lease expense for these leases on a straight-line basis over the lease term. As of September 30, 2021, the Company’s operating leases have remaining lease terms ranging from less than one year to 1 year, some of which include options to renew the leases. The exercise of lease renewal options is generally at the Company’s sole discretion. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.
The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and current and long-term operating lease liabilities are separately stated on the Consolidated Balance Sheet as of September 30, 2021. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The present value of future lease payments are discounted using either the implicit rate in the lease, if known, or the Company’s incremental borrowing rate for the specific lease as of the lease commencement date. The rate was determined as a fair value of the lease over a 37 month period using a 6.5% interest rate for the present value calculation. The ROU asset is also adjusted for any prepayments made or incentives received. The lease terms include options to extend or terminate the lease only to the extent it is reasonably certain any of those options will be exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company accounts for lease components (e.g., fixed payments) separate from the non-lease components (e.g., common-area maintenance costs). The Company does not have any material financing leases.
12
The Company’s new office lease began July 15, 2019 and ends July 31, 2022. A related party has a sub-lease for approximately $4,900 per month plus operating expenses.
The Company shares this space and the related costs associated with this operating lease with a related party (see Note 4) that also performs legal services associated with the collection of delinquent assessments. Net rent expense recognized for the Three and Nine Months ended September 30, 2021 and 2020 were approximately $23,700 and $71,200 for 2021 and $26,000 and $76,000 for 2020, respectively.
The following table presents components of lease expense excluding discontinued operations for the Three and Nine Months ended September 30, 2021 and 2020:
|
|
Three Months
Ended
September 30,
2021
|
Three Months
Ended
September 30,
2020
|
Nine Months
Ended
September 30,
2021
|
Nine Months
Ended
September 30,
2020
|
|
Operating lease expense
|
$ 22,627
|
$ 27,644
|
$ 47,483
|
$ 89,931
|
|
|
$ 22,627
|
$ 27,644
|
$ 47,483
|
$ 89,931
|
The following table presents supplemental balance sheet information related to operating leases as of September 30, 2021 and December 31, 2020:
|
|
|
Balance Sheet Line Item
|
As of September 30, 2021
|
|
As of December 31, 2020
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
ROU assets
|
|
Right of use asset, net
|
$
|
85,062
|
|
$
|
160,667
|
|
|
Total lease assets
|
|
|
$
|
85,062
|
|
$
|
160,667
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
Lease liability
|
$
|
93,340
|
|
$
|
103,646
|
|
|
Long-term lease liabilities
|
|
Lease liability
|
|
1,652
|
|
|
68,002
|
|
|
Total lease liabilities
|
|
|
$
|
94,992
|
|
$
|
171,648
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
1.00
|
|
|
1.60
|
|
|
Weighted-average discount rate
|
|
|
|
6.55
|
%
|
|
6.55
|
%
|
The following table presents supplemental cash flow information and non-cash activity related to operating leases for the Nine Months ended September 30, 2021 and 2020:
|
|
|
|
Nine Months Ended September 30, 2021
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
Operating cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
$
|
(76,656
|
)
|
$
|
(69,669
|
)
|
|
|
The following table presents maturities of operating lease liabilities on an undiscounted basis as of September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
|
|
2021 (excluding the nine months ended September 30, 2021)
|
|
|
$
|
26,990
|
|
|
|
|
|
|
2022
|
|
|
|
68,002
|
|
|
|
|
|
|
2023
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
94,992
|
|
|
|
|
|
13
Legal Proceedings
Except as described below, we are not currently a party to material pending or known threatened litigation proceedings. However, we frequently become party to litigation in the ordinary course of business, including either the prosecution or defense of claims arising from contracts by and between us and client Associations. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense, and settlement costs, diversion of management resources and other factors.
The Company accrues for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, the Company reassesses its position and makes appropriate adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters.
Entry into and Termination of Hanfor Share Exchange Agreement
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”). 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 September 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.
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 was purporting to appoint a director to the Company’s Board of Directors. Following the filing of the amended Schedule 13D, the Company continues to believe that its termination of the Share Exchange Agreement was proper because, among other reasons, the failure of Hanfor to provide audited financial statements by September 30, 2020, was an uncurable default under the Share Exchange Agreement. Furthermore, the Company was informed by Hanfor prior to such termination that Hanfor would be unable to provide audited financial statements for Hanfor for the foreseeable future because of ongoing legal issues in China. As a result, the Company believes that the purported appointment of Mr. Han to the Company’s Board of Directors was improper and therefore took no action in response to the Schedule 13D.
On January 11, 2021, the Company received a demand 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. In May 2021, counsel to Hanfor Owner requested a formal response to the demand letter, and on May 11, 2021, the Company sent a responsive email reiterating that the Company believes that Hanfor Owner’s alleged claim is invalid. In June 2021, counsel to Hanfor Owner further reiterated in writing to the Company’s counsel that Hanfor Owner is prepared to file a legal action in the absence of a satisfactory settlement, but the Company is not aware of any lawsuit filed to date.
14
Material Contracts
On September 8, 2021, the Company entered into a sale and purchase agreement (the “Purchase Agreement”) with Bitmain Technologies Limited (“Seller”) pursuant to which the Company agreed to purchase, and Seller agreed to supply to the Company, an aggregate of 1,002 Bitcoin S19J Pro Antminer cryptocurrency mining machines for an aggregate purchase price of $6.3 million (the “Mining Machines”). The Purchase Agreement provides for delivery of the Mining Machines in batches over an estimated delivery timeframe starting in April 2022 and continuing through September 2022. The Purchase Agreement requires the Company to pay a nonrefundable amount of 25% of the total purchase price for the Mining Machines within 7 days of the date of the signing of the Purchase Agreement, an additional 35% of the batch price at least 6 months prior to shipment of such batch, and the remaining 40% of each batch price one month prior to the shipment of the batch. The Purchase Agreement contains other customary terms, provisions, and conditions. The Company paid $1.6 million for the 25% as a deposit for the machines and is classified within Deposit on mining equipment in long term assets.
Note 8. Stockholders’ Equity
Stock Options
The 2015 Omnibus Incentive Plan provides for the issuance of stock options, stock appreciation rights, performance shares,
performance units, restricted stock, restricted stock units, shares of our common stock, dividend equivalent units, incentive cash
awards or other awards based on our common stock. Awards may be granted alone or in addition to, in tandem with, or (subject to the
2015 Omnibus Incentive Plan’s prohibitions on repricing) in substitution for any other award (or any other award granted under
another plan of ours or of any of our affiliates).
The following is a summary of the stock option plan activity during the Nine Months ended September 30, 2021 and 2020:
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options Outstanding at Beginning of the year
|
|
|
3,860
|
|
|
$
|
302.55
|
|
|
|
3,860
|
|
|
$
|
302.55
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at September 30,
|
|
|
3,860
|
|
|
$
|
302.55
|
|
|
|
3,860
|
|
|
$
|
302.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at September 30,
|
|
|
3,860
|
|
|
$
|
302.55
|
|
|
|
3,027
|
|
|
$
|
310.10
|
|
Compensation expense recognized from the vesting of stock options was approximately $ 0 and $10,200 for the Nine Months ended September 30, 2021 and 2020. There was no unrecognized compensation cost associated with unvested stock options as of September 30, 2021.
The aggregate intrinsic value of the outstanding common stock options as of September 30, 2021 and December 31, 2020 was approximately $0 and $0 respectively.
15
Warrants
The following is a summary of the warrant activity during the Nine Months ended September 30, 2021 and 2020:
|
|
|
2021
|
|
|
2020
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Warrants Outstanding at Beginning of the year
|
|
|
2,718,012
|
|
|
$
|
4.20
|
|
|
|
791,857
|
|
|
$
|
21.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
2,240,000
|
|
|
|
4.50
|
|
|
Exercised
|
|
|
(2,326,112)
|
|
|
|
4.08
|
|
|
|
(275,540)
|
|
|
|
3.48
|
|
|
Adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
126,694
|
|
|
|
1.70
|
|
|
Adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding at September 30,
|
|
|
391,900
|
|
|
$
|
4.35
|
|
|
|
2,958,011
|
|
|
$
|
8.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the Nine Months ended September 30, 2021, the Company received approximately $9.5 million upon the exercise by warrant holders of warrants for approximately 2.3 million shares. There was also a cashless warrant exercise for approximately 129,800 shares on January 29, 2021. The aggregate intrinsic value of the outstanding common stock warrants as of September 30, 2021 and December 31, 2020 was approximately $21,200 and $256,400 respectively.
Note 9. Investments
Short-term Investments
Short-term investments consist of a convertible debt investment. The Company entered into an agreement with BORQS Technologies Inc. (“Borqs”) (Nasdaq: BRQS) in February 2021 under which the Company agreed to purchase Senior Secured Convertible Promissory Notes (“Notes”) of Borqs up to an aggregate principal amount of $5 million. The Company’s purchase of the Notes was a part of a larger transaction in which an aggregate of $20 million in Notes were sold by Borqs in a private transaction to several institutional and individual investors, including the Company. The Notes become due in February 2023, 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. The Company received 2,922,078 warrants which had a nominal value on the grant date. One-third of the Notes ($1,666,667) were funded by the Company at the execution of definitive agreements for the transaction, and two-thirds of the Notes ($3,333,333) were purchased and funded upon the satisfaction of certain conditions, including effectiveness of a registration statement that was deemed effective on May 3, 2021 and the Company completed this funding on May 6, 2021. In June 2021, the Company exercised a cashless exercise of the Borqs warrants and received 5,956,544 common shares of Borqs. The Company subsequently sold those Borqs common shares in June 2021 and recognized $8.5 million in proceeds, all of which was recognized as a realized gain on securities in 2021.
During the three months ended September 30, 2021, the Company converted $4,100,000 of the Borqs convertible note plus accrued interest of $131,760 into 5,960,829 shares. The remaining Borqs convertible note plus accrued interest ($929,195) can be converted into common shares at a conversion price of $0.6534 per share or 1,422,091 shares. The fair value of the convertible note plus accrued interest are based on their classification as trading securities and as such are reported at fair value. As of September 30, 2021 the Company considered the fair value of the Borq convertible note to be equal to the fair value of the stock on September 30, 2021 or $0.592 per share times the number of shares that it could be converted into based on a conversion price of $0.6534 or 1,422,091 shares which have a fair value of $841,878. As of September 30, 2021, our re-measurement resulted in an unrealized loss of $87,316 and is included within “Unrealized gain on convertible debt security”. The Company classified the 5,960,829 shares as marketable securities and subsequently sold 587,530 shares in the nine months ending September 30, 2021
|
|
|
September 30, 2021
|
|
|
|
|
(Unaudited)
|
|
|
Convertible note
|
|
$
|
841,878
|
|
|
End of period
|
|
$
|
841,878
|
|
16
|
|
|
September 30, 2021
|
|
|
|
|
(Unaudited)
|
|
|
Beginning of year
|
|
|
-
|
|
|
Investment in convertible debt security
|
|
$
|
5,000,000
|
|
|
Accrued interest income on convertible debt security
|
|
|
160,954
|
|
|
Convertible debt and interest converted into marketable shares
|
|
|
(4,231,760
|
)
|
|
Unrealized loss on convertible debt security
|
|
|
(87,316
|
)
|
|
End of period
|
|
$
|
841,878
|
|
The Company entered into a Loan Agreement (the “Investor Loan Agreement”) in December 2020 with a private investor (“Investor”) 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 the Company. The Investor Loan Agreement does not provide a fixed rate of interest, and the Company and Investor agreed to split the net proceeds from the Company sales 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 the first three months ended March 31, 2021, the Company recognized a $5.7 million gain on the Borqs loan receivables loan transaction in which we acquired $18.2 million of Borqs debt for $15.5 million and converted the debt into Borqs common stock and subsequently sold such shares for $32.6 million, provided $11.3 million to the Investor and realized a $5.7 million gain.
Marketable Securities
Our marketable equity securities are publicly traded stocks measured at fair value using quoted prices for identical assets in active markets and classified as Level 1 within the fair value hierarchy. Marketable equity securities as of September 30, 2021 and December 31, 2020 are as follows:
|
|
|
Cost
|
|
|
Gross Unrealized Gain (Loss)
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities, September 30, 2021
|
|
$
|
3,958,678
|
|
|
$
|
(478,448
|
)
|
|
$
|
3,480,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities, December 31, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company sold 587,530 shares of Borqs shares for approximately $397,800 and realized a loss of approximately $173,300.
Digital Assets, net
Digital assets as of September 30, 2021 are as follows:
During the nine months ended September 30, 2021, the Company purchased and received an aggregate of $909 thousand in Bitcoin and $511 thousand in Ether cryptocurrency. These digital assets are recorded at cost, net of any impairment losses incurred since acquisition. During the three and nine months ended September 30, 2021, we recorded $24,000 and $24,000, respectively of impairment losses on such digital assets. As of September 30, 2021, the carrying value of our digital assets held was $1.4 million, which reflects cumulative impairments of approximately $24,000. The fair market value of such digital assets held as of September 30, 2021 was $1.4 million. The impairment loss was included within “Impairment loss on digital assets” in the consolidated statements of operations
Long-term Investments
In connection with LMF Acquisition Opportunities Inc (“LMAO”) initial public offering in January 2021, the Company’s affiliate LMFA Sponsor LLC purchased an aggregate 5,738,000 private placement warrants from LMAO (“Private Placement Warrants”) at a price of $1.00 per whole warrant. Each Private Placement Warrant is exercisable for one share of LMAO’s Class A common stock at a price of $11.50 per share, and as such meets the definition of a derivative as outlined within ASC 815, Derivatives and Hedging. The Private Placement Warrants are recorded at fair value and are classified in long-term "Investments" on the consolidated balance sheet. The fair value of the Private Placement Warrants is classified as level 3 in the fair value hierarchy as the calculation is dependent upon company specific adjustments to the observable trading price of LMAO’s public warrants for lack of marketability and related risk of forfeiture should no business combination occur. Subsequent changes in fair value will be recorded in the income statement during the period of the change. As of September 30, 2021, our re-measurement resulted in an unrealized loss of $3,626,400 and is included within "Unrealized gain (loss) on investment and equity securities" within our consolidated statements of operations.
17
Long-term investments as of September 30, 2021 consist of the following:
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
|
|
(Unaudited)
|
|
|
|
LMF Acquisition Opportunities Inc. warrants
|
|
$
|
2,111,584
|
|
|
|
End of period
|
|
$
|
2,111,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Beginning of year
|
|
$
|
-
|
|
|
|
Investments in affiliate
|
|
|
5,738,000
|
|
|
|
Unrealized loss on investment in affiliate
|
|
|
(3,626,416
|
)
|
|
|
End of period
|
|
$
|
2,111,584
|
|
|
|
|
|
|
|
|
|
Investment in Unconsolidated Affiliates
LMF Acquisition Opportunities Inc.
The Company is the sponsor of LMF Acquisition Opportunities, Inc. (“LMAO”), a special purpose acquisition company that completed an initial public offering in January 2021. Prior to LMAO’s initial public offering, LMFA Sponsor LLC (“Sponsor”), a 70% owned subsidiary of the Company, organized and initially capitalized LMAO by a $25,000 purchase of Class B shares par value $0.0001 per share, of LMAO. At the time of the initial public offering of LMAO, Sponsor purchased Private Placement Warrants that allow it to purchase 5,738,000 shares of Class A common stock at an exercise price of $11.50. The Class B shares and Private Placement Warrants were issued to and are held by Sponsor. The shares of Class B common stock of LMAO held by Sponsor will automatically convert into shares of LMAO’s Class A common stock on a one-for-one basis at the time of LMAO’s initial business combination and are subject to certain transfer restrictions.
The registration statement for LMAO’s initial public offering (the “LMAO IPO”) was declared effective on January 25, 2021 and on January 28, 2021, LMAO consummated the LMAO IPO with the sale of 10,350,000 units (the “Units” and, with respect to the shares of Class A common stock included in the Units sold, the “Public Shares”), at $10.00 per Unit, generating gross proceeds of $103,500,000. The Units trade on the NASDAQ Capital Market under the ticker symbol “LMAOU”. After the securities comprising the units began separate trading on March 18, 2021, the shares of Class A common stock and warrants were listed on NASDAQ under the symbols “LMAO” and “LMAOW,” respectively. Simultaneously with the closing of the LMAO IPO, LMAO consummated the sale of the Private Placement Warrants at a price of $1.00 per Private Placement Warrant in a private placement to Sponsor generating gross proceeds of $5,738,000.
As a result of the LMAO IPO, we ceased having a controlling financial interest in LMAO as of January 28, 2021. Additionally, as our retained investment in LMAO qualifies for equity-method accounting, we were required to remeasure our retained interest in LMAO at fair value and include any resulting adjustments as part of a gain or loss recognized on deconsolidation. The fair value calculation related to our retained interest in LMAO is dependent upon company-specific adjustments applied to the observable trading price of LMAO’s Class A common stock.
The Company’s investment in the Sponsor represents 70.5% of the Sponsor’s initial risk capital. The LMAO IPO closed on January 28, 2021 and proceeds from LMAO’s IPO totaled $103.5 million. If LMAO does not complete a business combination within 18 months from the closing of LMAO’s IPO, the proceeds from the sale of the Private Placement Warrants (after LMAO IPO transaction costs) will be used to fund the redemption of the shares sold in the LMAO IPO (subject to the requirements of applicable law), and the private warrants will expire without value. The Sponsor holds approximately 20% of the total common shares (Class A and Class B) in LMAO along with the 5,738,000 Private Placement Warrants. The Sponsor is managed by the Company. The Company has determined that as a result of the LMAO IPO, we ceased having a controlling financial interest in LMAO as of January 25, 2021. The
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Company, therefore, accounts for the Sponsor under the equity method of accounting. Additionally, as our retained investment in LMAO qualifies for equity-method accounting, we were required to remeasure our retained interest at fair value and include any resulting adjustments as part of a gain or loss recognized on deconsolidation. The fair value calculation related to our retained interest in LMAO is dependent upon company-specific adjustments applied to both the observable trading price of LMAO’s Class A common stock and the transaction price of the January 28, 2021 and the related risk of forfeiture should LMAO not consummate a business combination. As a result of the remeasurement of our retained interest in LMAO, we recognized for the Nine Months ended September 30, 2021, an unrealized gain on securities of $4.65 million. within our consolidated statements of operations.
|
|
|
September 30, 2021
|
|
|
|
|
|
(Unaudited)
|
|
|
|
LMF Acquisition Opportunities Inc. common stock
|
|
$
|
4,676,130
|
|
|
|
End of period
|
|
$
|
4,676,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Beginning of year
|
|
$
|
25,000
|
|
|
|
Unrealized gain on initial investment in affiliate
|
|
|
4,651,130
|
|
|
|
End of period
|
|
$
|
4,676,130
|
|
|
|
|
|
|
|
|
|
The net unrealized gain (loss) on securities from the Company’s investment in LMAO’s Class B shares and warrants totaled ($0.1) million and $1.0 million, respectively for the Three and Nine Months ended September 30, 2021.
Note 10. Subsequent Events
Public Equity Offering
On October 18, 2021, the Company entered into an Underwriting Agreement with Maxim Group LLC on behalf of itself and as representative of the underwriters named therein (the “Underwriting Agreement”), pursuant to which the Company issued and sold, in an underwritten public offering (the “Public Offering”), 6,315,780 units, with each unit consisting of one share of common stock, $0.001 par value per share (“Common Stock”), and one warrant to purchase one share of Common Stock (the “Common Warrants”). The units were sold to the public at the price of $4.75 per unit.
On October 19, 2021, the Public Offering closed, resulting in gross proceeds to the Company of approximately $30,000,000, before deducting the underwriting discounts and commissions and estimated offering expenses. The Company also granted to the underwriter a 45-day option to purchase up to an additional 947,367 shares of Common Stock (“Option Shares”) and/or warrants (“Option Warrants”) to purchase up to 947,367 shares of Common Stock (the “Over-Allotment Option”). The underwriter partially exercised the Over-Allotment Option, and the Company thereby issued and sold the additional 947,367 Option Warrants, in a simultaneous closing with the Public Offering on October 19, 2021. On October 20, 2021, the underwriter exercised the remainder of the Over-Allotment Option, and the Company thereby issued and sold the additional 947,367 Option Shares (the “October 20 Over-Allotment Closing”).
The Common Warrants issued in the offering are immediately exercisable and entitle the holder to purchase one share of Common Stock at an exercise price equal to $5.00 and expire on the fifth anniversary of the issuance date. The Common Warrants may be exercised on a cashless basis if there is no effective registration statement available for the resale of the shares of common stock underlying such warrants.
The Company agreed to an underwriting discount of 8% of the public offering price of the Units sold in this offering. In addition, the Company issued to Maxim Group LLC (or its designee) warrants to purchase to purchase an aggregate of 3% of the number of shares of Common Stock sold in the Public Offering, which warrants entitle the holder to purchase up to an aggregate of 217,894 shares of Common Stock after the October 20 Over-Allotment Closing (the “Representative’s Warrants”). The Representative’s Warrants have an exercise price equal to $5.94, which is 110% of the offering price in the Public Offering. The Representative’s Warrants may be exercised on a cashless basis and will be exercisable six months following the closing date until April 16, 2025.
Material Contracts
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On October 6, 2021, the Company entered into a sale and purchase agreement (the “Second Bitmain Purchase Agreement”) with Bitmain Technologies Limited (“Seller”) pursuant to which the Company agreed to purchase, and Seller agreed to supply to the Company, an aggregate of 4,044 Bitcoin S19J Pro Antminer cryptocurrency mining machines for an aggregate purchase price of $25.3 million (the “Mining Machines”). The Second Bitmain Purchase Agreement provides for delivery of the Mining Machines in batches over an estimated delivery timeframe starting in April 2022 and continuing through September 2022. The Second Bitmain Purchase Agreement requires the Company to pay a non-refundable deposit of $6.3 million or 25% of the total purchase price for the Mining Machines within 7 days of the date of the signing of the Second Bitmain Purchase Agreement, and additional 35% of the batch price at least 6 months prior to shipment of such batch, and the remaining 40% of each batch price one month prior to the shipment of the batch. The Purchase Agreement contains other customary terms, provisions, and conditions. The Company paid the $6.3 million deposit on October 15, 2021.
On October 6, 2021, US Digital, our wholly-owned subsidiary entered into a sale and purchase agreement (the “Uptime Purchase Agreement”) with Uptime Armory LLC (“Uptime”) pursuant to which US Digital agreed to purchase, and Uptimeagreed to supply to US Digital, an aggregate of 18 modified 40-foot cargo containers (“POD5ive containers”) that will be designed to hold and operate 280 S19 Pro Antminers manufactured by Bitmain. The purchase price of the POD5ive containers totals $3,125,000 of which 75% or $2.3 million is due as a non-refundable down payment within 7 business days of the effective date of the Uptime Purchase Agreement and the remaining 25% is due within five business days after US Digital delivers a “notice of completion” of the equipment. The Uptime Purchase Agreement contains other customary terms, provisions, and conditions. The $2.3 million down payment was paid on October 15, 2021.
US Digital also entered into a hosting agreement (“Hosting Agreement”) with Uptime Hosting LLC to host the Company’s 18 POD5ive containers at a secure location and provide power, maintenance and other services specified in the contract for 6 cents per kilowatt with a term of one year.
On November 4, 2021, LM Funding America, Inc. (the “Company”) entered into strategic alliance agreements (the “Strategic Alliance Agreements”) with each of OTC Miners Corp. (“OTC Miners”) and Spartan Crest Capital Corp. (“Spartan”). The Strategic Alliance Agreements generally provide that OTC Miners and Spartan will work together with the Company and collaborate with the Company regarding the Company’s cryptocurrency mining business strategy and planned business operations. The agreements contemplate that each of OTC Miners and Spartan will provide ongoing consulting and advisory services to the Company on a non-exclusive basis over a one-year period with respect to the bitcoin mining business and industry and that the parties will meet periodically to collaborate and share information regarding the industry, the equipment used in the industry, key industry relationships, and financing options. In consideration of the strategic alliances and related services and benefits, the Company will issue 100,000 shares of restricted common stock to each of OTC Miners and Spartan and will pay OTC Miners $1,250,000 to cover anticipate expenses of OTC Miners in connection with its activities under the strategic alliance. The Company also agreed to pay OTC Miners a fee of 3% of the aggregate consideration of any strategic transaction completed by Company that the Company and OTC Miners jointly agree to pursue. The Strategic Alliance Agreements have a term of one year each.
2021 Omnibus Incentive Plan
On October 27, 2021, the Board of Directors (the “Board”) of LM Funding America, Inc. (the “Company”, “we”, or “our”) adopted the LM Funding America, Inc. 2021 Omnibus Incentive Plan (the “Plan” or the “2021 Omnibus Plan”). The Plan authorizes the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to our employees and any of our parent and subsidiary corporations’ employees, and the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to our employees, directors and consultants and any of our future subsidiary corporations’ employees and consultants.
The Plan became effective on October 27, 2021, provided that no options or stock appreciation rights granted under the Plan will be exercisable and no shares or restricted stock units may be granted under the Plan unless and until the Plan has been approved by the stockholders of the Company, which approval must occur on or within twelve (12) months of the date on which the Plan became effective. Upon the adoption of the Plan, the Board terminated the LM Funding America, Inc. 2015 Omnibus Incentive Plan, provided that such plan will continue to govern outstanding awards previously made under such plan.
Management Employment Contracts
On October 27, 2021, the Company and Bruce Rodgers entered into an Amended and Restated Employment Agreement under which Mr. Rodgers will continue to serve as the Chief Executive Officer of the Company (the “Rodgers Employment Agreement”). The Rodgers Employment Agreement provides for an annual base salary of $750,000, and it provides that Mr. Rodgers may be granted annual bonuses at the discretion of the Board of Directors and may participate in the Company’s equity incentive plans on the same terms as other senior executives. The agreement also provides that, in consideration of the Company’s failure to make quarterly stock
20
grants to Mr. Rodgers as provided in his prior employment agreement, the Company will grant to Mr. Rodgers 48,662 fully vested restricted shares under the 2021 Omnibus Plan upon the approval of the 2021 Omnibus Plan by the Company’s stockholders. Under the Rodgers Employment Agreement, Mr. Rodgers is entitled to participate in all of the Company’s pension, life insurance, health insurance, disability insurance and other benefit plans on the same basis as the Company’s other employee officers participate. The agreement also provides for a $15,000,000 lump-sum cash bonus upon any change of control (as defined in the agreement) during the term of the agreement that does not involve a sale of the Company, or a bonus of 2% of the transaction value if the change of control is a Company Sale, and all unvested restricted shares will vest upon a change of control. The term of the Rodgers Employment Agreement is through September 30, 2023 and is automatically renewed each year unless notice of non-renewal is provided by the Company or Mr. Rodgers at least 30 days prior to the renewal date. Mr. Rodgers will receive the base salary due under the employment agreement for a period of 36 months after termination if terminated “without cause” (including a non-renewal of the agreement by the Company) or he terminates his own employment for a “good reason event”, as those terms are defined in the agreement, in addition to any accrued bonus as of the termination date and the accelerated vesting of any unvested options and other equity awards. Mr. Rodgers’ employment agreement contains certain non-competition covenants and confidentiality provisions.
On October 27, 2021, the Company and Richard Russell entered into an Amended and Restated Employment Agreement under which Mr. Russell will continue to serve as the Chief Financial Officer of the Company (the “Russell Employment Agreement”). The Russell Employment Agreement provides for an annual base salary of $500,000, and it provides that Mr. Russell may be granted annual bonuses at the discretion of the Board of Directors and may participate in the Company’s equity incentive plans on the same terms as other senior executives. The agreement also provides that, in consideration of the Company’s failure to make quarterly stock grants to Mr. Russell as provided in his prior employment agreement, the Company will grant to Mr. Russell 25,279 fully vested restricted shares under the 2021 Omnibus Plan upon the approval of the 2021 Omnibus Plan by the Company’s stockholders. Under the Russell Employment Agreement, Mr. Russell is entitled to participate in all of the Company’s pension, life insurance, health insurance, disability insurance and other benefit plans on the same basis as the Company’s other employee officers participate. The agreement also provides for a $10,000,000 lump-sum cash bonus upon any change of control (as defined in the agreement) during the term of the agreement that does not involve a sale of the Company, or a bonus of 2% of the transaction value if the change of control is a Company, an all unvested restricted shares will vest upon a change of control. The term of the Russell Employment Agreement is through September 30, 2023 and is automatically renewed each year unless notice of non-renewal is provided by the Company or Mr. Russell at least 30 days prior to the renewal date. Mr. Russell will receive the base salary due under the employment agreement for a period of 36 months after termination if terminated “without cause” (including a non-renewal of the agreement by the Company) or he terminates his own employment for a “good reason event”, as those terms are defined in the agreement, in addition to any accrued bonus as of the termination date and the accelerated vesting of any unvested options and other equity awards. Mr. Russell’s employment agreement contains certain non-competition covenants and confidentiality provisions.
On October 27, 2021, the Company and Ryan Duran entered into an Employment Agreement under which Mr. Duran will serve as the Executive Vice President of Operations of the Company (the “Duran Employment Agreement”). The Duran Employment Agreement provides for an annual base salary of $175,000, and it provides that Mr. Duran may be granted annual bonuses at the discretion of the Board of Directors and may participate in the Company’s equity incentive plans on the same terms as other senior executives. The agreement provides that Mr. Duran is entitled to participate in all of the Company’s pension, life insurance, health insurance, disability insurance and other benefit plans on the same basis as the Company’s other employee officers participate. The term of the Duran Employment Agreement is through September 30, 2023 and is automatically renewed each year unless notice of non-renewal is provided by the Company or Mr. Duran at least 30 days prior to the renewal date. Mr. Duran will be entitled to a lump sum severance payment of three times his base salary if he is terminated “without cause” (including a non-renewal of the agreement by the Company) or he terminates his own employment for a “good reason event”, as those terms are defined in the agreement, in addition to any accrued bonus as of the termination date and the accelerated vesting of any unvested options and other equity awards. Mr. Duran’s employment agreement contains certain non-competition covenants and confidentiality provisions.
On October 28, 2021, options to purchase 1,800,000 shares, 1,800,000 shares, and 175,000 shares of common stock were granted to Bruce Rodgers, Richard Russell, and Ryan Duran, respectively. The options were granted under the 2021 Omnibus Plan, have an exercise price of $5.95 per share (the closing price of our common stock on October 27, 2021), and will not be exercisable unless our stockholders approve the 2021 Omnibus Plan within one year of the adoption of the Plan. The options otherwise vest as to one-third of the option shares on the first anniversary of the date of grant and as to one-thirty sixth (1/36th) of the option shares on a monthly basis thereafter, provided that the executive is in continuous employment or service to the Company through the applicable vesting date. Unvested options will vest on an accelerated basis upon a change of control of the Company (as defined in 2021 Omnibus Plan) or upon our common stock achieving a $12.00 closing price for ten consecutive trading days. The options will expire 10 years from the date of grant and otherwise generally terminate early within 90 days after a termination of employment (or 12 months due to death or disability).
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