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 4,400 machines. As required under the Core Hosting Agreement, the Company has paid approximately $2.2 million as of March 31, 2023 and December 31, 2022 as a deposit. In December 2022, Core filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas. Core's bankruptcy filing has not negatively impacted our mining ability at their sites as of the date of this filing.
On January 26, 2023, the Company entered into a hosting agreement (the “Phoenix Hosting Agreement”) with Phoenix Industries Inc. (“Phoenix”) pursuant to which Phoenix agreed to host 228 of the Company's Bitcoin Miner S19J Pro machines at a secure location and provide power, maintenance and other services specified in the contract with a term of two years. This Phoenix Hosting Agreement will renew automatically for an additional two years if we provide written notice to Phoenix of its desire of renewal at least sixty (60) days in advance of the conclusion of the initial term of two years, unless terminated sooner pursuant to the terms of the Phoenix Hosting Agreement. As required under the Phoenix Hosting Agreement, the Company paid approximately $36 thousand as a deposit in January 2023. The Company and Phoenix have mutually terminated this agreement effective April 18, 2023 and the Company's S19J Pro machines were returned to the Company in May 2023. The Company fully impaired the $36 thousand deposit as of March 31, 2023.
On March 9, 2023, the Company entered into a hosting agreement (the “Longbow Hosting Agreement”) with Longbow HostCo LLC (“Longbow”) pursuant to which Longbow agreed to host 500 of the Company's Bitcoin Miner S19J Pro machines at a secure location and provide power, maintenance and other services specified in the contract with a term of two years. Upon written request from us at least ninety (90) days prior to the conclusion of the then current term and approval by Longbow, the term shall renew for successive one year periods with a three percent (3%) increase as of the commencement of each renewal term unless terminated sooner pursuant to the terms of the Longbow Hosting Agreement. As required under the Longbow Hosting Agreement, the Company paid approximately $157 thousand as a refundable deposit in March 2023.
On May 5, 2023, the Company entered into a hosting agreement (the “GIGA Hosting Agreement”) with GIGA Energy Inc. (“GIGA”) pursuant to which GIGA agreed to host 1,080 of the Company's Bitcoin Miner S19J Pro machines at a secure location and provide power, maintenance and other services specified in the contract with a term of one year. As required under the GIGA Hosting Agreement, the Company paid approximately $173 thousand as a pre-payment in May 2023 and will pay a refundable deposit of $173 thousand in May 2023.
Revenue recognition – Bitcoin Mining
We recognize revenue for Bitcoin mining operations in accordance with ASC 606. The Company has entered into contracts with Bitcoin mining pool operators to provide computing power to the mining pools. Contract inception occurs daily and the contracts are terminable at any time by either party. The Company’s enforceable right to compensation only begins when the Company starts providing computing power to the mining pool operator. When participating in ratable share pools, in exchange for providing computing power the Company is entitled to a fractional share of the Bitcoin award the mining pool operator receives for successfully adding a block to the blockchain, plus a fractional share of the transaction fees attached to that blockchain. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. When participating in a Full Pay Per Share (“FPPS”) mining pool, in exchange for providing computing power to the pool the Company is entitled to compensation, calculated on a daily basis, at an amount that approximates the total Bitcoin that could have been mined using the Company’s computing power, calculated on a look-back basis across previous blocks using the pools hash rate index.
The transaction consideration the Company receives is noncash consideration, in the form of Bitcoin, which the Company measures at fair value on the date received which is not materially different than the fair value at contract inception or time the Company has earned the award from the mining pools. Fair value of the Bitcoin award received is determined using the spot price of Bitcoin on the
10
date received. The Company cannot determine, during the course of providing computing power, that a reversal of revenue is not probable and therefore revenue is recognized when the Company receives consideration from the mining pool operator.
Cost of Revenues
The Company includes energy costs and external co-location mining hosting fees in cost of revenues. Depreciation of mining machines is included within "Depreciation and amortization" in the Consolidated Statements of Operations.
Investment in Securities
Investment in Securities includes investments in common stocks and convertible notes receivables. Investments in securities are reported at fair value with changes in unrecognized gains or losses included in other income on the income statement. The fair value of the Borq convertible note receivable is based on its classification as a trading securities. The Symbiont convertible note receivable is reported at amortized costs less impairment.
Investments in Unconsolidated Entities
We account for investments in less than 50% owned and more than 20% owned entities using the equity method of accounting. Because we have elected the fair value option for these securities, unrealized holding gains and losses during the period are included in other income within the Consolidated Statements of Operation.
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.
Income (Loss) Per Share
Basic income (loss) per share is calculated as net income (loss) to common stockholders divided by the weighted average number of common shares outstanding during the period.
The Company issued approximately nil shares and 74 thousand shares at various times during the Three Months ended March 31, 2023 and March 31, 2022, respectively, and has weighted averaged these new shares in calculating income (loss) per share for the relevant period.
Diluted income (loss) per share for the period equals basic loss per share as the effect of any convertible notes, stock based compensation awards or stock warrants would be anti-dilutive.
The anti-dilutive stock based compensation awards consisted of:
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|
|
|
|
|
As of March 31, |
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|
|
2023 |
|
|
2022 |
|
Stock Options |
|
|
1,121,262 |
|
|
|
3,956,827 |
|
Stock Warrants |
|
|
7,677,441 |
|
|
|
7,702,441 |
|
11
Income Taxes
The Company’s calculation of its tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. The Company recognizes tax liabilities for uncertain tax positions based on management’s estimate of whether it is more likely than not that additional taxes will be required. The Company had no uncertain tax positions as of March 31, 2023 and December 31, 2022.
Deferred income taxes are recognized in the consolidated financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, differences in depreciation methods of archived images, and property and equipment, stock-based and other compensation, and other accrued expenses. A valuation allowance is established when it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S., or the various state jurisdictions, may be materially different from managements estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities. Interest and penalties are included in tax expense.
The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of March 31, 2023 and December 31, 2022, the Company had no accrued interest or penalties related to the underpayment of income taxes.
Income tax expense/(benefit) from operations for the three months ended March 31, 2023 and 2022 was $0 in each period, which resulted primarily from maintaining a full valuation allowance against the Company's deferred tax assets.
12
Note 2. Digital Assets
Digital assets are as follows:
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March 31, 2023 |
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December 31, 2022 |
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
Digital assets |
$ |
|
1,751,914 |
|
$ |
|
888,026 |
|
$ |
|
504,366 |
|
|
|
|
|
|
|
|
|
|
|
Bitcoin |
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|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
|
|
|
March 31, 2022 |
|
Beginning of Year |
$ |
|
888,026 |
|
|
|
|
$ |
- |
|
Purchase of Bitcoin |
|
|
35,157 |
|
|
|
|
|
|
- |
|
Production of Bitcoin |
|
|
2,090,851 |
|
|
|
|
|
|
- |
|
Impairment loss on mined Bitcoin |
|
|
(199,554 |
) |
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|
|
|
|
- |
|
Carrying amount of Bitcoin sold |
|
|
(1,062,566 |
) |
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|
|
|
|
- |
|
End of Period |
$ |
|
1,751,914 |
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|
|
|
$ |
|
- |
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|
|
|
|
|
|
|
|
|
|
GUSD |
|
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|
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|
|
|
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|
March 31, 2023 |
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|
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|
March 31, 2022 |
|
Beginning of Year |
$ |
|
- |
|
|
|
|
$ |
|
- |
|
Purchase of GUSD |
|
|
- |
|
|
|
|
|
|
500,000 |
|
GUSD Earned on digital assets |
|
|
- |
|
|
|
|
|
|
4,366 |
|
Sale of GUSD |
|
|
- |
|
|
|
|
|
|
- |
|
End of Period |
$ |
|
- |
|
|
|
|
$ |
|
504,366 |
|
13
Note 3. Fixed Assets, net
The components of fixed assets as of March 31, 2023 and December 31, 2022 are as follows:
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|
Useful Life (Years) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
Mining machines |
|
5 |
|
$ |
|
27,953,916 |
|
|
$ |
|
27,637,041 |
|
Furniture, computer and office equipment |
|
3-5 |
|
|
|
217,907 |
|
|
|
|
216,312 |
|
Gross fixed assets |
|
|
|
|
|
28,171,823 |
|
|
|
|
27,853,353 |
|
Less: accumulated depreciation |
|
|
|
|
|
(1,462,909 |
) |
|
|
|
(661,036 |
) |
Fixed assets, net |
|
|
|
$ |
|
26,708,914 |
|
|
$ |
$ |
27,192,317 |
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|
As of March 31, 2023, there were approximately 3,700 mining machines in service at various hosting sites and approximately 1,950 machines in storage at a hosting facility. At December 31, 2022, there were approximately 2,700 mining machines in services at a Core location, approximately 2,700 machines at a Compute North LLC location which were awaiting transfer to storage as of December 31, 2022 and approximately 200 machines in transit. Depreciation has not commenced on those machines not yet in service. The Company’s depreciation expense recognized for the Three Months ended March 31, 2023 and 2022 was approximately $802,000 and $3,100, respectively.
There was no impairment loss recorded on fixed assets during the Three Months ended March 31, 2023 and 2022.
Note 4. Deposits on Mining Equipment and Hosting Services
As further described in Note 1, the Company has entered into a series of mining machine purchase agreements, hosting and colocation service agreements in connection with our cryptocurrency mining operations which required deposits to be paid in advance of the respective asset or service being received.
As of March 31, 2023 and December 31, 2022, the Company has a total of approximately $1.4 million and approximately $0.5 million, respectively, classified as "Deposits on mining equipment".
The Company classifies hosting deposit payments within "Hosting services deposits" in the consolidated balance sheets. As of March 31, 2023 and December 31, 2022 the Company has a total of approximately $2.2 million and $2.2 million, respectively, classified as "Hosting services deposits".
Note 5. Investments
Marketable Securities
Our marketable equity securities are publicly traded stocks measured at fair value using quoted prices for identical assets in active markets and classified as Level 1 within the fair value hierarchy. Marketable equity securities as of March 31, 2023 and December 31, 2022 are as follows:
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Cost |
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|
Cost of Shares Sold |
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|
Gross Unrealized Gain (Loss) |
|
|
Fair Value |
|
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|
|
|
|
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|
|
|
|
|
|
Marketable equity securities, March 31, 2023 |
|
$ |
4,290 |
|
|
$ |
- |
|
|
$ |
5,790 |
|
|
$ |
10,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities, December 31, 2022 |
|
$ |
2,976,933 |
|
|
$ |
(2,915,813 |
) |
|
$ |
(56,830 |
) |
|
$ |
4,290 |
|
The Company sold 4,895,894 shares of Borqs for approximately $1.4 million and realized a loss of approximately $395 thousand during the Three Months ended March 31, 2022.
Short-term Investments – convertible debt securities
Short-term investments consist of a convertible debt investment. The Company entered into an agreement with BORQS Technologies Inc. (“Borqs”) (Nasdaq: BRQS) in February 2021 under which the Company agreed to purchase Senior Secured Convertible Promissory Notes (“Notes”) of Borqs up to an aggregate principal amount of $5 million. The Company’s purchase of the Notes was a part of a larger transaction in which an aggregate of $20 million in Notes were sold by Borqs in a private transaction to several institutional and individual investors, including the Company. The Notes became due in February 2023, had an annual interest rate of 8%, were convertible into ordinary shares of Borqs at a 10% discount from the market price, and had 90% warrant coverage (with the
14
warrants exercisable at 110% of the conversion price). The Company received 2,922,078 warrants which had a nominal value on the grant date. One-third of the Notes ($1,666,667) were funded by the Company at the execution of definitive agreements for the transaction, and two-thirds of the Notes ($3,333,333) were purchased and funded upon the satisfaction of certain conditions, including effectiveness of a registration statement that was deemed effective on May 3, 2021. The Company completed this funding on May 6, 2021.
The Company sold 4,895,894 shares during the Three Months ended March 31, 2022 which resulted in a realized loss of $395 thousand which was reflected in Marketable Securities. The remaining principal amount of the Notes plus accrued interest ($965,096) were convertible into common shares of Borqs at a conversion price of $0.25 per share or 3,863,200 shares. As of March 31, 2022, the re-measurement resulted in an unrealized gain of approximately $288,320 and is included within “Unrealized gain on convertible debt security” in the consolidated statements of operations. Short-term investments in convertible debt securities consist of the following:
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March 31, 2023 |
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|
December 31, 2022 |
|
|
March 31, 2022 |
|
|
|
|
|
|
|
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|
Convertible note |
$ |
- |
|
|
$ |
- |
|
|
$ |
845,424 |
|
End of period |
$ |
- |
|
|
$ |
- |
|
|
$ |
845,424 |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
|
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Beginning of year |
$ |
- |
|
|
|
|
|
$ |
539,351 |
|
Investment in convertible debt security |
|
- |
|
|
|
|
|
|
- |
|
Accrued interest income on convertible debt security |
|
- |
|
|
|
|
|
|
17,753 |
|
Convertible debt and interest converted into marketable shares |
|
- |
|
|
|
|
|
|
- |
|
Unrealized gain on convertible debt security |
|
- |
|
|
|
|
|
|
288,320 |
|
End of period |
$ |
- |
|
|
|
|
|
$ |
845,424 |
|
Long-term Investments
Long-term investments held to maturity in debt securities consist of the following:
Note receivable - LMFAO and SeaStar Medical
On February 1, 2022, LMAO issued an unsecured promissory note to LMFAO Sponsor LLC, pursuant to which LMAO may borrow up to an aggregate principal amount of $500,000 to be used for a portion of LMAO’s expenses. As of March 31, 2022, LMAO had drawn down $310,000 under the promissory note with LMFAO Sponsor LLC to pay for offering expenses. On July 28, 2022 (effective as of June 30, 2022), the aggregate principal limit was increased to $1,750,000. The loan was non-interest bearing, unsecured and due at the earlier of the 24-month anniversary of LMAO’s initial public offering or the closing of its initial business combination.
On April 21, 2022, LMAO entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among LMAO, LMF Merger Sub, Inc., a Delaware corporation and direct, wholly owned subsidiary of LMAO (“Merger Sub”), and SeaStar Medical, Inc., a Delaware corporation (“SeaStar Medical”).
On July 29, 2022, LMAO issued a press release announcing that its board of directors elected to extend the date by which LMAO has to consummate a business combination from July 29, 2022 to October 29, 2022 (the “Extension”), as permitted under LMAO’s Amended and Restated Certificate of Incorporation. In connection with the Extension, LMFAO Sponsor deposited an aggregate of $1,035,000 (representing $0.10 per public share of LMAO) into LMAO’s trust account on July 29, 2022. This deposit was made in respect of a non-interest bearing loan to LMAO (the “Extension Loan”).
On October 28, 2022, LMAO through the Sponsor, consummated the previously announced business combination transaction (the “LMAO Business Combination”) contemplated by the Merger Agreement. Pursuant to the Merger Agreement, upon the closing of the LMAO Business Combination, SeaStar Medical was merged with and into Merger Sub, with SeaStar Medical continuing as the surviving entity in the merger as a wholly-owned subsidiary of LMAO and with LMAO subsequently changing its name in connection with the merger to SeaStar Medical Holding Corporation (“SMHC”).
In connection with the closing of the LMAO Business Combination, on October 28, 2022, Sponsor and SMHC amended, restated, and consolidated (i) the original Promissory Note, dated July 29, 2022, issued by LMAO to Sponsor in the principal amount of $1,035,000 and (ii) the original Amended and Restated Promissory Note, effective June 30, 2022, issued by LMAO to Sponsor in the principal amount of $1,750,000 (collectively, the “Original Sponsor Notes”), by entering into one consolidated amended and restated promissory note with an aggregate principal amount of $2,785,000 (the “Amended Sponsor Note”). During the Three Months ended March 31, 2023, approximately $1,104 thousand of repayments were received from Seastar for the Amended Sponsor Note. As of
15
March 31, 2023 and December 31, 2022, there was $1,681 thousand and $2,785 thousand of principal, respectively and $79 thousand and $35 thousand of accrued interest, respectively, on the Amended Sponsor Note included in "Notes receivable from Seastar Medical Holding Corporation" on the consolidated balance sheets.
On September 9, 2022, the Company entered into a Credit Agreement with SeaStar Medical pursuant to which the Company agreed to make advances to SeaStar Medical of up to $700,000 for general corporate purposes at an interest rate equal to 15% per annum. All advances made to SeaStar Medical under the Credit Agreement ("Original LMFA Note) and accrued interest were due and payable to LMFA on the maturity date. The agreement was modified on October 28, 2022 to reduce the interest rate to 7% per annum and the maturity date of the loan to October 30, 2023 ("amended LMFA Note"). As of December 31, 2022, SeaStar Medical had borrowed $700,000 under the amended LMFA Note. During the Three Months ended March 31, 2023, approximately $273 thousand of repayments were received from Seastar for the Amended LMFA Note. As of March 31, 2023 and December 31, 2022, there was $427 thousand and $700 thousand of principal, respectively, and $30 thousand and $19 thousand of accrued interest, respectively, on the amended LMFA Note in "Notes receivable from Seastar Medical Holding Corporation" included in the consolidated balance sheets.
The Amended Sponsor Note and the Amended LMFA Note (collectively, the “Notes”) extended the maturity date of the Original Sponsor Notes and Original LMFA Note, respectively, from the closing date of the Business Combination to October 30, 2023, subject to mandatory prepayments equal to a specified percentage of funds raised by SMHC prior to maturity. The Notes both bear interest at a per annum rate equal to seven percent (7%), simple interest, and pursuant to Security Agreements entered into by the parties (the “Security Agreements”), are secured by all of the assets of SMHC and SeaStar Medical (excluding certain intellectual property rights). On March 15, 2023, the Company extended the due date of the notes to June 15, 2024 as part of an agreement to allow SeaStar Medical to incur certain debt to accelerate the partial repayment of part of this loan.
On November 2, 2022 the Company advanced $268 thousand to SeaStar Medical for working capital needs, which was repaid on January 18, 2023. As of March 31, 2023 and December 31, 2022 there was nil and $268 thousand of the advance included in "Notes receivable from Seastar Medical Holding Corporation (formerly LMAO)" on the consolidated balance sheets. As of March 31, 2023 and December 31, 2022 there was also approximately nil and $12 thousand in amounts payable from the Company to Seastar Medical included in "Due to related parties" on the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Notes receivable from Seastar Medical Holding Corporation (formerly LMAO) |
$ |
2,216,649 |
|
|
$ |
3,807,749 |
|
|
$ |
310,000 |
|
End of period |
$ |
2,216,649 |
|
|
$ |
3,807,749 |
|
|
$ |
310,000 |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
|
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Beginning of year |
$ |
3,807,749 |
|
|
|
|
|
$ |
- |
|
Investment (repayment) in Seastar Medical Holding Corporation notes receivable (formerly LMAO) |
|
(1,644,834 |
) |
|
|
|
|
|
310,000 |
|
Accrued interest income |
|
53,734 |
|
|
|
|
|
|
- |
|
End of period |
$ |
2,216,649 |
|
|
|
|
|
$ |
310,000 |
|
Symbiont.IO
The Company entered into a secured promissory note and loan agreement with Symbiont.IO, Inc. (“Symbiont”) on December 1, 2021 under which the Company loaned Symbiont an aggregate principal amount of $2 million. The outstanding principal amount under the note bears interest at a rate of 16% per annum. The outstanding principal, plus any accrued and unpaid interest, became due and payable on December 1, 2022 but has not been paid to date. The Symbiont note is secured by a first priority perfected security interest in the assets of Symbiont.
Symbiont filed for bankruptcy on December 1, 2022. Symbiont agreed to assign a Chief Restructuring Officer on April 18, 2023 to facilitate the sale of all of its assets. On May 2, 2023, we entered a credit bid of approximately $2.6 million to acquire substantially all of the assets of Symbiont for $2.6 million in a sale under Section 363 of the Bankruptcy Code. A $1.1 million loss allowance was recorded against the Symbiont debt security for the year ended December 31, 2022.
As of March 31, 2023 and December 31, 2022, there was $347 thousand of accrued interest on the Symbiont security and $55 thousand of accrued reimbursement of legal fees incurred by the Company included in "Long-term investments - debt security".
As part of the loan to Symbiont in December 2021, the Company received 700,000 warrants to purchase shares of Symbiont common stock. Each warrant is immediately exercisable at a purchase price of $3.0642 per share of common stock, subject to adjustment in
16
certain circumstances, and will expire on December 1, 2026. The Company determined the warrants to have a nominal value due to lack of marketability and Symbionts filing of bankruptcy in December 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Symbiont.IO Note Receivable |
$ |
1,350,000 |
|
|
$ |
1,350,000 |
|
|
$ |
2,106,082 |
|
End of period |
$ |
1,350,000 |
|
|
$ |
1,350,000 |
|
|
$ |
2,106,082 |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
|
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Beginning of year |
$ |
1,350,000 |
|
|
|
|
|
$ |
2,027,178 |
|
Accrued interest income on debt securities |
|
- |
|
|
|
|
|
|
78,904 |
|
Accrued recovery of legal fees |
|
- |
|
|
|
|
|
|
- |
|
Allowance for losses on debt security |
|
- |
|
|
|
|
|
|
- |
|
End of period |
$ |
1,350,000 |
|
|
|
|
|
$ |
2,106,082 |
|
LMF Acquisition Opportunities Inc. and SeaStar Medical - Warrants
Pursuant to the Merger Agreement, the 5,738,000 private placement warrants of LMAO held by Sponsor automatically converted into 5,738,000 warrants of SeaStar on a one-for-one basis at the time of the LMAO business combination and are subject to certain transfer restrictions (the "Private Placement Warrants").
The fair value of the Private Placement Warrants is classified as Level 3 in the fair value hierarchy as the calculation is dependent upon company specific adjustments to the observable trading price of SeaStar (formerly LMAO) public warrants for lack of marketability. Subsequent changes in fair value will be recorded in the income statement during the period of the change.
During the Three Months ended March 31, 2023 and 2022, our re-measurement resulted in an unrealized loss of $26 thousand and $1.0 million, respectively and is included within "Unrealized gain (loss) on investment and equity securities" within our consolidated statements of operations.
Long-term investments for the SeaStar (formerly LMAO) warrants consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Seastar Medical Holding Corporation (formerly LMAO) warrants |
$ |
437,924 |
|
|
$ |
464,778 |
|
|
$ |
949,754 |
|
End of period |
$ |
437,924 |
|
|
$ |
464,778 |
|
|
$ |
949,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
|
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Beginning of year |
$ |
464,778 |
|
|
|
|
|
$ |
1,973,413 |
|
Investments in equity securities |
|
- |
|
|
|
|
|
|
- |
|
Unrealized loss on equity securities |
|
(26,854 |
) |
|
|
|
|
|
(1,023,659 |
) |
End of period |
$ |
437,924 |
|
|
|
|
|
$ |
949,754 |
|
LMF Acquisition Opportunities Inc. and SeaStar Medical - Common Stock
Pursuant to the Merger Agreement, the 2,587,500 shares of Class B common stock of LMAO held by Sponsor automatically converted into 2,587,500 shares of LMAO’s Class A common stock on a one-for-one basis and the Class A Common Stock and Class B Common Stock of LMAO was reclassified as Common Stock of SMHC at the time of the LMAO business combination and are subject to certain transfer restrictions. As of March 31, 2023, Sponsor holds 2,587,500 shares, or approximately 20% of the total common shares of SMHC, along with 5,738,000 private placement warrants. Taking into consideration the approximately 30% minority interest in Sponsor, the percentage of ownership in the total common shares of SMHC that is attributable to the Company is approximately 14%.
Our investment in SeaStar (formerly LMAO) common stock qualifies for equity-method accounting, for which we have elected the fair value option which requires the Company to remeasure our retained interest in SeaStar (formerly LMAO) at fair value and include
17
any resulting adjustments as part of a gain or loss on investment. Prior to the closing of the LMAO business combination, the calculation of fair value of our retained interest in LMAO included company-specific adjustments applied to the observable trading price of LMAO’s Class A common stock related risk of forfeiture should LMAO not consummate a business combination. Subsequent to the LMAO business combination, the fair value calculation related to our retained interest in SeaStar is based upon the observable trading price of Seastar's Class A common stock.
As part of the merger, Sponsor agreed that it will not transfer its shares of Seastar common stock until the date that is the earlier of (1) the twelve month anniversary of the closing of the merger and (2) the last sale price of the Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the close of the merger.
As a result of the remeasurement of our retained interest in SeaStar (formerly LMAO), we recognized an unrealized loss on securities of $5,796 thousand and an unrealized gain on securities of $37 thousand for the Three Months ended March 31, 2023 and 2022, respectively, within our consolidated statements of operations.
Long-term investments for the SeaStar (formerly LMAO) common stock consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Seastar Medical Holding Corporation common stock |
$ |
4,812,750 |
|
|
$ |
10,608,750 |
|
|
$ |
- |
|
Investment in unconsolidated affiliate |
|
- |
|
|
|
- |
|
|
|
4,713,390 |
|
End of period |
$ |
4,812,750 |
|
|
$ |
10,608,750 |
|
|
$ |
4,713,390 |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
|
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Beginning of year |
$ |
10,608,750 |
|
|
|
|
|
$ |
4,676,130 |
|
Unrealized gain (loss) on equity investment |
|
(5,796,000 |
) |
|
|
|
|
|
37,260 |
|
End of period |
$ |
4,812,750 |
|
|
|
|
|
$ |
4,713,390 |
|
18
Note 6. Debt and Other Financing Arrangements
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
Financing agreement with Imperial PFS that is unsecured. Down payment of $78,000 was required upfront and equal installment payments of $45,672 to be made over a 10 month period. The note matures on August 1, 2023. Annualized interest is 7.35%. |
|
$ |
229,383 |
|
|
$ |
365,379 |
|
|
|
|
|
|
|
|
Financing agreement with Imperial PFS that is unsecured. Down payment of $15,000 was required upfront and equal installment payments of $13,799 to be made over an 8 month period. The note matures on August 1, 2023. Annualized interest is 7.35%. |
|
|
68,999 |
|
|
|
110,396 |
|
|
|
$ |
298,382 |
|
|
$ |
475,775 |
|
Minimum required principal payments on the Company's debt as of March 31, 2023 are as follows:
|
|
|
|
|
Maturity |
|
Amount |
|
2023 (excluding the three months ended March 31, 2023) |
|
$ |
298,382 |
|
|
|
$ |
298,382 |
|
|
|
|
|
19
Note 7. Due to Related Party
Legal services for the Company associated with the collection of delinquent assessments from property owners were performed by a law firm, Business Law Group, P.A. (“BLG”) which was owned solely by Bruce M. Rodgers, the chairman and CEO of the Company, until and through the date of its initial public offering in 2015. 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. The law firm 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 its agreement with BLG, the Company paid BLG a fixed monthly fee of $82,000 for services rendered. The Company paid BLG a minimum per unit fee of $700 in any case where there is a collection event and BLG received no payment from the property owner. This provision was 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.
On February 1, 2022, the Company consented to the assignment by BLG to the law firm BLG Association Law, PLLC (“BLGAL”) of the Services Agreement, dated April 15, 2015, previously entered into by the Company and BLG (the “Services Agreement”). The Services Agreement had set forth the terms under which BLG would act as the primary law firm used by the Company and its association clients for the servicing and collection of association accounts. The assignment of the Services Agreement was necessitated by the death of the principal attorney and owner of BLG. In connection with the assignment, BLGAL agreed to amend the Services Agreement on February 1, 2022, to reduce the monthly compensation payable to the law firm from $82,000 to $53,000 (the “Amendment”). Bruce M. Rodgers is a 50% owner of BLGAL, and the assignment and Amendment was approved by the independent directors of the Company. A $150 thousand termination fee was also paid to BLG in association with the assignment.
The Company had originally 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 the Company and the Associations. This engagement was subsequently assigned to BLGAL as described above. Carollinn Gould, who is a Director of the Company, worked as the General Manager of BLG and works as the General Manager of BLGAL.
Amounts paid to BLG or BLGAL for the Three Months ended March 31, 2023 and 2022 were approximately $159,000 and $188,000, respectively.
Under the Services Agreement in effect during the Three Months ended March 31, 2023 and 2022, the Company pays all costs (lien filing fees, process and serve costs) incurred in connection with the collection of amounts due from property owners. Any recovery of these collection costs is accounted for as a reduction in expense incurred. The Company incurred expenses related to these types of costs for the Three Months ended March 31, 2023 and 2022 in the amounts of $4,000 and $24,000, respectively. Recoveries during the Three Months ended March 31, 2023 and 2022, related to those costs were approximately $14,000 for 2023 and $20,000 for 2022, respectively.
The Company also shares office space, personnel and related common expenses with BLGAL (previously BLG). All shared expenses, including rent, are charged to BLGAL based on an estimate of actual usage. Any expenses of BLGAL or 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. BLGAL and BLG, as applicable, were charged a total of approximately $15,000 and $15,000 for the office sub-lease during the Three Months ended March 31, 2023 and 2022, respectively.
Amounts payable to BLGAL and BLG, in aggregate as of March 31, 2023 and December 31, 2022 were approximately $63,000 and $63,000, respectively.
Note 8. Commitments and Contingencies
Leases
The Company leases certain office space and office equipment 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 March 31, 2023, the Company’s long term operating leases have a remaining lease term of between 29 and 38 months and 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 does not have any material financing leases.
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. 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
20
Company’s incremental borrowing rate for the specific lease as of the lease commencement date. 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) for its building lease. For office equipment, the company does not separate lease components (e.g., fixed payments) from the non-lease components (e.g., service costs).
The Company’s office lease began July 15, 2019 and was due to expire on July 31, 2022. During the first quarter of 2022 the Company exercised its option to extend its office lease to July 31, 2025. The Company accounted for the lease extension as a lease modification under ASC 842. Due to the lease extension, the Company remeasured the lease liability and ROU asset associated with the lease. As of the effective date of modification, the Company recorded an adjustment to the right-of-use asset and lease liability in the amount of $300,787 based on the net present value of lease payments discounted using an estimated incremental borrowing rate of 7.5%. Subsequent renewal options were not considered probable of being exercised as of lease commencement. This office space is in a building owned by a board member.
The Company shares this space and the related costs associated with this operating lease with a related party (see Note 7) that also performs legal services associated with the collection of delinquent assessments. The related party has a sub-lease for approximately $4,800 per month plus operating expenses.
Lease expense recognized for the Three Months ended March 31, 2023 and 2022 was approximately $28,300 and $23,400, respectively. Sub-lease income for the Three Months ended March 31, 2023 and 2022 was approximately $14,600 and $14,600, respectively.
On February 27, 2023, the Company executed a lease for office equipment which has been classified as an operating lease. The lease term is 39 months. As of the effective date of the lease, the Company recorded an adjustment to the right-of-use asset and lease liability in the amount of approximately $21,900 based on the net present value of lease payments discounted using an estimated incremental borrowing rate of 7.35%.
The following table presents supplemental balance sheet information related to operating leases as of March 31, 2023 and December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Line Item |
March 31, 2023 |
|
December 31, 2022 |
|
Assets |
|
|
|
|
|
|
ROU assets |
|
Right of use asset, net |
$ |
264,321 |
|
$ |
265,658 |
|
Total lease assets |
|
|
$ |
264,321 |
|
$ |
265,658 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Current lease liabilities |
|
Lease liability |
$ |
99,569 |
|
$ |
90,823 |
|
Long-term lease liabilities |
|
Lease liability |
|
170,295 |
|
|
179,397 |
|
Total lease liabilities |
|
|
$ |
269,864 |
|
$ |
270,220 |
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years) |
|
|
|
2.5 |
|
|
2.7 |
|
Weighted-average discount rate |
|
|
|
7.49 |
% |
|
7.50 |
% |
|
|
|
|
|
|
|
The following table presents supplemental cash flow information and non-cash activity related to operating leases for the Three Months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
2023 |
|
2022 |
|
Operating cash flow information |
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
$ |
(22,243 |
) |
$ |
(30,242 |
) |
Non-cashflow information |
|
|
|
|
|
|
ROU assets and operating lease obligation recognized |
|
|
$ |
21,887 |
|
$ |
300,787 |
|
21
The following table presents maturities of operating lease liabilities on an undiscounted basis as of March 31, 2023:
|
|
|
|
|
|
Lease Maturity Table |
|
|
|
|
|
|
|
Operating Leases |
|
2023 (excluding the three months ended March 31, 2023) |
|
|
|
87,056 |
|
2024 |
|
|
|
121,385 |
|
2025 |
|
|
|
85,324 |
|
2026 |
|
|
|
3,163 |
|
(less: imputed interest) |
|
|
|
(27,064 |
) |
|
|
|
$ |
269,864 |
|
Legal Proceedings
Except as described below, we are not currently a party to material pending or known threatened litigation proceedings. However, we frequently become party to litigation in the ordinary course of business, including either the prosecution or defense of claims arising from contracts by and between us and client Associations. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense, and settlement costs, diversion of management resources and other factors.
The Company accrues for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, the Company reassesses its position and makes appropriate adjustments to the consolidated financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters.
In October 2021, we entered into a sale and purchase agreement (the “Uptime Purchase Agreement”) with Uptime Armory LLC (“Uptime”) pursuant to which US Digital agreed to purchase, and Uptime agreed to supply to US Digital, an aggregate of 18 modified 40-foot cargo containers (“POD5ive containers”) that will be designed to hold and operate 280 S19 Pro Antminers manufactured by Bitmain. The purchase price of the POD5ive containers totals $3.15 million, of which $2.4 million or 75% was paid in 2021 as a non-refundable down payment and the remaining 25% was paid after Uptime delivered a “notice of completion” of the equipment in 2022. However, no containers have been delivered as of December 31, 2022.
On November 8, 2022, LMFA filed an action in Florida circuit court against Uptime and Bit5ive, LLC in a case styled US Digital Mining and Hosting Co. LLC v. Uptime Amory, LLC and Bit5ive, LLC (Fla. 11thCir. Ct., November 8, 2022). In that action, we alleged breach of contract and violation of the Florida Deceptive and Unfair Trade Practices Act and are seeking, among other things, damages of $3.15 million for non-delivery of the 18 POD5ive containers. The Defendants in this action filed a motion to compel confidential arbitration action. The court has now stayed the action in the Florida circuit court, and ordered the parties to confidential arbitration governed by the American Arbitration Association and the case is proceeding to arbitration. We recorded an impairment charge of $3.15 million on our mining machine deposit in the fourth quarter of 2022 and is reported on our Consolidated Statements of Operations as Impairment loss on prepaid mining machine deposits.
In October 2021, US Digital also entered into a hosting agreement with Uptime Hosting LLC (the “Hosting Agreement”) to host the Company’s 18 POD5ive containers at a secure location and provide power, maintenance and other services specified in the contract for 6 cents per kilowatt with a term of one year. Under the Hosting Agreement we paid a deposit of $0.8 million in 2021 and were required to pay an additional deposit for each container three months prior to delivery at the hosting site of $44 thousand and a final deposit for each container one month prior to arrival at the hosting site of $44 thousand. The deposits paid for hosting services under the Hosting Agreement are refundable. On June 29, 2022, the Company and Uptime Hosting LLC entered into a Release and Termination Agreement in which the Hosting Agreement was terminated and Uptime Hosting LLC agreed to pay the $0.8 million. We recorded an impairment charge of $0.8 million on our prepaid hosting deposit in the fourth quarter of 2022 and is reported on our Consolidated Statements of Operations as Impairment loss on prepaid hosting deposits.
On September 2, 2022, we filed in Florida circuit court a legal action against Uptime Hosting LLC in an action styled US Digital Mining and Hosting Co, LLC v. Uptime Hosting, LLC (Fla. 13th Cir. Ct. Sept. 2, 2022) for the return of the deposit and other damages, alleging breach of contract and violation of the Florida Deceptive and Unfair Trade Practices Act. On May 5, 2023 US Digital Mining and Hosting Co. amended our complaint adding parties Bit5ive, LLC, Block Consulting Services, LLC., 6301 Southwest Ranches, LLC., Robert D Collazo Jr. individually, Elyam Moral-Collazo individually, the Unknown Partners of Uptime Hosting LLC, Unknown Partners of Bit5ive, LLC, Unknown Partners of 6301 Southwest Ranches, LLC and adding counts for for (i) breach of contract against Uptime and Bit5ive, (ii) violation of Florida’s Uniform Fraudulent Transfer Act against Uptime; (iii) violation of Florida’s Uniform Fraudulent Transfer Act against Bit5ive; (iv) violation of Florida’s Uniform Fraudulent Transfer Act against Block Consulting and Robert Collazo (v) violation of Florida Fraudulent Asset Conversion against Block Consulting Services, 6301 Southwest Ranches, LLC, Robert D Collazo, Jr. and Elyam Moral-Collazo; (vi) violation of Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) against all Defendants, (vii) equitable lien against Robert D Collazo, Jr., Elyam Moral-Collazo and 6301 Southwest Ranches, LLC., and (viii) equitable lien against Defendants Robert D Collazo, Jr., Elyam Moral-Collazo and 6301
22
Southwest Ranches, LLC. Uptime Hosting LLC has answered the complaint with affirmative defenses and counterclaims for fraudulent inducement and rescission, which we believe are without merit.
Note 9. Stockholders’ Equity
Stock Options
The 2015 Omnibus Incentive Plan provided 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. This plan was reconstituted into a new 2021 Omnibus Plan. The 2021 Omnibus Plan is intended to allow us to continue to use equity awards as part of our ongoing compensation strategy for our key employees. Awards under the Plan will support the creation of long-term value and returns for our stockholders.
The following is a summary of the stock option plan activity during the Three Months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Number of |
|
|
Weighted Average |
|
|
|
Options |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at Beginning of the year |
|
|
1,121,262 |
|
|
$ |
3.26 |
|
|
|
3,956,827 |
|
|
$ |
6.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cancelled |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at March 31, |
|
|
1,121,262 |
|
|
$ |
3.26 |
|
|
|
3,956,827 |
|
|
$ |
6.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at March 31, |
|
|
206,410 |
|
|
$ |
11.20 |
|
|
|
3,760 |
|
|
$ |
293.95 |
|
Stock compensation expense recognized for the Three Months ended March 31, 2023 and 2022 was approximately $194 thousand and $3,318 thousand, respectively. There was approximately $455 thousand of unrecognized compensation cost associated with unvested stock options as of March 31, 2023.
The aggregate intrinsic value of the outstanding common stock options as of March 31, 2023 and December 31, 2022 was approximately $0 and $0, respectively. The remaining weighted average life of the options as of March 31, 2023 was 9.3 years.
Stock Issuance
In the year ended December 31, 2021, the Company issued 73,940 shares to management as part of their employment contracts of which $229,500 was expensed. The shares were physically issued in February 2022.
The Company issued 200,000 shares on November 4, 2021 pursuant to an agreement that is for one year with two vendors who provide consulting in the blockchain and crypto currency field. The total fair value of the stock at the time of issuance was approximately $1,318,000 of which we expensed approximately nil and $329,500 for the Three Months ended March 31, 2023 and 2022, respectively.
23
Warrants
The following is a summary of the warrant activity during the Three Months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
|
Number of Warrants |
|
|
Weighted Average Exercise Price |
|
|
Number of Warrants |
|
|
Weighted Average Exercise Price |
|
Warrants Outstanding at Beginning of the year |
|
|
7,677,441 |
|
|
$ |
5.00 |
|
|
|
7,702,441 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding and Exercisable at March 31, |
|
|
7,677,441 |
|
|
$ |
5.00 |
|
|
|
7,702,441 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the outstanding common stock warrants as of March 31, 2023 and December 31, 2022 was approximately $0 and $0 respectively. The remaining weighted average life of the warrants as of March 31, 2023 was 3.5 years.
Note 10. Segment Information
The Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has two reportable segments: Specialty Finance and Mining Operations. The guidance requires that segment disclosures present the measure(s) used by the CODM to decide how to allocate resources and for purposes of assessing such segments’ performance. The Company’s CODM uses revenue, income from operations and income before taxes of our reporting segments to assess the performance of the business of our reportable operating segments.
No operating segments have been aggregated to form the reportable segments. The 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.
The Specialty Finance segment generates revenue from providing funding to nonprofit community associations. The Mining Operations segment generates revenue from the Bitcoin the Company earns through its mining activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2023 |
|
|
Specialty Finance |
|
Mining Operations |
|
All Other |
|
Total |
|
Revenue, net |
$ |
222,667 |
|
$ |
2,090,851 |
|
$ |
- |
|
$ |
2,313,518 |
|
Depreciation and Amortization |
|
2,966 |
|
|
797,869 |
|
|
1,038 |
|
|
801,873 |
|
Operating loss |
|
(211,669 |
) |
|
(493,393 |
) |
|
(1,264,364 |
) |
|
(1,969,426 |
) |
Unrealized loss on investment and equity securities |
|
- |
|
|
- |
|
|
(5,822,854 |
) |
|
(5,822,854 |
) |
Realized gain on sale of purchased digital assets |
|
- |
|
|
- |
|
|
1,917 |
|
|
1,917 |
|
Unrealized gain on marketable securities |
|
- |
|
|
- |
|
|
5,790 |
|
|
5,790 |
|
Impairment loss on prepaid hosting deposits |
|
- |
|
|
(36,691 |
) |
|
- |
|
|
(36,691 |
) |
Coupon sales other income |
|
- |
|
|
603,591 |
|
|
- |
|
|
603,591 |
|
Interest income |
|
- |
|
|
- |
|
|
55,077 |
|
|
55,077 |
|
Income (Loss) before income taxes |
|
(211,646 |
) |
|
186,232 |
|
|
(7,137,182 |
) |
|
(7,162,596 |
) |
Fixed Asset Additions |
|
- |
|
|
316,874 |
|
|
1,596 |
|
|
318,470 |
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2022 |
|
|
Specialty Finance |
|
Mining Operations |
|
All Other |
|
Total |
|
Revenue, net |
$ |
191,004 |
|
$ |
- |
|
$ |
- |
|
$ |
191,004 |
|
Depreciation and Amortization |
|
2,365 |
|
|
- |
|
|
729 |
|
|
3,094 |
|
Operating loss |
|
(418,079 |
) |
|
- |
|
|
(4,612,153 |
) |
|
(5,030,232 |
) |
Realized loss on securities |
|
- |
|
|
- |
|
|
(395,181 |
) |
|
(395,181 |
) |
Unrealized loss on investment and equity securities |
|
- |
|
|
- |
|
|
(986,399 |
) |
|
(986,399 |
) |
Unrealized gain on convertible debt security |
|
- |
|
|
- |
|
|
288,320 |
|
|
288,320 |
|
Unrealized gain on marketable securities |
|
- |
|
|
- |
|
|
130 |
|
|
130 |
|
Dividend income |
|
- |
|
|
- |
|
|
1,375 |
|
|
1,375 |
|
Interest income |
|
- |
|
|
- |
|
|
98,370 |
|
|
98,370 |
|
Loss before income taxes |
|
(418,079 |
) |
|
- |
|
|
(5,601,172 |
) |
|
(6,019,251 |
) |
Fixed Asset Additions |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Note 11. Subsequent Events
On April 20, 2023 (the “Grant Date”), the board of directors of the Company approved the grant of (i) options to purchase 2,486,500 shares of common stock of the Company (“Options”) and (ii) 1,560,000 shares of restricted stock (“Restricted Shares”) to management and employees.
The Options grant each recipient the right to purchase shares of Company common stock at a price of $0.7513 per share, the fair market value of the Company’s common stock on the Grant Date. The Options vest as to 50% of the total amount of the award on the one-year anniversary of the Grant Date and 50% of the total amount of the award on the two-year anniversary of the Grant Date (subject to accelerated vesting upon a change of control of the Company), provided that the executive is in continuous employment or service to the Company through the applicable vesting date. The Options will be subject to accelerated vesting as follows: (a) 50% of the portion of the Options that are scheduled to vest during the first year after the Grant Date will vest as of June 30, 2023, if the Company’s Bitcoin mining operations achieve 500 petahash of computing power as of June 30, 2023, and (b) 50% of the portion of the Options that are scheduled to vest during the second year after the Grant Date will vest as of June 30, 2024, if the Company’s Bitcoin mining operations achieve 1,000 petahash of computing power as of June 30, 2024.
The Restricted Shares vest in twelve substantially equal installments on each monthly anniversary of the Grant Date for twelve months following the Grant Date (subject to accelerated vesting upon a change of control of the Company), provided that the employee is in continuous employment or service to the Company through the applicable vesting date.
On May 5, 2023, the Company entered into a hosting agreement (the “GIGA Hosting Agreement”) with GIGA Energy Inc. (“GIGA”) pursuant to which GIGA agreed to host 1,080 of the Company's Bitcoin Miner S19J Pro machines at a secure location and provide power, maintenance and other services specified in the contract with a term of one year. As required under the GIGA Hosting Agreement, the Company paid approximately $173 thousand as a pre-payment in May 2023 and will pay a deposit of $173 thousand in May 2023.
25
