Lm Funding America, Inc. Q4 FY2023 Earnings Call

Good morning, everyone, and welcome to the LM Funding America Fourth Quarter Business Update Conference Call. At this time, all participants are in listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Ted Ayvas. Sir, the floor is yours.

Good morning, and thank you for joining LM Funding America's 2023 financial results and business update 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 fourth quarter and year ended December 31, 2023, and its financial condition as of that date. The press release is posted on the company's website, lmfunding.com. In addition, the company has filed its annual report on Form 10-K 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 would like any additional information about the company, please contact Cresendo Communications at (212) 671-1020. Before management reviews the company's operating results for the three months and year ended December 31, 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 as described in the company's Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2024. 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 those anticipated or implied in these forward-looking statements. You should not rely on 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 other 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 directly 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, Chairman and CEO of LM Funding. 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 your continued support and for joining us this morning. I'm proud to report that our business is firing on all cylinders and our strategy is working. As evidenced, let me walk you through a few key metrics. First of all, we mined 423 Bitcoin in 2023 valued at approximately $12.3 million at an average market revenue value of approximately $29,000 per Bitcoin. With Bitcoin market prices recently at near record highs of approximately $70,000, we believe that this validates our strategy. Second, our revenue grew over 600% compared to last year, which was based on the average $29,000 Bitcoin price for 2023, which is now substantially higher. Additionally, we reported positive core EBITDA for the fourth quarter of 2023, a major milestone for the company. Last and possibly most important, I'd like to highlight the fact that we have stockholders' equity of $36.2 million or $14.52 per share as of December 31, 2023. We believe we are creating value for shareholders. If you give us no value for future growth, our stockholders' equity per share is roughly 4 times our current stock price. We are clearly executing on our strategy and remain committed to delivering value for our shareholders. We believe that as we start to get our story out, the intrinsic value of our company will be more accurately reflected in our market share price. In 2023, our first full year as a Bitcoin mining company, we made tremendous progress in implementing our approach to mining Bitcoin. As of December 31, 2023, our Bitcoin mining operations included about 5,900 mining machines actively engaged in mining at various hosting facilities, providing approximately 614 petahash per second of mining capacity. Our company held approximately 95 Bitcoin on December 31, 2023, valued at approximately $3.4 million. Mining activity from January and February of this year brought that total to approximately 154 Bitcoin held on February 29, 2024, valued at approximately $10.8 million based on the recent Bitcoin price of approximately $70,000. In December 2023, we sold Symbiont's blockchain technology, which we had acquired earlier in 2023 as debtor-in-possession in Symbiont's Chapter 11 bankruptcy case. We sold it for $2 million to Photonic Holdings, Inc. This transaction provided the company with additional capital to grow our Bitcoin business. Additionally, the transaction provided the company with additional working capital to strengthen our balance sheet. As most people likely know, Bitcoin halving is an event where the reward for mining new Bitcoin blocks is cut in half, resulting in miners receiving 50% fewer Bitcoin for verifying transactions. Halving is built into the Bitcoin algorithm and is designed to limit the supply of new Bitcoin. It is anticipated that the next halving event will occur in late April or early May of this year. In anticipation of the upcoming halving event, the company has invested approximately $1.1 million in acquiring 300 BITMAIN S21 Antminer units. These machines are known for their high efficiency and substantial hash rate capabilities, specifically designed for mining the SHA-256 algorithm. Each unit has a hash rate of 200 terahash per second while consuming 3,500 watts of power. We expect the delivery of the machines by the end of March or early April and plan to locate, energize, and commence mining with them by mid-April, which may increase the company's mining capacity to 674 petahash per second. We remain committed to investing our resources, including the proceeds from our Bitcoin mining activities towards acquiring the most efficient Bitcoin mining hardware on the market. We are confident that the S21 machines will be top performers during this year's halving event and will continue to play a significant role in driving revenue growth over the long term, including through and beyond the next halving event anticipated to take place sometime in 2028. We are concentrating our capital investments on Bitcoin and Bitcoin mining machines whose value closely follows that of Bitcoin itself. However, we are open to investing in opportunities to lower our mining costs and to eventually provide hosting facilities for artificial intelligence machines. If historical patterns continue and expected events materialize as predicted, we expect to create meaningful value for shareholders. This value creation is expected to mirror both the appreciation of our Bitcoin holdings as well as the enhanced value of our mining equipment. In addition to the purchase of the S21 mining machines, the company has upgraded approximately 1,000 of its mining machines with Braiins OS+ software. This enhancement is anticipated to boost the hash rate of these machines and improve efficiency by as much as 20%. As a result, this improvement should lead to an increase in the number of Bitcoin that the company can mine and an increase in the profitability using these upgraded machines. An additional benefit of utilizing Braiins' OS+ software for Bitcoin mining is that machines equipped with this software have the flexibility to mine with any pool or specifically with the Braiins' pool without incurring any pool fees to Braiins. With respect to our legacy business, which involves offering funding to nonprofit community associations, the business has remained fairly stable since the conclusion of 2022. We see opportunities in the future to grow this business from demand for reserve funding requirements active in response through to the collapse of seaside tower in South Florida. We continue to be extremely frustrated by the considerable disparity between our stockholders' equity, which, as I stated earlier, was valued at $36.2 million or $14.52 per share as of December 31, 2023, and the recent trading price of our shares at around $3.66, which represents a discount of around 75% from book value. Although we acknowledge the ongoing issues affecting the microcap market, our outlook for the business has never been more optimistic. Our optimism is rooted in our dedication to achieving strategic objectives in enhancing our Bitcoin mining activities in a prudent manner, which we believe will eventually be recognized by the market. On that note, I would like to turn the call over to Rick Russell, Chief Financial Officer of LM Funding, who will review the financial results for the year ended December 31, 2023. Rick?

Thanks, Bruce, and good morning, everyone. Total revenue for the quarter ended December 31, 2023, was approximately $4.1 million, an increase of $2.9 million or approximately 262% compared to $1.1 million for the fourth quarter of 2022. Total revenue for the year ended December 31, 2023, was approximately $13 million, an increase of $11.3 million from $1.7 million in 2022. These increases were primarily due to digital mining revenue of $3.9 million and $12.3 million in the three months and year ended December 31, 2023, compared with $0.9 million for both comparable periods in 2022 as the company commenced its Bitcoin mining operations in late September 2022. The average Bitcoin price for the three months and year ended December 31, 2023, recognized as revenue, was approximately $36,500 and $29,000, respectively. Operating expenses totaled $23 million for the year ended December 31, 2023, compared to $26.4 million for the year ended December 31, 2022. The decrease is primarily due to a $13.6 million decrease in staff-related payroll and a $1.3 million decrease in professional fees, partially offset by an $8.4 million increase in digital mining costs and a $4.5 million increase in depreciation compared to 2022. Net loss attributable to LM Funding shareholders for the three months ended December 31, 2023, was approximately $1.6 million, which included a $500,000 noncash unrealized gain on investments in equity securities compared to a net loss of approximately $19.7 million for the 2022 comparable quarter, which included a $6.6 million noncash unrealized loss on investment in equity securities and a $4.9 million impairment loss on various assets. Net loss attributable to LM Funding shareholders for the year ended December 31, 2023, was approximately $15.9 million, which included a $9.8 million noncash unrealized loss on investments in equity securities compared to a net loss of approximately $29.2 million for the year ended December 31, 2022, which included a $4.4 million noncash unrealized gain on investment in equity securities and a $4.9 million impairment loss on various hosting assets. Core EBITDA was positive for the three months ended December 31, 2023, which totaled approximately $0.3 million compared to a core EBITDA loss of $2.8 million in the prior year's comparable quarter. Core EBITDA loss for the 12 months ended December 31, 2023, totaled approximately $0.2 million compared with a core EBITDA loss of $6.5 million in 2022. Improvement in core EBITDA for the three and 12 month periods ended December 31, 2023, was primarily due to the existence of material Bitcoin mining operations in the current year that did not exist in the prior year. Core EBITDA is a non-GAAP financial measure and a reconciliation of core EBITDA to net loss can be found in our press release. Turning to our balance sheet, cash was approximately $2.4 million, with digital assets of $3.4 million and working capital of $7.4 million as of December 31, 2023. Based on 95.1 Bitcoin at a price of approximately $36,000 as of December 31, 2023. The current Bitcoin market price has fluctuated recently, but is around $70,000 in recent weeks. In 2023, the company also received approximately $2.7 million from SeaStar Medical Holdings as a partial repayment of their outstanding note receivable. Total LM Funding's equity was approximately $36.2 million or $14.52 per share as of December 31, 2023. That concludes our prepared remarks. I would now like to open the call for questions. Operator, could you please assist us with that?

Thank you. Your first question is from Kevin Dede at H.C. Wainwright. Your line is live.

Good morning, Bruce. Great. Thanks so much for having me on. Can you hear me guys?

Yes.

Congratulations on the significant improvements in mining this year. I appreciate the effort you all have put into this. I have a couple of questions. The 300 new machines you plan to acquire will need about a megawatt each. Can you share some thoughts on where you intend to place them? Will you be replacing existing plugs? This could bring your total petahash close to 700 if you retain all your current equipment. Additionally, I'd like to know more about the Braiins' software. Your fleet is considerably larger than the number of seats purchased, so any insights on that would be helpful.

Sure. We plan to place the three new machines at core, and we've also added to our contract to allow the installation of up to 1,100 new machines if needed. We will be relocating those three machines from core to Giga, where we operate our Braiins software. Currently, Giga has approximately 1,000 to 1,100 machines, and we will be moving the 300 machines there to run on the Braiins software, as the core does not support Braiins.

Okay. That helps. Thanks. So no retirement, just some moving around?

Correct.

Can you provide an update on your status with SeaStar, including what remains and your outlook for that investment this year? Additionally, Rick, could you clarify which business segments you consider core, as I reviewed the core EBITDA reconciliation in the press release and it was unclear?

Okay. So for SeaStar, we received all of the cash that was on the intercompany loans so far. I think, all the way through this year. So that receivable is all fully paid. As opposed to core, let me back up and for SeaStar, we have our common stock with them. So we'll see how that investment continues. We believe it's still a solid investment. They are solely progressing on getting more hospital studies and FDA approval. For Core, what was that question? I'm sorry?

Yes. No, no. I think that kind of summed it up, right? Because right now, as it is, you're just holding outstanding SeaStar stock. Could you remind us on how much that is, but its operations aren't flowing through your P&L at all?

We own about 2.6 million shares of SeaStar, which is currently trading between $0.70 and $0.80. We also hold approximately 5.7 million warrants, with the public warrants trading around $0.14 per share. SeaStar's price is nearly $0.80 at this time.

Okay. For as long as I've known you, I don't think you've had as strong a financial position in the past. I'm curious about how you're thinking about the BITMAIN purchase and would appreciate some insight on your perspective for the remainder of the year and any other commitments you might make regarding the growth of your hash rate.

Bruce, you want to chime in?

Yes. We are going to continue to hold Bitcoin to buy efficient machines with whatever excess proceeds we have. We may find some opportunities to go vertical and depart from our infrastructure-light plan. If we can find a few megawatts at a really good price that gives us some control, we probably would do that. That's where we're pointing for the balance of the year.

Okay. Thanks. That helps. I’ll pass the floor on. Thank you very much for entertaining my questions.

Thank you. Your next question is coming from Jack from Express Center. Your line is live.

Yes. Can you hear me?

Sure. I can hear you, Jack.

Thank you for the call, Bruce and Roger. Very good presentation. Just a couple of questions. I didn't get the name of the first caller, but he answered several of them. Roger, you mentioned you have 5,900 active rigs. Is that correct?

More or less, approximately.

I didn’t understand that. All right. Our most of those rigs polymer rigs are they S19’s?

No. We do have various models running.

Yeah. That's good. Do you have a chart or a spreadsheet of your mix, does not like a view that's public, I don't know. I'm just trying to get a balance of what you have, the S19, the XPs and now the S21s.

I think we disclosed that we have approximately we always do answer, but we have to look up what we've published. Yeah.

And I'm not looking for exact numbers here. I'm not holding in, but anything I just want an idea alter but the plan is like numbers.

We have approximately 500 XPs.

Okay. And then the balance will be more or less S19s?

Yes. You can get the S21 online.

And then you got the S21s. That answers that question. All right, Rick, regarding your last reported quarter for the fourth quarter of 2023, what is the current balance of Bitcoin inventory that the company is holding? What is that number?

So we reported as of end of February, and we had 153 Bitcoin mined in February, in December was like 95-ish. We mined about 58 Bitcoin in the first two months of this year. So you can kind of calculate what that may be through the first quarter.

Got it. Okay. Again, answers my question. Thank you. 80-C in 2024. Okay. All right. Let's see now. Do you have any plans for any further purchases of the S21 after this 300 that comes in?

We're considering further investments in the S21 and, as Bruce mentioned, a potential small hosting joint venture, which could be beneficial at the current megawatt price. We have some Bitcoin cash available, presenting a good opportunity.

We have the opportunity because we're private with BITMAIN. We don't go through intermediaries, so if we can, BITMAIN sometimes offers chances to purchase these machines at discounted prices and with rebates. There's always a possibility for us to form groups and make purchases. Currently, we don’t have anything planned.

Got it. Okay. And then my last question, and thank you. Everything is being answered very efficiently, by the way. Has anyone calculated a breakeven rate on the S19s regarding profitability?

So obviously, you're on a breakeven rate on everything, but there's two important variables. What is the price of Bitcoin and what's the price of the electricity you're putting in.

That’s the random. That’s the bottom line. I agree.

So yes, we run that all the time. I think that the generally published information out there would tell you that the S19s with halving teed up in the price of Bitcoin in the 70s, I think most people are right at the cutting edge or whether those things breakeven are losing depending on where the power contracts are and that's to be expected.

I agree. You addressed the question accurately. I remember I was on a call about six months ago, and you mentioned that on average, you're paying around $0.085 for hosting fees per kilowatt. I just want to confirm if that number has improved or not.

It's somewhat better. It's a bit lower, and we are considering additional options.

And also remember, hosting involves the guy with the screwdriver, the building, the rack, the land and the electricity. A lot of folks will approach with their electric price. We've got a total of really two guys that run the Bitcoin mining business. And you can do that because we're paying a little more than $0.08 to get up the other marginal costs that roll into it.

I agree. When a BITMAIN product fails, does Element have to pay for the repairs, or is it the responsibility of the hosting service to cover the hardware costs?

Well, generally, a certain period of time was a bit in warranty. And then after that is on us, generally, our hosting partners are able to get those fixed.

Okay. All right. So they generally can go fix them pretty easy and pretty cheap.

That's correct.

I mean there's not yes. So I'm not trying to put words in your mouth, but I'm hearing it's not a big deal, basically.

No, it's not.

I'm good. Thank you. I'll turn it over to the next person.

That concludes our Q&A session. I will now hand the conference back to our host for closing remarks. Please go ahead.

Thank you, everyone, for joining our 2023 financial results and business update conference call. Our company's transition towards Bitcoin mining is clearly working as we continue to experience encouraging results. We remain committed to reinvesting our mining revenues into acquiring more mining machines without incurring debt and also integrating advanced software aimed at enhancing the hash rate of our current machines. With the price of Bitcoin reaching a record high of approximately $74,000 earlier in March of 2024 and currently trading at approximately $70,000, our belief in the long-term value of Bitcoin as an asset class has never been stronger. We believe the momentum we ended 2023 with will continue to accelerate as we acquire and electrify more mining machines in 2024 and beyond. We're thankful for the ongoing support of our shareholders and we will continue to provide updates on our progress as new developments emerge. Thank you again for attending our call.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.