10-Q 1 lmfa-20230331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2023

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission file number 001-37605

 

LM FUNDING AMERICA, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

47-3844457

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification no.)

 

 

1200 West Platt Street

Suite 100

Tampa, FL

33606

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: 813-222-8996

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

Trading symbol

Name of each exchange on which registered

Common Stock par value $0.001 per share

LMFA

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The registrant had 14,651,883 shares of Common Stock, par value $0.001 per share, outstanding as of May 10, 2023.

 

 

 

 


 

LM FUNDING AMERICA, INC.

TABLE OF CONTENTS

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

LM Funding America, Inc. and Subsidiaries Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022

3

 

 

 

LM Funding America, Inc. and Subsidiaries Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022 (unaudited)

4

 

 

 

LM Funding America, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (unaudited)

5

 

 

 

LM Funding America, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022 (unaudited)

6

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 3.

Defaults Upon Senior Securities

32

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

Item 5.

Other Information

33

 

 

 

Item 6.

Exhibits

34

 

 

SIGNATURES

35

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

LM Funding America, Inc. and Subsidiaries Consolidated Balance Sheets

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Cash

 

$

3,428,906

 

 

$

4,238,006

 

Digital Assets (Note 2)

 

 

1,751,914

 

 

 

888,026

 

Finance receivables

 

 

22,107

 

 

 

26,802

 

Marketable securities (Note 5)

 

 

10,080

 

 

 

4,290

 

Notes receivable from Seastar Medical Holding Corporation (Note 5)

 

 

-

 

 

 

3,807,749

 

Prepaid expenses and other assets

 

 

1,196,849

 

 

 

1,233,322

 

Income tax receivable

 

 

293,466

 

 

 

293,466

 

Current assets

 

 

6,703,322

 

 

 

10,491,661

 

 

 

 

 

 

 

 

Fixed assets, net (Note 3)

 

 

26,708,914

 

 

 

27,192,317

 

Deposits on mining equipment (Note 4)

 

 

1,357,341

 

 

 

525,219

 

Hosting services deposit (Note 4)

 

 

2,200,452

 

 

 

2,200,452

 

Real estate assets owned

 

 

80,057

 

 

 

80,057

 

Long-term investments - debt security (Note 5)

 

 

2,402,542

 

 

 

2,402,542

 

Less: Allowance for losses on debt security (Note 5)

 

 

(1,052,542

)

 

 

(1,052,542

)

Long-term investments - debt security, net (Note 5)

 

 

1,350,000

 

 

 

1,350,000

 

Long-term investments - equity securities (Note 5)

 

 

437,924

 

 

 

464,778

 

Investment in Seastar Medical Holding Corporation (Note 5)

 

 

4,812,750

 

 

 

10,608,750

 

Notes receivable from Seastar Medical Holding Corporation (Note 5)

 

 

2,216,649

 

 

 

-

 

Operating lease - right of use assets (Note 8)

 

 

264,321

 

 

 

265,658

 

Other assets

 

 

10,726

 

 

 

10,726

 

Long-term assets

 

 

39,439,134

 

 

 

42,697,957

 

Total assets

 

$

46,142,456

 

 

$

53,189,618

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

1,682,392

 

 

 

1,570,906

 

Note payable - short-term (Note 6)

 

 

298,382

 

 

 

475,775

 

Due to related parties (Note 7)

 

 

62,829

 

 

 

75,488

 

Current portion of lease liability (Note 8)

 

 

99,569

 

 

 

90,823

 

Total current liabilities

 

 

2,143,172

 

 

 

2,212,992

 

 

 

 

 

 

 

 

Lease liability - net of current portion (Note 8)

 

 

170,295

 

 

 

179,397

 

Long-term liabilities

 

 

170,295

 

 

 

179,397

 

Total liabilities

 

 

2,313,467

 

 

 

2,392,389

 

 

 

 

 

 

 

 

Stockholders' equity (Note 9)

 

 

 

 

 

 

Preferred stock, par value $.001; 150,000,000 shares authorized; no shares issued and outstanding as of March 31, 2023 and December 31, 2022

 

 

-

 

 

 

-

 

Common stock, par value $.001; 350,000,000 shares authorized; 13,091,883 shares issued and outstanding as of March 31, 2023 and December 31, 2022

 

 

13,092

 

 

 

13,092

 

Additional paid-in capital

 

 

92,389,697

 

 

 

92,195,341

 

Accumulated deficit

 

 

(48,403,539

)

 

 

(43,017,207

)

Total LM Funding America stockholders' equity

 

 

43,999,250

 

 

 

49,191,226

 

   Non-controlling interest

 

 

(170,261

)

 

 

1,606,003

 

Total stockholders' equity

 

 

43,828,989

 

 

 

50,797,229

 

Total liabilities and stockholders’ equity

 

$

46,142,456

 

 

$

53,189,618

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3


 

LM Funding America, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Revenues:

 

 

 

 

 

 

Digital mining revenues

 

$

2,090,851

 

 

$

-

 

Specialty finance revenue

 

 

182,836

 

 

 

152,132

 

Rental revenue

 

 

39,831

 

 

 

38,872

 

Total revenues

 

 

2,313,518

 

 

 

191,004

 

Operating costs and expenses:

 

 

 

 

 

 

Digital mining cost of revenues (exclusive of depreciation and amortization shown below)

 

 

1,667,673

 

 

 

-

 

Staff costs & payroll

 

 

932,835

 

 

 

4,292,197

 

Professional fees

 

 

572,356

 

 

 

774,820

 

Settlement costs with associations

 

 

-

 

 

 

160

 

Selling, general and administrative

 

 

239,464

 

 

 

114,920

 

Real estate management and disposal

 

 

31,803

 

 

 

31,481

 

Depreciation and amortization

 

 

801,873

 

 

 

3,094

 

Collection costs

 

 

9,808

 

 

 

(3,820

)

Impairment loss on mined digital assets

 

 

199,554

 

 

 

-

 

Realized gain on sale of mined digital assets

 

 

(424,333

)

 

 

-

 

Other operating costs

 

 

251,911

 

 

 

8,384

 

Total operating costs and expenses

 

 

4,282,944

 

 

 

5,221,236

 

Operating loss

 

 

(1,969,426

)

 

 

(5,030,232

)

Realized loss on securities

 

 

-

 

 

 

(395,181

)

Unrealized gain on convertible debt security

 

 

-

 

 

 

288,320

 

Unrealized gain on marketable securities

 

 

5,790

 

 

 

130

 

Impairment loss on prepaid mining machine deposits

 

 

(36,691

)

 

 

-

 

Unrealized loss on investment and equity securities

 

 

(5,822,854

)

 

 

(986,399

)

Realized gain on sale of purchased digital assets

 

 

1,917

 

 

 

-

 

Digital assets other income

 

 

-

 

 

 

4,366

 

Other income - coupon sales

 

 

603,591

 

 

 

-

 

Dividend income

 

 

-

 

 

 

1,375

 

Interest income

 

 

55,077

 

 

 

98,370

 

Loss before income taxes

 

$

(7,162,596

)

 

$

(6,019,251

)

Income tax expense

 

 

-

 

 

 

-

 

Net loss

 

$

(7,162,596

)

 

$

(6,019,251

)

Less: Net loss attributable to non-controlling interest

 

 

1,776,264

 

 

 

291,200

 

Net loss attributable to LM Funding America Inc.

 

$

(5,386,332

)

 

$

(5,728,051

)

 

 

 

 

 

 

 

Basic loss per common share

 

$

(0.41

)

 

$

(0.44

)

 

 

 

 

 

 

 

Diluted loss per common share

 

$

(0.41

)

 

$

(0.44

)

Weighted average number of common shares outstanding

 

 

 

 

 

 

Basic

 

 

13,091,883

 

 

 

13,060,736

 

Diluted

 

 

13,091,883

 

 

 

13,060,736

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4


 

LM Funding America, Inc. and Subsidiaries Consolidated Statements of Cash Flows

(unaudited)

 

Three Months ended March 31,

 

 

2023

 

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(7,162,596

)

 

$

(6,019,251

)

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

Depreciation and amortization

 

 

801,873

 

 

 

3,094

 

Noncash lease expense

 

 

23,224

 

 

 

23,343

 

Stock compensation

 

 

-

 

 

 

329,500

 

Stock option expense

 

 

194,356

 

 

 

3,318,737

 

Accrued investment income

 

 

(53,734

)

 

 

(96,657

)

Digital assets other income

 

 

-

 

 

 

(4,366

)

Impairment loss on digital assets

 

 

199,554

 

 

 

-

 

Impairment loss on prepaid mining machine deposits

 

 

36,691

 

 

 

-

 

Unrealized gain on convertible debt security

 

 

-

 

 

 

(288,320

)

Unrealized gain on marketable securities

 

 

(5,790

)

 

 

(130

)

Unrealized loss on investment and equity securities

 

 

5,822,854

 

 

 

986,399

 

Realized loss on securities

 

 

-

 

 

 

395,181

 

Realized gain on sale of digital assets

 

 

(426,250

)

 

 

-

 

Proceeds from securities

 

 

-

 

 

 

1,428,050

 

Change in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

36,473

 

 

 

280,208

 

Advances (repayments) to related party

 

 

(12,659

)

 

 

252,580

 

Accounts payable and accrued expenses

 

 

111,486

 

 

 

(136,430

)

Stablecoin

 

 

-

 

 

 

(500,000

)

Mining of digital assets

 

 

(2,090,851

)

 

 

-

 

Proceeds from sale of digital assets

 

 

1,455,141

 

 

 

-

 

Lease liability payments

 

 

(22,243

)

 

 

(30,242

)

Deferred taxes and taxes payable

 

 

-

 

 

 

(326,178

)

Income taxes receivable

 

 

-

 

 

 

(143,822

)

Net cash used in operating activities

 

 

(1,092,471

)

 

 

(528,304

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Net collections of finance receivables - original product

 

 

-

 

 

 

(6,550

)

Net collections of finance receivables - special product

 

 

4,695

 

 

 

(1,948

)

Capital expenditures

 

 

(263,596

)

 

 

-

 

Investment in note receivable

 

 

-

 

 

 

(310,000

)

Collection of note receivable

 

 

1,644,834

 

 

 

 

Investment in digital assets

 

 

(35,157

)

 

 

-

 

Proceeds from sale of purchased digital assets

 

 

33,675

 

 

 

-

 

Deposits for mining equipment

 

 

(923,687

)

 

 

(7,118,572

)

Net cash provided by (used in) investing activities

 

 

460,764

 

 

 

(7,437,070

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Insurance financing repayments

 

 

(178,620

)

 

 

(57,344

)

Insurance financing

 

 

1,227

 

 

 

-

 

Net cash used in financing activities

 

 

(177,393

)

 

 

(57,344

)

NET DECREASE IN CASH

 

 

(809,100

)

 

 

(8,022,718

)

CASH - BEGINNING OF YEAR

 

 

4,238,006

 

 

 

32,559,185

 

CASH - END OF YEAR

 

$

3,428,906

 

 

$

24,536,467

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

ROU assets and operating lease obligation recognized

 

$

21,887

 

 

$

300,787

 

Reclassification of mining equipment deposit to fixed assets, net

 

$

54,874

 

 

$

-

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION

 

 

 

 

 

 

Cash paid for taxes

 

$

-

 

 

$

470,000

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5


 

LM Funding America, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2023 and 2022

(unaudited)

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional paid-in capital

 

 

Accumulated Deficit

 

 

Non-Controlling Interest

 

 

Total Equity

 

Balance - December 31, 2021

 

 

13,017,943

 

 

$

13,018

 

 

$

74,525,106

 

 

$

(13,777,006

)

 

$

249,089

 

 

$

61,010,207

 

Common stock issued for services

 

 

73,940

 

 

 

74

 

 

 

(74

)

 

 

-

 

 

 

-

 

 

 

-

 

Stock compensation

 

 

-

 

 

 

-

 

 

 

329,500

 

 

 

-

 

 

 

-

 

 

 

329,500

 

Stock option expense

 

 

-

 

 

 

-

 

 

 

3,318,737

 

 

 

-

 

 

 

-

 

 

 

3,318,737

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,728,051

)

 

 

(291,200

)

 

 

(6,019,251

)

Balance - March 31, 2022

 

 

13,091,883

 

 

$

13,092

 

 

$

78,173,269

 

 

$

(19,505,057

)

 

$

(42,111

)

 

$

58,639,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2022

 

 

13,091,883

 

 

$

13,092

 

 

$

92,195,341

 

 

$

(43,017,207

)

 

$

1,606,003

 

 

$

50,797,229

 

Stock option expense

 

 

-

 

 

 

-

 

 

 

194,356

 

 

 

-

 

 

 

-

 

 

 

194,356

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,386,332

)

 

 

(1,776,264

)

 

 

(7,162,596

)

Balance - March 31, 2023

 

 

13,091,883

 

 

$

13,092

 

 

$

92,389,697

 

 

$

(48,403,539

)

 

$

(170,261

)

 

$

43,828,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6


 

LM FUNDING AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2023

(UNAUDITED)

 

 

Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

LM Funding America, Inc. (“we”, “our”, “LMFA” or the “Company”) was formed as a Delaware corporation on April 20, 2015.

LMFA is the sole member of several entities including LM Funding, LLC, which was organized in January 2008, US Digital Mining and Hosting Co., LLC, which was formed on September 10, 2021; LMFA Financing LLC, formed on November 23, 2020, and LMFAO Sponsor LLC, formed on October 29, 2020. Additionally, USDM has formed various 100% owned subsidiaries to engage in business in various states. LMFAO Sponsor LLC formed a majority owned subsidiary LMF Acquisition Opportunities Inc. on October 29, 2020. LMF Acquisition Opportunities Inc. was subsequently merged with Seastar Medical Holding Corporation on October 28, 2022.

The Company also from time to time organizes other subsidiaries to serve a specific purpose or hold a specific asset.

The Company currently has two lines of business: our recently commenced cryptocurrency mining business and a historical specialty finance business.

On September 15, 2021, we announced our plan to operate in the Bitcoin mining ecosystem, and we subsequently commenced Bitcoin mining operations in late September 2022. This business operation deploys our computing power to mine Bitcoin and validate transactions on the Bitcoin network. We conduct this business through a wholly owned subsidiary, US Digital Mining and Hosting Co., LLC, a Florida limited liability company ("US Digital"), which we formed in 2021 to develop and operate our cryptocurrency mining business.

With respect to our specialty finance business, the Company has historically engaged in the business of providing funding to nonprofit community associations primarily located in the State of Florida. We offer incorporated nonprofit community associations, which we refer to as “Associations”, a variety of financial products customized to each Association’s financial needs. Our original product offering consists of providing funding to Associations by purchasing their rights under delinquent accounts that are selected by the Associations arising from unpaid Association assessments. Historically, we provided funding against such delinquent accounts, which we refer to as “Accounts”, in exchange for a portion of the proceeds collected by the Associations from the account debtors on the Accounts. In addition to our original product offering, we also purchase Accounts on varying terms tailored to suit each Association’s financial needs, including under our New Neighbor Guaranty™ program.

Cryptocurrency Mining Business

Bitcoin was introduced in 2008 with the goal of serving as a digital means of exchanging and storing value. Bitcoin is a form of digital currency that depends upon a consensus-based network and a public ledger called a “blockchain”, which contains a record of every Bitcoin transaction ever processed. The Bitcoin network is the first decentralized peer-to-peer payment network, powered by users participating in the consensus protocol, with no central authority or middlemen, that has wide network participation. The authenticity of each Bitcoin transaction is protected through digital signatures that correspond with addresses of users that send and receive Bitcoin. Users have full control over remitting Bitcoin from their own sending addresses. All transactions on the Bitcoin blockchain are transparent, allowing those running the appropriate software to confirm the validity of each transaction. To be recorded on the blockchain, each Bitcoin transaction is validated through a proof-of-work consensus method, which entails solving complex mathematical problems to validate transactions and post them on the blockchain. This process is called mining. Miners are rewarded with Bitcoins, both in the form of newly-created Bitcoins and transaction fees in Bitcoin, for successfully solving the mathematical problems and providing computing power to the network.

We obtain Bitcoin as a result of our mining operations, and we sell Bitcoin from time to time to support our operations and strategic growth. We plan to convert our Bitcoin to U.S. dollars. We may engage in regular trading of Bitcoin or engage in hedging activities related to our holding of Bitcoin. However, our decisions to hold or sell Bitcoin at any given time may be impacted by the Bitcoin market, which has been historically characterized by significant volatility. Currently, we do not use a formula or specific methodology to determine whether or when we will sell Bitcoin that we hold, or the number of Bitcoins we will sell. Rather, decisions to hold or sell Bitcoins are currently determined by management by monitoring the market in real time.

Factors such as access to computer processing capacity, interconnectivity, electricity cost, environmental factors (such as cooling capacity) and location play important roles in mining. In Bitcoin mining, “hashrate” is a measure of the computing and processing power and speed by which a mining computer mines and processes transactions on the Bitcoin network. We expect to continue increasing our computing power through 2023 and beyond as we expand the number of active mining machines. A company’s

7


 

computing power measured in hashrate is generally considered to be one of the most important metrics for evaluating Bitcoin mining companies.

Specialty Finance Company

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

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

Because we acquire and collect on the delinquent receivables of Associations, the Account debtors are third parties about whom we have little or no information. Therefore, we cannot predict when any given Account will be paid off or how much it will yield. In assessing the risk of purchasing Accounts, we review the property values of the underlying units, the governing documents of the relevant Association, and the total number of delinquent receivables held by the Association.

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; 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; US Digital Mining and Hosting Co., LLC (includes all 100% owned subsidiary limited liability companies) and LMF SPE #2, LLC and various single purpose limited liability corporations owned by REO Management Holdings, LLC which own various properties. It also includes LMFA Sponsor LLC (a 69.5% owned subsidiary). All significant intercompany balances have been eliminated in consolidation.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim consolidated financial statements as of March 31, 2023 and for the Three Months ended March 31, 2023 and March 31, 2022, respectively are unaudited. In the opinion of management, the interim consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods. The accompanying consolidated balance sheet as of December 31, 2022, is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for fiscal the year ended December 31, 2022.

Reclassifications

Certain prior period amounts on the consolidated balance sheets have been reclassified to conform to the current period presentation.

Segment and Reporting Unit Information

Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Chief Executive Officer and Chief Financial Officer of the Company are determined to comprise the CODM, as a group. The Company has two operating segments as of December 31, 2022, which we refer to as Specialty Finance and Mining Operations. Our corporate oversight function and other components that may earn revenues that are only incidental to the activities of the Company are aggregated and included in the “All Other” category. See Note 11, “Segment Information."

8


 

Digital Assets

When applicable, we account for all digital assets other than stablecoin as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. We have ownership of and control over our digital assets and use third-party custodial services to secure it. Digital assets that are purchased are initially recorded at cost and digital assets that are received in exchange for services provided are recognized at fair value as of the date received. Digital assets are measured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition. We account for stablecoin as financial assets in accordance with ASC 310, Receivables. The stablecoin are recorded at cost less impairment, which approximates their fair value.

We determine the fair value of our digital assets that are accounted for as intangible assets in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for such assets (Level 1 inputs). We perform an analysis each month to identify whether events or changes in circumstances indicate that it is more likely than not that our digital assets are impaired. If the current carrying value of a digital asset exceeds the fair value so determined, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value determined.

The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. When applicable, any impairment loss on digital assets held for investment would be recognized during the period incurred within "Impairment loss on digital assets" in other income/expense in the consolidated statements of operations. Impairment loss on mined digital assets would be recognized during the period incurred within "Impairment loss on mined digital assets" in operating costs and expenses in the consolidated statements of operations.

Gains or losses are not recorded until realized upon sale, at which point they are presented separately from any impairment losses. Any realized gain or loss from the sale of digital assets that were purchased as an investment is recorded in other income (loss), while any realized gain or loss from the sale of digital assets that were earned through mining operations would be recognized within operating costs and expenses. The Company accounts for its gains or losses in accordance with the first in first out (“FIFO”) method of accounting.

Digital assets earned by the Company through its mining activities, proceeds from the sale of mined digital assets, realized gain (loss) from the sale of digital assets and the loss on impairment of digital assets are included within operating activities on the consolidated statements of cash flows, where applicable. Purchases of digital assets and proceeds from the sale of purchased digital assets and included within investing activities in the consolidated statements of cash flows.

Equipment Purchases

We ordered 125 S19 XP machines in January 15, 2023 from Bitmain for an aggregate purchase price of approximately $0.5 million which were delivered in April 2023. We also paid $0.3 million to acquire an additional 101 S19 XP machines from Bitmain which will be delivered in May 2023.

Fixed Assets

The Company capitalizes all acquisitions of fixed assets in excess of $500. Fixed assets are stated at cost, net of accumulated depreciation. State and local use tax for equipment shipped from overseas is generally accrued on a quarterly basis at the time equipment is placed in service and is paid to the state in which the equipment is being utilized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and commences once the assets are ready for their intended use. Fixed assets are comprised of furniture, computer, office equipment and mining machines with assigned useful lives of 3 to 5 years.

The Company classifies mining machine deposit payments within "Deposits on mining equipment" in the consolidated balance sheets. As mining machines are received, the respective cost of the mining machines plus the related shipping and customs fees are reclassified from "Deposits on mining equipment" to "Fixed assets, net" in the consolidated balance sheet. Refer to Note 4.

The Company operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of mining machines. To the extent that any of the assumptions underlying management’s estimate of useful life of its mining machines are subject to revision in a future reporting period, either as a result of changes in circumstances or through the availability of greater quantities of data, then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets.

Impairment of Long-Lived Assets

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment amount is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Coupon Sales

9


 

From time to time the Company receives coupons from Bitmain to incentivize purchases of equipment. Coupons have a stated face value in dollars and can be applied against future invoices for purchased machines. Coupons are transferable and there are not restrictions on the sale to third parties. Occasionally, the Company sells coupons to third parties in exchange for cash consideration. As there is currently no active market for the buying and selling of Bitmain coupons, the Company has determined that the fair value of coupons received is nil at the time of receipt therefore revenue associated with the sale of such coupons is not recognized until the sale transaction has been completed and cash consideration has been received from the third party. During the Three Months ended March 31, 2023, the Company sold Bitmain coupons for approximately $604 thousand, which was recognized as other income within "Other income - coupon sales" in the Consolidated Statements of Operations.

Hosting Contracts

On September 5, 2022, the Company, through its wholly-owned subsidiary US Digital, entered into a hosting agreement (the “Core Hosting Agreement”) with Core Scientific Inc. (“Core”) pursuant to which Core, under various additional orders, agreed to host approximately 3,000 of the Company's Bitcoin miner machines as of March 31, 2023 at a secure location and provide power, maintenance and other services specified in the contract with a term of one year, with automatic renewals unless either party notifies the other party in writing not less than ninety (90) calendar days before such renewal of its desire for the order not to renew unless terminated sooner pursuant to the terms of the Core Hosting Agreement. In April 2023, the Company subsequently added approximately 1,400 machines under this agreement for Core to host a total of approximately