LM Funding (LMFA) Q3 2024 Earnings Call Transcript

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DATE

Wednesday, November 13, 2024 at 11 a.m. ET

CALL PARTICIPANTS

• President of U.S. Digital Mining — Ryan Duran
• Chief Financial Officer — Richard Russell
• Director of Investor Relations — Ted Ayvas

TAKEAWAYS

• Bitcoin Miners Deployed -- 3,700 active units in operation, with another 2,200 stored and pending redeployment.
• Total Mining Capacity -- Approximately 639 petahash across 5,900 miners, reflecting the current hash rate potential.
• Bitcoin Mined -- 18.5 Bitcoins produced during the quarter, generating about $1.1 million in revenue at an average Bitcoin price of $61,000.
• Total Revenue -- $1.3 million, a decrease of $2.1 million year over year, attributed to the April 2024 Bitcoin halving and miner repositioning.
• Operating Expense -- $5.6 million for the quarter, down from $6.6 million year over year, reflecting a $2 million decline in digital mining costs offset in part by a $0.8 million increase in depreciation and amortization.
• Core EBITDA Loss -- $1.6 million, widening from a $0.6 million loss year over year, while positive $0.6 million core EBITDA was achieved for the first nine months of 2024.
• Bitcoin Holdings -- 142.3 Bitcoins held as of September 30, 2024, valued at approximately $12.4 million as of November 11, 2024, using an $87,000 Bitcoin price.
• Power Rates -- Oklahoma site power cost reported at $0.04 per kilowatt, floating between $0.038 to $0.042 and expected to remain stable.
• Hosting Site Utilization -- 3,300 machines located in Oklahoma, 800 in Kentucky, and 2,200 pending installation in Oklahoma, with 10 megawatts currently in use and total site capacity of 15 megawatts.
• Strategic Pivot -- Management cited a shift post-halving to vertical integration and targeting sustainable low-cost power with expansion options, intentionally timed with contract expirations.
• Capacity Expansion Potential -- Oklahoma site can add up to 60 megawatts with substation buildout, requiring a nine-month lead time for infrastructure expansion.

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RISKS

• Revenue Decline -- Total revenue fell by $2.1 million year over year, with management explicitly attributing the decrease to the Bitcoin halving and miner repositioning.
• EBITDA Loss Increase -- Core EBITDA loss increased to $1.6 million from $0.6 million year over year, indicating greater operational strain.
• Undeployed Mining Assets -- 2,200 miners remain uninstalled, constraining full capacity utilization.
• Condo Funding Business Uncertainty -- CFO Russell said, "requirements are not quite as urgent as they have to be," signaling slower-than-hoped demand development in the Association funding segment.

SUMMARY

LM Funding America (NASDAQ:LMFA) reported 18.5 Bitcoins mined and nearly $1.3 million in quarterly revenue, as the company realigned its operations and infrastructure strategy following the April Bitcoin halving event. Management concentrated on completing the transition to a vertically integrated model, emphasizing low-cost, sustainable power and prioritizing redeployment of existing machines to optimize output and cost efficiency. Decisions regarding a Texas site expansion are pending further power validation, while Oklahoma offers up to 60 megawatts of scalable capacity over a nine-month timeline for required upgrades.

• All 2,200 undeployed miners are targeted for installation in Oklahoma by either year-end or early January, given available site power and capacity.
• Vertical integration efforts emphasize securing new sites with reliable, low-cost energy as a basis for long-term scaling and operational improvement.
• Bitcoin holdings stood at 142.3 coins, and management reaffirmed a strategy of "mining and holding" in anticipation of future price appreciation, stating, "We are thrilled to see Bitcoin recently reach an all-time high above $92,000, a milestone that we believe strongly validates our long-term strategy."
• Opportunities in the Association funding business remain hampered by delayed legislative urgency and special assessment demand, keeping growth expectations muted for this segment.

INDUSTRY GLOSSARY

• Vertical Integration: A strategy involving direct control of multiple stages of business processes, such as owning both mining equipment and power sourcing, to optimize operational efficiency and costs in digital asset mining.
• Bitcoin Halving: A scheduled reduction, by 50%, of Bitcoin mining rewards that occurs roughly every four years, impacting mining profitability and operational strategies.
• Hash Rate: The aggregate computational power used per second by Bitcoin miners when processing transactions and securing the network, commonly measured in petahash.

Full Conference Call Transcript

Ted Ayvas: Good morning, and thanks to everyone for joining LM Funding America's 2024 third quarter financial results and business update conference call. On the call with us today are Ryan Duran, President of U.S. Digital Mining; and Richard Russell, Chief Financial Officer of LM Funding. Bruce Rogers, the company's Chief Executive Officer, will not be able to attend the call this morning due to a family emergency. This morning, the company announced its operating results for the quarter ended September 30, 2024, and its financial condition as of that date. The press release is posted on the company's website, lmfunding.com and is filed as an exhibit to a Form 8-K, which was filed 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 three months and nine months ended September 30, 2024, 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 the 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 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 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 Ryan Duran. Ryan?

Ryan Duran: Thanks, Ted. Good morning, and thanks to everyone who joined us today. We have a lot of positive developments to share with you today as we continue to strengthen our position in the Bitcoin mining landscape. Following the Bitcoin mining halving earlier this year, there has been a strategic shift in our mining approach to more cost-effective operations. The halving event coincided with the expiration of several high-cost hosting contracts, providing us with opportunities to relocate our machines to more cost-effective facilities. We believe these strategic decisions have positioned LM Funding for continued growth and success in our mining operations.

I would now like to turn the call over to our CFO, Rick Russell, for a review of the financial highlights for the third quarter of 2024. Rick?

Richard Russell: Thank you, Ryan. As of September 30, 2024, the company had approximately 3,700 Bitcoin mining machines in operation and engaged in Bitcoin mining at various hosting sites. With an additional 2,200 miners at a third-party warehouse waiting to be redeployed, in total, our 5,900 miners provide the company with approximately 639 petahash of mining capacity. We mined 18.5 Bitcoins in the third quarter of 2024, generating approximately $1.1 million in revenue at an average Bitcoin price at $61,000. As of September 30, 2024, the company held 142.3 Bitcoins, which are valued as of November 11, 2024, at approximately $12.4 million assuming an $87,000 per Bitcoin price.

Total revenue for the third quarter of 2024 was approximately $1.3 million, a decrease of $2.1 million from the same period last year. The decrease in revenues reflects the effects of April 2024 Bitcoin halving event as well as the repositioning of miners during the quarter. Operating expense for the quarter ended September 30, 2024, decreased to $5.6 million from $6.6 million year-over-year due to a $2 million decrease in digital mining costs offset in part by a $0.8 million increase in depreciation and amortization. Moreover, we reported that our core EBITDA loss was $1.6 million in Q3 2024 from $0.6 million in Q3 2023.

However, we achieved positive core EBITDA for the first nine months of 2024 at $0.6 million due to expanded Bitcoin operations. I would now like to turn the call over to Ryan for our strategy overview.

Ryan Duran: Thanks, Rick. I would now like to focus our attention on our overall strategic shift in our mining operations post halving. Following the April halving event, the company strategically pivoted away from the infrastructure light approach that we had employed pre-halving to a strategy of vertical integration. This strategy is centered on securing mining sites with low-cost sustainable power sources and significant expansion potential, positioning the company and enhanced operations efficiency and growth. The timing of this strategic shift was intentional as we had aligned our hosting contract expirations to coincide with the halving event allowing us the flexibility to restructure our operations with minimal disruption.

As we continue to build out our infrastructure, we remain committed to identifying additional cost-effective hosting sites. We believe these investments will drive substantial growth and create long-term value for our shareholders positioning the company as a key player in the digital mining sector. I would now like to turn the call over to Rick Russell for a wrap-up.

Richard Russell: Thanks, Ryan. We remain fully committed to reinvesting our mining revenue into expanding our capacity with additional state-of-the-art miners and further enhancing our operations through the integration of advanced software and technologies boosting the hash rate of our existing machines. Moreover, we are enthusiastic about our recent vertical integration initiatives, which we anticipate will continue to lower our direct mining costs as compared to the prior year. I would now like to open up the call for questions. Operator, can you assist us with that?

Operator: Yes, sir. Thank you. At this time, we'll be conducting our question-and-answer session. [Operator Instructions] Our first question is coming from Kevin Dede with H.C. Wainright. Your line is live.

Kevin Dede: Thanks. Hi, Rick, Ryan. Thanks for having me on the call. Appreciate it. Yes, lots of questions because there weren't many details. Obviously, you are moving miners. Can you give us an indication of what you have mining now, where it is and where you think your hash rate goes by the end of the year?

Richard Russell: Sure. So we have about 3,300 machines located in Oklahoma, our facility that's generating -- that's about $0.04 per kilowatt there. Another 800 over at a core facility in Kentucky. And that's at about $0.07 per kilowatt. We have about 2,200 machines in a warehouse in Oklahoma, and we're working on being able to place those machines at that location in Oklahoma, hopefully by year-end, if not the first of January. So during the quarter, we were probably at 60% capacity, give or take?

Kevin Dede: Okay. Has that changed through the month of October?

Richard Russell: No, it has not changed, I can say. We hope to have entered into some additional contracts to put those remaining machines by year-end, if not by the first of January.

Kevin Dede: What would -- could you please remind me what your available power is in Oklahoma?

Richard Russell: The total site has 15 megawatts, we're only using 10.

Kevin Dede: Okay. And then when you get those 2,200 machines plugged in, then you'll be up to the full 15?

Richard Russell: 15, correct.

Kevin Dede: And they're going into containers, if I remember correctly?

Richard Russell: Correct.

Kevin Dede: Okay. Now there was some talk about a site in Texas. Are there any details you can share about how that might be progressing?

Richard Russell: No, that still had some requirements for power validation before we -- if you remember, that had a 12-megawatt site with 60 expansion. And we -- before we move forward on that, we want 60-megawatt expansion to be solidified and they're still working on that. So it's kind of wait and see on that one.

Kevin Dede: Any insight on timing? Is it a 3-month process, 6-month process?

Richard Russell: I think by year-end, we'll know whether it's go or no-go, how is that?

Kevin Dede: Fair enough. Can you offer any indication on where or how you're thinking about new rig purchases?

Richard Russell: Ryan, do you?

Ryan Duran: Yes. It all comes back to -- obviously, machines are consistently rolling out new models. When it comes time to make that purchase, we basically look at what options are available, what potential deals we could get directly through Bitmain which we normally do, and it comes back to payback period.

Richard Russell: And I know we've looked at the S21 Pros are fairly expensive. Some of the older ones models [indiscernible], right? So once we have the space and we start refreshing our older machine, those will be the main criteria.

Kevin Dede: And Rick, since you're intimately more familiar with the Condo business, can you give us just sort of a view on how you see it, how you see the Florida real estate market and what you think your opportunities are?

Richard Russell: Well, I think there are opportunities there given the new laws, but with the legislation coming in, in the spring, some of those demands upon the condos may lessen a little bit and give them more breathing room. We think regardless, the condos will need help and we're trying to work with them in that manner. I know that's not a lot, but it's kind of -- we're seeing a lot of increase in assessment and later assessment. Is that correct? Ryan?

Ryan Duran: Yes. special assessments are being assessed at a very large rate. And we're looking to solve that problem that's slowly rolling out, as Rick indicated, may be delayed a little bit longer down the road than originally planned, but there's definitely going to be opportunity there as associations continue to special assess and fill their reserve requirements.

Kevin Dede: So the past nine months seem to be fairly consistent for you folks. I'm wondering if there's any indication that you're potentially involved in more deals helping the associations manage these assessments? Has the tenor of business changed, I guess, is sort of the root of the question?

Richard Russell: Not really. Because requirements are not quite as urgent as they have to be, right? And I would like to have it to pick up more, but we're willing to take the opportunity to expand that if it comes about, but we can only push it so far.

Kevin Dede: So would it be fair to assume then, Rick, that the emphasis now is on expanding the vertical integration aspect, your Bitcoin mining, and it's kind of a wait and see really on how legislation changes the profile of the Condo business. Is that fair?

Richard Russell: Yes, that's fair. I mean, we're -- Ryan and his group are searching for additional sites, right, in that $0.04 power. And we've got some good leads on those, in addition to what we have already. And we think we can get funding to help acquire those sites, do loans and then use equity rates to help put machines in there.

Kevin Dede: Last question from me. Have you looked at sort of the M&A side of things with pre-established, privately held mining companies that might be hitting a roadblock given the hash price was so low for so long?

Richard Russell: We've talked to a few firms in those situations. Nothing has come about of it yet. And we do get introduced to other people who know such firms and we're open to discussions, but it depends on their situation and willingness to trade, right?

Kevin Dede: Absolutely. All right. Well thanks for your color, Rick. I appreciate it. Thank you.

Operator: [Operator Instructions] Our next question is coming from Matthew Galinko with Maxim Group. Your line is live.

Matthew Galinko: Hi, thanks for taking my question. I wanted to look back at Oklahoma for a second. What is the power you're currently paying and is it sustainable? I recall it might have been something that you have line of sight through maybe nine months? Or can you just refresh me on what the power rate is and how long you have it locked in for?

Richard Russell: Yes. It's -- we're roughly in the $0.04 range. It floats with cost of power each month, but we have projections and expectations, it's going to be anywhere from 3.8 to 4.2. So that's why we continue to say the $0.04 number sitting in that range. And we do not see that changing for better or for worse, that is our expectation for the foreseeable future.

Matthew Galinko: Got it. And do you have expansion past the -- I think you mentioned 5 megawatts is currently the target in Oklahoma. Could you -- is there capacity on site to add to the site? Or do you have more expansion beyond the five in Oklahoma that has potential?

Richard Russell: Yes. That site can be expanded with some substation expansion.

Matthew Galinko: So it's an additional 60 megawatts, right?

Richard Russell: Yes. It would take nine months once you put the expansion substations up there. And we're looking heavily at that since the price of electricity is reasonable for us.

Matthew Galinko: Got you. So I mean, I guess, last question from me in terms of decisioning. I think you mentioned earlier in the call that you might know by the end of the year whether you can get the expansion in Texas or not. So if the Texas expansion doesn't come your way, would expanding Oklahoma be your primary direction for the non-deployed machines currently or...

Richard Russell: Yes, we would look at primarily in Oklahoma and also we are looking at a few other sites out there to take advantage of.

Matthew Galinko: Okay. So sorry, just to put a finer point on that, if you have about a 9-month lead time to get infrastructure in place to expand Oklahoma beyond the $15 million, do you think you'd move more quickly on another site than sort of waiting for nine months for expansion? Or just how do you think about timing?

Richard Russell: Yes. We would do dual prong that we would definitely look hard at ready-to-go sites right now or something that could pop up in three months call it that while also exploring the 60-megawatt expansion also.

Matthew Galinko: Got it. Thank you.

Operator: Thank you. As we have no further questions on the line at this time, I'd like to turn it back over to management for any closing remarks.

Richard Russell: Thank you. We are thrilled to see Bitcoin recently reach an all-time high above $92,000, a milestone that we believe strongly validates our long-term strategy of mining and holding Bitcoin. This recent surge reinforces our confidence in Bitcoin's upward trajectory as we anticipate the price moving toward our projected target of over $100,000 in 2025. With the current initiatives providing cost-effective locations to power existing machines, we are extremely excited about what the future holds for LM Funding and its shareholders. We are grateful for the ongoing support from our shareholders and look forward to updating you on our future progress. Thank you.

Operator: Thank you, ladies and gentlemen. 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.

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