($FRMO) FRMO Corp: A uniquely managed OTC jockey-stock hedged for inflation and with incoming catalysts

A overview of the origins, mgmt incentives, assets, and upcoming catalysts for this interesting underfollowed basket of call options and contrarian plays

Nov 19, 2021

********** UPDATE 20240210:

Here is a screenshot of my spreadsheet that makes some adjustments to certain holdings of FRMO. It's a little old, so some things are slightly out of date, but I tried to clean it up a bit just now with updated values from the more recent FRMO, WELX, and CMSC reports.

The HK Revenue Stream value is based on the most recent annual Fee Income that FRMO get (I'm pretty sure) exclusively from the HK Stream multiplied by a median of 22x and 7x. The 22x is based on average EV/EBITDA multiples of streaming cos. like FNV, WPM, TPL, BSM (which is not unreasonable, IMO, given the kinds of things HK investments focus on). The 7x is based on the implied multiple from backing out of a (IMO, very) conservative and simple DCF on the Fee Income.

Taking 2023 Fee Income and projecting forward for 20yrs at no- and negative-growth gives a DCF value of ~$18.9MM ==> a rough multiple to 2023 fee income of 18.9/2.673=7x.

The HK LLC Equity value is based on FRMO’s 4.95% ownership of HK LLC and the median total company value as projected in the recent $SLGD reverse merger news (see the very bottom of this: https://www.sec.gov/Archives/edgar/data/88000/000095017023072802/slgd-ex2_1.htm). I might be doing this part wrong; need to look into this more.

The MIH/MIAX stuff is just based on FRMO’s own accounting of MIH's per share value which is just valued on a Precedent Transaction basis (can't remember where this is mentioned), so it's likely undervaluing the shares (MIH is supposed to IPO at some point, but not sure when). I had some old scratch work that tried to value the biz based on volumes that they report (https://www.miaxglobal.com/) + the fact that FRMO owns 1% of the equity (I think), but it's kinda old so I don't really trust it at this point.

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********** UPDATE 20230815: It’s been a while since I initially wrote this post and I’ve realized that I don’t do a great job of distinguishing between calendar and fiscal years when referencing FRMO’s financial statements, which is an important distinction to make since FRMO’s fiscal year does not match the calendar year. You can read a bit about the why here (https://www.frmocorp.com/_content/letters/2012_int.pdf), but I’m not totally sure of the reason myself. In any case, I’ll just note that FRMO’s fiscal year ends on May 31 (or starts on June 1) and goes like this:

June = Q1, September = Q2, December = Q3, March = Q4

**********

FRMO management investing in Bitcoin in 2015 and commodities in 2020

Quick Pitch

"One reason some people no longer resist the idea of inflation is because they’re hearing about it in the news. Others have begun to notice it in their daily lives. You, this audience, are well aware that we’ve been writing for some years about observable conditions that were creating serious inflation risk. The most recent extended discussions were in the March 2020 and June 2020 Quarterly Reviews. But the media made no such mention of inflation at the time; in fact, their concern was deflation." —- https://horizonkinetics.com/app/uploads/Q3-CVALUE-Review_FINAL-1.pdf

FRMO Corp is an underfollowed investment holding company, with no debt, owned and operated by two very smart value investors (Horizon Kinetics (HK) founders —you may know it from TPL fame— Murray Stahl (CEO) and Steve Bregman (president) (S&B))1 whose ownership structure and stake (owning ~40% of shares) in the company aligns them well with shareholders. They were one of the early “institutional” adopters of bitcoin (back in 2015) and have been warning about —and positioning for —(energy) inflation since before it was cool. You can look at the active share of any of their managed mutual funds2 to see that they are certainly not following the crowd. They recently expanded their BoD with new non-independent members and have announced the intent to spin off their crypto mining operations (whose true value is currently obscured by the at-cost accounting of those assets on the balance sheet); there also exists the potential of (an eventual) up-listing to a major exchange.

Overall, while fairly valued relative to historical P/TBV (noting that much of their assets are not marked-to-market), if you are going to bet on inflation remaining more than transitory and for crypto to continue it's extreme —and often conviction-testing— long-term rise, fairly-valued may end up being an acceptable entry price for having that allocation stewarded by these managers in this unique, shareholder-aligned, jockey stock.

FRMO's returns compared to some other holding companies and the S&P 500:

5yr CAGR

FRMO (Stahl / Bregman): 20%
IEP (Ichan): -1.6%
TPOU.L (Loeb): 16.2%
GLRE (Einhorn): -20.3%
PSH.L (Ackman): 16.8%
BRK.A (Buffett / Munger): 12.6%
SPY (Reddit, grandma, The Fed, and me): 16.2%

10yr CAGR

FRMO: 17%
IEP: 4.3%
TPOU.L: 11.5%
GLRE: 10.4%
PSH.L: 2.9% (7yr CAGR)
BRK.A: 14.4%
SPY: 15%

17yr CAGR

FRMO: 11.2%
IEP: 4.4%
TPOU.L: 8.3% (14yr CAGR)
GLRE: -7.8% (14yr CAGR)
NA
BRK.A: 9.9%
SPY: 8.5%

********** UPDATE 20221117: We can also use HK’s headline mutual fund, the Paradigm Fund, as another proxy for Stahl’s investing outperformance vs the stock market over the longrun:

Though, unlike the fund’s 1.6% expense ratio, with FRMO we get the same management’s ideas for free + some of their private equity bets. https://kineticsfunds.com/funds/paradigm-fund/

**********

Note that FRMO trades on OTC Markets, but is Pink Current and so is not affected by SEC Rule 15c2-11 and the subsequent changes many brokers are currently making around clients' ability to trade OTC stocks.

Also note that — as a lower-liquidity, OTC stock — FRMO's market pricing is more volatile than the other holding companies mentioned here, so buying only when cheap (eg. low price to TBV) or dollar cost averaging into the position may be important here.

Ready for what the indexes aren’t

Here are the past 5 and 10 year 12-month rolling correlations between some of the major category ETFs vs the S&P 500 vs a Horizon Kinetics mutual fund KMKNX (the one which I believe is most like the Polestar and Multi-Strategy LPs that make up ~50% of FRMO’s TBV — based on past comments by Stahl — as well as having a more similar makeup to FRMO itself when considering their ownership of TPL via Horizon Kinetics Hard Assets (FRMO’s OTC price was not available in the data on this site)):

Notice that all of the major category ETFs (ex. EEM) are nearly 90-100% correlated to the index (including both value and growth ETFs, interestingly), while the HK fund was about as correlated as the emerging markets fund though at a far greater return — matching or beating the S&P. So we see FRMO management providing the most non-correlated performance that can match or beat the market (and unlike the Kinetics fund unitholders here, FRMO shareholders get this management without any management expense fees).

Furthermore, FRMO is positioned for the segments of the economic quads that the broad market and — by extension, as we’ve just seen — all of the other category indexes (which are invested mostly in the deflation+growth paradigm) are not ready for.

Management

Origins of FRMO

FRMO was re-founded by Murray Stahl and Steve Bregman from the shell of FRM Nexus after it spun off substantially all of its asset into subsidiary MFC Development Corp. in November 2001; FRM was recapitalized privately by Stahl and Bregman and transformed into the public FRMO Corp (which stands for “Financial Risk Management Organization”… Corp)3. FRMO was created in order to hold certain assets that did not make sense to or could not properly be held in HK Asset Management LLC (HKAM). Also, having a publicly tradable capital vehicle allowed it to be used in ways HK or HKAM could not be (eg. making charitable donations).

********** UPDATE 20240617: Based on commentary in the FY2024Q3 conference call (https://www.frmocorp.com/_content/letters/2024_Q3_FRMO_Transcript.pdf; see “Questioner 3”), here is a brief history on the organizational structure of FRMO in relation to it’s sister companies within the Horizon Kinetics (HK) complex: When Stahl et al founded HK, it was originally two companies; Horizon Asset Mgmt (focused on securities research and private individual accounts) and Kinetics Asset Mgmt (which hosted the mutual funds). These companies were largely made up of “transitory” capital that was characterized by in/out flows at the “worst times” (ie. clients pulled money out in down markets, when assets were cheapest, and poured money in during rising markets). Thus FRMO was formed around early 2000 in order to be a home for “permanent capital.” HAM and KAM were merged in 2011 to become the asset management company HK LLC and a separate chunk of capital that became Horizon Common which Stahl et al invested for themselves. **********

Here, Stahl goes into FRMO's origins and why it was created (see QUESTIONER 3 and QUESTIONER 4): https://www.frmocorp.com/_content/letters/2012_FRMO_Transcript.pdf

The transcripts also have some interesting commentary on how the 2008 GFC — the FRMO site has no other shareholder meeting transcripts before 2012 — affected S&B and their investing POVs (eg. the dangers of indexation etc) as well as how they think about certain investments (near the end of the Q&A) that you can read if you’d like. FWIW note that — just by looking at the stock price history — Stahl does not appear to have been among the likes of Bill Ackman and Michael Burry who saw the GFC coming (IDK for sure b/c there are no letters etc around this time pre-GFC).

MURRAY STAHL: First, thank you for attending. Since the last shareholder meeting, we seem to have attracted more interest, so I’m gratified about that. During the brief period before the meeting began, I had a chance to talk to some of the attendees. It seemed to me that not everyone was acquainted with what FRMO does, which is, I think, rather unusual for a shareholder meeting. I will spend a couple of minutes discussing the history of the company, why we formed it, what we’re in business to do, what our goals and aspirations are, and how we propose to accomplish them.
If you were to see our first balance sheet, we had virtually no capital. We were founded as what we called at the time an “intellectual capital company.” The idea was that, given our positions in then-Horizon Asset Management, we would occasionally find an interesting investment idea that was at its inception stage and had virtually no revenue. Horizon would sell FRMO Corporation a revenue interest in that product and, if it was successful, the corporation would collect a certain amount of revenue from it with very little associated expenses. If it was not successful, there was very little capital placed at risk.

Basically, (if I'm understanding this right) FRMO would add a track record to Horizon LLC and Kinetics LLC investment products (when had not yet been merged to become HK LLC) when they came up with new ideas or seeding capital for new products to work with in exchange for piecemeal revenue interests. This later became an interest in the single HK entity when they two combined:

As the capital began to grow, because we did, in point of fact, have some successful investment products, we would invest that capital. This practice proceeded in a very intriguing way until 2008. No need to go into what happened in that year; we all know what happened. All investors—including us—were bedeviled by the events in 2008. I’ll come back to that momentarily. Right now, I’m just going over the history. I’ll give you more detail in just a minute.
Despite the fact that the investment business, especially the active equity business, which is the business we’re de facto in, was not doing very well, the balance sheet actually prospered. I think that the current shareholders’ equity is the highest we’ve ever had in the company. In terms of balance sheet structure, we’re in as good a condition as we’ve ever been which, in itself, is very unusual for a company involved in a business that has not prospered in the way we would have liked.
I mentioned the investment products in which we buy revenue interests. Those investment products came from Horizon Asset Management. At the time of our inception, Horizon Asset Management had a sister company called Kinetics Asset Management. Horizon Asset Management was organized around two activities: one is investment research, which we would sell to other investment advisors; and the other is money management, primarily, but not exclusively, for wealthy individuals. Kinetics was organized to manage money for various mutual funds and for a variety of institutions.
In May of 2011, Horizon and Kinetics merged to form Horizon Kinetics LLC, of which we, FRMO, own a little bit less than one half of one percent (0.47%). We recently sold our smallest revenue interest to Horizon Kinetics in exchange for more Horizon Kinetics stock. I don’t remember the share count; it’s not going to move anything very much. We’re shifting our strategy a little bit, in that now we’d much prefer to have an actual equity interest in Horizon Kinetics itself.

FRMO's HK participation later changed between 2012 and 2013 from a piece-wise participation in individual HK products to a single gross 4.2% revenue stream from HK. From the 2020 annual report: https://www.frmocorp.com/_content/10k/FRMO_Annual_Report_2020.pdf

The Company [FRMO Corp] holds a 4.95% interest in Horizon Kinetics LLC and earns substantially all of its advisory fees from Horizon. As of May 31, 2020 and 2019, the Company held a 19.23% and 15.49% equity interest in Horizon Kinetics Hard Assets LLC (“HKHA”), a company formed by Horizon and certain officers, principal stockholders and directors of the Company. Due to the common control and ownership between HKHA and the Company’s principal stockholders and directors, HKHA has been consolidated within the Company’s financial statements. [...] [And] In 2013, the Company amended the terms of its product-specific revenue interests in the following products managed by Horizon Kinetics and its subsidiaries: (i) a mutual fund, (II) two private investment funds, (III) a consultative relationship with an institutional investor and, (iv) an institutional separate account. Since then, FRMO now receives a single revenue interest (the "Revenue Interest") equal to 4.199% of the gross revenues of Horizon Kinetics.

Aligned Incentives

Frankly, I don’t know of another company in my portfolio of investments, nor have I ever come across a company, that had two fellows like these who work for nothing, in FRMO at least. Although, I can’t really say exactly nothing, because they’re the two largest shareholders in the company, so they’re working for their investment. But they’re not working for their current compensation. And I think the price-to-gray matter ratio is very low. So, I’m just mentioning that as something you might consider. I can’t think of another company to which I would apply a price-to-gray matter ratio into the calculation of what it’s worth. —- Questioner 7, FRMO shareholder meeting 2018 https://www.frmocorp.com/_content/letters/2018_FRMO_Transcript.pdf

An interesting thing to note is that S&B take no salary for running FRMO and are only compensated by the gains in FRMO as shareholders.

The FRMO website (FRMO Corp.) does not really have any proxy statements where we could see executives' compensation breakdowns that would definitively show this nor does the company file such a thing w/ in OTC Markets disclosures (https://www.otcmarkets.com/stock/FRMO/disclosure), so where can we actually see this?

From the 2014 annual letter regarding some drama between a proxy advisory firm and S&B's compensation at FRMO: https://www.frmocorp.com/_content/letters/2014.pdf

As we prepared to write the fiscal 2014 shareholder letter, we were confronted by a most interesting occurrence that properly may be utilized as an introduction to a shareholder letter. It seems that Institutional Shareholder Services (ISS), a well-known proxy advisory firm, recommended that an affirmative vote for current management of FRMO be withheld at this year’s election of directors.
Some of the reasons for withholding an affirmative vote are, on their face, actually rather sound and convincing: FRMO has no compensation committee at the board of directors level, so that the management decides upon its own compensation; furthermore, the board does not contain genuinely independent directors who could serve on a compensation committee and amend this practice; in addition, there is no board nominating committee to select independent directors who might, theoretically, alter this situation.

Apparently, ISS was contracted by HK to facilitate proxy voting for shareholders (https://www.privatebank.citibank.com/pdf/adv/Horizon_ADV.pdf, Appendix G) and recommended shareholders vote not to continue with current management for the fact that there is no independent compensation committee oversight (I can't find this proxy vote form, so IDK exactly what they were saying to withhold the affirmative vote for, but I assume it was something like that). S&B had this to say:

Indeed, we agree that management compensation should be subject to independent director oversight. There really is no excuse for our conduct. We might only say in our own defense that we did not subject our compensation to independent director oversight, because we actually receive no compensation.
The facts are as follows. Technically, we do receive compensation of some $12,000 per year each. The amount was chosen to be roughly equivalent to the minimum wage rate. However, we do not actually take the money. The salaries are contributed back to the corporation. Although the reader may find this procedure to be somewhat bizarre, many years ago it was found by our auditors to be necessary in an accounting sense as well as a tax sense because our labor, inadequate as it may be, still has some value that must be recorded as an expense. Once the sum in question is expensed, it becomes momentarily our property, at which point we are at liberty to, essentially, decline to cash the check.
[...]
In its current incarnation, the form versus substance issue arises again. We have publicly undertaken not to pay ourselves anything apart from what we might earn as shareholders from our stock holdings. We have also disaggregated a revenue share from our investment in Horizon Kinetics that is paid directly to FRMO [referring to the 4.2% revenue stream that FRMO receives straight from the top-line at HK], essentially creating a type of special earnings that cannot be used to compensate management [being S&B among others at HK]. Consequently, it is for these reasons that we have not undertaken to engage paid independent directors to make certain that we are not paid.

I didn't 100% understand that last part about how the HK revenue stream claim can't be used to compensate FRMO's mgmt and I would still like to see independent directors confirming that S&B are indeed not getting paid (just for the sake of solidifying the shareholder alignment narrative); I don't understand how that last paragraph is an argument against having that. I'll say this though: S&B have a combined ~32% stake in the company, a big part of the the investment appeal of the company is the shareholder alignment, if it ever came out that they were lying and taking a significant compensation that would be a big trust issue w/ existing investors so it just doesn't seem like something worth lying about in the first place.

More on this from the 2014 shareholder meeting: https://www.frmocorp.com/_content/letters/2014_FRMO_Transcript.pdf

Murray Stahl:Thank you, Therese, and thanks, everybody, for coming today.
I was very fortunate when beginning to write the annual Letter to Shareholders to be apprised of an event that you may have read about in that letter. The idea was that we as a corporation were lacking in certain corporate governance formalities and requirements, one of which happened to be the lack of a compensation committee, and I took the occasion to comment on that. I hope you’ll understanding that I did it tongue in cheek. Corporate governance is a very serious matter, but in our case the recommendation of a certain proxy firm was to withhold the vote from us for, among other reasons, the lack of corporate governance relating to management compensation.
Now, there’s no excuse in a normal corporation for not having proper oversight of management. The only excuse we can offer on our own behalf is that we don't actually receive compensation and, therefore, we didn’t think it was necessary to appoint a board, independent as they might be, and properly compensate them and incentivize them to rule on whether or not we’re actually going to be compensated.
Interestingly enough, you might observe that since we control the company we could dismiss the board anytime we wanted to. So we’d be supervised by people who effectively serve at our pleasure. I didn’t put this next point in the annual letter, but I might have. In terms of motivating us, our compensation is designed to come from our return as shareholders, and we don't wish to get any other compensation. Of course, a compensation committee could theoretically overrule us and force us to take compensation. They might be within their rights and might arguably do that with the idea that if we don't get compensation, how can they possibly motivate us to work harder, since only the threat of removing the compensation that we get would impel us to make the effort that's really required. To put themselves in that position, they would have to first give us compensation and, as big shareholders, the compensation would actually come from us. We would be compensating ourselves.

I get the logic of the last paragraph and I don't really think anything untoward is happening (but, again, they don't have an independent compensation committee or file proxy statements so who really knows and having some kind of independent committee to confirm this would add a bit more comfort). Anyway, finishing out the Q&A transcript...

Steven Bregman: Then if they did that we would have to fire them.
Murray Stahl: Yes. Of course, I respect the corporate governance process, and I trust we have been faithful to it because we are the fiduciaries, we are the custodians, effectively, of the shareholder trust among other things. We take that responsibly very seriously. But the question is larger. The question is about form versus substance. Is one a proper corporate steward because of the presence of certain formalities, or is one a proper corporate steward by taking that responsibly very seriously?

To that I say it’s not a ‘form v substance’ issue, it’s about the reduction of doubt or any appearance of corruption. Of course this all could have changed since this was written and maybe they do take a salary. I assume not, but again they don't file w/ the SEC and so have no consistent Proxy Statements to confirm/disprove4 — you can however use the google search query “site:frmocorp.com + compensation | proxy statement” to find bits of info. Though if this really did change, I suppose this would be visible by some big change in the FRMO compensation expenses which has not happened. In any case, I ultimately trust FRMO management on this.

********** UPDATE 20221202: Note that FRMO does presently have two paid employees: in-house counsel, Jay Kesslen and corporate secretary Therese Byars. (This I learned in the Q3FY2022 earning call — where I accidentally confused a past statement re. HK employees w/ FRMO and management graciously assumed that the mistake must have been a past miscommunication on their part, I was “Questioner 1”). **********

S&B's Stake In FRMO

From my reading, Stahl has about 20% of his net worth in FRMO, and both S&B own 16% stakes in FRMO (32% combined):

Basically, we're on the beach about 16.6%, that's not the exact number, it may be off by a few basis points, but my personal holding it was something like 16.6%, something like that. And that's the [weighting] it is right now, (Bregman) https://seekingalpha.com/article/4420765-frmo-corporation-frmo-ceo-murray-stahl-on-q3-2021-results-earnings-call-transcript

FRMO insider ownership — https://whalewisdom.com/stock/frmo

(Bloomberg has FRMO shares outstanding at ~43M. 7/43 ~= 16%, so their statements do jive with the data available).

We can get a better sense of how Stahl views his stake in FRMO from some of the older FRMO investor meeting transcripts...

https://www.frmocorp.com/_content/letters/2012_FRMO_Transcript.pdf

QUESTIONER 3: How important is FRMO to you, relative to Horizon Kinetics?
MURRAY STAHL: Well, let me give you a little history to answer that question, so you can get an idea of who we are as people. When we founded Horizon Asset Management in 1994 and then Kinetics in 1996, the precursors of Horizon Kinetics, we weren’t thinking about FRMO. We weren’t involved in FRMO until 2001. In 1994, we had just left a large financial institution. All we wanted to do at the time was to make a reasonable living, manage a little money, have a few clients, and have a nice life. That’s all we wanted to do. We had no other objective than that.
Now, my partner, to my right [Steven Bregman], tells the story slightly differently and more colorfully. You see, we didn’t like the institutional framework of investing, so we were really running away from that. The way he describes it, if you ever saw the movie Raiders of the Lost Ark, you know the scene where Harrison Ford is running through the cave with the big rock rolling after him? He says that was us. [LAUGHTER]
In any event, we founded Horizon Asset Management. Then, roughly two years after, we founded Kinetics, which was for mutual funds. And we had success financially that, frankly, we never thought we would ever have. So, we became wealthy to the degree that we really didn’t have to work anymore. We didn’t have to. We could have gotten rid of every client, and stopped doing it.
I view the thrust of your question as to get an appreciation for what sort of person I am. Don’t forget, I write research almost every week. No doubt you see it. It’s usually 15 or 20 pages long. Imagine if your job was writing a term paper every week for the rest of your life. You have to like it to do it. If you don’t like it, you can’t do it. Now, it’s for you to judge, by reading it, whether I execute that task well or poorly. But, to merely do it at all, you have to like it.
For me, the ultimate destiny of FRMO is that I don’t intend to sell my stock. I intend to build up the market value and place either all my shares or—close to my demise; [...] — I want to set up a family foundation, and I want my kids to basically run the family foundation and give money to charity, because I want them to think that their home and their world is not a place that you just eat and sleep in, that you do things with it.
[...] Now, for tax purposes, Horizon Kinetics is a Subchapter S corporation. If you’re a Subchapter S corporation based in the city of New York, they hit you with every tax you can possibly imagine.
If you’re a C Corp, you’re advantaged in taxes, at least from that point of view. And you can judge the rest of it. It’s better to have more of your cash flow in a C Corp [FRMO] than it is an S Corp [Horizon Kinetics (Horizon Common LLC)], if you want to maximize your wealth for the charitable purpose that I enumerated.

So Stahl ostensibly does not plan to sell and rather is intending to build FRMO for the long term as an inheritance for his own children. That kind of personal investment make FRMO seem like a good vehicle to ride S&B's investing coat-tails on into the long run, IMO (assuming you believe they are truthful about their intentions — which I'm inclined to — and that you approve of their investing style/philosophy, which I do). This was in 2012 and I've seen no indication that Stahl (or Bregman) has sold any of their stock since then.

Asset Breakdown

The company takes a diversified approach, balancing exposure to traditional assets and emerging opportunities like cryptocurrencies. The inclusion of various small private equity and micro/smallcap investments shows Stahl’s philosophy of exploring potentially high-reward longterm investments while keeping risk de minimis.

I won' try to go too much into the individual investment thesis for each of these holdings (unless they aren't marked-to-market or don't have a market value), but I will try to untangle certain confusing things withe how FRMO records their assets and highlight the basics as I see them and ID some main things to monitor for some.

The corporate structure and holdings of FRMO relative to HK is a bit confusing, but below is my understanding of the ownership structure (w/ rounded asset weights based on the Q1FY2022 earnings report relative to TBV5 (currently $179M)).

“I thought I’d commence today by reviewing the income statement and balance sheet, showing you how to read them, because there are some new accounting guidelines. If you don’t know how to read them, I imagine it would look fairly bizarre.“, https://www.frmocorp.com/_content/letters/2019_Q1_FRMO_Transcript.pdf

The way that FRMO’s holdings are recorded in their filings is also a bit confusing, so in order of concentration to FRMO's attributable TBV the holdings are...

Horizon Kinetics LPs (50%) + HKHA which together encompasses most of FRMO’s holdings of…
1. Texas Pacific Land Trust (TPL) (44%) and…
2. Grayscale Bitcoin Trust (GBTC) (15%)
  1. (The sub-bulleted numbers here don’t exactly add up because FRMO owns most of it’s TPL and GBTC indirectly through HKHA and the LPs it also holds have some GBTC and TPL directly)
    https://www.frmocorp.com/_content/10q/FRMO_Corp_Q1_2022.pdf
Cash and equivalents (20%)
Reciprocal ownership stake in Horizon Kinetics as well as an HK royalty interest (14%)
********** UPDATE 20230502: Securities exchanges (3%, book value accounting based on prior transaction costs of shares) **********
Everything else (other equity securities, crypto mining assets)

https://www.frmocorp.com/_content/10q/FRMO_Corp_Q1_2022.pdf

Keeping things simple, I look at it like this: As long as 1 and 3 (the most concentrated individual investments held by FRMO) are OK, then 4-5 will be fine as well because of the thematic similarity between all of these particular investments.

Like many other holding companies that are mostly just collections of other businesses that are already actively valued by the market, FRMO generally trades in correlation to it's TBV which is why most of my focus is on the balance sheet.

Note that I only use data starting from 2011 here, b/c FRMO was dark until around that time; I assume that TIKR is pulling it's data from the quarterly releases from OTC Markets.

However, we can look at FRMO’s non-GAAP self-reported TBV from their 2011 annual letter for the missing period from 2001 to 2011 — particularly what the deal is with the massive rise and fall in share price leading up to the 2008 GFC6:

Using that table, we can see the P/TBV for that period:

Notice 1) the strong TBV growth even through the 2008 finacial crisis and 2) the wild P/TBV valuations that FRMO was trading at from 2006 to 2008. I currently have no explanation for the valuation during this period and I could not find any resources of S&B looking back and reflecting much on this period or much mention of this in their earlier annual letters post-2011 (in contrast to the transparency and candor of their shareholder letters and meeting today)7.

Also, just an FYI, the shareholders equity in the FRMO statements differs from what is shows as Net Assets on OTC Markets. This is because that Net Assets also deducts the (80%) Noncontrolling Interest of HKHA that is consolidated in FRMO's financials, because of the common control by S&B of both HKHA and FRMO as described in their annual reports, but can be confusing at first glance (ie. you need to look at the "Stockholders' Equity Attributable to the Company" breakout to see the real TBV or NAV)). 8

“The accounting practice is as follows: You take all of the assets, whatever they are—and many are equity securities—and you put them in the equity securities category on the balance sheet. Then, on the liabilities side, you back out non-controlling interests. You’ll see, all the way down, right above shareholders’ equity, the non-controlling interests. If someone doesn’t pay attention to that, it would be very easy to get the idea that we really are sitting here with $52.6 million in equity securities, but we are not; the actual value is a lower number. Why do we even consolidate this? Why not just be a limited partner, as we’re a partner in the other funds? Because this is an entity that FRMO [management] is actually running, so that is the appropriate accounting treatment.” —- https://www.frmocorp.com/_content/letters/2019_Q1_FRMO_Transcript.pdf

HK LP Investments

********** UPDATE 20221030: Stahl and Bregman have explicitly clarified the actual strategies of the various LPs in the 2022 annual shareholders meeting, see (Questioner 10). I will include a few snippet from that discussion here, below, in place of what I initially wrote. https://www.frmocorp.com/_content/letters/2022_FRMO_Transcript.pdf

“What you discover about life's shell game is that it's hardest to follow the pea when you're the pea.” —- Robert Breault

https://www.frmocorp.com/_content/10q/FRMO_Corp_Q1_2022.pdf

South LaSalle Partners holds shares of MIAX, that's the Miami International Holdings, otherwise known as MIAX, and it's a private company. It's a one-stock private company, and presumably it's going to come public, and we'll see how well we do.

(I will go over MIAX a bit more in a later part of this post)

The Multi-Strategy Fund has become quite concentrated, and not because we ever took the position of saying, let's make a very large position in something. It’s not that we wagered that we know enough to take that much capital risk in two positions, but this has come about through the combination of appreciation over a fairly extended holding period, and periodic withdrawals from the Fund. Actually, in the last year or two, there were few withdrawals, almost none, so I guess whoever's in there now either likes what they've got or is resigned to what they've got. In any case, there are two familiar investments, which comprise a great portion of the assets now: Texas Pacific Land Corp., which is probably just about two thirds of the market value, and bitcoin, through a couple of different kinds of fund instruments. It accounts for another 15% or so, so I'd say 80%-plus of the fund is in those two securities. FRMO Corp. probably owns close to a third of the Fund, so somewhere north of 25% and a bit less than a third is probably FRMO's capital. We're eating the same cooking, and I thought it might be interesting to look at how much we put at risk. It's difficult to know because, again, there have been withdrawals over time, but if we look at the tax cost, the actual cost of these holdings, TPL on a cost basis is probably 6% of market value of the fund, and the bitcoin position is probably, in terms of cost basis, about 2½ % or so.

CDK Partners was started to do two things. It was started to invest in exchanges. South LaSalle was started to invest in exchanges as well, and now it owns one exchange. CDK Partners was investing in a variety of exchanges, and it still does that, but it also had some cash, and we bought some shares of TPL, and we put some crypto in there. Why did we do that? Because we're the only partners, we don’t have any shareholders, so it's our money and we thought it was a good idea, and we did it. So, you could say it has three things in it. We also sold short some path-dependent ETFs.

(IDK if I’m going to get around to describing S&B’s POV on “path dependent ETF” in much detail anywhere else on this post, so I’ll just say that they are essentially shorting ETF that are structured using futures contracts and that have a predictably negative roll yield (eg. long-volatility ETFs) —IDK exactly who their counter parties are in this trade).

The Polestar Fund basically also has a holding in TPL, and the three companies that I mentioned that are in HK Hard Assets II, they're being bought every single day in the Polestar Fund, so little by little it's growing. And there's one other security that has nothing to do with Hard Assets. It's just a very undervalued security that you could call a special situation that we're also buying there. And in the Polestar Fund, we do short pathdependent ETFs, and we short some of the path-dependent gold-related ETFs as well.

(I don’t think he names the HKHA II holdings in the transcript, but I think he has mentioned some names in recent past before this meeting that include Mesabi Trust and PrairieSky Royalty. Not sure what the 3rd investment would be.)

The Multi-Disciplinary Fund was started to do two things. The approach was to buy bonds and generate supplemental income by writing options. And we came to two conclusions. Number one, interest rates eventually got so low, it didn't make any sense to do a lot of work with bonds, so we got rid of most of the bonds. I think there's one bond that's left in there, and it's probably going to be shorted in a week or two. So, the Multi-Disciplinary Fund, since it's mostly our money anyway, sort of looks a lot like Polestar.

(As I’m doing this update in Q2 2023 where FFR rates have drastically risen to near pre-GFC levels, I wonder if S&B will re-implement this fund’s original bond put-writing income strategy).

Kinetics Institutional Partners, it does have outside money in it. It has not purchased those commodity royalties that are in the Hard Assets II portfolio. However, it's much more aggressive, as far as that goes, with special situations. And then there's Shepherd. Shepherd is similar to Kinetics Institutional Partners. It just has a much bigger exposure to cryptocurrency than Kinetics Institutional Partners.

(Not really sure what to make of these last two, but the stake is so tiny that I’ve basically just been glossing over it in my mind).

**********

~~So initially, I could not find of whole lot of public information on these various LPs, but was able to see some commentary by Stahl here (see “QUESTIONNER 1”):~~ ~~https://www.frmocorp.com/_content/letters/2013_FRMO_Transcript.pdf~~

"The Multi-Strategy Fund is a classical hedge fund that was formed in 2007 in partnership with Credit Suisse. Its strategy goes across the asset classes. [...] The Polestar Fund is not radically different from the Horizon Multi-Strategy Fund, with one salient difference. The Polestar Fund created a subclass called Class S, which is designed to give clients of the Polestar Fund direct exposure to some of the index arbitrages that we would engage in on our own balance sheet. [...] The Multi-Disciplinary Fund was designed to do the same sorts of things, but in the form of options. Specifically, we believe there are certain inefficiencies—they’re not huge inefficiencies, but certain inefficiencies—in the business of writing puts versus engaging in buy-writes. [...] There’s also a mutual fund that’s not listed among the various funds detailed in the Annual Report. It’s called The Kinetics Multi-Disciplinary Fund (~~KMDNX), and it’s a conventional mutual fund. The reason for having two funds is that this fund is not leveraged"~~

~~While this would~~ ~~seem~~ to imply that the Multi-Strat. fund is similar to the Polestar fund which is similar to the Multi-Disciplinary fund (whose main difference from the MS and Polestar funds are that it uses put writing strategy rather than a buy-write strategy) which is similar to the fixed-income focused ~~HK Multi-Disciplinary mutual fund~~ ~~(sans leverage), looking in~~ ~~more recent documents this appears to no longer be — or never has been — the case~~.

“Regarding the partnerships, using the Polestar Fund as an example—I may be slightly off, but I think it’s 39.4% TPL, and the Horizon Multi-Strategy is roughly 43% TPL. So, when you see these movements up or down, ~~they’re largely—not entirely—but largely either TPL or bitcoin.~~“, ~~https://www.frmocorp.com/_content/letters/2020_Q3_FRMO_Transcript.pdf~~

~~In looking trying to resolve this confusion a bit more, it was cathartic to see it addressed in a way during the shareholder meeting as well (and it appears they plan to do something about it):~~

~~“[…] from the point of view of generally accepted accounting principles,~~ ~~there is no bitcoin, there is no TPL; there’s HK Hard Assets, which is a fund. There is the Polestar Fund. There is the Multi-Strategy Fund~~. […] But everybody who looks at the FRMO stock is thinking about cryptocurrency, they’re thinking about TPL; they’re not thinking in terms of the Multi-Strategy Fund or the Polestar Fund, or HK Hard Assets because, ~~as funds without an explanation, they’re just inscrutable. That’s one of the problems that we want to solve~~~~. If we put the two companies together, that might solve the problem, so we’re thinking about it.“,~~ ~~https://www.frmocorp.com/_content/letters/2020_Q3_FRMO_Transcript.pdf~~

~~In any case, based on how Stahl has talked about the LPs — in terms of visibility into the holdings and themes —~~ ~~I take HK’s~~ ~~Paradigm mutual fund~~ or ~~Market Opportunities fund~~ ~~(this second one maybe more so) to likely be good proxies for what is going on with the Polestar and Multi-Strat. funds~~ ~~(w/ the main difference between these LPs and the MFs being the use of margin). As explicated by Stahl in the 3Q2020 transcript,~~ ~~the main movers of these funds are going to be TPL and Bitcoin (ie. GBTC)~~.

~~(When looking at more~~ ~~recent filings~~’ “Note 4“s — the image posted at the start of this section) — I assume that “Equity Securities“ are mostly TPL via HKHA (which jives with the numbers for “Investment A“ ) and that GBTC comes mostly from the LPs (which jives with the numbers for “Investment B“) in the filing. Read on to see what I mean by “Investment X“)

$TPL

“But you can't forget that what you are sitting on, you are sitting on like the greatest hydrocarbon property in North America and you can even make a strong argument maybe even the world. The technology keeps getting better. This pipeline is being constructed, as gas being flared that in 11 months is not going to be flared and this is going to -- there is leases, there is water being sold, there’s all kind of things happening except those variables don’t change in any appreciable way in a matter of week[s].” —- https://www.frmocorp.com/_content/letters/2019_Q2_FRMO_Transcript.pdf (Question 6)

FRMO equity investments — FRMO’s TPL holdings are reported as “Investment A” in their reports, https://www.frmocorp.com/_content/10q/FRMO_Corp_Q1_2022.pdf

TPL has been a concentrated holding of FRMO’s for a long time and Murray Stahl’s involvement dates back to the mid 80s (and HK first started accumulating shares in the mid 90s). He also now sits on the board of trustees after fighting his way on in 2019 and pushing for TPL’s conversion from a trust to a C-corp (you can see about when this started happening by the large uptick in the graph below near the beginning of 2021).

The dates are cut off on this (IDK why it does this, but couldn’t fix), but in chrono order they are: March 2019, June 2019, July 2019, Jan 2021

TPL is a large O&G royalty streamer in Texas that fits into Horizon’s “hard asset” - asset-light inflation beneficiaries theme of companies that benefit from increased dollar costs while not themselves getting hit on the other side by capex inflation. Below are the returns of TPL vs other royalty streamers and oil funds over last 7yrs (I use 7yr because that’s when a lot of these other royalty companies begin, but rolling the window further back does show anything different) — all of which would have a negative return today if held through the same period:

FRMO owns TPL through it's 20% stake in the FRMO inflation “fund” HK Hard Assets (HKHA)9 of which TPL is the primary holding (more than 90%) — as well as through its LP investments — and its total direct and indirect amount owned by FRMO is cryptically aggregated as "Investment A" (GBTC being the similarly reported as "Investment B"). I don't 100% get why they report these investments in this cryptic way, even after reading the transcripts, but there you go. Again, note this “Investment X“ notation encompasses TPL and GBTC exposure FRMO has through all the LPs and HKHA (discussed here, see “Questioner 6”) (so be careful not to double count when summing up individual parts on your own).

That disclaimer aside, TPL is well covered at this point and I'm not going to be able to say much new about it right now (and in any case it's already marked to market on the B/S), but I will say this: If energy inflation turns out to be non-transitory, I think oil and gas royalty companies are going to be one of the best ways to benefit without getting hit on the other end with capex inflation. The major thing to watch here I'd say is oil prices (primarily regarding forces on the supply side).

You can read more about TPL’s history here (I found the explanation of why, when looking at a map of TPL’s acreage, its plots of land are in a checkerboard patter rather than being contiguous, to be very interesting): https://www.oilandgaslawyerblog.com/texas-pacific-railway-texas-pacific-land-trust-history-railroads-texas/

Furthermore, I generally see TPL as a special situation bet on HK eventually taking over —or something analogous to this. In the fullness of time, if HK is able to take greater control (eg. by getting free of the Stockholders’ Agreement10), I wonder how TPL's trading multiple could change given that it already trades richly despite, from what I can tell, having a BoD with a history of being openly adversarial towards shareholders, while enriching themselves.

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UPDATE 20230120: In yet another example of value destruction and ignoring shareholders, we can see the letter here from ATG Capital: https://www.globenewswire.com/news-release/2022/11/14/2555309/0/en/Texas-Pacific-Land-Corporation-shareholder-Gabi-Gliksberg-shares-public-letter-to-stockholders-about-upcoming-Annual-Meeting-outlines-why-he-plans-to-vote-against-Board-recommendat.html

Guess how TPL’s BoD reacted to the failure of the initial vote allowing them to dilute shareholders for empire building aspirations? They sued a bunch of the major recalcitrant shareholders.

Hoping the issue would become moot if enough stockholders voted for Proposal Four, TPL took a “wait and see” approach to see how the vote turned out. When Proposal Four failed at TPL’s November 16, 2022 annual meeting, TPL adjourned the meeting to February 14, 2023, and filed this action six days later. TPL simultaneously moved for expedited proceedings, requesting a trial on February 3, 2023, less than ten weeks from now. —- https://assets.law360news.com/1554000/1554265/defendants'%20opposition%20to%20plaintiff's%20motion%20for%20expedited%20proceedings%20with%20certificate%20of%20service.p.pdf

3:10 Value @310Value

In a latest act of desperation from our stalwart management/co-chairs at $TPL according to the Del Court Docket, $TPL subpoenaed the following:

Stahl had this to say in response to my …generalized… question during the Q2FY2023 shareholders meeting:

[…] I don't agree that it makes sense to acquire royalty interests for equity like we've done in a transaction that you described. So I'll explain why. The royalty, no matter how good the royalty is, the royalty is finite. Sooner or later, so every oil royalty has a decline curve. Sooner or later it will produce no oil, even if it's great and lasts long period of time. The equity is forever. So equity is a perpetuity. […] You buy a business, whatever it is, in this case it's royalties, but it could be technology, it could be machinery, it could be even pharmaceuticals, it could be anything.
[…] So when you offer stock for someone else's business, the business you buy is going to have finite life. The stock you were offering has changed to that has an infinite life. And that's the problem with using equity in acquisitions.
[…] But the problem is every business is like a human being. It has a finite life and the equity has an infinite life. So ultimately it's not a sensible strategy and I don't think very highly of it. And when the reason is why we don't use equity very much to buy things at FRMO. So that's how I feel about that.

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Steve Bregman had a lot of interesting things to say about the current energy inflation situation and TPL (and other asset-light operations with “hard assets” exposure) in HK's 3rd Quarter Commentary (see “Why can the coming inflation be severe?“ and “Why will the energy price reaction be severe?“).

In terms of things to look for, I mainly look at it like this:

Supply constraints
- Aggressive ESG policies by Dem. Congress / White House
- OPEC+ refusing to release reserve supply
- Continued under-investment by O&G industry post-2014 oil bust (exacerbated by increased debt and equity financing difficulties due to ESG trends amoung banks and investors)
  HorizonKinetics @HorizonKinetics
  3/7 Energy companies that require external financing in order to expand production -of the KEY commodity in any economy– can’t get it. The divestment movement (see gofossilfree.org), has $13trillion of commitments by institutions to sell energy investments/withdraw funding
  gofossilfree.orgFossil Free100% Renewables for all. No new coal, oil or gas projects.
  8:54 PM ∙ Nov 18, 2021
  5Likes3Retweets
- Lockdowns (which killed a good number of O&G businesses)
Demand pulls
- Gov stimulus (eg. the US recently passed the $1.2T infrastructure bill and France recently introduced a fuel subsidy to offset rising costs)
- An economic recovery or growth
- General fossil fuel demand in-elasticity
  https://www.eia.gov/outlooks/aeo/pdf/00%20AEO2021%20Chart%20Library.pdf

You can read more about TPL on the interesting blog here: https://tpltblog.com/

Cash and equivalents

"He thinks of cash differently than conventional investors. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.", (Warren Buffett’s biographer Alice Schroeder (author of “The Snowball”))

… or in Stahl’s own words…

I like the flexibility to be able to act when I need to, or when I wish to. But I don’t want to have the obligation to do so, merely because I happen to have cash. Let’s say that all the cash arrived on the balance sheet today. Of course, it didn’t, but let’s just imagine it did. Therefore, should I limit in time, temporally, my selection set to the next couple of days? If on a certain Tuesday, the money were to arrive, should I then limit myself to saying I intend to have all that money or the bulk of that money, invested by Friday, simply because it existed? […] The funny thing about the investment process is that, in the modern day and age, it’s possible to move, if you wish to, billions of dollars in the click of a computer mouse. It’s a technological achievement; I’ll certainly agree with that. But whether or not it’s conducive to good investment results is an entirely different question. I certainly don’t think it is. We like to be reflective. We like to be deliberate. We like to study our potential investment candidates to the degree that we can, and sometimes it’s very time consuming.

Not much to say here about this other than that it is a rather large cash horde and given the current state of the market (which Stahl mentions in the 2019 annual letter), I'm comfortable with the amount of dry powder S&B are holding on to right now.

Just as a little experiment, we can play around with what the value of a dollar from that cash horde would be if S&B were to invest it in the future:

Here I assume that the money just sits there for 5 years while discounting at 11% (the 17yr CAGR for FRMO) and then is spent to compound that same 17yr CAGR over the next 5 years. We see that the present value of such a dollar would be worth 3x (so from thie POV, the 20% cash holding would contribute a (0.2 x 3) - 0.2 = 40% gain to FRMO's TBV). I wouldn't go so far as to actively mentally adjust that into FRMO's TBV, but it's an interesting POV to play around with (in any case, I think 1 FRMO dollar is worth more than 1 me-managed dollar (SPAC premium-to-trust ratios come to mind here )).

Here’s what management had to say about their large cash position in 2014:

Cash and Equivalents. This segment comprises roughly 24.6% of total corporate assets. Ordinarily, since cash produces essentially no return, this would severely limit our possibilities for earning a robust return on shareholders’ equity. In fact, we were able to avoid this problem for two reasons.
First, as noted previously in this text, we were easily able to use the cash as collateral for our short sale activity. A successful short sale of one dollar of a path dependent ETF is over 200 times as productive as cash, even if interest rates were somewhat higher. Moreover, we only needed to use a very small proportion of our cash balances as collateral. In fact, the short sales themselves produce cash.
Second, the revenue share from Horizon Kinetics is structured to be a high return vehicle that generates cash with no reinvestment requirement. Most corporate earnings streams require the reinvestment of a significant quantity of the earnings generated. It is therefore obvious that our situation is unique.
It should also be obvious that our cash balances vastly exceed our normal operating requirements. We are therefore in a position to invest a substantial amount of capital should the opportunity arise. In fact, given that shareholders’ equity now exceeds $94 million, we could, in principle, borrow against that sum, as we are a debt free company. This is not to assert that we are about to engage in such an undertaking. The purpose is merely to observe that we could theoretically write a very substantial check if such an action were desirable.
Thus, cash is a quasi dormant asset that can be mobilized to increase return on equity. It is only quasi dormant as it does serve a collateral purpose, in part. This cash sum, when considered as only part of our liquidity in addition to our closed end bond fund assets and potential borrowing capacity, should give the reader a proper sense of our total available liquidity. Such a figure, even calculated most conservatively, comfortably exceeds 50% of corporate assets.

In any case, I think of this portion of FRMO’s assets as the deflation-hedged part of their portfolio.

********** UPDATE 20230518: With interest rates now higher than they’ve been in a decade, far from previous zero-bounded yields, this cash can earn a meaningful amount of interest income. I’ve seen a lot of talk of recession resistance in stocks like API Group and HireQuest —I have allocations of both— citing their ability to draw down on working capital in the COVID-lockdowns crash of 2020 as a useful feature in hard times. The one gripe I would point to with this is that this working capital drawdown came from collecting accounts receivable due to the businesses and would have eventually run out as cash inflows to the companies’ top line dried out in this environment —you can kind of think of these AR items like buffers or capacitors11 to the business machine that can smooth the flow of power/capital to the business if there are quick, temporary shutting off of electricity. Large cash reserves like this, on the other hand, have the ability to generate income even in a recessionary environment —though I’d also expect rates to be cut significantly in such an environment. The value of cash in a recession is mentioned repeatedly in the firsthand historical account of the Great Depression by Benjamin Roth in “The Great Depression: A Diary”.
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Crypto assets

"The reason Bitcoin is successful is that its distribution allows for it to be used as a store of value. It was designed to appreciate in value and to become harder to produce. Therefore, its intrinsic value is supposed to rise. One Bitcoin now is worth roughly $430." — Murray Stahl, https://horizonkinetics.com/app/uploads/December-2015_Cryptocurrencies-An-Emerging-Asset-Class.pdf

I think an overlooked aspect of gaining exposure to cryptocurrency via FRMO is that crypto transactions can come with very complex tax consequences (that are no doubt going to be subject to relatively eventful regulatory changes going forward) and having all of that handled by FRMO as Stahl & Bregman think through and experiment in this space is a significant benefit of ownership.

How many publicly traded, owner-operated, smallcap businessses are there with existing traditional high-ROE operations (or large interests therein) that are also backing incremental de minimis investments into very young emerging industries (so young as to not have any primary incumbent players or business roadmap for the industry) that have the potential for orders-of-magnitude greater returns?

********** UPDATE 20230502:

The purpose of this labyrinthine approach is not to be opaque, although this is the unfortunate effect; rather, the purpose is to explore new asset classes and new business opportunities in a gradual manner that limits risk and disruption. Risk is not merely the possible loss of capital. —- https://frmocorp.com/_content/letters/2019.pdf

In the 2021 annual meeting, Stahl mentions that

1) they had always planned to move beyond being an asset holding company —in order to have something that could generate cashflow even after they had eventually departed— and wanted to build some kind of operating business,

2) the type of business they eventually decided to pursue was (ironically, if your goal was to generate “cash”-flow) Bitcoin and cryptocurrency, and

3) due to the predictable nature of the Bitcoin protocol block reward halving and the associated sporadic and unpredictable deflationary innovation (and corresponding obsolescence of existing generations of technology and equipment) that it incentivizes, they did not want to make singular, large capex spends in order to build up a crypto business. (This step-wise approach to capex spending in their crypto investments also helped FRMO avoid making fresh losses during the crypto crash the unraveling of the FTX scandal through 2022).12

But to put too much money in any new-generation equipment risks their obsolescence if a halving is approaching and, therefore, places in peril the whole cryptocurrency mining effort, so we can’t do that. So, we have to move in a step-by-step function in terms of capital investment. You’re taking a machine and operating it until it can’t operate anymore, until it’s worn out, and, effectively—we want to think of it this way—you’re converting it into cryptocurrency. You’re taking a temporal asset, one that has a limited life and for which it’s hard to judge the lifespan at point of purchase, to convert it into crypto.

Thus, when looking at FRMO’s various crypto investments, you should keep in mind that these are not intended to remain separate from each other, but are planned to eventually be operated together in an integrated manner. In short, those components are…

Data center monitoring equipment and crypto mining (via Winland Electronics Inc. and Winland Mining LLC (which HK hosts on their behalf) under Winland Holdings (WLEX))
- THÉRÈSE BYARS: "That’ll be my pleasure. The first one says, “Are there any updates to potentially becoming an operational business rather than just an owner of assets? Are there any updates that can be discussed with shareholders?” MURRAY STAHL: I alluded to it but I didn’t elaborate. The easiest path is to acquire 51% of one of our publicly traded subsidiaries. The company we have the biggest stake in right now is Winland, at about 29% [31% as of more recent earnings calls]. In the most recent quarter, we bought some more. So, if we end up going in that direction with one of our businesses, we’d acquire 51%, if we could, and conduct our operations via that entity. —- https://www.frmocorp.com/_content/letters/2022_Q2_FRMO_Transcript.pdf
- “FRMO owns 30.8% of Winland. […] What we’ve been doing in FRMO is to nibble away, when we thought it was appropriate, at Winland shares. So, we’ve been buying Winland shares, and we thought that was the best use of the capital, given what was going on in the mining rig market” —- https://www.frmocorp.com/_content/letters/2023_Q2_FRMO_Transcript.pdf
Mining rig sales, repairs, and rig hosting, as well as mining for their own account (HashMaster (A.K.A. HK Tech LLC) (HMT))
- “One is called HashMaster. We own, I think it’s 7.1%. Horizon Kinetics itself owns over 50%, so we obviously have a big stake in it. HashMaster does a number of things.” —- https://www.frmocorp.com/_content/letters/2022_Q3_FRMO_Transcript.pdf
- “It's our default mining site, so if we don't want to or we cannot or we find it disadvantageous to be in other sites, we can always retreat to HM Tech. We've done that more than once when we couldn't get terms that we needed, and of course HM Tech repairs our equipment. Also, there's some HM Tech mining for its own account.” —- https://www.frmocorp.com/_content/letters/2023_Q2_FRMO_Transcript.pdf
S&B’s / HK’s own mining efforts (currently named Consensus Mining & Seigniorage Corporation (“CMSC”) and should be due to go public on the OTCQX exchange tier this year)13
- On December 1, 2021, two of the Company’s Other Investments, HK Cryptocurrency Mining, LLC (“HKCCM”) and HK Cryptocurrency Mining II, LLC (“HKCCM2”) merged into a newly created Delaware corporation named Consensus Mining & Seigniorage Corporation (“CMSC”)., https://www.frmocorp.com/_content/10q/FRMO_Corp_Q3_2022.pdf
- “In the HK Cryptocurrency Mining LLC, the idea is to mine the cryptocurrency, then sell it that day. We accumulate the cash for a quarter, and then we pay it out as a dividend. Internally, we refer to that dividend as seigniorage, meaning we’re actually creating money—if you accept the idea that cryptocurrency is going to be money—and earning a margin on that.” —- https://www.frmocorp.com/_content/letters/2018_Q3_FRMO_Transcript.pdf
- I could find not information on what exactly HK Cryptocurrency Mining II does, but I assume it’s the side of CMSC that mines and retains Bitcoin on its own behalf give that HKCM I sells its BTC, yet transcripts show that CMSC does hold BTC as well.

These crypto assets make up around 10% of FRMO’s TBV at the time of my writing this update. More commentary on FRMO’s various larger crypto investments can be found here (espeicailly in response to Questioner 7): https://www.frmocorp.com/_content/letters/2023_Q2_FRMO_Transcript.pdf

This figure also factors in FRMO’s GBTC and direct Bitcoin, Litecoin, and various other smaller cryptocurrency holdings either directly or via Grayscale trusts (eg. Ethereum Classic, ZCash, Bitcoin SV, and Bitcoin Cash). The logic in holding these smaller cryptos was enumerated in the 3QFY2021 earnings call (see “Questioner 5”). The basic logic is that the network effects of a crytpo are/should be generally correlated to the value of it’s monetary policy; all of these smaller cryptos have similar monetary policies to Bitcoin; due to their obscurity or unpopularity after their forking from Bitcoin (or other parent crypto), they are akin to spinoff businesses that have been sold off for non-economic reasons (recall Joel Greenblatt’s “You Can Be A Stock Market Genius”). Furthermore, they have lower total supply as many of their addresses have since been “lost.” Stahl believes that when (not if) a BTC spot ETF is approved by the US, it will open the flood gates for other cryptocurrency spot ETFs; market liquidity will flood into crypto space; Mr.Market will be able to bring greater crowd-wisdom to bear in the space; these obscure cryptos should end up with similar total marketcaps to BTC due to their comparable monetary policies; just holding a few could then fetch a 400x return per unit of these cryptos —that have much lower un-lost supply and currently trade at tiny fractions of BTC’s price— when this correction happens.

One last thing I’d like to add re. CMSC: As further evidence of S&B’s confidence in the mining operations and crypto space in general, it should be noted that while the initial investment in equipment for CMSC came from FRMO and HK, they never had CMSC repay that investment once the business actually started generating cash, but rather had FRMO and HK accept stock in the new company.

My only-intelligible-to-me notes on FRMO’s cryptocurrency businesses are included below —ignore the diagram of securities exchange holdings in the lower left side which will be relevant in a later section of this post (and feel free to ask me for clarification on this cryptic drawing the comments if it’s too confusing):

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I'm still not totally convinced that the historic rise of cryptocurrency is not just the 21st century's biggest global Ponzi scheme (including Bitcoin). HK recently published an article regarding the possibility of cryptocurrency being outlawed to which their response was to point out the fact that many illicit markets continue to exist for outlawed goods, to which I'd say: Fair enough, but FRMO would no more be able to hold any cryptocurrency assets in such a situation as they would be able to hold any cocaine distribution businesses today. I've read the commentary by Howard Marks, Murray Stahl, and Matt Huang and still cannot fully buy in to either camp, but the asymmetric long term reward/risk of holding bitcoin in a success scenario + the fact that I just find it interesting does seem to merit some kind of allocation (I personally am allocated such that a total zeroing out of FRMO’s GBTC position represents a 2pps VAR for my portfolio).

I think the major things to watch for here are

Regulatory assassination by world governments (esp. the US)
Public acceptance of bitcoin (as "the likelihood and timing of the success scenario for bitcoin, it is ultimately merely a function of public acceptance as an alternative medium of exchange.", Bregman)
That it is never proven that one-way cryptographic functions can't actually exist (ie. someone finds a way to reverse them or the mere possibility of such), although this is not really a specific risk to cryptocurrency as it is to the whole digital world we rely on, so if this goes down your going to have much bigger problems on your hands

$GBTC

"As to what to do about the discount, I’d first ask a preparatory question. Is bitcoin a long-term strategic asset in your portfolio, or a trading security? We treat it as the former, no different than four years ago. As a strategic holding, in a success scenario, bitcoin’s future returns vs. the dollar would be even greater going forward (by our estimation, of course) than it has been since 2017. In that context, the 17% discount is an irrelevance.", https://horizonkinetics.com/app/uploads/Q3-CVALUE-Review_FINAL-1.pdf
“Most of our cryptocurrency is in the form of the Grayscale Bitcoin Trust, ticker symbol GBTC.“, https://frmocorp.com/_content/letters/2020_Q2_FRMO_Transcript.pdf

Another popular stock — and the primary way that FRMO own Bitcoin — that I'm not going to go too far into here, but I will just say that GBTC has been a long time holding of FRMO and provides institutions with a liquid pure-play exposure to BTC as an asset class in a way that does not currently exist in any other form other than actually buying and holding BTC in a digital wallet or cold storage device in earnest and that GBTC could see another leg of its historic run if they ever actually get SEC approval to convert to an spot-tracking Bitcoin ETF as they are intending to do.

Personally, I see it like this: There is a non-zero probability B that the Fed/SEC simply bans BTC before too many rich donors’ and politicos’ personal fortunes are significantly tied to it for it to be too painful to carry out. There is some non-zero probability S that Murray Stahl’s total-success case comes to pass and a single BTC is worth V = $3M.

So the (eventual) expected value of BTC is V * P(S) * (1 - P(B))

Note that as BTC continues to gain momentum unabated (sans some intermittent volatility that will no doubt be touted as the death of crypto each time) the probability P(B) grows ever smaller from a Lindy Effect POV.

Apparently, Stahl thinks P(S) is much closer to 1 than 0 and P(B) is much closer to 0 than 1, but you can do your own calculations for an expected value of BTC using this same formula.

As Bill Miller recently noted: “It [Bitcoin] has worked for twelve years with little regulatory interference under multiple administrations. In fact, the regulatory outlook for Bitcoin in the US has never been brighter, which may explain why so many institutions are now getting involved.”

This is how Stahl (and many other’s Bitcoin bulls nowadays) look at Bitcoin: As a fiat debasement bet without having to be long any side of a particular trading pair. As the best bet on a store of value when/as the world economy falls into the inflation-contraction quadrant.

With cryptocurrency it’s the same sort of thing. But not exactly, not really. We’re used to saying that bitcoin goes up or bitcoin goes down, and I do it, too. But it’s wrong and I need to remind myself to stop doing it, because bitcoin doesn’t go up and bitcoin doesn’t go down. Everybody should turn the bitcoin charts upside down. If you turn them upside down, what it would show is the value of the dollar in relation to bitcoin. When bitcoin “goes up,” what’s actually happening is the dollar is going down in relation to bitcoin, and the euro is going down in relation to bitcoin, as well as the Swiss franc, as well as sterling, as well as the yen, and so on. Basically, bitcoin is a long-oriented way of shorting fiat currencies. Why do you want to short them? Because, altogether, they are clearly losing purchasing power., https://www.frmocorp.com/_content/letters/2020_Q3_FRMO_Transcript.pdf

What's more to say really? Be it as a global Ponzi scheme, digital gold, or the next evolutionary step in modern finance, I don’t think anyone believes Bitcoin is going to move anywhere near sideways from here on. Murray Stahl thinks BTC has a good shot of reaching $1M per coin. In either case, I think that Stahl is going to do a better job at monitoring that outlook — and positioning for it — with a more informed and level head than I would. More on Stahl’s BTC outlook can be found here.

(Again note that GBTC is held by FRMO through its investments in the various LPs et al and it’s value is aggregated as “Investment B“ in their reporting)

Consensus Mining

"[...] we have these investments in the various cryptocurrency mining companies. And I'm pleased to report that we are bringing those investment, we're consolidating those LLCs and we're bringing it public. So, there's going to be a public listing and direct listing for what we call or what we will call consensus mining, which is going to be a publicly traded mining company and it's going own a fair amount of cryptocurrency.", FROM's (FRMO) CEO Murray Stahl on Q4 2021 Results - Earnings Call Transcript

https://www.frmocorp.com/_content/10q/FRMO_Corp_Q1_2022.pdf

FRMO recently announced in October that they are going to spin off their crypto mining operation into a public company called Consensus Mining. This intent could have been sniffed out by listening to Stahl's comments on FRMO's crypto mining operations in the recent 2021 annual letter in August:

"The challenge for FRMO is to convert its disparate cryptocurrency exposures into an actual operating company that will be valued on its produced profits and not merely on the basis of the aggregate value of its individual parts. This would be a big change for FRMO, since it would itself become an operating company with actual employees and all of the complexities that actual operations entail.", https://www.frmocorp.com/_content/letters/2021.pdf

The operation is carried on the balance sheet at $1.4M **14 and makes up just a small amount relative to total assets as it is reported at cost (which also does not include the market value of the various cryptocurrencies mined and held by FRMO). It's a development that's worth mentioning that could be worth $0 or could actually turn out to be something.

The crypto mining assets’ BV does not really move the needle much relative to FRMO’s total TBV, but we could really bump this up to something meaningful by applying a market multiple to the BV of this line item. As Bregman states in a recent HK commentary regarding cryptocurrency mining companies:

"A price-to-book value multiple would be a more meaningful comparator. Indeed, book value seems to be how investors are pricing these companies. Price relative to property and equipment (P&E), perhaps adjusted to exclude cash and cryptocurrency holdings, might be an even better way, because for some of the miners, book value includes very large intangible assets. On a price/book value basis, the six companies I took a quick look at, including Hive Blockchain Technologies (HIVE), which has a $1.2 billion market cap, trade between 2.0x and 8.4x their June 30th book value. Leaving out the lowest-valued one, Cleanspark, the range is 3.7x to 8.4x. Of course, this is an industry in rapid development and flux, which can distort some of these valuations.", https://horizonkinetics.com/app/uploads/Q3-CVALUE-Review_FINAL-1.pdf

Just applying the adjusted range extremes, we could have a market value of the crypto mining operation of between $5.2M to $11.8M (a 2-6% increase in FRMO’s total TBV).

From the 4Q2021 earnings transcript, we can also get a view of how much cryptocurrency FRMO directly holds that could be going along with the crypto mining spinoff:

"And here's what we own directly without being the funds. We own 110.4 Bitcoin real Bitcoin; it comes from our mining ownership. Basically, we're always mining, so we're always increasing that. [...] We have mind and we continue to hold 1,060 Litecoin. We have mind and continue to hold 35 Ethereum, and we have mind that continue to hold 661.7 Ethereum Classic. And we have mind and continue to hold 58.9 Zcash. [...] And then Winland Holdings; so, we own, we min[e]d this quantity 39.1 Bitcoin itself. And then there's a separate we acquired through and that through buying up a partnership, we acquired 7.4 Bitcoin, that's why there's sanction there. So, you have to add together 39.1 and 7.4 to get our whole Bitcoin exposure. We owned 14.9 shares of liter coins I should say of Litecoin.", FROM's (FRMO) CEO Murray Stahl on Q4 2021 Results - Earnings Call Transcript

The transcription here is not the best, but the numbers roughly jive with the 2021 annual letter which I believe was released just a few months prior to this shareholder meeting — in Aug 2021 — which shows a cryptocurrency inventory of...

So according to this call, we have…

BTC: 110.4
ETH: 35
Litecoin: 1,060

...and the rest I'm not going to go through the trouble, since Bitcoin and Ethereum are the main attractions here.

Though note that the value of the cryptocurrency held by FRMO is already factored into their B/S under the Equity Securities line:

Questioner 9
Where on the balance sheet can we see the cryptocurrencies that FRMO has mined? I assume it is in cash and cash equivalents, but I am not sure.
Murray Stahl — Chairman & Chief Executive Officer
Well, to tell you the truth, before this call, I had to ask the accountants, and they had to look it up. […] it had to be booked with the equity securities. That would be logical because GBTC is clearly a security and that’s part of it. So, the answer is that it is booked under Equity securities, at fair value.
https://www.frmocorp.com/_content/letters/2020_Q3_FRMO_Transcript.pdf

But as this is not broken out anywhere in the financials, we can estimate the approximate value of these coin holdings manually given the inventory numbers from the transcript and approximate market values of the various coins:

So that gives us a more encompassing value of FRMO's mining operations as:

Cryptocurrency market value = (110.4x$60000 + 35x$4300 + 1060x$225)

= $7M (~3% of FRMO’s TBV)

(Note I’m using very approximate/rounded market values — as of Nov 16 2021 — for each cryptocurrency here and these values may be very different in just a few weeks)

At the moment, this spinoff would not seem to really move the needle on FRMO’s TBV, but Stahl comments in the 4Q2021 transcripts that they are planning to use the direct listing to fund expansions of the business (one of the new board members that FRMO recently brought on — Alice Brennan — has extensive experience in M&A). I see this as a "heads I win, tails I win only by a tiny amount" kind of situation for them.

Digital Currency Group (DCG)

"It might also be noted that FRMO owns 353 shares of Digital Currency Group (DCG). This represents only about 0.05% of the [roughly 700000, according to Stahl] DCG shares outstanding. This might not seem impressive; however, the company’s scope is.", https://www.frmocorp.com/_content/letters/2021.pdf

FRMO's DCG investment is held on the B/S at-cost as $76,261 from when they first bought shares in 2016 as one of their first cryptocurrency investments. They own 0.05% of the company.

The most recent round of funding of the private company resulted in a market valuation of $10B. If FRMO were to mark this investment to market on the B/S, their stake would be worth 0.05% of 10 billion = $500,000.00 (6.57x the value held on the B/S), so this early investment has so far proven to be an astute choice.

Winland Holdings ($WELX)

"FRMO owns over 28.2% of Winland Holdings Corporation. At about the time of the 2020 shareholder letter, FRMO exchanged crypto mining equipment for Winland shares. On occasion during fiscal 2021, FRMO has added to its Winland position in the open market. The market value of this investment now exceeds $5 million. Winland itself now owns 27.7376 bitcoin, all of which has been mined in the past year.", https://www.frmocorp.com/_content/letters/2021.pdf

This represents around 5% of FRMO's equity investments, but it's market to market, so I'm not really going to spend much time on it. Though, it is an interesting little call option in FRMO’s pocket; you can read more about it here (https://fundamentalfinanceplaybook.com/2018/08/10/winland-holdings-corporation-welx/) and here (https://blog.wizsec.jp/2021/02/mtgox-claim-calculator.html?m=1).

Miami Options Exchange (MIAX)

MIAX is the culmination of FRMO’s various securities exchange investments under the theme of what Stahl calls “croupier businesses”15. My understanding of the transactions that led to this present state is this: FRMO directly held shares in both South La Salle Partners LP (SLSP), which owned shares in the Minneapolis Grain Exchange (MGEX) —of which Stahl was a BoD member and diverted his compensation from this role to FRMO itself— and in the Bermuda Stock Exchange (BSX). Then in/around 2020 MGEX merged with MIAX, which was owned by Miami International Holdings (MIH), and SLSP received stock in MIAX during the merger. In this same period, BSX was acquired by MIH and FRMO received MIH stock. The result was that FRMO directly held shares in MIH and SLSP (which held MIAX stock). Here's a snippet of my notes for a visual aid:

Now, what’s interesting about these small securities exchange businesses is this: due to the global scale of the indexation and passive investing complex and continued zero-bound interest rates pushing investors to the further end of the risk and duration curves, fund flows have been crowded into certain asset classes and derivatives (namely, large, liquid, marginable securities whose data is readily available in a specific set of standardized databases that the various large exchanges deal with) which has increased their correlations to each other and increasing the exposure to systemic risk in these asset classes. As a way to avoiding these crowded asset classes, S&B invested in various smaller exchanges that

1) take up the limited amount of existing US-granted securities exchange clearing licenses on which new securities and derivatives can be traded, (from the 2018 annual letter re. FRMO’s MGEX and BSX investments)…

Our two primary exchange investments are the Minneapolis Grain Exchange (MGEX) and the Bermuda Stock Exchange. It is our belief that exchange licenses are extremely valuable, because it is necessary to begin to re-imagine modern trading in a blockchain environment. There are many different approaches possible to trading in a blockchain environment. However, there is a limit to how many trading environments can be permitted to exist, simply because there is a limit to the regulatory resources that can be devoted to supervision. Hence, in principle, demand for such licenses should comfortably exceed supply. Moreover, improvements in technology make it possible to trade on a variety of exchanges that normally did not benefit from significant activity.

… 2) have exposure to the trading volumes of various existing smaller niche asset classes outside of the spaces crowded with the fund flows of the passive investing complex (from the 2016 annual letter)…

The bulk of this is held in the Minneapolis Grain Exchange (“MGEX”) and the Bermuda Stock Exchange (“BSX”). The basic idea is that the smaller exchanges collectively represent the alternative to industrial scale investing as practiced by the larger exchanges.

… (this theme of finding investment opportunities that presented an “alternative to industrial scale investing” was also a motivating factor in S&B cryptocurrency investments)16; doing it this way ties your share of the economics more to the adoption of the various asset classes (via trading volumes), rather than betting on any price directionality; and…

… 3) can create new types of —ever complex or unique— derivatives limited only by the capability of imagination and algorithms to conceive of and monitor new contracts along the trend of an increasingly financialized and securitized economy —the idea of a GDP-linked derivative was floated by Stahl in the 2016 annual letter (where a few, much smaller, exchange investments are covered as well).

At present, think MIAX makes up around 3% of FRMO's TBV, but this is based on the balance sheet accounting value and I actually think it is worth more than that recorded value —put it at, say, 6-7% of TBV.

********** UPDATE 20230524: Investments in security exchanges are also part of Stahl’s bet on cryptocurrency and digital assets, which he’s discussed many times in conference calls and be seen in a bit more detail here. **********

HK stake + revenue participation

Unlike the LPs, TPL, and cryptocurrency assets, the HK stake and revenue stream participation are not valued by the market. FRMO holds a 4.95% interest in Horizon Kinetics LLC (which reciprocally owns a similar stake in FRMO (can't find my notes right now on exactly how much)) from which it earns advisory fees and also owns a 4.2% revenue participation interest which is carried at a fixed value on the balance sheet as worth $10,200,000 and does not amortize.

(I don't really think it’s worth it to re-rate the book value of the HK equity stake is because — referencing the same article here on that scenario — it's apparent that attempts to massage the equity value up or down doesn't really amount to a significant change; certainly not in the same multiplying way that playing with the revenue participation valuation does)

Revenue participation

We can follow a similar analysis as done in the interesting article here (which was conveniently published right before things went crazy in the markets due to COVID19 / lockdowns and so avoids that turbulence in both the down- and up-swings in the statistics it uses) and make a case that the HK revenue participation is carried at significantly undervaluation on FRMO's balance sheet relative to other revenue streaming businesses. In my case the main difference is that I use the notes from the annual reports to attempt to break out the percent of "fees" on the income statement that are actually derived from the participation rights (rather than from consulting/advisory fees) — which netted out to not be too much different TBH.

(Participation breakout from "fees" using info in “Note 4” in more recent filings, “Note 3” in older, and an 85% default value for even older filings where participation breakout not discussed)

(Just some forward hypothetical projections ignoring 2020 crash effects)

(Using participation breakout numbers to derive valuation ranges)

So taking the low end of the streaming multiple, we could could value FRMO's HK revenue participation at $62.2M (6x the reported value) for a TBV closer to...

TBV - Default stream value + Comped stream value

= $179M - $10.2M + $62.2M

= $231M (a 29% increase in TBV)

We could also play around by working backwards through a simple DCF model using the CAGR of the streaming cashflow and come up with a simple DCF that assumes it stays status quo for 10 more years under Stahl (though HK is introducing ETFs and is experimenting with a CEF, so who knows how that will change things if those or other products not yet created take off) —then also assume HK continues for five more years after his death without change.

Even in this case, it’s clear that the HK revenue stream is undervalued to some degree.

Active catalysts

Possible up-listing...eventually

“Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.“, Stanley Druckenmiller

"And I think uplisting is going to do a lot of good for FRMO when we get around and do it by just by uplisting, we would've done it already. It's just that we got so much going on. So, you want to blame somebody. You really should blame me because this is so much going to take so many hours in a day and we just didn't get to it.", FROM's (FRMO) CEO Murray Stahl on Q4 2021 Results - Earnings Call Transcript

The promise of an FRMO uplisting from the pink sheets to a major exchange has been a cause for excitement and disappointment for FRMO shareholders for some time:

Therese Byars
Okay, different subject does for amount still have plans to move from pink sheet listing to crap the higher OTC Markets listing or one of the larger exchanges.
Murray Stahl
Eventually we'll get around to that. In the last six months or so, given what we went through. I guess it wasn't our top priority. But eventually we'll get around to that.
FRMO Corporation (FRMO) CEO Murray Stahl on Q1 2021 Results - Earnings Call Transcript

The added visibility as well as the ability for other institutional buyers (who may other wise be unable to hold OTC stocks) will surely be a significant tailwind to FRMO's stock price and, just based on pattern matching, a stock moving to a higher liquidity exchange tends to either be positive or a non-event — yet another “heads I win, tails I don't lose situation”. Despite the delays, I'm still confident that it will happen w/in the next few quarters because...

New board members

"So, we just put three people on the Board and I can assure you that's one of the things we're going to be discussing. So, believe me, I wouldn't mind a little time off. I got other interests. I'm sorry to say I really do. And if there are people who can and will help me, I welcome it all to the better.", https://seekingalpha.com/article/4461318-froms-frmo-ceo-murray-stahl-on-q4-2021-results-earnings-call-transcript

https://www.frmocorp.com/_content/statements/FRMO_NEWS_RELEASE_2_20211014.pdf

In the 4Q2021 meeting, Stahl mentions lack of time and being too busy as a reason for the stalled uplisting. FRMO recently added three new non-independent members to it's BoD (all remaining six are independent). These new board members may help to provide the extra intellectual energy required to manage an FRMO uplisting and in any case signal an increase in activity at FRMO that — just in terms of general pattern matching — may present other value-catalyzing events.

Crypto mining spinoff

As mentioned, FRMO is planning to spin off their crypto mining operation with the funds from the direct listing planned to be used to expand the business and one of the new BoD members — Alice Brennan — deep experience in M&A. Essentially, a free call option here on FRMO’s ability to make intelligent crypto investments.

Risks

US government outlaws crypto (or crypto is indeed just a global Ponzi scheme and the music finally stops playing); Bitcoin otherwise falls into obscurity in all investment concerns except for when future textbook want to cover the historical asset bubbles of history
Inflation turns out to be, indeed, transitory
Stahl and/or Bregman leave the company (FRMO could maybe survive an “either/or” scenario, but “and” would be the absolute end)
********** UPDATE 20230518: S&B leave the company in the hands of new management that runs the business assets poorly. Stahl has mentioned that FRMO is planned to be passed on or merged with some other asset manager they have confidence in to run the show their own way; in the Q2FY2023 transcripts I asked about FRMO succession plans and Stahl had this to say:
“Why don’t we want to make them employees of Horizon? Because we want to see what they would do unconstrained by us. If they're our employees, whether we give them total freedom or not, they're going to be operating under our constraints even if only implicitly. […] They've got to be running their own show. So, maybe a way to do it is, they're someone already running their own show, doing whatever they're doing. Maybe, when the time comes, we would merge FRMO with whatever their enterprise is, and now they're going to run the show. And they'd be unconstrained by us, other than the fact that we respect what they're doing, but they're different people, and maybe that's the way it should be. So that's the way I see it happening.”
If the incentives at FRMO weren't so aligned with shareholders (ie. Stahl and Bregman simply own a majority of the common stock along with shareholders, taking no cash compensation or options), I would be much more concerned than I am presently; I don’t think Stahl is planning to screw FRMO shareholders in the end (himself being one of the largest ones and those shares ostensibly being planned to be passed to his children). **********
********** UPDATE 20230728: Stahl is 69 years old. While the guy is rich and thus likely has access to great healthcare, it’s something to sweat over. In any case, Steve Bregman is five years younger. IDK for sure how impactful it would really even be if Stahl were no longer at the fund, as they could just resume its liquidation plans and close the discount spread that way —so you’d still have some upside. This statement from Stahl in a 2018 “Value Investor Insight” interview also gives me a bit of solace that he’s certainly not going anywhere if he has any say in it: “From the first day I did this until today, 99% of the time I enjoy it. I like the intellectual challenge. I like writing the research. As with any job, there are certain days I don’t like it that much, but happily those days are few and far between. As long as I’m still welcome and physically able, I contemplate doing what I’m doing until they carry me out one day.” Furthermore, this may simply be an unavoidable trade-off when attempting to balance longevity and wisdom when running a fund. I am reminded of Charlie Munger’s comments in the “Becoming Warren Buffett” documentary on running an HQ: “The ideal way to run a headquarters is to have one man, preferably over 80, sitting in an office by himself. Anything else is pure frippery.” —so, in ten years time, maybe the RENN Fund will be in an even better management position with Stahl (still) at the helm. **********

********** UPDATE 20231210: Prof. Damodaran recently published an article covering the ideas around key-man risks that was pretty interesting. In particular, this segment stood out to me:

Aging of key person(s)
There are many reasons that key persons leave companies, and while companies can try to stave them off by taking actions to protect key people, there is one reason - aging and death - which are inexorable and inevitable. As key people, especially at the top of an organization age, investors should start factoring in not just their eventual departures, but a decline in effectiveness, as they get older. Speaking of key people in large companies, Berkshire Hathaway has a had a special status, an insurance company with the best portfolio managers in the world in Warren Buffett and Charlie Munger. Well before Munger's passing, Buffett and Munger had bowed to advancing age and had passed the baton on to Ted Wechsler and Todd Combs. While Buffett undoubtedly still has a say in investment choices, it is also clear that he has a far lesser role than he used ro, which may explain Berkshire's bet on a company like Snowflake, a company that has a snowball's chance in hell of getting through a Buffett-Munger investment screening.
Are markets building in the recognition that Berkshire Hathaway's future will be in the hands of someone other than the two legendary leaders? I think so, and one way to see how markets have adjusted expectations is by comparing the price to book ratio that Berkshire Hathaway trades at relative to a typical insurance company.

Note that at the time of my wirting this, FRMO is currently trading at a P/TBV of ~1.5x (a similar valuation to that of the lows of 2020 or 2012).

**********

On Transitory Inflation

"The French general staff understood that the last war had been won with the use of certain strategies and tactics; unfortunately, they assumed that the same or similar tactics and strategies would assure success in any new test of strength with Germany.", Fighting the Last War

I look at the current inflation situation like this:

To go against the deflation / transitory-inflation view, you need to believe that “this time is different” (from previous QEs that have caused only transitory inflation before continuing on the US’s deflation trend since 2008). Ie. that this time, inflation is driven by cost-push (rather than transitory demand-pull) driven by energy inflation and supply chain blockages (that academics — who don’t heavily consider time and space and rather think of supply as ever-available and supply chains like a togglable video game — don’t understand will take years to fix). Under this POV, we are ultimately heading for a stagflation bust rather than deflation one. So while Jeff Snider et al are looking at the various declining demand factors and concluding deflation, they are actually fighting the previous war(s) (understandably using historical analogies from other past QEs) when there are serious supply chain and energy inflation issues this time around that are going to drive prices up regardless of demand (thus the apparent contradictory signals from Snider’s precious LIBOR and TED spreads who are predicting that “this time is not different” and that QE inflation effects will once again be transitory as the Fed claims (or at least wants to manage public expectation into fulfilling)), thus stagflation.

In either case, the ultimate destination at some point appears to be an economic bust due to collapse in demand (either from QE wearing off or high prices taking care of high prices), but with very different asset allocation recommendations in the meantime and aftermath.

In/stagflation ⇒ short duration = commodities and net-nets etc

Deflation ⇒ long duration = tech and other long-period-DCF businesses

https://horizonkinetics.com/app/uploads/Q3-2019-CVALUE-Review_FINAL.pdf

Given their nominal TBV concentrations and current investing decision-making themes, I’d mark FRMO as a SWAN allocation in the right half of this diagram17.

Regarding uplisting

I mentioned uplisting as a possible value catalyst, earlier. However, one thing that I have to make note of is that FRMO currently trades a ~3x premium to TBV. It could be argued that this is because there is a lot of baked-in optionality on top of that TBV as well as certain assets being held at-cost on FRMO's B/S (eg. the unrecognized value of FRMO’s crypto mining operations), but in any case it should be pointed out that other, more well known, investment holding companies like Pershing, Greenlight, Third Point, and Berkshire all trade at around closer to 1x TBV). Though I’d also point out that IEP — whose price action has historically been the most similar to that of FRMO the best out of the other holdCos mentioned here — does trade at an abnormal premium to book value.

(And on the topic of the uplisting. Currently, FRMO shares are quite illiquid. This means that any kind of market correction is really going to affect the price.)

Another small thing

koyfin.com

Again, looking at this chart of FRMO's 20yr price performance and drawdowns, one thing that is concerning is the amount of time it took FRMO's share price to recover from the 2008 GCF vs the index: nearly twice as long as the S&P. What were S&B doing in 2008 that FRMO corrected so hard? FRMO did not start releasing public filings until around 2012 and their old archived website only goes back to 2011, so I have not been able to find much info on FRMO from before this time. This isn't so much a forward looking risk as much as it's just an observation that something bad happened in FRMO's history and I can't find any info on what exactly how it went down.

Conclusion

"With time, probabilities of most outcomes become attenuated. We may assign a probability of 60% to Outcome A today, but what will be the probability of Outcome A six months from now? Worse, the passage of time may create other outcomes we cannot even visualize today, and those outcomes will tend to squeeze down the probability of the outcomes we believe we do know something about. Outcome A could be irrelevant in six months.", Peter Bernstein
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.", Warren Buffett

Perhaps the inflation we are seeing now is truly transitory as the Fed claims and the bond markets are signaling rightly about the transitory nature of the inflation affects of QE or maybe this time is different and supply chain woes will last longer than ivory tower economists are expecting (still fighting the previous war of demand-pull inflation while to today is about cost-push) and the oil industry's long under-investment in new development and infrastructure after the oil crash in 2014 is finally coming to get us all and that ESG really does mean that "energy stops growing".

I think both outlooks are still pretty plausible right now and really don't know which narrative is going to be the future that will happen, but I think as far as being a trustworthy steward for a portfolio’s inflation allocation, FRMO is a smartly inflation-hedged holdCo that is managed by some very smart independent thinkers that have a track record of apt investments with a focus on the longterm time horizon and are well aligned with shareholder interests (FRMO essentially get's S&B's intellectual capital output for free given that they take no compensation beyond the value creation on their own large equity stakes — FRMO doesn’t pay them though FRMO’s P/TBV averages ~2.5x, so you do pay the person selling you the shares). And, while currently trading around mean historical P/TBV, they have some potentially catalyzing events coming up and averaging into this position could prove cheap in hindsight even at the currently-average multiple.

FD: I own shares of FRMO.

Peter Doyle is another significant owner (FRMO’s vice president), but does not seem to be involved much in conference calls and I believe he is more related to HK or it’s other sister companies — I’d need to re-find the interview where he briefly mentions something like this. Most of the other significant shareholders come from the same team of execs and directors at HK. Ultimately, my understanding is that FRMO is mostly just a Stahl & Bregman operation.

********** UPDATE 20220909:

From the 2022 annual shareholder meeting proxy (https://materials.proxyvote.com/Approved/30262F/20220725/NPS_514395.PDF)…

**********

********** UPDATE 20221202:

Active Share is a measure of the percentage of stock holdings in a manager's portfolio that differs from the benchmark index, see https://www.investopedia.com/articles/mutualfund/07/active-share.asp

From HK’s largest MF, the Paradigm Fund:

https://kineticsfunds.com/funds/paradigm-fund/

**********

This SEC Form 10K was filed for the year that Stahl and Bregman took over the company and provides other interesting required tidbits that you no longer see in FRMO’s OTC disclosures. (I find the “RECEIVABLES FROM SHAREHOLDERS FOR ISSUANCE OF COMMON STOCK” section interesting as it shows some details about the initial capital structure and ownership interests of FRMO):

https://www.sec.gov/Archives/edgar/data/1042017/000095012302005722/y61047e10vk.txt

In the annual proxy statement, a company must disclose information concerning the amount and type of compensation paid to its chief executive officer, chief financial officer and the three other most highly compensated executive officers A company also must disclose the criteria used in reaching executive compensation decisions and the degree of the relationship between the company's executive compensation practices and corporate performance. This information can be found in several separate disclosure items. —- https://www.sec.gov/answers/execcomp.htm

********** UPDATE 20221202: I use the terms TBV, NAV, and equity value interchangeably throughout this post, IDK why I id this. In all cases, what I’m referencing is the balance sheet item “Stockholders' Equity Attributable to the Company” **********

Funnily, shortly before this rise and fall period, Stahl and Bregman write in their 2003 shareholder letter that "In any case, current share valuations are a circumstance that cannot possibly endure. History will repeat itself, we believe, funds will one day exit the business, perhaps in the customary state of panic, and opportunities will thereby be created. Some investment patience is therefore required and we will endeavor to exhibit such patience."

********** UPDATE 20221202: I asked about this in the 1Q2022 earning call. You can read/hear Stahl’s answer here (starting at 00:38:24) or here (pg.8) **********

One thing I have not been able to reconcile is: why is it the case — if FRMO owns just a 20% stake in HKHA and that stake is consolidated in the Equity Securities line of FRMO’s B/S — that the amount of Stockholders' Equity attributed to Noncontrolling interests is not equal to 80% of that Equity Securities number? Rather, via the 1Q2022 report, it is

114M / 165M = 69%

(What would make it work is if ~25% of the Equity Securities were something outside of HKHA)

If there are any FRMO fans reading this that know what is going on here, do let me know.

From the 2021 TPL 10K, Stahl owns 4.8% of TPL both directly or indirectly via 374340 shares which…

“(2) Includes (i) 1,573 shares held by Murray Stahl, (ii) 60 shares held by Mr. Stahl’s spouse, (iii) 1,253 shares held by Horizon Common Inc., (iv) 1,444 shares held by Horizon Kinetics Hard Assets II LLC, (v) 43,032 shares held by Polestar Offshore Fund Ltd., (vi) 5,417 shares held by CDK Fund Ltd., (vii) 2,469 shares held by CDK Partners LP, (viii) 103,375 shares held by Horizon Kinetics Hard Assets LLC, (ix) 1,441 shares held by Horizon Credit Opportunities Fund LP, and (x) 214,276 shares held by Horizon Kinetics Asset Management LLC. The amount of common shares of TPL reported herein excludes shares held by partnerships and other accounts in which Mr. Stahl has a non-controlling interest and does not exercise investment discretion. The shares referenced in (iii)-(x) above are managed by Horizon, in which Mr. Stahl serves as Chairman, Chief Executive Officer and Chief Investment Officer but does not participate in investment decisions with respect to the securities of TPL. Horizon separately reports its position and transactions in the securities of TPL on Forms 4 and Schedule 13D. Mr. Stahl disclaims beneficial ownership in any of the accounts managed by Horizon except to the extent of his pecuniary interest therein. Based on Form 4 filed by Mr. Stahl on February 15, 2022.”

https://www.sec.gov/Archives/edgar/data/97517/000121390020014919/ea122864ex10-1_texas.htm

The Stockholders shall, or shall cause their Representatives to, appear in person or by proxy at each Stockholder Meeting and vote all shares of Common Stock beneficially owned by such Stockholder and over which such Stockholder has voting authority at each Stockholder Meeting in accordance with the Board’s recommendations as such recommendations of the Board are set forth in the applicable definitive proxy statement filed with the SEC (the “Board Recommendations”).

The only degree of freedom being…

Notwithstanding Section 2(a), the Stockholders shall not be required to vote in accordance with the Board Recommendation for any proposals (i) related to an Extraordinary Transaction or (ii) related to governance, environmental or social matters; provided, however, that the Stockholders shall be required to vote in accordance with the Board Recommendation for any proposal relating to any corporate governance terms that would have the effect of changing any of the corporate governance terms set forth in the plan of conversion recommended by the Conversion Exploration Committee of the Trust on January 21, 2020.

A capacitor can help smooth out quick temporary power loss to a device by storing energy in an electric field. When the power is lost, the capacitor releases this energy, providing a small amount of power to the device until the power is restored.

A capacitor is an electrical component that stores energy in an electric field. It is made up of two conductors, separated by an insulator. When a voltage is applied to the capacitor, electrons move from one conductor to the other, creating an electric field. The amount of charge that can be stored in a capacitor is determined by its capacitance.

When the power is lost to a device, the capacitor can release the stored energy, providing a small amount of power to the device until the power is restored. This can help to prevent the device from shutting down or losing data.

What is Capacitor — https://binaryupdates.com/what-is-capacitor/

Stahl had a few interesting comments of the FTX situation and it’s impact on the larger crypto space here: https://www.frmocorp.com/_content/letters/2023_Q2_FRMO_Transcript.pdf

https://www.businesswire.com/news/home/20220824005622/en/Consensus-Mining-Seigniorage-Corporation-%E2%80%9CCMSC%E2%80%9D-Reported-Its-Financial-Results-for-the-Second-Quarter-Ending-June-30-2022

** I don’t actually fully get where this number is coming from because in the filing’s Other Investments section, it appears that the Cryptocurrency Mining Entities owned by FRMO are only a fraction of that reported $1.4M and the remainder of that BV does not appear to be broken out anywhere else.

See…

********** UPDATE 20230504: As an example, the BSX is the leading exchange for the trading of insurance-linked securities (ILS). ILS are a type of financial instrument that is designed to transfer insurance risk from insurers to investors. ILS can be used to hedge against a variety of risks, including natural disasters, terrorism, and pandemics. The BSX is a leading market for ILS trading and has listed a number of ILS-related derivatives, including catastrophe bonds and insurance-linked notes. **********

On the discussion of this “economic quads” model as a useful framework for thinking about diversification, I also find this diagram useful as well:

https://intelligencequarterly.com/ahead-of-the-herd/the-thinking-mans-quad-system/

Lemon Cakes Investing

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Lemon Cakes Investing

($FRMO) FRMO Corp: A uniquely managed OTC jockey-stock hedged for inflation and with incoming catalysts

A overview of the origins, mgmt incentives, assets, and upcoming catalysts for this interesting underfollowed basket of call options and contrarian plays

Table of Contents

Quick Pitch

Ready for what the indexes aren’t

Management

Origins of FRMO

Aligned Incentives

S&B's Stake In FRMO

Asset Breakdown

HK LP Investments

$TPL

Cash and equivalents

Crypto assets

$GBTC

Consensus Mining

Digital Currency Group (DCG)

Winland Holdings ($WELX)

Miami Options Exchange (MIAX)

HK stake + revenue participation

Revenue participation

Active catalysts

Possible up-listing...eventually

New board members

Crypto mining spinoff

Risks

On Transitory Inflation

Regarding uplisting

Another small thing

Conclusion

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