LM Funding America Inc (LMFA) 2015 Q4 法說會逐字稿

Good morning and welcome to LM Funding America's fourth-quarter and full-year 2015 earnings call. My name is Karen and I will be your conference call operator this morning. (Operator Instructions).

Joining us for today's presentation is LM Funding America's Chairman, CEO, and Founder, Bruce Rodgers, and its Chief Financial Officer, Steve Weclew. Following their remarks, we will open up the call for your questions. Then, before we conclude today's call, I will provide the necessary cautions regarding the forward-looking statements made by management during this call.

I would like to remind everyone that this call will be recorded and made available for replay via a link in the investor relations section of the Company's website. Now I would like to turn the call over to Mr. Bruce Rodgers. Sir, please proceed.

Thank you, Karen, and good morning, everyone. Thank you for joining us today for our first earnings conference call as a public company.

Despite the distraction of the IPO process last October and needing funding provided, we still generated a strong fourth quarter in 2015 and it marked our second consecutive profitable quarter as a reporting company.

Since this is our inaugural call, before we get into our results for the fourth quarter and year, I would like to take a moment to provide a brief overview of our Company for those new to the story. LM Funding was founded in 2008 when we recognized there needed to be a better way for nonprofit community associations, like homeowners associations and condo owners associations, to manage unpaid association dues and to secure the funds needed to operate the association.

As all homeowners know, if you don't pay your property taxes, the local municipality has the right to issue a tax lien on your property, and then if it goes unpaid, they can auction off a certificate representing the tax lien against your property and ultimately take your home. This auction process allows the municipality to monetize their delinquent receivables, fund their budgets, and continue to provide government services.

Now if you live in a community association, your association's elected Board of Directors sets a budget and imposes assessments on the community residents, which is effectively a tax, in order to provide all of the promised association amenities -- these amenities can include elevators, roofing, landscaping, pools and hot tubs, tennis courts, clubhouses, et cetera. When too many association fees go unpaid, associations are unable to meet their budgets and ultimately they either must levy a special assessment on all the paying residents or cut association services by closing down the hot tub or pool, cut back on landscaping, maintenance, et cetera.

Both of these options are very likely to make the responsible paying residents very upset. If someone doesn't pay their association dues, associations have similar lien and foreclosure rights as municipalities. However, unlike municipalities, there is no easy way for these associations to monetize these delinquent receivables. They cannot convert them into lien certificates and sell them at auction. The market for this simply does not exist.

Their only option is to proceed as if they were a mortgage lender and hire a law firm to pursue collections, and traditionally, this has been a very slow, expensive, complicated, and inefficient process. In fact, associations are often left with legal bills that total as much as the accounts collected by the law firm -- that is, if they are successful in collecting anything at all.

So there has been no easy solution -- that is until LM Funding came along. We have established a long and successful track record of returning capital to associations in a highly efficient and successful manner. In fact, we began in 2008 and we have completed over 11,000 collection events, resulting in more than $55 million returned to the approximately 500 associations we have contracted with.

We have accomplished this all with two product offerings that are designed to help associations solve the burdens and problems of delinquent accounts. Our first product, or what we call original product, provides associations an easy straightforward way to recover overdue assessments. LM Funding simply purchases a portion of the proceeds of the delinquent accounts from the association, giving an association immediate financial relief. We then apply our proprietary methods and software systems to manage and ultimately collect the delinquent assessments and, in many cases, return additional capital to the association.

Our second product, which we introduced in 2013, we call the New Neighbor Guaranty. Our New Neighbor Guaranty provides associations guaranteed funding going forward. That is, with this product, we agree to pay the monthly or quarterly assessments for a given delinquent account in exchange for the right to collect all past-due assessments. This in effect guarantees associations' budgets are met.

Both of these solutions become particularly attractive when the delinquency rate of an association reaches two specific thresholds. First, when an association's overall delinquency rate reaches 8%, banks will typically no longer lend to the association. So if a community needs to borrow money for a new roof, elevator repairs, or new asphalt, the bank will not provide financing to cover even these basic needs. Their only option is to special assess the current paying owners, which in turn usually leads to even more delinquencies.

Second, when an association's overall delinquency rate reaches 15%, government-backed mortgage lenders will no longer lend to potential home or condo buyers, therefore requiring potential buyers to pay in cash. As you would expect, this has a very negative effect on real estate prices.

We have found our New Neighbor Guaranty solution very helpful in both scenarios, as we can virtually guarantee the future budget and credit worthiness of an association.

As for our current target markets, we began our operations in Florida in 2008 and we have since expanded into Washington state and Colorado, and we recently announced that we have entered Illinois. Given our history of 11,000 collection events, we have discovered a certain general formula that has remained fairly consistent, which demonstrates the strong leverage of our business model. That is, for about every $1 we deploy to purchase association debt, we realize a $5 payout at some point in the future, and of that $5 payout, about $3.25 is free cash flow that we can then reinvest.

Certainly handling hundreds of collection events per year is not an easy task, so a critical part of what has made our business model so successful and the reason we have been able to scale over the years is our proprietary software. This software, which we have developed and continually enhanced over the years, essentially automates the collection process. It ensures that all the necessary paperwork is submitted and complete, that all figures are accurate and all state and specific local ordinances are followed, as well as it ensures that critical deadlines are met.

Altogether, it has put tremendous efficiency, speed, capacity, and quality control into a collection process that previously was tedious, time consuming, and subject to human error. In a way, this reporting system represents our secret sauce and we have seen many copycat competitors go out of business over the years because they simply cannot handle the volume of paperwork like we can. Our Company PowerPoint presentation, which is available for download from the investor section of our website, provide some great examples about how this all works in terms of real numbers, so if you haven't seen it, we encourage you to have a look.

So now, hopefully, I have been able to give you a better understanding about our business model and how it works. With that, I would now like to discuss our results from the fourth quarter and full year of 2015.

Certainly 2015 was a landmark year for LM Funding. On October 23, we successfully completed our initial public offering and our stock began trading on the NASDAQ Capital Market. The IPO generated $12 million of gross proceeds, which we have been using to purchase delinquent association accounts that represent future income. This IPO, in many respects, has established LM Funding as a leader in our market. In fact, to our knowledge, there isn't another public pure play in the association funding market, and I'm glad to report we generated profitable results for both the fourth quarter and full year of 2015.

For more details around our results, I would like to now turn the call over to our CFO, Steve Weclew. Steve?

Thank you, Bruce, and thanks, everyone, for joining us today.

Now turning to our income statement, for the fourth quarter revenues totaled $1.7 million, which compares to $1.8 million for the fourth quarter of 2014. For the full year, revenues totaled $7 million versus $7.6 million in 2014.

These results reflect a decrease in the total number of payoffs for both periods. For the fourth quarter of 2015, we collected revenue from 374 payoff events, compared with 400 for the fourth quarter of 2014. And for the full year of 2015, we collected revenue from 1,522 payoff events versus 1,690 units in 2014. The decrease in payoff events in both periods was offset by a higher average amount collected per payoff event, as well as an increase in collections related to our New Neighbor Guaranty product and an increase in rental income.

It is important to note that our performance for the quarter and most of the year was greatly affected by capital constraint, which was due to a number of factors that include one (technical difficulty) related to our IPO, certain tax payments, and the buyout of a business partner. The events consumed a substantial amount of our working capital that we would normally deploy to growing our business.

Now that these one-time events are behind us and given the receipt of $9.7 million in net proceeds from our IPO, we were able to return to growing our business by the end of the year. Given our typical month -- multi-month sales cycle, we don't expect to see the benefits of deploying our IPO capital until the second half of the year.

Our operating expenses in the fourth quarter of 2015 totaled $1.5 million, up from $1 million in the fourth quarter of 2014. For the full year, operating expenses were $4.5 million versus $4.1 million in 2014. The increase in both the period and the full year was due to the increase in business activity and expenses related to our initial public offering and a recognition of an estimated credit loss reserve. This was partially offset by a new favorable agreement with our partner law firms, which lowered expenses.

Interest expenses for the fourth quarter of 2015 decreased to $151,000 from $225,000 in the fourth quarter of 2014. For the full year of 2015, interest expenses decreased to $700,000 from $1 million in 2014. The decrease in interest expense was attributable to the refinancing of $7.4 million in debt in December 2014 at an 8% interest rate.

Prior to this refinancing, we had outstanding debt at interest rates of approximately 16% and 10%. As of December 31, 2015, our notes had interest rates of about 6% and 8%.

For the fourth quarter of 2015, net income totaled $202,000 (sic -- see Press Release -- "$159,000") or $0.06 per basic and diluted earnings per common share, which compares to $571,000 in the fourth quarter of 2014. For 2015, net income totaled $1.8 million or $0.53 diluted earnings per common share, compared to $2.4 million in the same year-ago period. Because the Company was privately held in 2014, an earnings per common share figure is not applicable for the quarter and year-end December 31, 2014.

The decrease in net income was driven by the aforementioned increase in operating expenses and decrease in revenues.

One of the metrics we feel gives a more accurate representation of the performance of our business is our cash flow from operations. Cash flow from operations for the fourth quarter of 2015 totaled $508,000, compared to $517,000 in the fourth quarter of 2014. For the full year 2015, cash flow from operations totaled $2.3 million, compared to $2.4 million in 2014.

The marginal decrease was due to the decline in collections from our original product, which was offset by an increase in revenue from our New Neighbor Guaranty product and our rental properties. Our staff and payroll expenses and other operating expenses were both improved when compared to 2014, as was our interest expense.

Now turning to the balance sheet. At December 31, 2015, we had a total of $9 million in cash, compared to $2 million at December 31, 2014. The increase in cash was due to the $9.7 million in net proceeds from our IPO. We believe this cash on our balance sheet and our cash flow from operations will provide more than adequate amounts to fund our current operations in the foreseeable future.

I would like to point out a few items on our balance sheet that are fairly unique to our business. Our receivables are calculated using the cash recovery accounting method. This means we only account for the dollar amount paid to acquire the delinquent debt and not the actual underwriting value of the debt. For example, at December 31, 2015, our balance sheet shows that our original product receivables totaled $1.5 million. This amount only represents the capital we have deployed to purchase the delinquent accounts.

However, we estimate that the actual fair value of these receivables in terms of what they could potentially collect to be around $9 million.

Also at the end of 2015, our balance sheet shows our New Neighbor Guaranty product receivables totaled $716,000, and we estimate the fair value of these receivables at about double, or $1.5 million.

Further, given the nature of our business, we often receive title on a property that has delinquent assessments, with this title also having considerable inherent value to consider. Bruce will explain this in a moment, but when we take title, we will typically refurbish the property and rent it out. So at year-end, we were renting about 43 properties, as compared to 25 properties at the end of 2014. This resulted in an increase in our rental revenues from $127,000 in 2014 to $180,000 in 2015.

Our balance sheet shows our real estate owned assets at the end of 2015 valued at $285,000. Again, this is the amount that we paid to acquire the properties. And according to Zillow, the value of these properties totals around $4.5 million. So we believe these fairly unique aspects of our business, as reflected in our balance sheet, are important things to consider when evaluating our performance and particularly our prospects for realizing the inherent value of the assets we have acquired.

Now with that, I would like to turn the call back over to Bruce. Bruce?

Thanks, Steve.

We believe our results for last year reflect that we have hardly even begun to scratch the surface of the market opportunity ahead. In fact, recent market data shows that there are 65 million Americans living in over 333,000 community associations, and in the four states in which we currently operate, there are 85,000 associations governing 2.7 million homes and condos.

Assuming the typical delinquency rate of 6%, which usually is approximate to the unemployment rate, we see in our current markets a total of $1.8 billion in annual delinquent assessments. To put this in perspective, we have collected a total of $102 million since 2008, which averages about $15 million per year, so no doubt our market opportunity continues to be substantial.

However, we recognize that in order to take better advantage of this opportunity, we need to expand our reach and spread awareness of our unique funding solutions. Given the funding provided by the IPO last October, we have become much better equipped to take advantage of this market opportunity in three key ways. First, we now have funds available to purchase delinquent accounts for both our original product and New Neighbor Guaranty product. Second, we can now increase the number of rental properties in our portfolio, which can provide a steady, reliable stream of recurring income. And third, given the virtual greenfield opportunity we have with our unique products, we now have the financial resources to build out a highly qualified, entrepreneurial minded sales team and roll them out on a wide scale.

For example, earlier this year we expanded our operations into Illinois, which we see as a choice market for our offerings. In Illinois, we are currently working to build strong relationships within the association community, targeting management companies, law firms, and community associations. We expect to begin acquiring delinquent accounts in Illinois this summer. To support our expansion in Illinois, we deployed an experienced sales rep, who is now based in Chicago.

We have also added five commission-based sales reps in Florida to take advantage of the significant opportunity that still remains in our home state. We believe their success will be supported by the fact that our funding solutions continue to be superior to any other options available to associations and particularly when it comes to ensuring their operating budget.

In terms of scalability, we believe our software platform gives us a unique competitive advantage and that it enables our collection partners, comprised of independent attorneys skilled in these collection cases, to process and manage more than 1,000 accounts at a time and at an extremely high level of accuracy. This compares to around 100 accounts at a time that is typical for collection attorneys in our industry.

Another hidden gem in our business model that I should talk about is the value of our receivables. Unlike typical debt, where the debtor is less and less likely to repay the debt as time goes on, association receivables can become more and more valuable as time passes, since the outstanding account balance is subject to a statutory interest rate of 18% and $25 a month late fee and secured by a lien against real property, which must be satisfied at some point in the future. Further, the legal fees associated with the collection efforts are paid by the debtor, so it is fairly cheap to service the debt.

In 25 states, including the four states where we operate, there is what is called a super lien. In these states, when there is a payoff event from a mortgage foreclosure, the lesser of 1% of the existing mortgage or 12 months' worth of assessment are guaranteed to be repaid to the association. This dollar amount has priority over everyone, including all mortgage [loans].

In all other payoff instances, whether from sale, short sale, refinance, junior mortgage foreclosure, or even if the place burns down, the full balance of the receivable is repaid to the association. Often when we acquire a delinquent account, the account has been racking up late fees and interest for many months, so our receivables gain in value this way as time goes on.

As Steve mentioned earlier, one area of our business where we see significant opportunity is within the REO market. Often when we exercise our lien and foreclosure rights, we end up with the rights to the property. In these situations, we fix up the condo or home and rent it out.

With our funding from last fall, we now have access to capital necessary to refurbish properties and subsequently rent them out. We believe that the revenue driven by our rental income continues to increase throughout 2016 as we add properties to our REO portfolio, which included 43 properties at year-end.

While the expansion of our sales team will allow us to grow our business organically, we also see opportunities to bring on a substantial portfolio of delinquent accounts through acquisition. In fact, there are a number of competitors and management companies that we are currently monitoring as potential acquisition candidates.

Supported by the influx of capital and expansion of our sales team, we are working to increase the number of our delinquent accounts we own. At December 31, 2015, we had 2,035 accounts outstanding. This number has continued to increase in the first quarter and we expect this to continue to increase throughout the year. Our newly staffed sales team has set a goal to acquire 2,000 accounts in the next 12 months.

It is also important to note that we deploy approximately $1,000 to acquire a delinquent unit and on average it takes 25 months to collect. And throughout our history, we have averaged approximately $5,500 in collection per condominium association. One of the challenges in this business is predicting when accounts will pay off, as we have little control over the speed of the court system and other variables. However, based upon our history, we project that between 1,500 and 1,700 accounts will pay off in 2016.

Since our IPO, we have continued to make tremendous progress adding additional building blocks to our Company. In a short amount of time, we have gone from being a private company with a few million dollars in the bank and 13 employees to today a NASDAQ-listed company with $9 million in cash and 22 employees operating across four states and with all of the elements in place to continue to grow our top and bottom line and build long-term shareholder value.

Now with that, we are ready to open the call to your questions. Operator, please provide the appropriate instructions.

Actually, Bruce, I have two clarifications. In reviewing my remarks, I need to clarify two points made during the financial presentation. When quoting earnings per share, I used full-year and full-quarter data. The earnings per share in the financials is based on activity only after IPO.

Second, also when discussing our Q4 net income I mistakenly quoted a dividend number. Net income for Q4 was $159,000.

With those two, Operator, please open the line for questions.

(Operator Instructions). William Gibson, ROTH Capital Partners.

I am sure this won't surprise you, but a headline in The Wall Street Journal this morning reads, another Miami condo bust looms. And the question, and you went into that a bit on a broader sense, but how does that affect the local REO market?

Well, it's bad to be in a position where you're rooting for a bust as a bubble, but the reality is we are a countercyclical business in that it is easier to buy accounts when things are messed up in the real estate market. The money comes in better when real estate prices are going up because people pay to protect their position in the real estate.

Okay. And these may be questions for Steve, just technical questions to help me understand. When I see administrative and late fees in the income statement, is that actual fees collected or is that -- you talked about the fees you are potentially picking up?

They are cash recovery methods, so everything you see is on the cash basis. So that is actual cash in the door.

Okay. And then, the -- I notice we have now got a credit loss provision and I assume that's related to the Neighbor Guaranty program. How does that work? Is that just -- is that something where you can see that you have got a loss coming or is it a rough estimate of a dollar amount? How does that work?

I will let Steve answer because I have my own opinions on that.

It is based off of our historical credit losses when looking at our insurance claim, if you will. We have a methodology internally that we are using on a go-forward basis since we have non-renewed the insurance. As everybody knows with insurance, you normally lose money at the point of an insurance premium, so we've booked that now as basically our, quote, unquote, insurance premium that we would have had to pay in 2016 as a reserve in 2015.

Yes, and is your estimate of the 2,000 delinquent accounts in the next 12 months, is that from the second quarter forward or does that include first quarter?

I hedged my bet a little bit there by saying 12 months. We had a really good first quarter in terms of acquisitions that would put us on pace for that for the year, but the last of the five hires started on Monday, so the team looks at it like the team is now in place in the field and it will take a little time for them to ramp up their pipelines and close these deals. So for their compensation, they are looking at the next 12 months.

Okay. And you mentioned the five commissioned sales people you hired. How many do we have total?

I like to think that everybody is in sales in some respects, but we have six total and one being -- am I right on that, no?

Counting Chicago.

Counting Chicago, we have six total.

Okay. And then -- thank you. That's good. Appreciate it.

(Operator Instructions). Jeff Silver, Berson+ Corrado.

Thanks for all the information. It was very helpful. Maybe you can say a little more about what the considerations are for entering a new market, for instance, Illinois, and how these markets might be a little different than the ones in Florida. And three-part question, I guess, is looking out, say, over the next 12 months, whether you think that you will be adding more geographies or whether you think that the inorganic growth perhaps, mergers and acquisitions, might be more impactful for you in terms of growing the business.

Sure. Taking a market like Chicago was based on really about two years of laying groundwork in terms of finding that best-in-practices law firm to partner with, finding some large management companies that were interested, and then with that in place, we hired the right guy. Chicago is a great market because it's very dense. It is central.

Florida, on the other hand, we have to be -- we are like a country unto itself. There is six MSAs that we have to operate in. The opportunity in Chicago equals that of just Broward County alone, where Fort Lauderdale is. Broward and Dade combined, which is Fort Lauderdale down to Miami, is about 50% bigger than that.

Organic growth is important because you just can't count on M&A work to get you there. We are pursuing growth through M&A and it would be exponential compared to what you can do just on the ground organically. But there is an organic component even when you have, for instance, control of a management company and its opportunities to get delinquent units. You still have to sell to a Board of Directors. So, the guys that are on the ground doing organic growth now could easily be redeployed into an M&A opportunity where there is a pipeline built in.

Going back to your geographies, as you look at the potential market, is the gating factor more finding the right person for a particular market or do you have your sights set on any additional geographies and then you go out and find the right people?

We are looking at several. The components that are important, though, it doesn't do you any good to buy delinquent accounts if you don't have the ability to service and collect the money. So, the key -- the first linchpin is how are we going to service these accounts, whether it's an expansion of one of our current firms we work with into a new market or finding somebody that has got a book of business and is best in practices in that market.

And then after that, it just comes down to what is the potential value of the market, what's the number of condominiums or homeowners associations, units, and then figure out an applied delinquency rate, and then apply some dollars to that and make sure that we are deploying G&A dollars at rich targets.

Thanks, Bruce.

At this time, this concludes our question-and-answer session. I would like to turn the call back over to Mr. Rodgers for his closing remarks.

Thank you and thank you all for listening in today. We hope to have some more good news in the coming quarter and some healthy stuff going on here. It is just a pleasure to run a company that is finally capitalized adequately and can follow the opportunities as they present themselves.

Thank you. Before we conclude today's call, I would like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical fact that were discussed today, including without limitation statements regarding the Company's future financial position, business strategy, budget, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements.

Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, intend, plan, project, estimate, anticipate, believe, or the negative thereof or any variations thereon or similar terminology or expression. The Company has based these forward-looking statements on their current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties, and assumptions about us that may cause the Company's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements.

Important factors which could materially affect the Company's results and future performance include, without limitation, the Company's ability to purchase defaulted consumer receivables at appropriate prices; changes in government regulations that affect the Company's ability to collect sufficient amounts on defaulted consumer receivables; the Company's ability to employ and retain qualified employees; changes in the credit or capital market; changes in interest rate; deterioration in economic conditions; and negative press regarding the debt collection industry, which may have a negative impact on a debtor's willingness to pay the debt we acquire; as well as other factors set forth under risk factors in the Company's filings with the SEC.

Thank you for joining us today for our presentation. This concludes today's call. You may now disconnect.