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1/23/18

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Groove Portfolio Focus Stock #1
LM Funding America (NASDAQ: LMFA)

Price - $1.46
Market Cap - $8.8 million
LT Debt - 0
Shares Outstanding: 5.9 million
Public Float: 1.01 million
Short Position: 511,000

Short as % of Float: 51%
Insider Ownership (69%) 12/31/17

*51% of Public Float Sold Short Betting on Default
*All Debt Converted to Equity Last Few Weeks = No Default Risk & No Debt
*Pristine Balance Sheet and Lower Expense Structure Not Reflected in Stock Price
*Entire Non-Shorted Public Float Could Be Acquired for $750k at Current Stock Price
*Should trade $2.25-$3.35 on Core Prospects Alone Without Debt Overhang
*Potential for Signficant Short Squeeze on Any Positive Catalyst

LM Funding America, Inc. is a specialty finance company that provides funding to nonprofit community associations (Associations) with current contracts in the states of Florida, Washington, Colorado and Illinois. The company offers funding to Associations by purchasing a certain portion of the associations’ rights to delinquent accounts that are selected by the Associations arising from unpaid Association assessments. It is also involved in the business of purchasing delinquent accounts from Associations and when economically sensible, taking ownership of units through the foreclosure process. As a result of the company's taking ownership of condo units through this process, the company is also involved in the condo rental and real estate investment business.

A critical part of what has allowed LMFA to operate effectively and to scale this business is their proprietary software. This software was developed internally and has continually been enhanced so that it essentially automates the entire collection process and ensures that all necessary legal documentation is submitted and complete, that all figures are accurate and all state and specific local ordinances are followed as well as snsuring that critical deadlines are met. LMFA's proprietary software puts tremendous efficiency, speed, capacity and quality control into a collection process that previously was tedious, time-consuming and subject to human error.

Read more about the details of LMFA's core business here.

Our due diligence on LMFA leads us to believe that its stock is significantly undervalued at current prices for several reasons -

1)the core business is one that can be highly profitable at the right scale. At the transactional level, the company makes $5 for every $1 spent acquiring association receivables and the company has triple digit ROIs on the majority of the REO they have acquired. when rental income is factored in. The model works, it just needs to be done on a larger scale. Over the last 12 months the company has right sized the general and administrative expense structure and as of this month they have converted all long term debt to equity. LMFA's balance sheet will be debt free and its income statement will have significantly lower expenses from G&A and interest going forward. Bottom line, the bottom line should look much better going forward and the company will not have the dark cloud of maturing debt hanging overhead.

2) Historically this company has traded at prices that equate to a market cap of between $13m and $20m, with the lower end of that range coming in to play as the debt grew and some one time litigation expenses took their toll. The litigation was settled last year and the debt was completed wiped out with the recent equity exchange so the major issues dragging the stock down to the $13m market cap range are no longer an issue. But the stock is still trading at historical lows, such that the market cap is only $8.9 million even after adding the additional 2.6m shares issued in the debt exchange. If the stock just gets back to the $13m market cap it hit when those issues presented, that would equate to a share price of $2.25 or 50% higher than the current price. If the stock moves back to the $20m range where it traded prior to the emergence of these issues, that would equate to a price around $3.35 per share, a gain of over 100% from current levels.

3) Short Interest - as of the latest NASDAQ short interest report, 51% or 511,000 of the 1.01 million shares of LMFA have been sold short. That is a staggering number that we believe reflects traders betting against the company due to the missed payments on their long term debt a few months ago. As mentioned above, LMFA converted all of its debt to equity over the last few weeks so there will be no default and core thesis behind a short bet here has been put to bed. What remains is a highly exposive situation where we believe the stock could pop 50 - 100% on short covering alone in the event of positive news or any uptick in buying interest.

In summary, our due diligence leads us to believe that LMFA is tremendously undervalued on the prospects of its core business alone. Additionally, the jaw dropping short interest situation leads us to believe that the stock could move substantially higher on any good news or uptick in buying. With the market cap below $10m and the public float at current prices of only $1.5m with half of that already sold short, LMFA is like a tightly wound spring that could get sprung on just about any positive catalyst, leading to exponential gains for investors who buy at current prices. We think Groove community participants would do well to consider adding LMFA to your portfolio.

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