Earnings Call Transcript - LMFA Q3 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the LM Funding Third Quarter 2022 Business Updates Conference Call. At this time all participants are placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. David Waldman, Investor Relations. Sir, the floor is yours.

David Waldman, Investor Relations

Good morning, and thank you for joining LM Funding America's third quarter 2022 conference call. On the call with us today are Bruce Rogers, Chief Executive Officer, and Richard Russell Chief Financial Officer of LM Funding. This morning the company announced its operating results for the quarter-ended September 30, 2022 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 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 would like 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 September 30, 2022 and the company's financial condition at September 30, 2022, we'd like to remind everyone 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 March 31, 2022. 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 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 other person assumes responsibility for the accuracy and completeness of any forward-looking statement. The company disclaims any duty to update any 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. With that, I'll now turn the call over to Bruce Rogers. Please go ahead, Bruce.

Bruce Rogers, CEO

Thank you, David. Good morning, and thanks to everyone for joining us today. I'd like to begin by saying thank you to all of our investors for your continued support and confidence in the LM Funding story. I'm pleased to report that in the third quarter, our Bitcoin mining strategy has taken another step forward, as we've been actively mining Bitcoin in September 2022 and have electrified 1,200 of our machines as of November 15, 2022. The 1,200 machines provide us with a capacity of 120 petahash. We currently believe that by year's end 2022 we will have approximately 2,700 machines electrified and mining Bitcoin and that our capacity will increase to approximately 270 petahash. When we last updated you at the end of the second quarter, we had anticipated that we would have more than 5,000 miners operational by the fourth quarter of 2022. However, like many others in the industry, we are experiencing issues with one of our third-party hosting companies, Compute North, with whom we had placed nearly 2,700 of our mining machines during the second quarter of 2020. These machines are currently sitting there dormant. We are attempting to regain control of these machines and look for alternative solutions to host these miners. In the third quarter, we opportunistically took advantage of favorable pricing on mining machines and purchased an additional 400 S19J Pros miners and 200 S19XP miners, which we expect to come online between now and March 31, 2023. We will continue to look for and take advantage of similar opportunities to purchase additional miners when pricing is favorable in order to maximize long-term shareholder value. We would expect that once all of the 5,646 miners that we currently own are electrified and mining, they would provide us with a capacity of approximately 570 petahash. Overall, we continue to believe that the current volatility facing the entire cryptocurrency market has created and will continue to create significant opportunities for us to acquire distressed assets at attractive prices. While the market for Bitcoin may be volatile, the one thing that will not change is our resolve to maintain a disciplined approach of opportunistically purchasing and cost-effectively operating Bitcoin mining machines in order to maximize long-term value for our shareholders. We plan to continue our strategy of hosting with strong creditworthy third parties. We believe our decision to remain debt-free for now, and our strong cash position will serve us well this crypto winter. Regarding our legacy business, providing funding to nonprofit community associations, the business remains relatively unchanged from when we last reported in the second quarter. Our priority going forward continues to be Bitcoin mining, which we believe can potentially transform our business for the foreseeable future. As a sponsor and founding shareholder in LMF Acquisition Opportunities, our special purpose acquisition company (SPAC), we're happy to report that the business combination transaction with SeaStar Medical was successfully completed on October 28, 2022. We did this at a time when many other SPACs have been unable to complete business combinations prior to SPAC expiration date. SeaStar Medical's business plan is focused on bringing a critical care therapeutic breakthrough to the market. They are a medical technology company that is seeking FDA approval of its proprietary solutions to reduce the consequences of hyper-inflammation on vital organs, and an innovative immunomodulatory platform for pediatric and adult acute kidney injury, as well as other programs for acute and chronic inflammations, including conditions associated with COVID-19. Prior to SeaStar Medical's therapy, patients experiencing inflammation have had only limited options for treatment. This innovative therapy will provide treatment options that not only treat inflammation, but also help the body heal. Since the closing of the transaction, SeaStar Medical has been busy announcing positive interim data from the company's ongoing open-label clinical trial in a poster presentation at the American Society of Nephrology Kidney Week 2022 in Orlando, Florida. They gave a poster presentation highlighting preliminary findings from the ongoing open-label clinical trials being conducted at five pediatric hospitals across the U.S. evaluating their Selective Cytopheretic Device, also known as the SCD, for the treatment of immunomodulatory dysregulation. SeaStar also announced that its SCD has been included in the consensus statement for pediatric acute kidney injury as part of the first pediatric acute disease quality initiative meeting, which builds upon the existing support within the pediatric community for this important therapy. The outcome of the meeting titled 'Consensus Based Recommendations on Priority Activities to Address Acute Kidney Injury in Children' has been published in the Journal of the American Medical Association Network Open. In conclusion, we are encouraged about the prospects for SeaStar and believe that they are well positioned to accelerate the execution of their business plan, which we believe will create significant value for the LM Funding shareholders. At the same time, we're excited about the prospects for our Bitcoin mining strategy. As we continue to electrify machines and mine Bitcoin, we expect to reinvest the net proceeds of our mined Bitcoin back into the business to buy more miners, further accelerating our business plan. We closed the quarter with a strong balance sheet, cash of $10.2 million, working capital of $50.5 million, and no long-term debt. This provides us with a solid foundation and the ability to further invest and drive returns from our Bitcoin mining operations. We continue to be surprised by the disconnect between our stockholders' equity of $62.2 million as of September 30, 2022, which equates to $4.75 per outstanding share, and the price where our shares are currently trading at just $0.78 a share. Our plan is to increase our investor outreach in the future by supplementing our quarterly earnings calls, with an increasing number of presentations to investors at upcoming conferences, which will be announced.

Rick Russell, CFO

Thanks, Bruce, and good morning everyone. Revenues for the three months ended September 30, 2022 totaled $180,000 compared to $224,000 for the three months ended September 30, 2021, which reflects our shift in focus to Bitcoin mining. Our revenues for the three months ended September 30, 2022, included $42,000 in digital mining revenues as we mined our first bitcoins during the period. However, because our mining activities didn't commence until late in the quarter, our mining revenues don't have a meaningful impact on the quarter's results of operations. Operating expenses totaled $5.5 million for the three months ended September 30, 2022, compared to $2.4 million for the three months ended September 30, 2021. The $3.1 million increase is primarily attributed to a $3.6 million increase in noncash stock compensation, as well as increases in professional fees and other operating expenses as compared to the third quarter of 2021. For the three months ended September 30, 2022, the net loss attributed to LMF shareholders was $6.6 million, compared to $5.5 million for the three months ended September 30, 2021. Net income in the third quarter of 2020 included an unrealized loss on investment equity securities. The $194,000 relates to the company's interest in LMF Acquisition Opportunities. Turning to our balance sheet, as Bruce mentioned earlier, we ended the quarter with $10.2 million in cash and $15.5 million in working capital, which we believe provides sufficient liquidity to execute our current Bitcoin mining strategy. In addition, we have no long-term debt and ended the quarter with stockholder's equity of $62.2 million, or $4.75 per share. Finally, net cash used by operations was $1.7 million through the nine months ended September 30, 2022, compared to net cash provided by operations of $5.3 million through the nine months ended September 30, 2021. This change in cash provided by operating activities was primarily the result of a non-recurring $14 million realized gains on securities from the BORQS note transaction through the nine-month period ended September 30, 2021. That completes our prepared remarks. I would now like to open the call for questions. Operator, could you please assist with that?

Operator, Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. Our first question is coming from Matthew Galinko with Maxim Group. Please go ahead.

Matthew Galinko, Analyst

Hi, thank you for taking my question, and congratulations on starting Bitcoin mining. Can you elaborate on your confidence in getting the remaining miners operational by the end of the year? How much of that is within your control, and what steps can you take to ensure it happens?

Bruce Rogers, CEO

Interesting question, Matt. What we can control are the miners we have purchased and sent to Core, as well as those still scheduled for delivery. However, we currently do not have control over the miners at Compute North. We have tried various approaches to resolve this situation, but we haven't found a solution yet. Therefore, we cannot project when the miners at Compute North will come online until we have established some level of control that allows us to provide a meaningful update.

Matthew Galinko, Analyst

Got it. Okay, that makes sense. Outside of, I guess, your current equipment that's mining, did that constitute everything you've sent to Core?

Rick Russell, CFO

As of the end of September, we had about 800 machines. The total number of machines we've deployed up to today is approximately 1,200.

Bruce Rogers, CEO

The number we provided is a definitive figure based on machines that are operational. We have a significant amount of equipment ready for deployment across various locations, and the number we shared is the confirmed total of those that are powered.

Rick Russell, CFO

Yes.

Matthew Galinko, Analyst

Okay, thanks. So as you have additional machines coming in and we know the public challenges Compute North and Core are facing. What are your alternatives to finding hosting facilities, and it looks like a more fragmented deployment going forward? And I guess talk a little bit about how you manage the challenge of going to more disparate facilities.

Bruce Rogers, CEO

You're exactly right. It's very fragmented, 200 here, 300 there, different facilities. Being half full on that gives us more geographic dispersity, more power differentiation. There are a lot of benefits to being spread all out. It's a lot of tracking and a lot of hunting and finding places. The meltdown in DeFi has touched all of the Bitcoin world as well. And there are racks that are in various stages of bankruptcy liquidation coming available, machines coming available. And you trade machines that are on racks for machines in boxes now. It's a very dynamic operating environment for those manning the phones.

Matthew Galinko, Analyst

Thanks. Okay, last question before I jump back in the queue. Given that you do have a cash position, and in your words, a lot of distressed assets out there, how much cash do you need to operate and mine at this point? And how do you think about your capital structure as you see inexpensive or distressed assets kind of within your crypto wheelhouse as we move into 2023?

Bruce Rogers, CEO

The prices are decreasing, creating opportunities to take action. It's about identifying the market's lowest point. Due to the situation with Compute North, we need to safeguard our cash since our machines aren't powered yet. Once they are, it will depend on Bitcoin's price, but at the current levels, we should be generating cash and could start accumulating funds for future investments. We need to determine how much of the $10 million and $15 million amounts we plan to use for deployment. That's essentially what I wanted to convey.

Matthew Galinko, Analyst

All right, thank you. I'll jump back in.

Operator, Operator

Thank you. As there are no further questions in the queue, I will hand it back to management for any closing statements they may have.

Bruce Rogers, CEO

Sure. I'd like to thank everyone for participating in our third quarter 2022 conference call. The future is extremely bright here in Tampa and we're excited to have taken the next step on our Bitcoin mining strategy. And we have miners actively mining Bitcoin as of November 15, 2022. We've mined our first Bitcoins. We look forward to the momentum continuing as we electrify additional mining machines in the quarters to come. We appreciate the ongoing support of our shareholders and look forward to updating you on our progress as developments unfold. Thank you.

Operator, Operator

Thank you, ladies and gentlemen, and this does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. And we thank you for your participation.