LM Funding America Inc (LMFA) 2016 Q1 法說會逐字稿

Welcome to LM Funding America's first-quarter 2016 earnings call. My name is Andrew, and I will be your conference call operator.

(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 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 conference.

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, available at www.lmfunding.com.

Now I would like to turn the call over to Mr. Bruce Rodgers. Sir, please proceed.

Thank you, Andrew, and good morning, everybody. Thank you for joining us today for our first-quarter 2016 earnings conference call.

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

As all of you 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 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. This is in order to provide all the promised association amenities. When too many association fees go unpaid, associations become unable to meet their budgets, and ultimately they either must levy a special assessment on the paying residents or cut association services, like closing down the hot tub or pool, or foregoing property maintenance.

If someone doesn't pay their dues, associations have similar lien and foreclosure rights as municipalities. However, unlike municipalities, there's no easy way for 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 amounts 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, since we began in 2008, we've completed over 11,800 collection events, resulting in more than $57 million returned to the approximately 500 associations we have contracted with, which is up from $55 million at the end of 2015.

We have accomplished this with two product offerings that are designed to help associations solve this burdensome problem of delinquent accounts. Our first product, or what we call our original product, provides associations an easy, straightforward way to recover overdue assessments. LM Funding simply purchases an assignment of the interest and late fee portion of uncollected proceeds from delinquent accounts from the association, giving the association immediate financial relief. We then apply our proprietary method and software system to manage and ultimately collect the delinquent assessments, and in most 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 that 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, new asphalt, the bank will not provide financing to cover these basic needs. Their only option is to level a special assessment on 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 homeowners 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 product is particularly helpful in both scenarios, as we can virtually guarantee the future budget and credit worthiness of a given association.

As for our current target markets, we began our operations in Florida in 2008, and have since expanded into Washington State, Colorado, and most recently, Illinois. Given our history of nearly 12,000 collection events, we've discovered a certain general formula that has remained fairly consistent, which demonstrates the strong leverage in 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; in that $5 payout, about $3.25 is free cash flow that we can reinvest.

That said, in quarters where we have made strategic investments into our Business like this quarter, we expect our free cash flow per unit to be below average. Once we begin to see our newly acquired accounts begin to collect in significant numbers, we are confident we will again see the typical operating leverage we are used to.

Certainly handling hundreds of collection events per year is not an easy task, so a critical part of what has made our Business so successful and the reason we have been able to scale over the years is our proprietary software. This software, which we have developed internally, and continually enhanced over the years, essentially automates the entire collection process.

It ensures that all of the necessary paperwork is submitted and complete, that all figures are accurate, and that all state and specific local ordinances are followed. As well, it ensures that critical deadlines are met. All together, 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, that supporting system represents our secret sauce. 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 we provide to investors who request it from the Investor section of our website, provide some great examples about how all this works in terms of real numbers. So if you haven't seen it, we encourage you to take a look. So now you have a better understanding about our business model and how it works.

I would like to discuss our results for the first quarter of 2016. On the heel to our IPO during October of last year, the first quarter of 2016 was highlighted by the implementation of our strategic growth plan, where we made significant investments into our Business by expanding our sales and marketing team.

In fact, at quarter end, we had 10 full-time sales and marketing professionals, compared to only two at the time of our IPO last October. We believe these investments are already paying off, as we saw a 52% improvement in units acquired compared to the same period for 2015, and a 137% improvement over last quarter. We remain confident that we will achieve our goal of acquiring 2,000 delinquent accounts by the end of first quarter next year.

Further, at quarter's end, our REO portfolio consisted of 56 properties, which are currently being rented out or in the process of being rented out. This is up from 41 at December 31, 2015. This significant increase represents a tremendous value to the Company, both in terms of potential revenue value, as well as an increase in our Company's assets, which Steve will get to in a moment.

Before I get into more details, I would like to now turn the call over to our CFO, Steve Weclew, who will go through our financial results. Steve?

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

For the first quarter, revenues remained relatively flat, at $1.6 million. These results reflect a decrease in the average revenue collected per unit to $4,400 in the first quarter of 2016 from $4,600 for the first quarter of 2015. The overall decrease is partially due to an increased number of payoffs related to single-family homes compared to condominiums, which typically have higher payoffs.

The decrease was partially offset by an increase in total payoffs, as we collected revenue from 363 payoff occurrences for the first quarter of 2016 compared to 324 payoff occurrences for the first quarter of 2015. The slight decrease in revenues is partially offset by an increase in revenue generated by our New Neighbor Guaranty product and an increase in rental revenue from our REO properties.

Our operating expenses in the first quarter of 2016 totaled $2.1 million, up from $1 million in the first quarter of 2015, and $1.6 million last quarter. The year-over-year increase was a result of increased staff costs and payroll, which include the addition of eight new full-time employees, as well as an increase in professional fees. These fees include the service agreement with Business Law Group, which was established in the fourth quarter of 2015; the increased expenses incurred as a result of being a public company; and expenses related to increased legal activity during the quarter.

The sequential increase, which is a more relevant comparison, as both quarters were subject to public company expenses and the new service agreement with Business Law Group, was primarily due to the aforementioned investments into our sales and marketing efforts, as well as an increase in legal fees and settlement costs. We view the increase in legal fees as compared to previous quarters as a necessary investment in developing precedent for future cases that will enhance the value of our portfolio of delinquent accounts.

Interest expense for the first quarter of 2016 decreased to $140,000 from $194,000 in the first quarter of 2015. The decrease in interest expense is attributable to the refinancing of $1.8 million in debt in July of 2015 at 6% interest, and the refinancing of $7.4 million in December 2014 at 8% interest. Prior to this refinancing, we had outstanding debt at interest rates of approximately 14% and 10%.

For the first quarter of 2016, we recorded a net loss of $436,000, or a negative $0.13 per basic and diluted earnings per share which compares to net income of $405,000 in the first quarter of 2015. It should be noted that, in 2015, LM Funding did not have a tax burden, as it was a privately held LLC. Because the Company was privately held during the first quarter of 2015, an earnings per common share figure is not applicable. The decrease in net income was driven by the aforementioned increase in operating expenses.

Now turning to the balance sheet, at March 31, 2016, we had a total of $7.3 million in cash compared to $9 million at December 31, 2015. We believe this cash on our balance sheet is adequate to fund our traditional operations into the foreseeable future.

I would now 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, not the actual underlying value of the debt.

For example, at March 31, 2016, our balance sheet shows that our original product receivables totaled $1.36 million. This amount only represents the capital we have deployed to purchase the delinquent accounts. However, our third-party actuarial estimates, completed as part of our 2015 year-end audit, estimated actual fair value of these receivables in terms of what we could potentially collect, to be around $9 million.

Also at the end of the first quarter of 2016, our balance sheet shows our New Neighbor Guaranty product receivables totaled $646,000, net of a credit allowance of $125,000. Similar to the original product, the actuarial estimate of the fair value of these receivables are about $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 expand on this in a moment. But when we take title, we will typically refurbish the property and rent it out.

So at quarter end, we controlled about 56 properties as compared to 27 properties at the end of the first quarter of 2015. Our rental revenues for the quarter totaled $55,000, which compared with $48,000 in the first quarter of 2015. It's important to note that, included in the revenue numbers for the first quarter of 2015, there's a benefit from the sale of a property, where in 2016 we no longer look to dispose of these properties, but instead have taken the strategy of holding and renting.

At quarter end, our balance sheet showed our real estate owned assets were valued at $552,000. Again, this amount is what we paid to acquire the properties. This represents an average investment of roughly $9,500 per property.

According to Zillow, the value of those properties totals around $5.1 million, as compared to $3.6 million at December 31, 2015. This $1.5 million quarterly increase in value is not fully reflected in our financial statements, and should be considered when looking at the Company's overall performance. 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'd like to turn the call back over to Bruce. Bruce?

Thanks, Steve.

First quarter of 2016 was a reflection of the implementation of our strategic growth plan where we made significant investments in the future of our Company. Most notably at quarter end, we had 10 full-time sales and marketing professionals compared to three at December 31, 2015, and only two at the time of our IPO last October.

Additionally, we saw an increase in our legal and settlement expense during the quarter, which we believe were necessary investments into setting future precedent around purchasing and collecting delinquent association dues. Although we do not comment on ongoing litigation, we believe these investments are necessary and are in the best interest of the Company.

Despite the overall increase in operating expenses, we're pleased to say that these investments are already paying off, as we saw a 137% improvement in units acquired during the quarter. We remain confident that we will achieve our goal of acquiring 2,000 delinquent accounts by the end of the first quarter next year.

We believe the investment into the infrastructure of the Company will be ongoing over the next few quarters, and as such, believe tracking delinquent units acquired is the best way to measure our progress during this time. Since our sales staff works on commission, successful acquisition of units will increase expenses once they have acquired more than their base salary amounts. Other than this nominal increase, we expect our corporate G&A expenses to remain fairly stable, as we do not perceive adding additional members to our management team.

As we have stated in the past, 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 employment rate, in our current market we see a total of $1.8 billion in annual delinquent assessments. To put this in perspective, we have collected a total of $112 million since 2008, which gives -- is an average of about $16 million per year. In order to take better advantage of this opportunity, we needed to expand our reach, and spread awareness of our unique funding solutions, hence the investments we made into our Business during the quarter.

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 more funds available to purchase delinquent accounts for both our original product and New Neighbor Guaranty. We've already seen, and continue to see, the increase in the number of delinquent accounts acquired.

Second, we can now increase the number of REO properties in our portfolio, which can provide a steady, reliable stream of recurring income. We've increased our REO holdings from 41 properties on December 31, 2015, to 56 REO properties on March 31, 2016.

Finally, given the tremendous opportunity we have with our unique products, we've begun to build out a highly qualified, entrepreneurial-minded sales team, and rolled them out on a wide scale. As we have previously mentioned, we now have 10 full-time sales people, directed by our recently appointed Chief Operating Officer, Dean Akers. Dean has consulted part-time with LM Funding since 2009, and consulted on a full-time basis since January 4, 2016. During this time, Dean has assembled and trained his sales team, which is now deployed geographically with one sales person serving each of Florida's largest markets, as well as Chicago.

Our research indicates there are tremendous opportunities in these markets. Despite our successes to date, we really have less than a 0.1% market share. So despite the improved economy, we have a lot of work to do until the next downturn makes our job easier.

While the expansion of our sales team will allow us to grow our Business organically, we also see opportunities to bring on substantial portfolio of delinquent accounts through acquisitions. 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 the expansion of our sales team, we're working to increase the number of delinquent accounts we own. At the end of the first quarter, we owned 2,000 accounts. Our newly staffed sales team has set a goal to acquire an additional 2,000 accounts by March 31, 2017.

It's 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've averaged approximately $5,500 in collection per condominium association account.

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 maintain our projections that we set last quarter, that between 1,500 and 1,700 accounts will pay off in 2016.

Since our IPO, we've made significant progress executing our growth strategies. For example, we have completed an assembly and training of our Florida sales team. We've opened operations in Chicago, and made great inroads with the legal and management company communities there that we believe will lead to significant growth in unit count, REO opportunities, and other account receivable opportunities unique to that market. Also, we've continued to pursue accretive acquisition opportunities that will grow our core business and potentially create other opportunities.

Despite the income statement results of the quarter, we were able to grow the value of our real estate by $1.5 million. We're confident we are making the necessary investments into our Business that will grow both our top line, our bottom line, and balance sheet, which will ultimately build significant long-term shareholder value.

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

(Operator Instructions)

William Gibson, ROTH Capital Partners.

Bruce, you talked about acquisition opportunities and you are monitoring a lot of companies. Would you just be buying a portfolio or would you see this as potentially buying the whole company?

There's potential for both. There are portfolio is available and some of them are better purchases concerned because they have some synergies that would work out and then the other side of the management company potentials and that's more purchase of the pipeline, if you will, these management companies control large amounts of delinquencies. They can send them to lawyers or they can send them to us and so we are looking at that.

Okay. And basically, looking at the two products, the original and then the New Neighbor Guaranty, which do you see having the most momentum over the next 12 months?

I think the New Neighbor Guaranty, simply because it solves that 8% and 15% problem that associations face. That said, when you have an association that has 5% delinquencies, they might rather take the traditional product because it has a potential for a higher long-term payoff and they don't face a critical need to have their budget made whole.

Understood. Thank you.

(Operator Instructions)

Jeff Silver, Berson & Corrado.

Hey Bruce and Steve, I have two number questions, I guess. Just if you could give us a sense, so I've got -- you said that it cost you about $1,000 to purchase or take over delinquent account and you'll hope to do around 2,000 by the end of the first quarter next year, so that's around $2 million in payoffs or anywhere from $1,500 to $1,700 in 2016. If you achieve your typical -- or maybe even a little less on a $1 per payoff basis, it seems as though that would be more than enough funding -- or more than enough funds to fund the acquisition of the 2,000 accounts; is that correct?

Yes, that's basically how it works. You have to have enough coming in, more coming in than going out makes you profitable. Before we had the capital cushion from the IPO, I was always faced with the decision of how to deploy this month's collections, whether we hire people, whether I pay my taxes, whether I pay myself, or whether we buy 200 units or 100 units, or et cetera. So now we at least have the flexibility that we'll take all the units these guys can generate, we're able to buy a monthly basis.

Do you anticipate adding more sales reps throughout 2016 or are you going to plateau here for the time being at 10?

Absent going into a new market, and I think that Chicago is going to be enough opportunity that we've got to pursue that and perfect our out-of-state operations, I don't anticipate us going into a new market and hiring additional people.

Okay, the other question I had on the REO portfolio. Did you say that the rental income was $55,000 in the quarter?

Yes, that's correct.

And presumably, we can at least annualize that because obviously, you added to the portfolio in the first quarter so that would be over 200 -- call it 220,000 for the year and that's on -- I'm sorry, your total on your balance sheet, stated on your balance sheet at what amount?

$552,000. The one thing I will say about annualizing that is that there is a number of properties that are in that portfolio that weren't rented the entire quarter. So it would be better to go through and maybe wait another quarter before you start annualizing.

In addition, (multiple speakers) we can look at our foreclosures and how they are proceeding through the courts, and predict that we're adding about one a week right now and that should probably accelerate throughout the year.

So I mean, even if you just capitalize, call it, the $220,000 though, and I understand that as you keep adding properties, it sort of layers on, but if you just even capitalize that $220,000, obviously, as you said the underlying value of that portfolio you assessed, or was assessed at how much?

$5.1 million.

Okay. All right. Great. Those are the only questions I had. Thank you.

Jeff, I would point out, too, that even though we lost money on income statement, the value of our real estate went up $1.5 million this quarter.

Right. I guess I do have -- and where -- have you changed your view as to where ultimately, where you want to take the REO portfolio in terms of number of units?

The more we can get, the better, I think, because it does create that strong, reliable revenue stream.

Right. Thanks. Thanks, guys.

(Operator Instructions)

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

Thank you all for tuning in this morning. As I said, we didn't like losing money. I don't like losing money, but we actually grew the Company considerably this quarter and I expect we're going to continue to grow at a pretty rapid pace right now. I hope I have better news for everybody in a short period of time. Again, thanks for tuning in.

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 facts, that were discussed today, including without limitation, statements regarding the Company's future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives as 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, expects, intends, plans, projects, estimates, anticipates, believes, or the negative thereof or are any variation of thereon or similar terminology or expressions. 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 retain qualified employees; changes in the creditor capital markets; changes in interest rates; 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 on our presentation. This concludes today's call. You may now disconnect at this time.