LM Funding America, Inc.

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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to your host, Ted Avis. 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 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 June 30, 2023, and our financial conditions 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 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 measure is available in today's news release on our website. With that, I will now turn the call over to Bruce Rogers. 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 in 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 end of 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 halving 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 cost. In July, we announced that the company had installed Brains OS Plus software on 360 of its mining machines. We expect this to increase the hash rate on these machines by as much as 25%, which should lead to an increase in the number of Bitcoins that we can mine. In addition to increasing hash rate, there is further advantage to mining Bitcoin with machines operating Brains OS Plus software. as machines equipped with this software may mine with any pool or mine with brains pool without having to pay pool fees to brains. We believe the best use of our capital is to increase hash rate production through the purchase of additional miners and 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 petash. 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 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 nonprofit 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 weaknesses in the stock market, especially within the microcap market that has suffered disproportionately, We remain optimistic that by diligently executing our strategic plan, mining more Bitcoin, and monetizing the Symbion 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 Funds, 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 into June 30, 2023 increased by $3 million to $3.2 million, from $235,000 to the three months into 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 into 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 into June 30, 2023, compared to $5.6 million for the three months into 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 of June 30, 2023, the net loss attributed to LM funding shareholders was $4.5 million, which included a $3.7 million non-cash unrealized loss on investment in 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 investment in equity securities. Core EBITDA for the quarter into 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 entered the quarter with $1.8 million cash, Bitcoins worth $2 million, and the 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 entered the quarter with stockholders' equity of $39.9 million, or $2.72 per share. Finally, net cash used by operations within $370,000 during the three months into June 30, 2023 compared to net cash provided by operations of $374,000 during the three months into 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 amount of mined Bitcoin liquidated support operations in three months into 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?

Certainly. At this time, we will be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. You may press star 2 if you would like to remove your question from the queue. For participants using a speakerphone, it may be necessary to pick up your handset before pressing the star keys. Please hold just one moment while we pull for questions. Your first question is coming from Matthew Galenko at Maxim Group. Please pose your question. Your line is live.

Hi. Thanks for taking my question. Can we start with maybe a little bit more on your thoughts looking into the halving event expected for next year? 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 halving means that basically half the machines will probably fall into a level of unprofitability worldwide. So you want to be at the top end of the efficiency curve there, which is why we focused our purchases, most recent purchases, on XP. And before that, we had J-Pros, rather, 19 J-Pros. We're an infrastructure-like 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 the halving. Because in the past, there have been sort of a rejiggering period after the halving where things kind of go sideways before the supply and demand curve discrepancy created by the halving kicks in and the price goes up. So our infrastructure light plan is to stay with lean and fast machines, keep our joules per terahash low, and have our contracts be in position that we can renegotiate should the halving produce different economics on the go forward.

Got it. Thanks. And then maybe

Touching on the implementation of brains on a subset of your mining equipment, is that something you expect to bring across the fleet? Or, you know, I guess what's the timing on, you know, rolling out more broadly optimization strategies like that?

So this is Rick Grosso. On the brain software, the bulk of our fleet is with core, and generally, you know, we don't run brains 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 a rollout throughout the entire fleet.

Got it. And then on Symbian, I I think you mentioned you might, um, you're hoping to announce something in the next few months. Um, so I guess what's your sense since closing that, that acquisition, um, uh, you know, are things going sort of according to plan or, you know, how could you help us with a little bit more color on, um, uh, how that's going.

Sure. So we've learned an awful lot about what it is we've 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've 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're looking at in the different projects that we're talking to people about, believe that there's a level of capex going to be required to commercialize this for the customer base that they're targeting. And of course, all those things require money and money requires negotiation and different interests and different objectives for use of the technology. So it's going great. It's just hasn't revealed itself as to how it's going to go.

Got it. Okay.

Maybe I think last question for me is on plans for fleet, I guess, evolution on the mining side. Do you expect to just sort of be in a steady state for the next few months going into the halving in terms of the size of the fleet? And, you know, if you have any failures, you'll replace them with higher efficiency units or what's the thinking there?

To the latter part, yes. We're buying machines to replace and increase efficiency. Our executive comp plans are all incentivized to get us to 1x a hash. So everybody from Rick and I down through the guys that are out at the mines in Texas looking at broken 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're 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.

Once again, if you do have any questions, please press star 1 to enter the queue. Your next question is coming from Kevin Didi with HC Wainwright. Please pose your question. Your line is live.

Hi, Bruce and Rick. Thanks for taking my question. This is Michael Dobbink on all behalf of Kevin Didi. I was hoping to get a bit more color on your fleet. So you mentioned, again, to 1x a hash. 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 your 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 one exahash. 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're willing to operate without. And then we're, We're always looking at our capital markets and our stock and hoping that we'll respond well to this 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're very reluctant to leverage our position much. And then as for your hosting question, we're pursuing a geographically dispersed hosting plan so that our Tad Piper- capex isn't tied up into transformers and land and buildings and things that don't equate to the actual coin mind when it's mine 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're currently mining with and are always asking them for more space, we're 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 for me.

Very good.

That's helpful. Now, in regard to Symbiont, I guess... We'll 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 Symbiot'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're surrounding ourselves with some very, very difficult successful tech savvy people that have their own views on those things. And I think we'd be better to defer to those.

Makes sense. Uh, now in terms of, uh, the regulatory landscape, um, what sort of feedback have you, you received, um, in terms of how, um, um, symbiont assets can complain to the current, uh, current regulatory landscape?

I'm unaware of any regulatory landscape effects on symbionts assets. Could you elaborate on your question?

It's more of just a kind of a general question of that in terms of crypto and blockchain in general, specifically in the U.S. versus, say, Europe's MICA regulatory assets. regime that's being put in place right now. Just at 50,000 square foot level, are you feeling optimistic about the landscape, or do you see things need to change before symbionts tech can really take off?

So we're Bitcoin miners at heart, and the regulatory environment for being a Bitcoin miner kind of keeps getting clearer and clearer. We're a commodity, I guess. We're not going to be treated as security. There's not a lot changing for us. What we're really hoping will change there will be on the accounting side. We need FINRA to come out and allow us to mark this thing to fair market value each quarter rather than to its lowest trading point and keeping it impaired. 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. Our Symbian asset, it was designed as a blockchain for private use among financial institutions, and so it never really had a look towards the tokenization and some of the things that the exchanges have run into with issuing coins and such like that. Now, it's a very robust blockchain that could be turned into a public blockchain, but 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 if that path can present itself to having a licensed security and a registered security, rather, and an exchange to trade it 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 the Expressway Center. Please pose your question. Your line is live.

This is Jack. Can you all hear me? Hello, can you hear me? Okay, great. 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, you know, it includes all service needs, and it's around 80%.

Okay.

But again, that's the charge for the kilowatt, the real estate underneath the rack that the machine sits on, and somebody walking around with a screwdriver and fixing the brakes.

That includes maintenance and real estate, and does that include hard work fixing?

Yeah. We do everything infrastructure-like, so it's kind of an all-in cost.

Okay, so when a machine goes down, you can fix it. Is that correct?

That's how we set up our machines.

That's correct. Okay. Rick, in your presentation, you had mentioned your net number of miners as of a couple of days ago in August. What is that number again?

I believe it's like 5,900 and change. 5,900 and change? Okay. All right. Yeah. And since we have a mixture of XP, that's about 615. Okay.

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

Yes.

Somebody or another. Okay. All right.

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 hash rate of our existing mining machines. 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're extremely pleased with the progress we've 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're thankful for the ongoing support from our shareholders and will continue to provide updates on our progress as new developments emerge. Thank you for joining us today and for your questions. 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.