Business Overview and History

LM Funding America, Inc. (NASDAQ: LMFA) is a diversified fintech company with a unique business model, operating in both the cryptocurrency mining and specialty finance sectors. Incorporated in 2015, the company has evolved from its origins as a provider of funding to nonprofit community associations to become a player in the rapidly-evolving world of digital assets.

LM Funding America, Inc. traces its roots back to January 2008 when it was originally organized as a Florida limited liability company under the name LM Funding, LLC. The company's primary focus at that time was providing funding to nonprofit community associations in Florida by purchasing their rights to collect delinquent assessments from property owners.

A significant milestone in the company's history came in October 2015 when it completed its initial public offering (IPO). Immediately prior to the IPO, the members of LM Funding, LLC contributed all of their membership interests to LM Funding America, Inc., a Delaware corporation incorporated on April 20, 2015, in exchange for shares of the common stock of the newly formed entity.

In the years following its IPO, LM Funding America expanded its operations by organizing several new subsidiaries. In 2020, the company formed LMFA Financing LLC and LMFAO Sponsor LLC. The latter subsidiary went on to form LMF Acquisition Opportunities Inc., which was subsequently merged with Seastar Medical Holding Corporation in 2022.

The company's entry into the cryptocurrency mining business came in 2021 with the formation of its wholly-owned subsidiary, US Digital Mining and Hosting Co., LLC (US Digital). This strategic move marked LM Funding's diversification into the rapidly growing digital asset space and has since become a significant focus of the company's operations.

Throughout its history, LM Funding America has faced various challenges. In 2022, the company experienced financial difficulties related to its hosting vendor Uptime Armory LLC, which filed for bankruptcy. This led to LM Funding America recording impairment charges on its mining machine deposits and prepaid hosting deposits. Additionally, in the same year, the company's core lender, Core Scientific, filed for Chapter 11 bankruptcy, though this did not immediately impact the company's mining operations.

Financials

As of the latest 10-Q filing in 2024, LM Funding reported total revenue of $7.76 million for the six-month period ending June 30, 2024. The company's net loss for the same period was $4.74 million, with a net loss attributable to LM Funding America, Inc. of $4.58 million.

For the most recent fiscal year (2023), LM Funding reported revenue of $6.19 million, a net loss of $15.94 million, operating cash flow of -$3.40 million, and free cash flow of -$5.03 million.

In the most recent quarter (Q2 2024), the company reported revenue of $3.01 million, a net loss of $6.07 million, operating cash flow of -$3.02 million, and free cash flow of -$4.24 million. Revenue decreased by $0.18 million year-over-year, primarily due to a reduction in the number of Bitcoins mined during the quarter due to increased network difficulty, partially offset by higher Bitcoin prices. The net loss increased year-over-year due to a $1.3 million loss in the fair value of Bitcoin and a $1.2 million increase in depreciation and amortization, offset by a $1.6 million decrease in staff costs and payroll.

LM Funding's financial ratios paint a mixed picture. The company's current ratio stands at 0.73, indicating potential liquidity challenges, while its debt-to-equity ratio of 0.05 suggests a relatively low level of leverage. The company's return on assets and return on equity for the six-month period were -0.31 and -0.29, respectively, reflecting the impact of its net losses.

Liquidity

The company's current ratio of 0.73 suggests potential liquidity challenges, as it indicates that LM Funding's current liabilities exceed its current assets. This could potentially impact the company's ability to meet short-term obligations and fund ongoing operations.

As of June 30, 2024, the company had $145,650 in cash and cash equivalents. The company also had access to a $5 million secured loan from Brown Family Enterprises LLC, which pays 10% interest per annum. The quick ratio, which is identical to the current ratio at 0.73, further underscores the company's potential liquidity issues.

Cryptocurrency Mining Operations

LM Funding's cryptocurrency mining business has been a significant focus in recent years. As of June 30, 2024, the company owned approximately 5,900 mining machines, with a total mining capacity of 639 petahash per second. The company has faced challenges, such as the April 2024 Bitcoin halving event, which reduced miners' rewards by 50%.

In the second quarter of 2023, LMFA mined 44.1 Bitcoins, generating $2.9 million in revenue at an average Bitcoin price of $65,600. As of June 30, 2024, LMFA held 160.4 Bitcoins, valued at approximately $10 million. The company's digital mining revenue was relatively flat at $2.9 million in the second quarter of 2024 versus $3 million in Q2 of 2023, due to the effects of the April 2024 Bitcoin halving event and the repositioning of miners during the month of June, offset in part by the increase of Bitcoin prices.

To address these challenges, LM Funding has made strategic moves, including securing hosting agreements with Core Scientific, Giga Energy, and Tech Infrastructure. The company has also announced the acquisition of a mining site in Texas, which is expected to provide a cost-effective location to power its existing machines. This Texas site offers an initial power capacity of 12 megawatts with the potential to expand by an additional 60 megawatts. The site is currently generating 55 petahash of mining capacity using immersion mining techniques, and LMFA's primary goal is to invest capital to mine the full potential 72 megawatts, which is projected to yield about 1,000 Bitcoin annually at current network difficulty rates.

Additionally, the company has partnered with Arthur Mining to establish a new 15-megawatt hosting facility near Oklahoma City, where it has already relocated approximately 3,000 of its Bitmain S19j Pro machines. The companies are considering a new 60-megawatt site adjacent to the existing Oklahoma facility.

To further bolster its mining capabilities, LMFA has secured a $5 million non-convertible loan, the proceeds of which will be dedicated to acquiring additional miners.

Specialty Finance Business

While cryptocurrency mining has become a significant part of LM Funding's business, the company's legacy specialty finance operations continue to play a role. The company provides funding to nonprofit community associations in Florida by purchasing their rights to collect delinquent assessments from property owners.

LM Funding's specialty finance segment generated $205,000 in revenue for the six-month period ending June 30, 2024, a decrease from the $373,000 reported in the same period of the previous year. The company's experience in collecting delinquent condominium owners' accounts may present opportunities to address the fully funded reserve problem faced by Florida condominium associations following legislative changes in the state.

Challenges and Risks

LM Funding faces several risks and challenges in its operations. The volatility surrounding the value of Bitcoin and other cryptocurrencies poses a significant risk to the company's mining business. Additionally, the company's reliance on third-party hosting providers, such as Core Scientific and Giga Energy, exposes it to potential financial problems or operational issues at those companies.

The company's specialty finance business also faces risks, including competition to acquire delinquent consumer receivables, the ability to purchase such receivables at appropriate prices, and the impact of class action suits and other litigation on the company's operations.

Outlook and Conclusion

LM Funding's diversified business model, combining cryptocurrency mining and specialty finance, presents both opportunities and challenges. The company's strategic initiatives, such as the acquisition of the mining site in Texas and the partnership with Arthur Mining, aim to enhance its cryptocurrency mining operations and drive increased shareholder value.

However, the company's financial performance, as evidenced by its net losses and liquidity concerns, highlights the need for continued operational improvements and cost-cutting measures. LMFA reported a net loss attributable to shareholders of approximately $6.1 million in Q2 2024, including a $1.9 million unrealized loss on securities, compared to a $4.5 million net loss in the prior year. While the company achieved positive core EBITDA for the first half of 2024 of $2.2 million, it reported a core EBITDA loss of $2.2 million in Q2 2024, down from $0.1 million in Q2 of 2023.

As LM Funding navigates the complex and rapidly evolving fintech landscape, its ability to effectively manage risks and capitalize on emerging opportunities will be crucial to its long-term success. The company's focus on expanding its mining operations, particularly through the Texas and Oklahoma facilities, along with its efforts to secure additional funding for miners, demonstrates a commitment to growth in the cryptocurrency sector. However, the company will need to carefully balance these investments with its ongoing liquidity challenges and the performance of its specialty finance segment to achieve sustainable profitability.