LM Funding America, Inc. (LMFA) Q2 2023 Earnings Report, Transcript and Summary

Greetings. Welcome to the LM Funding America, Inc. Second Quarter 2023 Business Update Conference Call. At this time, all participants are in a listen-only mode. a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to your host, Ted Ayvas. You may begin.

Good morning. And thank you for joining LM Funding America’s second quarter 2023 conference call. On the call with us today are Bruce Rodgers, Chief Executive Officer; and Richard Russell, Chief Financial Officer of LM Funding. This morning, the company announced its operating results for the quarter ended June 30, 2023 and our financial condition as of that date. The press release is posted on the company’s website on lmfunding.com. In addition, the company has filed its quarterly report on Form 10-Q with the U.S. Securities and Exchange Commission which can also be accessed on the company’s website, as well as the SEC’s website at www.sec.gov. If you have any questions after the call or unlike any additional information about the company, please contact Crescendo Communications at 212-671-1020. Before management reviews the company’s operating results for the quarter ended June 30, 2023, and its financial condition as of that date, we would like to remind everyone that this conference call may contain forward-looking statements. All statements other than statements of historical facts contained in this conference call, including statements regarding our future results of operations and financial position, strategy and plans and our expectations for future operations are forward-looking statements. These forward-looking statements are based largely on the company’s current expectations and projections about future events and trends that it believes may affect its financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to various risks, uncertainties and assumptions described in the company’s Form 10-K filed with the United States Securities and Exchange Commission on March 31, 2023. Because of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this conference call may not occur and actual results could differ materially and adversely from these anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although the company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, level of activity, performance or achievements. In addition, neither the company nor any person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The company disclaims any duty to update any of these forward-looking statements. All forward-looking statements attributable to the company are expressly qualified in their entirety by these cautionary statements, as well as others made in this conference call. You should evaluate all forward-looking statements made by the company in the context of these risks and uncertainties. In addition, today’s discussion will include references to non-GAAP measures. The company believes that such information provides an additional measurement and consistent historical comparison of its performance. A reconciliation of the non-GAAP measures to the most direct comparable GAAP measures is available in today’s news release on our website. With that, I will now turn the call over to Bruce Rodgers. Bruce?

Thanks, Ted. Good morning and thanks to everyone for joining us today. On behalf of the LM Funding team, I want to thank our shareholders for their continued patience with our share price through much of the second quarter. Our company made significant progress in the second quarter towards our Bitcoin mining and other objectives and furtherance of our strategic plans. We believe our strategic plans for our businesses will lead to considerable value for our shareholders. At June 30, 2023, we had approximately 5,230 mining machines electrified at hosting facilities and actively mining Bitcoin. During the quarter ended June 30, 2023, we mined 106.6 Bitcoin, a sequential increase of 16%, compared to 91.6 Bitcoin mined in the first quarter of 2023, at an average market revenue value of $27,900 per Bitcoin. The current Bitcoin price has been higher and has fluctuated between $29,000 and $31,000 over the last several months. As of August 14, 2023, we have approximately 5,950 mining machines fully operational and mining, providing approximately 615 petahash of mining capacity. Looking ahead to the next Bitcoin having event projected to occur in 2024. Our goal is to continue to procure more energy efficient mining machines to boost our rep mining capacity and lower our average joules per terahash costs. In July, we announced that the company had installed Braiins OS+ software on 360 of its mining machines. We expect this to increase the hashrate on these machines by as much as 25%, which should lead to an increase in the number of Bitcoin that we can mine. In addition to increasing hashrate, there is further advantage to mining Bitcoin with machines operating Braiins OS+ software as machines equipped with this software may mine with any pool or mine with Braiins pool without having to pay pool fees to Braiins. We believe the best use of our capital is to increase hashrate production through the purchase of additional miners enhancements to their hashing capabilities. We pivoted our focus to Bitcoin mining with the purchase delivery and energization of our first miners completed at the end of 2022. We mined 53.4 Bitcoin in 2022, 91.7 Bitcoin in the first quarter of 2023 and 106.6 Bitcoin in the second quarter of 2023. Since the beginning of Q1, we have increased our mining capacity from 3,000 mining machines to 5,950 mining machines, generating 615 petahash. We believe our stock price should better reflect the growth in our Bitcoin mining business since the beginning of 2023. A significant highlight from the recent quarter was our successful $2.6 million stalking horse bid leading to the acquisition of Symbiont.io, Inc.’s assets, including its flagship product, the Assembly financial services blockchain enterprise platform. Assembly was developed for financial institutions to handle the issuance, tracking and management of various financial transactions such as loans, investment contracts and securities on a shared blockchain. This acquisition affords us entry into the smart contracts business with an advanced technology offering developed for real customers. We are currently in dialogues with technology partners to license, develop and sell our Symbiont assets and expect to announce further developments this quarter. With respect to our legacy business, which involves offering funding to non-profit community associations, the business has remained fairly stable since the conclusion of 2022. In summary, we find it puzzling that such a substantial discrepancy exists between our stockholders’ equity of $39.9 million, equivalent to $2.72 per outstanding share as of June 30, 2023, and the recent trading price of our shares at $0.70 per share. This represents a 75% discount to book value. While we are mindful of the broader weakness in the stock market, especially within the microcap market and suffered disproportionately, we remain optimistic that by diligently executing on our strategic plan, mining more Bitcoin and monetizing the Symbiont assets we can narrow this valuation gap. On that note, I’d like to turn the call over to Rick Russell, Chief Financial Officer of LM Funding, who will review the financial results for the three-month period ended June 30, 2023. Rick?

Thanks, Bruce, and good morning, everyone. Total revenues for the three months ended June 30, 2023, increased by $3 million to $3.2 million from $230,000 -- $235,000 for the three months ended June 30, 2022. Furthermore, we have experienced strong sequential quarterly revenue growth of more than 38% compared to the first quarter of 2023. Revenues for the three months ended June 30, 2023, include digital mining revenue of $3 million due to the mine of 106.4 Bitcoins in the second quarter of 2023, whereas there was no mining for the 2022 comparable quarter. Operating expenses totaled $6.4 million for the three months ended June 30, 2023, compared to $5.6 million for the three months ended June 30, 2022. The $1 million increase is primarily attributable to a $2.4 million increase in digital mining costs, a $1.3 million increase in depreciation, partially offset by a $1.9 million decrease in stock compensation and a $700,000 decrease in professional fees as compared to the second quarter of 2022. For the three months ended June 30, 2023, the net loss attributable to LM Funding shareholders was $4.5 million, which included a $3.7 million non-cash unrealized loss on investment and equity securities, compared to net income of $2.8 million for the second quarter of 2022, which included a $12.2 million unrealized gain on investments and equity securities. Core EBITDA for the quarter ended June 30, 2023, was $1 million, compared to a core EBITDA loss of $2.3 million in the 2022 comparable quarter, primarily due to our Bitcoin mining operations and the gain on adjustment of Symbiont note receivable allowance. Turning to our balance sheet. We ended the quarter with $1.8 million cash, Bitcoin worth $2 million and working capital of $5.5 million. which we believe provides us with sufficient liquidity to execute on our current Bitcoin mining strategy. In addition, we have minimal long-term debt and ended the quarter with stockholders’ equity of $39.9 million or $2.72 per share. Finally, net cash used by operations was $330,000 during the three months ended June 30, 2023, compared to net cash provided by operations of $334,000 in the three months ended June 30, 2022. This change in cash used in operating activities was primarily driven by the difference between Bitcoin mining revenue received in non-cash consideration, i.e., Bitcoin as compared to the mined Bitcoin liquidity support operations to the three months ended June 30, 2023. That concludes our prepared remarks. I would now like to open the call for questions. Operator, could you please assist us with that?

Sure. Certainly. [Operator Instructions] Your first question is coming from Matthew Galinko at Maxim Group. Please post your question. Your line is live.

Hi. Thank you for taking my question. Can we start with maybe a little bit more on your thoughts looking into the having event next -- expected for next year? Is the -- maybe talk a little bit more about your strategy going into that or maybe how you see that playing out?

Sure, Matt. Well, from a 50,000-foot view, the having means that basically half the machines will probably fall into a level of profitability worldwide. So you want to be at the top end of the efficiency curve there, which is why we focused our purchases -- most recent purchase on XPs and before that we have XJ Pros or the 19 J Pros. Then we have -- we are an infrastructure-light plan. So we host with other people and we have spread our hosting contracts around and we have our hosting contracts coming due around the period of having, because in the past, there have been sort of a rejiggering period after having more things kind of go sideways before the supply and demand curve discrepancy created by having kicks in and the price goes up. So our infrastructure-light plan is to stay lean and fast machines, keep our joules per terahash low and have our contracts be in position that we can renegotiate should the having produced different economics on the go forward.

Got it. Thanks. And then maybe touching on the implementation of Braiins on a subset of your mining equipment. Is that something you expect to bring across the fleet or what -- I guess, what’s the timing on rolling out more broadly optimization strategies like that?

So this is Rick Russell. On the Braiins software, the bulk of our fleet is with core, and generally, we don’t run Braiins on those machines, but we do run it at our other hosting giga. And it works a lot, I think, in the Texas environment, where there’s a lot of adjustments to the power usage going on, but it won’t be rolled out throughout the entire fleet.

Got it. And then on Symbiont, I think you mentioned, you might -- you are hoping to announce something in the next few months. So, I guess, what’s your sense since closing that acquisition, are things going sort of according to plan or could you help us with a little bit more color on how that’s going?

Sure. So we have learned an awful lot about what it is we have acquired and both on its functionality and its features, which seem to be more robust than what’s out there in the marketplace and that seems to be encouraging and attracting a lot of attention. We have learned some criticisms of the technology and some of it was done in a proprietary manner that if you can rule the world might work great, but maybe converting it to open source will be better. And so, everyone believes that for the different uses that we are looking at in the different projects that we are talking to people about, believe that there is a level of CapEx going to be required to commercialize this for the customer base that they are targeting. And of course, all those things require money and money requires negotiations and different interests and different objectives for use of the technology. And so it’s going great, it just hasn’t revealed itself as to how it’s going to go.

Got it. Okay. Maybe I think the last question for me is on plans for fleet, I guess, evolution on the mining side to -- do you expect to just sort of be in a steady state for the next few months going into the having in terms of the size of the fleet, and if you have any failures, you replace them with higher efficiency units or what’s the thinking there?

So the latter part, yes, we are buying machines to replace and increase efficiency. The -- our executive comp plans are all incentivized to get us to 1 hexahash. So everybody from Rick and I down through the guys that are out at the mines in Texas looking at broker machines today are motivated to do that and so there’s a combination of finding machines at the right price, hosting at the right price and deploying capital to do so. And so we are constantly working on that, it’s the right time to be acquiring machines. We are just looking at our best sources of capital to do so.

Got it. Thank you.

[Operator Instructions] Your next question is coming from Kevin Dede with H.C. Wainwright.

Hi, Bruce and Rick. Thanks for taking my question. This is Michael Doblin [ph] calling on behalf of Kevin Dede. I was hoping to get a bit more color on your fleet. So you mentioned, going to 1 hexahash and so how much are you planning to invest in purchasing new machines? And then also, do you have any specific sites in mind for expanding hosting agreements or are you pretty content with your providers on that front right now?

So, the first question, we haven’t released any guidance on that. To talk around the question, obviously, machines cost a certain amount of money to get that 1 hexahash, then Bitmain offers coupons and incentives to their better customers that keep piling up for us. And then there’s the amount of Bitcoin we have on hand that we could sell and then turn those into machine. The amount of cash we have on hand that we are willing to operate without. And then we are always looking at our capital markets and our stock and hoping that we will respond well to these earnings call and provide some opportunity there. So that’s the status of sources of ways that you can buy machines. You can also borrow money, but we are very reluctant to leverage our position much. And then as for your hosting question, we are -- we pursue a geographically dispersed hosting plan so that our CapEx isn’t tied up into transformers and land and buildings and things that don’t equate to the actual coin mined when it’s not. And then by being geographically dispersed, you get politically dispersed with that, as well as power source dispersed. And although we like all the people that we are currently mining with and are always asking them for more space, we are also open to going and seeing new sites and new technologies and new ways to mine that’s why these guys are racking up so many frequent flyer miles forming.

Great. Good. That’s helpful. In regard to Symbiont, I guess, we will have to wait for your announcements there. So a bit more of an esoteric question. Are you going to stick with the current branding of Assembly or are you going to look to rebrand Symbiont’s individual assets?

I don’t know the answer, but I know that I am not the one that’s going to make that decision. We are surrounding ourselves with some very, very successful tech savvy people that have their own views on those things, and I think, we would be better to defer those.

Makes sense. Now in terms of the regulatory landscape, what sort of feedback have you received in terms of how Symbiont assets can’t complaint to the current regulatory landscape?

I am unaware of any regulatory landscape effects on Symbiont assets. Could you elaborate on your question?

Just a kind of general question about in terms of crypto and blockchain, in general, specifically in the U.S. versus, say, Europe -- Europe’s MiCA regulatory machine that’s being put in place right now. Just a 50,000 square foot level, are you feeling optimistic about the landscape or do you see things need to change before Symbiont tech can really take off?

Yeah. So we are Bitcoin miners at heart and regulatory environment for being a Bitcoin miner kind of keeps getting clearer and clearer. We are a commodity, I guess, we are not going to be treated as security. There’s not a lot changing for us. What we are really hoping we will change there will be on the accounting side. We need vendor to come out and allow us to mark this thing to fair market value each quarter rather than do its lowest trading point and keeping it impaired. But I think that, the guidance on that, it’s just a matter of time until it gets approved, there’s really not much resistance there. On our Symbiont asset doesn’t, it was designed as a blockchain for private use of owned financial institutions and so it never really had a look towards the tokenization and some of the things that the exchanges have run into issuing coins and such like that. Now it’s a very robust blockchain that could be turned into a public blockchain. But we would be -- we need to see a regulatory path for us to be able to pivot that thing to a public tokenization. But, yeah, it’s very interesting. That path can present itself to having a less security and register rather and exchange and traded on, that would interest us.

Okay. Great. Well, thank you so much, Bruce and Rick.

Thank you.

Thanks.

Your next question is coming from Jack Richardson with Expressway Center. Please post your question. Your line is live.

Jack, well, you are on mute.

Hello. Can you hear me?

Okay. Great.

Yeah.

This is -- I am a stockholder. This is my very first conference call of this matter. I just have really just one question and please tell me if this is proprietary or not. I will not be offended. The question is, what is the average cost per kilowatt for power, including hosting fees?

Well, it includes all service fees and it’s around $0.80 [ph].

Okay.

I think, again, that’s the charge for kilowatt, the real estate entity, the rack, the machine system and somebody walk around the street [Technical Difficulty].

And that includes maintenance and real estate and does that include [Technical Difficulty]

We do everything for structure light. So it’s kind of an all in cost.

Okay. So when the machine goes down, you can fix it? Is that correct?

That’s how we set up our machines. Yeah.

That’s correct.

Okay. Okay. And what -- Rick, what -- or in your presentation, you had mentioned, your net number of miners as of a couple of days ago in August, what does that number again?

I believe it’s like 5,900 exchange.

5,900 exchange. Okay. All right.

Yeah. Yeah.

All right.

It’s just we have a mix of XPs, that’s about at 615 petahash.

Okay. And I guess, a follow-up question is, I assume that all the rigs in LMFA are hosted?

Yes.

Yeah. But somebody or another. Okay. All right. Okay.

Thank you.

Thank you.

This does conclude the question-and-answer session. And I will now turn the call back over to management for any closing remarks.

Thank you. I’d like to thank everyone for participating in our 2023 second quarter conference call. The company’s pivot to Bitcoin mining has been successful to-date. We continue to reinvest our mining revenues to purchase additional mining machines, debt free, as well as adding cutting-edge software designed to improve the hashrate of our existing mining sheets. We continue to believe in the long-term appreciation of Bitcoin as an asset class. We believe the most efficient way to invest in Bitcoin is through the purchase of highly efficient mining machines. In summary, we are extremely pleased with the progress we have made during the second quarter of 2023 and believe that the momentum of our transition to Bitcoin mining will accelerate as we continue to acquire and electrify more machines in the future. We are thankful for the ongoing support from our shareholders and we will continue to provide updates on our progress as new developments emerge. Thank you for joining us today and for your questions. We look forward to speaking to you soon.

This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.