Item 1. Business
Item 1. Business
General
This Annual Report on Form 10-K is being filed by the registrant, Lendway, Inc. (“Lendway,” “we,” “us,” “our” and the “Company”), a Delaware corporation. Effective August 4, 2023, we changed our name from “Insignia Systems, Inc.” and reincorporated from Minnesota to Delaware. As part of the name change, our common stock now trades under the symbol “LDWY” on The Nasdaq Stock Market LLC.
The Company has evolved into a specialty agricultural (“ag”) and finance company focused on making and managing its ag investments in the United States (“U.S.”) and internationally. The Company is the majority owner of Bloomia B.V. and its affiliated entities, representing a significant producer of fresh cut tulips (“stems”) in the U.S. The Company also fully owns and operates FarmlandCredit.com, a non-bank lending business that seeks to purchase existing loans and/or originate and fund new loans domestically. During the past twelve months, the Company took three major steps in its evolution.
The Company is building a scalable non-bank lending business (“Lending Business”) to purchase existing loans or originate and fund new loans, all of which will be secured by collateral. Initially, we intend to focus on loans secured by real estate, primarily for agricultural purposes. We expect to expand our product offerings over time as we identify needs and opportunities in the marketplace for loans generally. Our plan, therefore, is to build a portfolio of well-secured loans, with a portion of the credit risk being participated to third parties in most cases, to maintain a low net loss experience and to charge fully compensatory rates and fees.
On August 3, 2023, the Company completed the sale of certain assets and certain liabilities relating to the Company’s legacy business of providing in-store advertising solutions to brands, retailers, shopper marketing agencies and brokerages (the “In-Store Marketing Business”) for a price of $3.5 million, subject to escrows and a post-closing adjustment.
The operations of the In-Store Marketing Business are presented as discontinued operations beginning with the Quarterly Report on Form 10-Q for the three months ended September 30, 2023, the quarter in which the sale of the In-Store Marketing Business met the criteria as discontinued operations. All previous periods presented have been restated to present the In-Store Marketing Business as discontinued operations. See Note 2 to the Consolidated Financial Statements appearing in Part II, Item 8, of this Annual Report on Form 10-K for a further description of the impact of the sale of the In-Store Marketing Business on the consolidated financial statements.
On February 22, 2024, the Company acquired Bloomia B.V. (“Bloomia”) for a price of $47.5 million financed with Company cash, a new credit facility and promissory notes payable to the sellers. Bloomia is one of the largest producers of fresh cut tulips in the United States, nurturing over 75 million stems annually. Bloomia purchases tulip bulbs, hydroponically grows tulips from the bulbs, and sells the stems to retail stores. The Company’s primary focus in the near-term will be on the Bloomia business.
Our internet address is www.lendway.com. We make all reports we file with the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and amendments to those reports, if any, available free of charge on its website, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to the SEC. Our website is not incorporated by reference into this Annual Report on Form 10-K. Copies of reports can also be obtained free of charge by requesting them from Lendway, Inc. Our mailing address is 5000 West 36th Street, Suite 220, Minneapolis, MN 55416; telephone 763-392-6200.
Recent Acquisitions
On February 22, 2024, we completed the acquisition of Bloomia B.V., a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands (“Bloomia”). The Acquisition was completed through Tulp 24.1, LLC, a Delaware limited liability company ( “Tulp 24.1”) and Tulipa Acquisitie Holding B.V., a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands and a wholly owned subsidiary of Tulp 24.1 ( “Tulipa”, together with Tulp 24.1, the “Purchasers”), pursuant to an Agreement for the Sale and Purchase of Shares (the “Purchase Agreement”) by and among Tulp 24.1, Tulipa, Botman Bloembollen B.V. (“Botman”), W.F. Jansen, who has continued to serve as chief executive officer of Bloomia (“Jansen”), and H.J. Strengers (“Strengers”, together with Botman and Jansen, the “Sellers”) and Lendway, as the Guarantor. Following the Acquisition, Tulp 24.1 became the holder of 100% of the ownership interests of Bloomia. As a result of the acquisition, Lendway holds an 81.4% ownership interest in Tulp 24.1 and Jansen owns the remaining 18.6% ownership interest.
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We acquired Bloomia for $47.5 million. The acquisition price was paid with $9.2 million of the Company’s cash, $22.8 million of proceeds from a new credit agreement, and promissory notes payable to the sellers totaling $15.5 million.
We entered into a revolving credit and term loan agreement (the “Credit Agreement”), together with Tulp 24.1 as the borrower. Under the terms of the Credit Agreement, Tulp 24.1 had an $18.0 million term loan funded. The Credit Agreement also contains a $6.0 million revolving credit facility, which may be used by Tulp 24.1 for general business purposes and working capital. The Credit Agreement contains ongoing affirmative and negative covenants that Tulp 24.1 is required to comply with. The Company provided an unsecured guaranty of the obligations of Tulp 24.1 under the Credit Agreement.
The Company acquired Farmland Credit, Inc., a Minnesota corporation (“FCI”), and FCI’s subsidiaries, Farmland Credit FR, LLC and Farmland Credit AV, LLC for a nominal amount from a related party, Air T, Inc., a member of the group that holds 38.9% of Lendway’s outstanding shares. This transaction was part of starting the non-bank lending business discussed below.
The following summarizes the current entity structure of the Company:
Segments
With the February 2024 acquisition of Bloomia, we operate in two industry segments:
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Specialty Ag, consisting of the Bloomia business
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Non-bank Lending, consisting of the Lending Business
Specialty Ag
Our Specialty Ag segment consists of Bloomia’s operations. Bloomia was founded in the Netherlands and has grown to become a leader in the fresh cut tulip industry in the U.S. Bloomia nurtured over 75 million stems annually in 2023 and 2022. Bloomia operates from three strategically positioned locations in the United States, the Netherlands and South Africa, and also has a 30% interest in a greenhouse business in Chile.
Bloomia operates greenhouses to hydroponically grow tulips at its United States and South Africa locations. Bloomia has invested in automation in its U.S. greenhouse in recent years that has increased production efficiency. Bloomia has historically sourced tulip bulbs from producers in the Netherlands, Chile, and New Zealand, which provides for year-round supply. Bulbs from the Southern Hemisphere are generally used from the end of August to early December, with the Northern Hemisphere produced bulbs used the remainder of the year.
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Bloomia has established business relationships with prominent retailers. A small number of mass-market retailers in the U.S. have historically accounted for more than 99% of Bloomia’s total annual sales. Revenues are mainly generated on the East Coast, leaving potential for growth on the West Coast. Bloomia aims to offer premium tulip stems, the result of sourcing larger bulbs, that have a longer shelf life than imported stems. Growing bulbs domestically also allows for higher margins because the freight costs for importing bulbs by sea have been substantially less than the costs associated with importing stems by air.
In the Netherlands, Bloomia’s office facilitates the sourcing of bulbs, conditioning to prepare bulbs for planting, and shipping of bulbs to its United States and South Africa facilities.
In South Africa, Bloomia’s wholly owned subsidiary operates a greenhouse that has produced an average of approximately 3.5 million tulip stems per year over the last five years. The facility is capable of growing tulips hydroponically year-round.
In Chile, Bloomia has a minority ownership interest in Araucania Flowers S.A. (“Araucania”). The operation grows tulips hydroponically year-round. Its growing and production complex consists of about 8,600 square feet of greenhouse, 7,000 cubic feet of cold storage, and more than 2,400 square feet of processing space. Araucania traditionally sells to retailers located in Chile, Bolivia, and Peru.
Customers
Bloomia has well established customer relationships. In the U.S., Bloomia sells stems to some of the largest mass-market retailers. During 2023, Bloomia had approximately 15 customers in the U.S. Of those customers, three individually represented greater than 10% of Bloomia’s revenue, accounting for 37.7%, 16.2%, and 10.4% of its U.S. revenue during the 12 months ended December 31, 2023.
Industry
The estimated market for cut flowers in the United States for 2023 is approximately $8 billion, of which approximately 80% is imported and around 20% is produced within the U.S. Of overall cut flowers sales, approximately 15% is represented by tulip stems. Bloomia believes it has a market share of approximately 20% of the cut tulips grown in the U.S. Barriers to entry are considered high due to the need for high volumes and efficient operations to generate significant profitability.
Seasonality
In the U.S., the tulip industry has historically been highly seasonal due to peak demand between January to May, supported by the Valentine’s Day, Easter, and Mother’s Day holidays, and also because of the tulip bulbs’ growing season in traditional sourcing areas. The tulip market is growing outside of the peak season, as demand increases for other events such as birthdays and weddings. As one of only a few tulip producers in the U.S. with sourcing of bulbs from the Southern Hemisphere, we believe Bloomia is well positioned to fill this growing demand.
Competition
Bloomia competes with both local (U.S.) producers and foreign producers who import cut tulips, primarily from the Netherlands. Bloomia has carved out a strong competitive position amongst U.S. growers by developing unique infrastructure through the combination of hydroponics and an integrated supply chain. Growing tulips in a greenhouse using hydroponics enables year-round production and requires less water and nutrients to grow the stems, and results in tulips that are better quality and have a longer shelf life. By sourcing tulip bulbs from both the Netherlands and the Southern Hemisphere, Bloomia is able to offer quality fresh cut tulips year-round, meeting unmet demand.
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Supply Chain
The supply chain steps for U.S. operations are detailed below:
Step 1: Procure bulbs: Purchase bulbs from established suppliers in the Netherlands or Southern Hemisphere.
Step 2: Buffer storage: Bulbs kept in cooled storage in the Netherlands.
Step 3: Shipping to U.S.: Bulbs are shipped via ocean containers.
Step 4: Rooting: Bulbs are prepared for growing.
Step 5: Growing: Bulbs are moved into the greenhouse.
Step 6: Harvesting: Tulips are cut and wrapped.
Step 7: Storage: Stems are stored in a cooled warehouse to prevent spoilage.
Step 8: Transport: Stems are transported to retailer’s distribution centers.
Step 9: Sales: Consumer sales at mass-market retailers.
During 2023 Bloomia sourced bulbs to grow around 75 million stems. The Netherlands has around 1,500 bulb suppliers, who jointly export over 2.5 billion tulip bulbs each year. Over the past five years, Bloomia has sourced from the 10 largest producers, 20 medium-sized producers, as well as from smaller producers.
The Netherlands’ large-scale production of tulip bulbs has created an efficient marketplace for Bloomia to source bulbs. The large majority of Bloomia’s contracts for purchase of bulbs from growers in the Netherlands are short term; however, Bloomia has a long history with most of its suppliers. Bulb contracts obligate Bloomia only to buy an agreed upon volume of bulbs; bulb price is established through market pricing.
To help facilitate year-round growing, Bloomia has routinely sourced bulbs from Chile and more recently began sourcing bulbs from New Zealand. Chile and New Zealand are currently the only countries in the Southern Hemisphere with bulb production at volume. By sourcing bulbs from around the world, Bloomia has bulbs that are ready for planting year-round, limiting its reliance on importing stems. Year-round production results in Bloomia being less exposed to higher logistics costs that result from importing stems.
Bloomia has also made investments to automate its greenhouse. The automation of the greenhouse allows Bloomia to:
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scale production faster if needed to meet demand;
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increase greenhouse efficiency resulting in higher margins, and;
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reduce its dependence on seasonal labor.
Bloomia and its customers conduct regular purchase planning meetings, enabling Bloomia to fine-tune its planning for delivery volume and timing. Bloomia is also a member of three trade associations; providing import/export logistics support, marketing support, and support for conducting business with wholesalers.
Non-Bank Lending Segment
We are building a scalable Lending Business to purchase existing loans or originate and fund new loans, all of which will be secured by collateral (individually or collectively, “Secured Loans”). In April 2023, we launched our Lending Business, through the hiring of a Senior Vice President of Lending with over 20 years of experience in credit and lending.
Initially, we intend to focus on loans secured by real estate, primarily for agricultural purposes. We expect to expand our product offerings over time as we identify needs and opportunities in the marketplace for loans generally. Our plan, therefore, is to build a portfolio of well-secured loans, with a portion of the credit risk being participated to third parties in most cases, to maintain a low net loss experience and to charge fully compensatory rates and fees.
We are building our strategy and long-term growth initiatives through development of customized niche products to support identified customer needs and opportunities in the marketplace, and effective funding structures to maximize returns.
Competition
We face competition from other entities that originate, purchase, securitize, or provide financing for Secured Loans. These entities include commercial and investment banks, insurance companies, Farm Credit System institutions, and financial funds.
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We plan to compete through development of niche products and effective fundings structures, while controlling overhead costs. The relative competitiveness and our ability to grow loan volume will be affected by many factors, including demand for the lending products we offer, availability of capital, and liquidity and cost of funds from third-party funding sources.
Activity to Date
The Company met with a number of prospects for loan originations and/or purchases since the start of the lending business. Deals were negotiated, but ultimately did not close. With the Company’s decision to allocate capital to the Bloomia acquisition, capital available for the lending business will be significantly constrained in the near term. Accordingly, we anticipate minimal revenue and operating losses from the lending business during the remainder of 2024.
Intellectual Property: Patents and Trademarks
Bloomia holds a trademark on its name and logo. Certain employees are required to enter into nondisclosure and invention assignment agreements. Customers, vendors and other third parties also must agree to nondisclosure restrictions to prevent unauthorized disclosure of the Company’s trade secrets or other confidential or proprietary information.
Environmental Matters
We believe our operations follow all applicable environmental regulations within the jurisdictions in which we operate. The costs and effects of compliance with these regulations have not been and are not expected to become material.
Importers of cut flowers air ship stems to the U.S., while Bloomia ships bulbs via sea containers. Bloomia’s business model (shipping bulbs for local production) lowers its carbon footprint compared to importers of cut flowers. Hydroponic farming method is free of pesticides, requires less water and has fewer diseases, and requires substantially fewer import shipments.
Governmental Regulation
The Company and its subsidiaries are subject to regulation by various governmental agencies. Bloomia has an import permit from the USDA for shipments of tulip bulbs. For import of bulbs from the Netherlands to the U.S., Bloomia participates in a pre-clearance program with the USDA where the climate-controlled tulip bulb shipments are inspected in the Netherlands, and the containers are sealed in the Netherlands. While there is a process for random inspection by the USDA once the shipment arrives on U.S. shores, receiving of the shipment is generally expedited. Chile has a similar process through the USDA. The European Union regulations may impact aspects of the growing of tulip bulbs in the Netherlands. Farmland Credit FR, LLC has a money broker’s license in North Dakota.
Employee and Human Capital Resources
As of March 1, 2024, the Company and its subsidiaries had 156 employees, of which 5 were part-time employees. None of the employees are represented by labor unions. During 2023, approximately 50% of our hourly workers were hired for seasonal support during January through the end of May. As of March 1, 2024, 54 employees were seasonal. We employ temporary foreign agricultural workers (H2A employees).
We regard our relationship with our employees as favorable. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incenting, and integrating our employees. Our human capital department also requests quarterly feedback through surveys and focus groups to continuously improve the workplace and employee relations. As it relates to our employees:
Oversight and Management
Our executive officers are tasked with leading our organization and managing employment-related matters, including recruiting, hiring, onboarding, training, compensation planning, talent management and development. We are committed to providing team members with the training and resources necessary to continually strengthen their skills both inside and outside the workplace. In 2023, Bloomia added to its Human Capital and Human Resources team, to take on initiatives such as employee wellness programs and continuing education.
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Our executive team is responsible for periodically reviewing team member programs and initiatives, including healthcare and other benefits, as well as our management development and succession planning practices. Management periodically reports to the Board regarding our human capital measures and results that guide how we attract, retain, and develop a workforce to enable our business strategies.
Workplace Safety and Health
A vital part of our business is providing our workforce with a safe, healthy, and sustainable working environment. We focus on implementing change through workforce observation and feedback channels to recognize risk and continuously improve our processes. Our team continues to also focus on improving our educational materials for employees to be informed of the best safety practices based on OSHA guidelines and workplace observations.