LM FUNDING AMERICA, INC. AND SUBSIDIARIES
LM FUNDING AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS DECEMBER 31, 2020 AND 2019
Note 1. Summary of Significant Accounting Policies
Nature of Operations
LM Funding America, Inc. (“LMFA” or the “Company”) was formed as a Delaware corporation on April 20, 2015. LMFA was formed for the purpose of completing a public offering and related transactions in order to carry on the business of LM Funding, LLC and its subsidiaries (the “Predecessor”). LMFA is the sole member of LM Funding, LLC and operates and controls all of its businesses and affairs.
LM Funding, LLC a Florida limited liability company organized in January 2008 under the terms of an Operating Agreement dated effective January 8, 2008 as amended, had 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 acquired IIU, Inc. on January 16, 2019 (“IIU”), which provided global medical insurance products for international
travelers, specializing in policies covering high-risk destinations, emerging markets and foreign travelers coming to the United States. All policies were fully underwritten with no claim risk remaining with IIU. IIU was disposed of on January 8, 2020.
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.
On January 8, 2020, the Company entered into a Stock Purchase Agreement (the “Craven SPA”) with Craven House Capital North America LLC(“Craven”) pursuant to which the Company sold to Craven all of the issued and outstanding shares of IIU for $3,562,569. The purchase price was paid by Craven through the cancellation of the $3,461,782 Convertible Promissory Note issued by LMFA to Craven on January 16, 2019 in connection with the purchase of IIU (the “Craven Convertible Note”), plus forgiveness of $100,787 of accrued interest under the Craven Convertible Note. LMFA originally paid Craven $4,969,200 for the purchase of IIU in January 2019, which included a negative $720,386 net fair value of assets and $5,689,586 of goodwill. As a result, goodwill was impaired by $1.65 million in December 2019.
During 2019, we were a diversified business with two focuses:
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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. 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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Travel insurance brokerage company provides global medical insurance products for international travelers through IIU, specializing in policies covering high-risk destinations, emerging markets and foreign travelers coming to the United States. These operations were discontinued on January 16, 2020.
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During 2020, we begin exploring other specialty finance business opportunities that are complementary to or that can leverage our historical business.
Specialty Finance
The Company provides funding principally to Associations that are almost exclusively located in Florida. The business of the Company is conducted pursuant to relevant state statutes (the “Statutes”), principally Florida Statute 718.116. The Statutes provide each Association lien rights to secure payment from unit owners (property owners) for assessments, interest, administrative late fees, reasonable attorneys’ fees, and collection costs. In addition, the lien rights granted under the Statutes are given a higher priority (a “Super Lien”) than all other lien holders except property tax liens. The Company provides funding to Associations for their delinquent assessments from property owners in exchange for an assignment of the Association’s right to collect proceeds pursuant to the Statutes. The Company derives its revenues from the proceeds of Association collections.
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The Statutes specify that the rate of interest an Association (or its assignor) may charge on delinquent assessments is equal to the rate set forth in the Association’s declaration or bylaws. In Florida if a rate is not specified, the statutory rate is equal to 18% but may not exceed the maximum rate allowed by law. Similarly, the Statutes in Florida also stipulate that administrative late fees cannot be charged on delinquent assessments unless so provided by the Association’s declaration or bylaws and may not exceed the greater of $25 or 5% of each delinquent assessment.
The Statutes limit the liability of a first mortgage holder for unpaid assessments and related charges and fees (as set forth above) in the event of title transfer by foreclosure or acceptance of deed in lieu of foreclosure. This liability is limited to the lesser of twelve months of regular periodic assessments or one percent of the original mortgage debt on the unit (the “Super Lien Amount”).
Recent Developments
IIU Acquisition and Disposal
On November 2, 2018, the Company invested cash by purchasing a Senior Convertible Promissory Note in the original principal
amount of $1,500,000 (the “IIU Note”) from IIU, a synergistic Virginia based travel insurance brokerage company controlled by
Craven House North America, LLC (“Craven”) N.A., (whose ownership excluding unexercised warrants was approximately 20% of
the Company’s outstanding stock at the time of the acquisition). The maturity date of the IIU Note was 360 dates after the date of
issuance (subject to acceleration upon an event of default). The IIU Note carried a 3.0% interest rate, with accrued but unpaid interest
being payable on the IIU Note’s maturity date.
On January 16, 2019, the Company entered into a Stock Purchase Agreement with Craven (the “IIU SPA”) to purchase all of the
outstanding capital stock of IIU as a possible synergistic effort to diversify revenue sources that were believed to be accretive to
earnings. IIU provided global medical insurance products for international travelers, specializing in policies covering high-risk
destinations, emerging markets and foreign travelers coming to the United States. All policies were fully underwritten with no claim
risk remaining with IIU.
On January 8, 2020, the Company entered into a Stock Purchase Agreement (“SPA”) with Craven pursuant to which the Company
sold back to Craven all of the issued and outstanding shares of IIU for $3,562,569. The purchase price was paid by Craven through
the cancellation of the $3,461,782 Craven Convertible Note plus forgiveness of $100,787 of accrued interest. The Company originally
paid $4,969,200 for the purchase of IIU in January 2019, which included a negative $720,386 net fair value of assets and $5,689,586
of goodwill. As a result, goodwill was impaired by $1.65 million. The sale of IIU resulted in a gain of $16,428
Specialty Health Insurance
Our former subsidiary IIU through its wholly owned company Wallach and Company (“Wallach”) offers health insurance, travel insurance and other travel services to:
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United States citizens and residents traveling abroad
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Non United States citizens or residents who travel to the United States
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These services are typically sold through a policy offered by Wallach and fully underwritten by a third party insurance company. The policies offered include:
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HealthCare Abroad - Short term medical insurance, medical evacuation and international assistance for Americans traveling overseas. There is an age limit of 84 years old.
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HealthCare Global – up to 6 months coverage for Americans traveling abroad and foreign nationals traveling outside their home countries to destinations other than the United States. There is an age limit of 70 years old.
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HealthCare America – up to 90 days coverage for foreign nationals visiting the United States. There is an age limit of 70 years old.
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HealthCare International – International medical insurance & assistance for persons living outside their home country. There is an age limit of 70 years old.
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HealthCare War – up to 6 months coverage for Americans traveling abroad and foreign nationals traveling outside their home countries to identified war risk areas. There is an age limit of 70 years old.
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As such, IIU is considered a discontinued operation. We did not report any activity from operations from IIU for the twelve months ended December 31, 2020.
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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 June 30, 2020. Although the Company believes that it
properly terminated the Share Exchange Agreement, on July 21, 2020, former counsel to Hanfor Owner informed the Company that Hanfor Owner believes that the Company’s termination of the Share Exchange Agreement was not effected in accordance with the terms of the Share Exchange Agreement.
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 June 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 letter from newly engaged outside counsel to Hanfor and Hanfor Owner alleging that the Company’s termination of the Share Exchange Agreement constituted a breach of contract and/or was invalid and further alleging breach of fiduciary duty by the Company’s Chief Executive Officer and Chief Financial Officer. Such letter demanded $1,250,000 (the amount of Hanfor Owner’s investment in common stock of the Company) plus interest and threatened legal action against the Company and the Company’s Chief Executive Officer and Chief Financial Officer. Following the receipt of that letter, on or around January 27, 2021, the Company assisted Hanfor Owner with the removal of the restrictive legend from the shares of Company common stock owned by Hanfor Owner in accordance with SEC Rule 144 to enable the sale thereof by Hanfor Owner, at which time Hanfor Owner’s counsel indicated in writing that Hanfor Owner may have remaining damages. However, there have been no further communications from Hanfor, Hanfor Owner, or their counsel subsequent to the communications that occurred on or around January 27, 2021.
Nasdaq Listing
On March 27, 2020, the Company received a notification letter from the Nasdaq Listing Qualifications department of The Nasdaq
Stock Market LLC (“Nasdaq”) stating that the Company has not regained compliance with Nasdaq Continued Listing Rule 5550(a)(2),
which requires the Company’s listed securities to maintain a minimum bid price of $1.00 per share (the "Minimum Bid Price Rule").
The notification stated that the Company’s securities would be delisted from the Nasdaq Capital Market on April 7, 2020 unless the
Company timely requested a hearing before a Nasdaq Hearing Panel. The Company has timely requested a hearing. However, on
April 16, 2020, Nasdaq suspended any enforcement actions relating to bid price issues through June 30, 2020. On July 1, 2020, the
Company received a letter from Nasdaq stating that the Company regained compliance with the Minimum Bid Price Rule because
the closing price for the Company’s common stock was $1.00 per share or greater for ten (10) consecutive business days.
Additionally, on January 3, 2020, the Company received a deficiency letter from Nasdaq, indicating that it was in violation of Listing
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Rules 5620(a) and 5810(c)(2)(G) by virtue of passing the applicable deadline for holding of its annual general meeting of shareholders
for the financial year ended December 31, 2018. The Company resolved this issue by having its annual general meeting of
shareholders on May 11, 2020.
On September 28, 2020, the Company received a notification letter from the Nasdaq Listing Qualifications department of Nasdaq
stating that the Company was not in compliance with the Minimum Bid Price Rule. The notification stated that the Company’s
securities would be delisted from the Nasdaq Capital Market on March 29, 2021 unless the Company timely requested a hearing
before a Nasdaq Hearing Panel. On February 5, 2021, the Company received a letter from Nasdaq stating that the Company had regained compliance with the Minimum Bid Price Rule because the closing price for the Company’s common stock was $1.00 per share or greater for ten (10) consecutive business days.
Reverse Stock Split Approval
On May 11, 2020, our shareholders voted in favor of the approval of an amendment to our Certificate of Incorporation, in the event it
is deemed advisable by our Board of Directors, to effect an additional reverse stock split of the Company’s issued and outstanding
common stock at a ratio within the range of one-for-two (1:2) and one-for-ten (1:10), as determined by the Board of Directors.
However, a reverse stock split has not yet been effected pursuant to such approval.
Registered Public Offering
On August 18, 2020, in connection with an underwritten public offering, we raised approximately $8.2 million in net proceeds by
issuing 10.2 million shares of common stock, the exercise of 1.7 million pre-funded warrants and 11.2 million warrants to purchase
shares of common stock. Holders of the warrants subsequently exercised such warrants for 150,000 shares of common stock for $135
thousand.
Principles of Consolidation
The consolidated financial statements include the accounts of LMFA and its wholly-owned subsidiaries: LM Funding, LLC; LMF October 2010 Fund, LLC; LMFAO Sponsor LLC (including the 70% owned subsidiary LMF Acquisition Opportunities Inc,), 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 IIU Inc. and its wholly-owned subsidiary; Wallach & Company. All significant intercompany balances have been eliminated in consolidation
Basis of Presentation
The consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”).
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the evaluation of any probable losses on amounts funded under the Company’s New Neighbor Guaranty program as disclosed below, the evaluation of probable losses on balances due from a related party, the realization of deferred tax assets, the evaluation of contingent losses related to litigation, fair value estimates of real estate assets owned and impairment of goodwill and reserves on notes receivables.
We are not presently aware of any events or circumstances arising from the COVID-19 pandemic that would require us to update our
estimates or judgments or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events
occur and additional information is obtained, and any such changes will be recognized in the condensed consolidated financial statements.
Revenue Recognition
Accounting Standards Codification (“ASC”) 606 of the Financial Accounting Standards Board (“FASB”) states an entity needs to conclude at the inception of the contract that collectability of the consideration to which it will be entitled in exchange for the goods
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and services that will be transferred to the customer is probable. That is, in some circumstances, an entity may not need to assess its ability to collect all of the consideration in the contract. The Company provides funding to Associations by purchasing their rights under delinquent accounts from unpaid assessments due from property owners. Collections on the Accounts may vary greatly in both the timing and amount ultimately recovered compared with the total revenues earned on the Accounts because of a variety of economic and social factors affecting the real estate environment in general.
The Company’s contracts with its customers have very specific performance obligations. The Company has determined that the known amount of cash to be realized or realizable on its revenue generating activities cannot be reasonably estimate and as such, classifies its finance receivables as nonaccrual and recognizes revenues in the accompanying statements of income on the cash basis or cost recovery method in accordance with ASC 310-10, Receivables. The Company’s operations also consist of rental revenue earned from tenants under leasing arrangements which provide for rent income. The leases have been accounted for as operating leases. For operating leases, revenue is recorded based on cash rental payments was collected during the period. The Company analyzed its remaining revenue streams and concluded there were no changes in revenue recognition with the adoption of the new standard.
Under ASC 606, the Company applies the cash basis method to its original product and the cost recovery method to its special product as follows:
Finance Receivables—Original Product: Under the Company’s original product, delinquent assessments are funded only up to the Super Lien Amount as discussed above. Recoverability of funded amounts is generally assured because of the protection of the Super Lien Amount. As such, payments by unit owners on the Company’s original product are recorded to income when received in accordance with the provisions of the Florida Statute (718.116(3)) and the provisions of the purchase agreements entered into between the Company and Associations. Those provisions require that all payments be applied in the following order: first to interest, then to late fees, then to costs of collection, then to legal fees expended by the Company and then to assessments owed. In accordance with the cash basis method of recognizing revenue and the provisions of the statute, the Company records revenues for interest and late fees when cash is received. In the event the Company determines the ultimate collectability of amounts funded under its original product are in doubt, payments are applied to first reduce the funded or principal amount.
Finance Receivables—Special Product (New Neighbor Guaranty program): During 2012, the Company began offering associations an alternative product under the New Neighbor Guaranty program whereby the Company will fund amounts in excess of the Super Lien Amount. Under this special product, the Company purchases substantially all of the delinquent assessments owed to the association, in addition to all accrued interest and late fees, in exchange for payment by the Company of (i) a negotiated amount or (ii) on a going forward basis, all monthly assessments due for a period up to 48 months. Under these arrangements, the Company considers the collection of amounts funded is not assured and under the cost recovery method, cash collected is applied to first reduce the carrying value of the funded or principal amount with any remaining proceeds applied next to interest, late fees, legal fees, collection costs and any amounts due to the Association. Any excess proceeds still remaining are recognized as revenues. If the future proceeds collected are lower than the Company’s funded or principal amount, then a loss is recognized.
Net Commission Revenue: The Company acts as an agent in providing health travel insurance policies. As a result, the Company revenue is recorded at net. The Company has determined that the known amount of cash to be realized or realizable on its revenue generating activities can be reasonably estimated and as such, classifies its receivables as accrual and recognizes revenues in the accompanying statements of income on the accrual basis. If a policy is not effective as of the end of a period, then the associated revenue and underwriting costs are deferred until the effective date. The majority of the commission revenue is underwritten by two policy underwriters who pays the Company commissions.
Cash
The Company maintains cash balances at several financial institutions that are insured under the Federal Deposit Insurance Corporation’s (“FDIC”) Transition Account Guarantee Program. Balances with the financial institutions may exceed federally insured limits.
Finance Receivables
Finance receivables are recorded at the amount funded or cost (by unit). The Company evaluates its finance receivables at each period end for losses that are considered probable and can be reasonably estimated in accordance with ASC 450-20. As discussed above, recoverability of funded amounts under the Company’s original product is generally assured because of the protection of the Super Lien Amount. However, the Company did have an accrual at December 31, 2020 and 2019, respectively for an allowance for credit losses for this program of $141,616 and $112,027.
Under the New Neighbor Guaranty program (special product), the Company funds amounts in excess of the Super Lien Amount. When evaluating the carrying value of its finance receivables, the Company looks at the likelihood of future cash flows based on
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historical payoffs, the fair value of the underlying real estate, the general condition of the Association in which the unit exists, and the general economic real estate environment in the local area. The Company estimated an allowance for credit losses for this program of $6,564 and $20,016 as of December 31, 2020 and December 31, 2019, respectively under ASC 450-20 related to its New Neighbor Guaranty program.
The Company will charge any receivable against the allowance for credit losses when management believes the uncollectibility of the receivable is confirmed. The Company considers writing off a receivable when (i) a first mortgage holder who names the association in a foreclosure suit takes title and satisfies an estoppel letter for amounts owed which are less than amounts the Company funded to the association; (ii) a tax deed is issued with insufficient excess proceeds to pay amounts the Company funded to the Association; (iii) an association settles an account for less than amounts the Company funded to the Association or (iv) the Association terminates its relationship with the Company’s designated legal counsel. Upon the occurrence of any of these events, the Company evaluates the potential recovery via a deficiency judgment against the prior owner and the ability to collect upon the deficiency judgment within the statute of limitations period or whether the deficiency judgment can be sold. If the Company determines that collection through a deficiency judgment or sale of a deficiency judgment is not feasible, the Company writes off the unrecoverable receivable amount. Any losses greater than the recorded allowance will be recognized as expenses. Under the Company’s revenue recognition policies, all finance receivables (original product and special product) are classified as nonaccrual.
Real Estate Assets Owned
In the event collection of a delinquent assessment results in a unit being sold in a foreclosure auction, the Company has the right to bid (on behalf of the Association) for the delinquent unit as attorney in fact, applying any amounts owed for the delinquent assessment to the foreclosure price as well as any additional funds that the Company, in its sole discretion, decides to pay. If a delinquent unit becomes owned by the Association by acquiring title through an association lien foreclosure auction, by accepting a deed-in-lieu of foreclosure, or by any other way, the Company in its sole discretion may direct the Association to quitclaim title of the unit to the Company.
Properties quitclaimed to the Company are in most cases acquired subject to a first mortgage or other liens, and are recognized in the accompanying consolidated balance sheets solely at costs incurred by the Company in excess of original funding. At times, the Company will acquire properties through foreclosure actions free and clear of any mortgages or liens. In these cases, the Company records the estimated fair value of the properties in accordance with ASC 820-10, Fair Value Measurements. Any real estate held for sale is adjusted to fair value less the cost to dispose in the event the carrying value of a unit or property exceeds its estimated net realizable value.
The Company capitalizes costs incurred to acquire real estate owned properties and any costs incurred to get the units in a condition to be rented. These costs include, but are not limited to, renovation/rehabilitation costs, legal costs, and delinquent taxes. These costs are depreciated over the estimated minimum time period the Company expects to maintain possession of the units. Costs incurred for unencumbered units are depreciated over 20 years and costs for units subject to a first mortgage are depreciated over 3 years. As of December 31, 2020 and 2019, capitalized real estate costs, net of accumulated depreciation, were $18,767 and $21,084, respectively. During the years ended December 31, 2020 and 2019, depreciation expense was $7,740 and $21,444, respectively.
If the Company elects to take a quitclaim title to a unit or property held for sale, the Company is responsible to pay all future assessments on a current basis, until a change of ownership occurs. The Association must allow the Company to lease or sell the unit to satisfy obligations for delinquent assessments of the original debt. All proceeds collected from any sale of the unit shall be first applied to all amounts due the Company plus any additional funds paid by the Company to purchase the unit, if applicable. Rental revenues and sales proceeds related to real estate assets held for sale are recognized when earned and realizable. Expenditures for current assessments owed to associations, repairs and maintenance, utilities, etc. are expensed when incurred.
If the Association elects (prior to the Company obtaining title through its own election) to maintain ownership and not quitclaim title to the Company, the Association must pay the Company all interest, late fees, collection costs, and legal fees expended, plus the original funding on the unit, which have accrued according to the purchase agreement entered into by the community association and the Company. In this event, the unit will be reassigned to the Association.
Fixed Assets
The Company capitalizes all acquisitions of fixed assets in excess of $500. Fixed assets are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Fixed assets are comprised of furniture, computer and office equipment with an assigned useful life of 3 to 5 years. Fixed assets also includes capitalized software costs. Capitalized software costs include costs to develop software to be used solely to meet the Company’s internal needs, consist of employee salaries and benefits and fees paid to outside consultants during the application development stage, and are amortized over their estimated useful life of 5 years. As of December 31, 2020 and 2019, capitalized software costs, net of accumulated amortization, was $nil and $nil, respectively.
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Amortization expense for capitalized software costs for the periods ended December 31, 2020 and December 31, 2019 was $nil and $21,951, respectively.
Right to Use Assets
The Company capitalizes all leased assets pursuant to ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. As of December 31, 2020, right to use assets, net of accumulated amortization, was $160,667. Amortization expense for right to use assets for the twelve months ended December 31, 2020 was $99,593 while the payments totaled $94,235 for the twelve months ended December 31, 2020.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair value of the net assets acquired. Goodwill is not amortized, but instead is tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable.
During 2019, the Company recorded goodwill of approximately $5.7 million which represented amounts for the purchase of IIU. For purposes of the 2019 annual test, we will elected to perform a goodwill impairment analysis to assess whether it was more likely than not that the fair value of these reporting units exceeded their respective carrying values. In performing these assessments, management relied on a number of factors including, but not limited to, macroeconomic conditions, industry and market considerations, cost factors that would have a negative effect on earnings and cash flows, overall financial performance compared with forecasted projections in prior periods, and other relevant reporting unit events, the impact of which are all significant judgments and estimates. This assessment was performed as of December 31, 2019 and showed a $1.65 million impairment due to the sale of IIU on January 8, 2020. The balance of goodwill as of December 31, 2020 and 2019 was approximately $0 and $4.1 million, respectively. The goodwill was removed upon the sale of IIU.
Debt Issue Costs
The Company capitalizes all debt issue costs and amortizes them on a method that approximates the effective interest method over the remaining term of the note payable. The Company did not have any unamortized debt issue costs at December 31, 2020 or 2019. The Company incurred $291,760 debt issuance costs in 2018. Any costs will be presented in the accompanying condensed consolidated balance sheets as other assets until the loan proceeds are received which at that time will be reclassified as a direct deduction from the carrying amount of that debt liability in accordance with Accounting Standards Update (“ASU”) 2015-03.
Debt Discount
On April 2, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with a New York-based family office (“Investor”), which was subsequently amended, pursuant to which the Company issued to Investor a Senior Convertible Promissory Note (the “Note”) in the original principal amount of $500,000 in exchange for a purchase price of $500,000. The maturity date of the Note was six months after the date of issuance (subject to acceleration upon an event of default). The Note carried a 10.5% interest rate, with accrued but unpaid interest being payable on the Note’s maturity date. Investor was also issued pursuant to the SPA five- year warrants exercisable at the closing per share bid price on April 2, 2018 to purchase 40,000 shares of the Company’s common stock (the “Warrants”) (see Note 7. Long Term Debt).
The 40,000 warrants were valued on the grant date at approximately $3.87 per warrant or a total relative fair value of $154,676 using a Black-Scholes option pricing model with the following assumptions: stock price of $7.40 per share (based on the quoted trading price on the date of grant), volatility of 100.6%, expected term of 5 years, and a risk-free interest rate of 2.55%. The relative fair value of the warrants ($154,676) was treated as a debt discount that was amortized over 6 months in 2018. Due to the subsequent issuance of stock and warrants on October 31, 2018 and also on August 2020, these warrants now represent the right to purchase 777,059 shares of common stock at an exercise price of $0.34 per share. These warrants expire in the year 2023.
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Settlement Costs with Associations
Associations working with the Company will at times incur costs in connection with litigation initiated by the Company against property owners and or mortgage holders. These costs include settlement agreements whereby the Association agrees to pay some monetary compensation to the opposing party or judgments against the Associations for fees of opposing legal counsel or other damages awarded by the courts. The Company indemnifies the Association for these costs pursuant to the provisions of the agreement between the Company and the Association. Costs incurred by the Company for these indemnification obligations for the year ended December 31, 2020 and 2019 were $31,885 and $68,188, respectively. The Company does not limit its indemnification based on amounts ultimately collected from property owners.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes resulting primarily from the tax effects of temporary differences between financial and income tax reporting. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
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 2019 and 2018, the Company concluded there was not sufficient positive evidence to overcome this recent operating history. As a result, the Company believes that a valuation allowance is necessary based on the more-likely-than-not threshold noted above. During the year ended December 31, 2019, the Company increased the valuation allowance to $3,634,857 to reflect a change in deferred tax assets. During the year ended December 31, 2020, the Company increased the valuation allowance to $4,658,226 to reflect continuing losses.
Prior to the Company’s initial public offering in October 2015, the taxable earnings of the Predecessor were included in the tax returns of its members (separate limited liability companies) and taxed depending on personal tax situations. In connection with the Company’s initial public offering, the members contributed ownership interests to the Company (a newly form C-Corporation) and all earnings subsequent to that date (October 23, 2015) are subject to taxes and reflected in the Company’s consolidated financial statements.
Loss Per Share
Basic loss per share is calculated as net loss to common stockholders divided by the weighted average number of common shares outstanding during the period.
The Company issued 11,200,000 of common stock at various times during the month of August 2020 and has weighted average these new shares in calculating loss per share for the relevant period.
Diluted loss per share for the period equals basic loss per share as the effect of any stock based compensation awards or stock warrants would be anti-dilutive. The anti-dilutive stock based compensation awards consisted of:
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For the years ended December 31
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2020
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2019
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Stock Options
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19,300
|
19,300
|
Stock Warrants – number of shares to purchase
|
13,590,059
|
2,879,287
|
Stock-Based Compensation
The Company records all equity-based incentive grants to employees and non-employee members of the Company’s Board of Directors in operating expenses in the Company’s Consolidated Statements of Operations based on their fair values determined on the date of grant. Stock-based compensation expense, reduced for estimated forfeitures, is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the outstanding equity awards.
Contingencies
The Company accrues for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, the Company reassesses its position and makes appropriate
F-14
adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal and other regulatory matters.
Fair Value of Financial Instruments
FASB ASC 825-10, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. The Company engages a third party valuation firm to assist in estimating the fair value of its finance receivables. See Note 13.
Related Party
ASC 850 - Related Party Disclosures requires disclosure of related party transactions and certain common control relationships. The Company disclosures related party transactions and such transactions are approved by the Company’s Board of Directors. See Note 11.
Risks and Uncertainties
Funding amounts are secured by a priority lien position provided under Florida law (see discussion above regarding Florida Statute 718.116). However, in the event the first mortgage holder takes title to the property, the amount payable by the mortgagee to satisfy the priority lien is capped under this same statute and would generally only be sufficient to reimburse the Company for funding amounts noted above for delinquent assessments. Amounts paid by the mortgagee would not generally reimburse the Company for interest, administrative late fees and collection costs. Even though the Company does not recognize these charges as revenues until collected, its business model and long-term viability is dependent on its ability to collect these charges.
In the event a delinquent unit owner files for bankruptcy protection, the Company may at its option be reimbursed by the Association for the amounts funded (i.e., purchase price) and all collection rights are re-assigned to the Association.
Non-cash Financing and Investing Activities
During the year ended December 31, 2020 and 2019, the Company acquired unencumbered title to certain properties as a result of foreclosure proceedings. Properties were recorded at fair value less cost to dispose of approximately $0 and $0, respectively. The fair value of these properties was first applied to recover the Company’s initial investment with any remaining proceeds applied to interest, late fees, and other amounts owed by the property owner.
During the year ended December 31, 2019, the Company acquired fixed assets of $12,892 through a financing loan.
ROU Assets and Lease Obligation – for the year ended December 31, 2020 and 2019 the Company acquired $0 and $331,477, respectively of ROU lease asset and liability.
Financing of Insurance Premium – the Company financed the purchase of various insurance policies during the year ended December 31, 2020 and 2019 using a $193,000 and $127,000, respectively, using a finance agreement.
During the year ended December 31, 2020, the Company disposed of IIU which included assets and liabilities listed in Note
13.
New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses which establishes a new approach for credit impairment based on an expected loss model rather than an incurred loss model. The standard requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. The guidance is effective January 1, 2020. We have determined that this did not impact our consolidated financial statements.
Recent Accounting Pronouncements
Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact to the Company.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
F-15
Note 2. Finance Receivables – Original Product
The Company’s original funding product provides financing to Associations only up to the secured or “Super Lien Amount” as discussed in Note 1. Finance receivables for the original product as of December 31, based on the year of funding are approximately as follows:
|
|
2020
|
|
|
2019
|
|
Funded during the current year
|
|
$
|
25,000
|
|
|
$
|
40,000
|
|
1-2 years outstanding
|
|
|
12,000
|
|
|
|
15,000
|
|
2-3 years outstanding
|
|
|
9,000
|
|
|
|
20,000
|
|
3-4 years outstanding
|
|
|
12,000
|
|
|
|
11,000
|
|
Greater than 4 years outstanding
|
|
|
200,000
|
|
|
|
300,000
|
|
|
|
|
258,000
|
|
|
|
386,000
|
|
Reserve for credit losses
|
|
|
(142,000
|
)
|
|
|
(112,000
|
)
|
Total
|
|
$
|
116,000
|
|
|
$
|
274,000
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2020, maximum future contingent payments under these arrangements was approximately $3,000.
Delinquent assessments and accrued charges under these arrangements as of December 31, are as follows:
|
|
2020
|
|
|
2019
|
|
Finance receivables, net
|
|
$
|
53,000
|
|
|
$
|
129,000
|
|
Delinquent assessments
|
|
|
148,000
|
|
|
|
374,000
|
|
Accrued interest and late fees
|
|
|
57,000
|
|
|
|
235,000
|
|
Number of active units with delinquent assessments
|
|
|
20
|
|
|
|
31
|
|
Note 4. New Neighbor Guaranty Allowance for Credit Losses
Allowance for credit losses are recorded for losses that are considered “probable” and can be “reasonably estimated” in accordance with ASC 450-20. Recoverability of the Company’s original product is generally assured because of the protection of the Super Lien amount under Florida statute and as such no allowance is recorded.
Credit losses on the New Neighbor Guaranty product were estimated by the Company and had a remaining balance of approximately $6,500 and $20,000 as of December 31, 2020 and 2019, respectively.
F-16
Note 5. Real Estate Assets Owned
Real estate assets owned as reported in the accompanying consolidated balance sheets consist of the fair market value less cost to dispose for those foreclosed units acquired free and clear of any mortgage or other liens plus costs incurred by the Company in excess of original funding on units. Real estate assets owned (free and clear of any mortgage) at December 31, 2020, and 2019, were approximately $18,800 and $21,100 respectively, consisting of one and one unit, at these dates. The Company acquired none and none new unencumbered units, net of disposals during 2020 and 2019 that were capitalized at fair value less cost to dispose of approximately $0 and $0, respectively. The fair market value of each unit was first applied to recover the Company’s investment with any remaining proceeds applied next to interest, late fees, legal fees, collection costs, and payable to the association. Any excess proceeds still remaining were recognized as a gain.
Most units are quitclaimed to the Company without the Company incurring additional cost and are subject to mortgage. Total units within the real estate portfolio at December 31, 2020 and 2019 as a result of foreclosure action were, including those discussed above, 8 and 20, respectively. During 2020 and 2019, the Company sold twelve and twenty-three units, respectively, and realized proceeds of approximately $73,000 and $190,000, respectively. Any proceeds collected are first applied to recover the Company’s investment with any remaining proceeds applied next to interest, late fees, legal fees, collection costs and any amounts due to the community association. Any excess proceeds still remaining are recognized as gain on sale of real estate assets. If the future proceeds collected are lower than the Company’s carrying value, then a loss is recognized on the sale. There was no significant gain or loss on the disposal of real estate assets during 2020 or 2019. Rental revenues collected in 2020 and 2019 were approximately $133,000 (net of cost recovery of $0) and $227,000, respectively (net of cost recovery of $0).
As mentioned above, upon a unit being quitclaim deeded to the Company, the Company becomes responsible for current association assessments. The monthly contingent obligation for assessments due on these units to associations as of December 31, 2020 and 2019 approximates $3,000 and $7,000, respectively.
Note 6. Goodwill and Acquisition
On November 2, 2018, the Company invested cash by purchasing a Securities Purchase Agreement (the “IIU SPA”) from IIU Inc. (“IIU”), a synergistic Virginia based travel insurance brokerage company controlled by Craven House N.A. (whose ownership excluding unexercised warrants is approximately 20% of the Company’s outstanding stock as of the date of acquisition), pursuant to which IIU issued to the Company a Senior Convertible Promissory Note (“IIU Note”) in the original principal amount of $1,500,000 in exchange for a purchase price of $1,500,000. The maturity date of the Note is 360 dates after the date of issuance (subject to acceleration upon an event of default). The Note carries a 3.0% interest rate, with accrued but unpaid interest being payable on the Note’s maturity date.
The IIU Note allows the Company the right on or after the maturity date to convert any unpaid principal and accrued and unpaid interest of the IIU Note into shares of IIU based on a conversion amount which is the fair value of the common shares of IIU at the time. The conversion price will be reset if IIU issues or sells common shares, convertibles securities or options at a price per share that is less than the conversion price in effect immediately prior to such issue or sale or deemed issuance or sale of such dilutive issuance.
On January 16, 2019, the Company entered into a Stock Purchase Agreement with Craven House North America, LLC (“Craven”) to purchase all of the shares of IIU as a possible synergistic effort to diversify revenue sources that are believed to be accretive to earnings. IIU provides global medical insurance products for international travelers, specializing in policies covering high-risk destinations, emerging markets and foreign travelers coming to the United States. All policies are fully underwritten with no claim risk remaining with IIU.
The Board of Directors of LMFA approved the purchase of IIU. LMFA purchased 100% of the outstanding stock of IIU for $5,089,357. LMFA paid the Purchase Price at closing as follows:
|
•
|
Cancellation by LMFA of all principal and accrued interest of IIU’s Promissory Note dated November 3, 2018 and issued to LMFA for principal indebtedness and accrued interest of $1,507,375.
|
|
•
|
LMFA issued to Craven a $3,581,982 Convertible Promissory Note (“Craven note”) for the balance of the Purchase Price. At the option of Craven, the Convertible Note may be paid in restricted common shares of LMFA or cash. The Convertible Note shall bear simple interest at 3% per annum. The Convertible Note shall be due and payable 360 days from the Closing Date. If repaid by LMFA in restricted common stock, the outstanding principal and interest of the Convertible Note shall be paid by LMFA by issuing to Seller a number of restricted common shares equal to the adjusted principal and accrued interest owing on the Convertible Note divided by $2.41. The note principal was subsequently reduced by $120,200 arising from lower than expected Closing Cash and Net Working Capital. Craven had verbally agreed to extend repayment of this Convertible Promissory Note 12 months from April 15, 2019.
|
F-17
|
•
|
Net cash received in the business acquisition was $51,327.
|
As such, the $1.5 million note receivable was cancelled as of January 16, 2019.
The following table summarizes the approximate consideration paid and the amounts of the identified assets acquired and liabilities assumed at the acquisition date:
|
January 16, 2019
|
|
|
Total adjusted purchase price
|
$
|
4,969,200
|
|
|
Recognized preliminary amounts of identifiable assets acquired and (liabilities assumed), at fair value:
|
|
|
|
|
Cash
|
|
51,300
|
|
|
Prepaid and other current assets
|
|
5,200
|
|
|
Profit on purchased policies
|
|
14,600
|
|
|
Property, plant and equipment
|
|
17,100
|
|
|
Accounts payable
|
|
(5,100
|
)
|
|
Accrued expenses and other liabilities
|
|
(62,686
|
)
|
|
Income taxes
|
|
(28,500
|
)
|
|
Deferred revenue
|
|
(9,300
|
)
|
|
Debt
|
|
(703,000
|
)
|
|
Preliminary estimate of the fair value of assets and liabilities assumed
|
|
(720,386
|
)
|
|
|
|
|
|
|
Goodwill
|
$
|
5,689,586
|
|
|
We performed an assessment effective as of December 31, 2020 in light of the Company’s sale of IIU on January 8, 2020 which resulted in a $1.65 million goodwill impairment. On January 8, 2020, the Company entered into a SPA with Craven pursuant to which the Company sold to Craven all of the issued and outstanding shares of IIU for $3,562,569. The purchase price was paid by Craven through the cancellation of the $3,461,782 Convertible Promissory Note issued by LMFA to Craven dated January 16, 2019 plus forgiveness of $100,787 of accrued interest. See Note 10 Discontinued Operations.
F-18
Note 7. Long-Term Debt and Other Financing Arrangements
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Promissory note issued by a financial institution, bearing interest at 1.0%, interest and no principal payments. The note matures April 30, 2022. Annualized interest is 1.0%. This is a U.S. Small Business Administration’s Paycheck Protection Program (the “PPP Loan”)
|
|
$
|
185,785
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Financing agreement with FlatIron capital that is unsecured. Down payment of $19,170 was required upfront and equal installment payments of $11,590 to be made over a 11 month period. The note matured on June 1, 2020. Annualized interest is 6.8%
|
|
|
-
|
|
|
|
69,540
|
|
|
|
|
|
|
|
|
|
|
Financing agreement with FlatIron capital that is unsecured. Down payment of $20,746 was required upfront and equal installment payments of $19,251 to be made over a 10 month period. The note matures on May 1, 2021. Annualized interest is
5.95%
|
|
|
96,257
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Senior secured convertible note to Craven House Capital North America LLC (Related Party), bearing interest at 3.0%. Note was issued on January 16, 2019 and either matured on January 14, 2020 or became convertible into 1,436,424 shares of the Company's common stock. The value of the beneficial conversion feature as of January 16, 2019 was zero.*
|
|
|
-
|
|
|
|
3,461,782
|
|
|
|
|
|
|
|
|
|
|
Promissory note issued by a financial institution, bearing interest at 9.09%, interest and principal payments due monthly of $323. Note is secured by an automobile and was issued on July 26, 2019 with original borrowings of $12,892. The note matures on August 26, 2023.
|
|
|
-
|
|
|
|
11,802
|
|
|
|
|
|
|
|
|
|
|
Promissory note issued by a financial institution, bearing interest at 5.85%, interest and principal payments due monthly of $10,932. Note was issued on May 31, 2018 with original borrowings of $608,000 and subsequent borrowings of $141,000 and repayments of $51,000. The note matures on May 30, 2025 and can be prepaid at any time without penalty. This note is secured by the Company’s inventory, chattel paper, accounts, equipment and general intangible intangibles and deposit accounts.
|
|
|
-
|
|
|
|
606,454
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
282,042
|
|
|
$
|
4,149,578
|
|
*The $3.5 million convertible note was forgiven in connection with Craven’s repurchase of IIU on January 8, 2020 pursuant to the terms of the Craven SPA.
On April 30, 2020, the company obtained a $185,785 Paycheck Protection Program loan. These business loans were established by the
2020 US Federal government Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to help certain businesses, self-employed workers, sole proprietors, certain nonprofit organizations, and tribal businesses continue paying their workers.
The Paycheck Protection Program allows entities to apply for low interest private loans to pay for their payroll and certain other costs.
The loan proceeds will be used to cover payroll costs, rent, interest, and utilities. The loan may be partially or fully forgiven if the
Company keeps its employee counts and employee wages stable. The program was implemented by the U.S. Small Business
Administration. The interest rate is 1.0% and has a maturity date of 2 years. We applied for loan and interest forgiveness in
F-19
the fourth quarter of 2020.
Minimum required principal payments on the Company’s debt as of December 31, 2020 are as follows :
Years Ending
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2020
|
|
|
|
$
|
96,257
|
|
2021
|
|
|
|
|
185,785
|
|
2022
|
|
|
|
|
-
|
|
2023
|
|
|
|
|
-
|
|
2024
|
|
|
|
|
-
|
|
|
|
|
|
$
|
282,042
|
|
Note 8. 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 December 31, 2020, the Company’s operating leases have remaining lease terms ranging from less than one year to 3 years, some of which include options to renew the leases. The exercise of lease renewal options is generally at the Company’s sole discretion. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.
The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and current and long-term operating lease liabilities are separately stated on the Consolidated Balance Sheet as of December 31, 2020. 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.
The Company leased its office under an operating lease beginning March 1, 2014 and ending July 31, 2019. 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 11) that also performs legal services associated with the collection of delinquent assessments. The Company entered into a sub-lease with an unrelated party but we stopped receiving such sub-lease rental income in September 2018. Net rent expense recognized for the twelve months ended December 31, 2020 and 2019 were approximated $94,000 and $186,600, respectively.
F-20
The following table presents supplemental balance sheet information related to operating leases as of December 31, 2020:
|
|
Balance Sheet Line Item
|
|
2020
|
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
|
ROU assets
|
|
Right of use asset, net
|
|
$ 160,667
|
|
|
|
$ 260,260
|
|
Total lease assets
|
|
|
|
$ 160,667
|
|
|
|
$ 260,260
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
Lease liability
|
|
$ 103,646
|
|
|
|
$ 94,235
|
|
Long-term lease liabilities
|
|
Lease liability
|
|
68,002
|
|
|
|
171,648
|
|
Total lease liabilities
|
|
|
|
$ 171,648
|
|
|
|
$ 265,883
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
1.6
|
|
|
|
2.6
|
|
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 twelve months ended December 31, 2020 and 2019:
|
|
|
|
2020
|
|
2019
|
|
Operating cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
$ 94,235
|
|
|
$ 44,765
|
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease liabilities (lease cancelled)
|
|
|
|
-
|
|
|
26,685
|
|
ROU assets obtained in exchange for lease liabilities
|
|
|
|
-
|
|
|
304,792
|
|
Total ROU assets obtained in exchange for lease liabilities
|
|
|
|
|
|
|
331,477
|
|
The following table presents maturities of operating lease liabilities on an undiscounted basis as of December 31, 2020:
|
|
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
2021
|
|
|
|
|
103,646
|
|
2022
|
|
|
|
|
68,002
|
|
|
|
|
|
|
171,648
|
|
Legal Proceedings
Other than the lawsuits described below, we are not currently a party to material 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.
F-21
Funding Commitment
On December 14, 2020, the Company entered into a Master Loan Receivables Purchase and Assignment Agreement (the “Purchase Agreement”) under which the Company agreed to purchase up to $18 million of loan receivables of Borqs Technologies, Inc. (NASDAQ: BRQS), a British Virgin Islands company (“Borqs”), from Borqs’ senior lenders, Partners for Growth IV, L.P. and Partners for Growth V. L.P. As a part of the transaction, LMFA entered into a Settlement Agreement, dated December 14, 2020 (the “Settlement Agreement”), with Borqs pursuant to which Borqs was obligated to issue shares of Borqs common stock to LMFA (the “Settlement Shares”), in one or more tranches, in settlement of the loan receivables acquired by LMFA under the Purchase Agreement. This transaction was not funded until 2021. See Note 15 – Subsequent Events
In a separate transaction and also as previously disclosed, on December 16, 2020, LMFA and Esousa Holdings, LLC, a private investor (the “Investor”) entered into a Loan Agreement (the “Loan Agreement”) pursuant to which the Investor agreed to provide consulting services and make one or more non-recourse loans to LMFA in a principal amount of up to the purchase price of the Borqs loan receivables purchased by LMFA. The Loan Agreement does not provide a fixed rate of interest, and LMFA and Investor agreed to split the net proceeds from LMFA’s sales of the Settlement Shares, with LMFA 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.
Note 9. 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 believes that a valuation allowance is necessary based on the more-likely-than-not threshold noted above. The Company recorded a valuation allowance of approximately of $3,635,000 during the year ended December 31, 2019 equal to its deferred tax asset as of December 31, 2019 and increased the valuation allowance to $4,658,000 during the year ended December 31, 2020.
Significant components of the tax expense (benefit) recognized in the accompanying consolidated statements of operations for the years ended December 31, 2020 and December 31, 2019) are as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Current tax benefit
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(955,977
|
)
|
|
$
|
(426,931
|
)
|
State
|
|
|
(197,796
|
)
|
|
|
(88,334
|
)
|
Total current tax benefit
|
|
|
(1,153,773
|
)
|
|
|
(515,265
|
)
|
Deferred tax expense
|
|
|
130,403
|
|
|
|
84,015
|
|
Valuation allowance (expense)
|
|
|
1,023,370
|
|
|
|
431,250
|
|
Income tax (reduction) benefit
|
|
$
|
-
|
|
|
$
|
-
|
|
F-22
The reconciliation of the income tax computed at the combined federal and state statutory rate of 25.3% for the year ended December 31, 2020 and 25.3% for the year ended December 31, 2019 to the income tax benefit is as follows:
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
Benefit on net loss
|
|
$
|
(1,024,640
|
)
|
|
|
25.3
|
%
|
|
$
|
(849,700
|
)
|
|
|
28.3
|
%
|
Nondeductible expenses
|
|
|
1,271
|
|
|
|
0.0
|
%
|
|
|
418,450
|
|
|
|
(13.90
|
)%
|
Valuation allowance (expense)
|
|
|
1,023,369
|
|
|
|
(25.3
|
)%
|
|
|
431,250
|
|
|
|
(14.30
|
)%
|
Other items
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Tax benefit/effective rate
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
-
|
|
|
|
0.1
|
%
|
The significant components of the Company’s deferred tax liabilities and assets as of December 31, 2020 and December 31, 2019 are as follows:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Tax expense for internally developed software
|
|
$
|
(1,814
|
)
|
|
$
|
4,081
|
|
Tax depreciation in excess of book
|
|
|
(2,917
|
)
|
|
|
1,029
|
|
Total deferred tax liabilities
|
|
|
(4,731
|
)
|
|
|
5,110
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
|
3,913,579
|
|
|
|
2,759,806
|
|
Step up in basis at contribution to C-Corp
|
|
|
511,052
|
|
|
|
682,231
|
|
Stock option expense
|
|
|
124,876
|
|
|
|
89,295
|
|
Step up in basis - purchase of non-controlling interest
|
|
|
49,950
|
|
|
|
54,597
|
|
Allowance for credit losses
|
|
|
33,466
|
|
|
|
33,466
|
|
Accrued liabilities
|
|
|
20,573
|
|
|
|
20,572
|
|
Total deferred tax asset
|
|
|
4,653,496
|
|
|
|
3,639,967
|
|
Valuation allowance
|
|
|
(4,658,226
|
)
|
|
|
(3,634,857
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
(0
|
)
|
As discussed above, the Predecessor effected a transaction resulting in the contribution of member interests to the Company (a newly formed C-Corporation). This transaction was recorded at the carryover basis of the Predecessor for both tax and financial reporting purposes. In accordance with ASC 740-10-45-19, Income Taxes, the Company accounted for the tax effect of the difference in tax basis and book basis assets and liabilities at contribution date as a direct consequence of a change in tax status. As such, the Company recognized a net deferred tax asset for the tax effect of those basis differences equal to $91,068 with a corresponding increase in tax benefit. As a result of various equity transactions prior to the incorporation, the former members of the Predecessor recognized taxable gains associated with redemption consideration and/or deficit capital accounts totaling approximately $5.25 million. In accordance with ASC 740-20-45-11, the Company accounted for the tax effect of the step up in income tax basis related to these transactions with or among shareholders and recognized a deferred tax asset and corresponding increase in equity of approximately $1.97 million. Federal net operating loss carryforwards of approximately $512,000 related to 2015, $3,850,000 related to 2016, $2,977,000 related to 2017, $1,408,000 related to 2018, $2,033,000 related to 2019, and $1,950,000 related to 2020 will expire in 2035, 2036 ,2037 , 2038, respectively and net operating loss generated after January 1, 2018 will not expire. The Company's federal and state tax returns for the 2016 through 2020 tax years generally remain subject to examination by U.S. and various state authorities.
Note 10. Stockholders’ Equity
Stock Issuance
Fiscal Year 2020
On March 23, 2020, the Company entered into a Share Exchange Agreement, dated March 23, 2020 (the “Share Exchange
F-23
Agreement”), with Hanfor (Cayman) Limited, a Cayman Islands exempted company (“Hanfor”), and BZ Industrial Limited, a British
Virgin Islands business company and the sole stockholder of Hanfor (“Hanfor Owner”). In connection with the execution of the Share
Exchange Agreement, the Company and Hanfor Owner entered into a Stock Purchase Agreement, dated March 23, 2020, pursuant to
which Hanfor Owner purchased from Company an aggregate of 520,833 shares of the Company’s common stock at a price of $2.40
per share. Hanfor Owner paid $250,000 cash on March 23, 2020 and the Company received the remaining $1.0 million in April 2020 at which time the Company issued the 520,838 shares.
In connection with an underwritten public offering on August 18, 2020, the Company issued (i) 8,300,000 units (the “Units”), with each Unit consisting of one share of common stock, par value $0.001 per share (the “Common Stock”) and one warrant to purchase one share of common stock (the “Common Warrants”), and (ii) 1,700,000 pre-funded units (the “Pre-Funded Units”), with each pre-funded unit being comprised of one pre-funded warrant to purchase one share of common stock at an exercise price of $.01 per share (the “Pre-Funded Warrants”) and one warrant to purchase one share of common stock. Each Unit was sold for a price of $0.90 per Unit, and each Pre-Funded Unit was sold for a price of $0.89 per Pre-Funded Unit. Pursuant to an over-allotment option in the underwriting agreement, the Company sold an additional 200,000 shares of Common Stock. The net proceeds of the offering were approximately $8,198,000.
During the twelve months ended December 31, 2020, warrants for 1,377,702 shares were exercised for $3,081,730.
Fiscal Year 2019
During the twelve months ended December 31, 2019, warrants for 9,300 shares were exercised for $22,320.
Stock Warrants
The following is a summary of the stock warrant plan activity during the years ended December 31, 2020 and 2019:
|
|
2020
|
|
2019
|
|
|
Number of Warrants
|
|
Weighted Average Exercise Price
|
|
Number of Warrants
|
|
Weighted Average Exercise Price
|
Warrants Outstanding at Beginning of the year
|
|
3,959,287
|
|
$5.45
|
|
3,843,587
|
|
$5.53
|
|
|
|
|
|
|
|
|
|
Granted
|
|
11,200,000
|
|
0.90
|
|
125,000
|
|
2.64
|
Exercised
|
|
1,377,700
|
|
2.24
|
|
9,300
|
|
2.40
|
Adjustment
|
|
1,008,472
|
|
0.46
|
|
-
|
|
-
|
Forfeited
|
|
1,200,000
|
|
12.50
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding and Exercisable at End of Year
|
|
13,590,059
|
|
$0.84
|
|
3,959,287
|
|
$5.45
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the outstanding common stock warrants as of December 31, 2020 and 2019 was $256,429 and $0 respectively.
As part of its initial public offering, on October 23, 2015 the Company issued 1,200,000 warrants that allowed for the right to purchase 1,200,000 shares of common stock at an average exercise price of $12.50 per share. Due to the Reverse Stock Split on October 16, 2018, each warrant may only purchase one-tenth of one share of common stock at $12.50. These warrants have weighted average price of $12.50 per share and expired on October 31, 2020 but had a weighted average life of 0.94 years as of December 31, 2019, respectively. These warrants expired in the year 2020.
On October 31, 2018, the Company issued warrants as part of its secondary offering that allowed for the right to purchase 2,500,000 shares of common stock at an exercise price of $2.40 per share which were subsequently adjusted due to an issuance of shares in August 2020 to $0.67 per share. These warrants have an average remaining life of 2.8 years as of December 31, 2020. These warrants expire in the year 2023. During the twelve months ended December 31, 2020 and 2019, warrants for 1,227,700 shares were exercised for $2,945,252, warrants for 9,300 shares were exercised for $22,320,respectively.
F-24
On August 18, 2020, the Company issued warrants as part of its secondary offering that allowed for the right to purchase 11,200,000 shares of common stock at an exercise price of $0.90 per share. These warrants have an average remaining life of 4.63 years as of December 31, 2020. These warrants expire in the year 2025. During the twelve months ended December 31, 2020, warrants for 150,000 shares were exercised for $135,000.
On April 2, 2018, the Company issued warrants that allowed for the right to purchase 40,000 shares of common stock at an exercise price of $6.605 per share. If at any time these warrants are outstanding, the Company combines its outstanding shares of common stock into a smaller number of shares or enters into a corporate action or transaction to change the number of outstanding shares of common stock, then the exercise price will be adjusted along with the number of shares that can be purchased under this agreement. Due to the subsequent issuance of stock and warrants on October 31, 2018, these warrants now represent the right to purchase 777,059 shares of common stock at an exercise price of $0.34 per share. These warrants have an average remaining life of 2.25 years as of December 31, 2020. These warrants expire in the year 2023.
As part of its underwriting agreement dated, October 31, 2018, the Company issued additional warrants, effective May 1, 2019, to its underwriter as part of its secondary offering that allowed for the right to purchase 125,000 shares of common stock at an exercise price of $2.64 per share on or after May 1, 2019. These warrants expire on May 2, 2022.
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).
On May 29, 2018 the Company granted a total of 10,000 stock options to an employee at an exercise price of $10.00 per share. These awards will vest evenly over a three year period. The maximum term of an option is 10 years from the date of grant. The grant date fair value of the options was $4.68. Total expense to be recognized after adjusting for forfeitures for the employee options is approximately $35,000.
The Black-Scholes pricing model was used to determine the fair value of the stock options granted by the Company. The Company recognizes this value as an expense over the period in which the stock options vest. There were no awards in fiscal year 2019. The weighted average grant date fair value of the options granted was $4.68 for awards granted in the years ended December 31, 2019. Compensation expense recognized from the vesting of stock options was approximately $15,000 of which $9,000 was for options issued prior to 2019 and $25,000 of which $18,800 was for options issued prior to 2018, respectively for the years ended December 31, 2020 and 2019. The remaining unrecognized compensation cost associated with unvested stock options as of December 31, 2020 and 2019 is approximately $15,000 and $18,000, respectively. At December 31, 2020 and 2019, the stock options had a remaining life of approximately 6 and 7 years, respectively.
The aggregate intrinsic value of the outstanding common stock options as of December 31, 2020 and 2019 was $0 and $0 respectively.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions. The model requires the use of subjective assumptions. Expected volatility was based on the historical volatility of another public company with a similar business model and comparable market share as the Company. The expected life (in years) was determined using historical data to estimate options exercise patterns. The Company does not expect to pay any dividends for the
foreseeable future thus a value of zero was used in the calculation. The risk-free interest rate was based on the rate for US Treasury bonds commensurate with the expected term of the granted options. Significant assumptions used in the option-pricing model to fair value options granted were as follows:
|
|
2018
|
|
Risk-free rate
|
|
|
2.65
|
%
|
Expected life
|
|
6 years
|
|
Expected volatility
|
|
|
108.00
|
%
|
Expected dividend
|
|
|
—
|
|
|
|
|
|
|
F-25
The following is a summary of the stock option plan activity during the years ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
Options Outstanding at Beginning of the year
|
|
|
19,300
|
|
|
$
|
60.51
|
|
|
|
19,300
|
|
|
$
|
60.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at End of Year
|
|
|
19,300
|
|
|
$
|
60.51
|
|
|
|
19,300
|
|
|
$
|
60.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at End of Year
|
|
|
15,134
|
|
|
$
|
68.08
|
|
|
|
11,800
|
|
|
$
|
84.49
|
|
Note 11. Related Party Transactions
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 the Company until and through the date of its initial public offering. Following the initial public 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.
Under the agreement, the Company pays BLG a fixed monthly fee of $82,000 per month 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 collected from property owners and paid to BLG for 2020 and 2019 were approximately $1,002,200 and $1,052,000, respectively. As of December 31, 2020 and 2019, receivables from property owners for charges ultimately payable to BLG were approximately $1,332,000 and $1,883,000, respectively.
Under the related party agreement with BLG in effect during 2020 and 2019, 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 are accounted for as a reduction in expense incurred. The Company incurred expenses related to these types of costs of $127,000 and $203,000, during 2020 and 2019, respectively. Recoveries during 2020 and 2019 related to those costs were approximately $157,000 and $221,000, respectively.
The Company also shares office space, personnel 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. The charges for certain shared personnel totaled approximately $240,000 in 2020 and $185,000 in 2019.
The Company assessed the collectability of the amount due from BLG and concluded that even though BLG had repaid $252,771 during 2017, it did not have the ability to repay the remaining balance at the end of 2017 and as such took a reserve of approximately $1.4 million for the balance due as of December 31, 2017. In 2020 and 2019, the Company subsequently recouped $500,000 and $190,000, respecively of this write-off. Amounts payable to BLG as of December 31, 2020 was approximately $158,400 and a receivable from BLG as of December 31, 2019 was $152,800.
LMF has engaged BLG on behalf of many of its Association clients to service and collect the Accounts and to distribute the proceeds as required by Florida law and the provisions of the purchase agreements between LMF and the Associations. Ms. Gould works as the General Manager of BLG which pays her compensation of $150,000 per year.
F-26
Consulting Services
One of our directors, Martin A. Traber, is Chairman at Skyway Capital Markets which billed us in total $125,000 for a fairness opinion of $110,000 in 2019 and $25,000 in 2019 for a future fairness opinion, the total of which represents less than 1% of Skyway Capital Markets annual revenue. We believe that such services were performed on term at least as favorable to us as those that would have been realized in transactions with unaffiliated entities or individuals.
The Company advanced Craven $27,738 and it was settled in 2020.
Note 12. Investment in Note Receivable – Related Party
On November 2, 2018, the Company entered into a Securities Purchase Agreement with IIU, pursuant to which IIU issued to the
Company a Senior Convertible Promissory Note (the “IIU Note”) in the original principal amount of $1,500,000 in exchange for a
purchase price of $1,500,000. The maturity date of the IIU Note was 360 days after the date of issuance (subject to acceleration upon
an event of default). The IIU Note carried a 3.0% interest rate, with accrued but unpaid interest being payable on the IIU Note’s
maturity date.
The IIU Note allowed the Company the right on or after the maturity date to convert any unpaid principal and accrued and unpaid
interest of the IIU Note into shares of IIU based on a conversion amount which is the fair value of the common shares of IIU at the time.
The Company subsequently purchased 100% of the issued and outstanding capital stock of IIU on January 16, 2019 for $5,089,357.
On December 20, 2019, the Company loaned $1.5 million to Craven in the form of a secured promissory note (the “Craven Secured
Promissory Note”) which had an initial maturity date of April 15, 2020 and carried an interest rate of 0.5% that is to be paid monthly.
The Company subsequently extended the due date of the Craven Secured Promissory Note and the monthly interest payments to August 1, 2021. The Craven Secured Promissory Note is secured by, among other things, stock pledge of Craven’s 640,000 common stock of the Company and the assignment of the assets of Craven in favor of the Company.
The IIU Note was fully repaid in 2020.
Note 13. Discontinued Operations
On January 8, 2020, the Company entered into a Stock Purchase Agreement (“SPA”) with Craven pursuant to which the Company sold to Craven all of the issued and outstanding shares of IIU for $3,562,569. The purchase price was paid by Craven through the cancellation of the $3,461,782 Craven Convertible Note plus forgiveness of $100,787 of accrued interest. The Company originally paid $4,969,586 of goodwill. As a result, goodwill was impaired by $1.65 million. The sale of IIU resulted in a gain of $16,428.
The impact of this transaction is reflected as a discontinued operation in the consolidated financial statements. Pursuant to ASU 2014-08, the major classes of assets and liabilities of IIU were as follows:
F-27
|
|
|
As of December 31, 2019
|
Major classes of assets
|
|
Cash
|
$ 246,914
|
Related party receivable
|
27,738
|
Prepaid expenses
|
2,301
|
Total major classes of current assets – discontinued assets
|
276,953
|
Fixed assets, net
|
27,245
|
Total major classes of assets – discontinued assets
|
$ 304,198
|
|
|
Accounts payable and accrued expenses
|
$ 144,006
|
Note payable – short term
|
100,672
|
Other liabilities
|
21,153
|
Income taxes payable
|
14,226
|
Total major classes of current liabilities – discontinued liabilities
|
280,057
|
|
|
Debt
|
517,584
|
Total major classes of liabilities - discontinued liabilities
|
$ 797,641
|
|
|
The operating results for IIU, Inc. have been presented in the accompanying consolidated financial statements of operations for the year ended December 31, 2020 and 2019 as discontinued operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Revenue
|
$ -
|
$ 639,815
|
Total operating costs and expenses
|
-
|
525,616
|
Gain (Loss) from discontinued operations
|
-
|
114,199
|
Other expense, net
|
-
|
39,320
|
Gain on disposal of discontinued operations
|
16,428
|
-
|
Net gain (loss) from discontinued operations
|
$ 16,428
|
$ 74,879
|
|
|
|
Net cash provided by operating activities
|
$ -
|
290,805
|
Net cash (used in) provided by investing activities
|
(246,914)
|
40,879
|
Net cash used in financing activities
|
|
(84,771)
|
|
|
|
|
|
|
|
|
Note 14 Going Concern
The Company’s financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.
In accordance with Financial Accounting Standards Board, or the FASB, Accounting Standards Update No. 2014-15, Presentation of
Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events,
considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that
the financial statements are issued.
The Company has experienced significant operating losses over the past 4 years (2016 through December 31, 2020) with cumulative
losses of approximately $18,538,000 and negative cashflows from operations. These losses resulted in the usage of all cash proceeds
from the Company’s initial public offering in 2015. For the year ended December 31, 2019, the Company disclosed substantial
doubt about the Company’s ability to continue as a going concern
The Company received a total of approximately $14.0 million during the year ended December 31, 2020 due to a number of
factors including:
|
•
|
Holders of our warrants exercised such warrants for 1.2 million shares in June 2020 which resulted in the Company receiving approximately $2.9 million.
|
F-28
|
•
|
The Company was repaid approximately $1.5 million on a related party receivable.
|
|
•
|
The Company received $1.25 million for the issuance of 520,838 common shares.
|
|
•
|
The Company received $8.3 million for the issuance of 10,200,000 common shares.
|
|
•
|
Holders of our warrants exercised such warrants for 150 thousand in August 2020 which resulted in the Company receiving approximately $0.1 million.
|
As such, we have $11.6 million of cash as of December 31, 2020 which the Company believes will be enough to satisfy our estimated liquidity needs for the 12 months from the issuance of these financial statements.
However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally. At the time of issuance of these consolidated financial statements, the Company believes the previously reported going concern has been alleviated based on the reasons above, and management does not have substantial doubt of the Company’s ability to continue as a going concern.
These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern
Note 15. Subsequent Events
From January 10, 2021 to March 1, 2021, warrant holders exercised their option to acquire 11,003,500 shares for $9,562,440.
On January 28, 2021, the Company loaned funds to LMFAO Sponsor LLC which in turn purchased 5,738,000 private placement warrants in LMF Acquisition Opportunities Inc (“LMAO”) with an exercise price of $11.50 for $5,738,000. LMAO consummated an IPO for 10,350,000 units which generated gross proceeds of $103,500,000.
On January 14, 2021, the holder of the warrant that allowed for the purchase of 777,059 common share elected a cashless option and received 649,179 shares.
On February 16, 2021, the Company announced that, as of February 11, 2021, it had completed its obligations under the Purchase Agreement by purchasing approximately $18.2 million of aggregate debt (including principal, accrued interest and fees) from Partners for Growth IV, L.P. and Partners for Growth V, L.P. during the period from January 7, 2021 to February 10, 2021, at a discount for approximately $15.5 million. Under the Settlement Agreement, LFMA received approximately 22.7 million shares from Borqs. The Company sold those shares for approximately $32.6 million, of which approximately $5.7 million was received by LMFA after fulfilling its obligations to the Investor under the Loan Agreement.
In an additional transaction on February 24, 2021, the Company entered into a specialty finance transaction with Borqs, under which the Company agreed to purchase Senior Secured Convertible Promissory Notes of Borqs (the “Borqs Notes”) up to an aggregate principal amount of $5 million. The Borqs Notes are due in two years, have an annual interest rate of 8%, are convertible into ordinary shares of Borqs at a 10% discount from the market price, and have 90% warrant coverage (with the warrants exercisable at 110% of the conversion price. One-third of the Borqs Notes ($1,666,500) were funded by the Company at the execution of definitive agreements for the transaction, and two-thirds of the Borqs Notes ($3,333,500) to be purchased by the Company are required to be purchased and funded upon the satisfaction of certain conditions, including effectiveness of a registration statement to be filed by Borqs by April 15, 2021.
On January 11, 2021, the Company received a letter from outside counsel to Hanfor and Hanfor Owner alleging that the Company’s termination of the Share Exchange Agreement constituted a breach of contract and/or was invalid and further alleging breach of fiduciary duty by the Company’s Chief Executive Officer and Chief Financial Officer. Such letter demanded $1,250,000 (the amount of Hanfor Owner’s investment in common stock of the Company) plus interest and threatened legal action against the Company and the Company’s Chief Executive Officer and Chief Financial Officer. Following the receipt of that letter, on or around January 27, 2021, the Company assisted Hanfor Owner with the removal of the restrictive legend from the shares of Company common stock owned by Hanfor Owner in accordance with SEC Rule 144 to enable the sale thereof by Hanfor Owner, at which time Hanfor Owner’s counsel indicated in writing that Hanfor Owner may have remaining damages. However, there have been no further communications from Hanfor, Hanfor Owner, or their counsel subsequent to the communications that occurred on or around January 27, 2021.
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