FRMO Corporation (PNK:FRMO) Q2 2024 Earnings Call Transcript

FRMO Corporation (PNK:FRMO) Q2 2024 Earnings Call Transcript January 16, 2024

FRMO Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Therese Byars: Good afternoon, everyone. This is Therese Byars speaking, and I’m the Corporate Secretary of FRMO Corp. Thank you for joining us on this call. The statements made on this call apply only as of today. The information on this call should not be construed to be a recommendation to purchase or sell any particular security or investment fund. The opinions referenced on this call today are not intended to be a forecast of future events or a guarantee of future results. It should not be assumed that any of the security transactions referenced today have been or will prove to be profitable, or that future investment decisions will be profitable or will equal or exceed the past performance of the investments. For additional information, you may visit the FRMO website at frmocorp.com.

Today’s discussion will be led by Murray Stahl, Chairman and Chief Executive Officer. He will review key points related to the 2024 second quarter earnings. A replay for this call will be available on the FRMO website until the summary transcript is posted. And now I’ll turn it over to Mr. Stahl.

Murray Stahl: Okay. Thanks, Therese, and thanks, everybody, for joining us. I’ll just go right into it. This quarter, I would argue was a milestone quarter for us. The reason I say it was a milestone quarter for us is, you’ll observe that our biggest position, TPL, was actually down for the quarter, and you can see the line of unrealized losses. Of course, that’s on all our realized losses because we’re consolidating HK Hard Assets, but it was down, however, it was more than balanced by two other positions. And the first one was Winland, formerly known as Winland Electronics, now we call Winland Holdings, which is where we’ve been doing a lot of our cryptocurrency mining work, and you might observe if you line up all the quarterly financial statements.

And then you’ll see we’re gradually increasing our position in. And as of quarter-end, I think you can look it up on the on the summary page on the website, but I think we’re up to 1,593,000 shares, roughly, and we bought more subsequently. So I think we’re around 35% of Winland. More about that in a minute. And then the other position or the other positions is the various ways we express ownership of bitcoin directly, not the least of which, actually most important of which is the Bitcoin Investment Trust, GBTC. So this was the first quarter that the crypto earnings actually outweighed TPL. And incidentally, we increased our exposure to every one of our holdings. We might also remark that despite all of that the investing, and you can see how much money we spent, we increased our cash balance, not decreased our cash balance relative to fiscal year-end.

So – and our own shareholders, not the consolidated shareholders, that we were consolidate – that were noncontrolling interest in the HK Hard Assets, but our own equity interest now exceeds $206 million. So there’s a substantial investment here with substantial liquidity and we expand in crypto little by little every quarter. So maybe the first thing I should tell you is why do we expand little by little every quarter when no one else seems to do that. And I know it might be excruciating to watch, but it’s necessary to do it that way. The reason it’s necessary to do it that way is because of two factors in the world of mining, the one is, that no matter what point in the cycle you are, this is a cycle, of course, relative to the having in bitcoin, you’re always every passing day you’re approaching yet another halving.

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Q&A Session

So I would look at the halving or I would encourage you to look at the halving the following way. The block reward is kind of is cut in half. So another way of saying, if you want to get the same block reward for your mining activity, essentially, you have to have twice as many machines. Now in practice, you have to have many more than twice as many machines, why do you need many more than twice as many machines if the block reward is cut in half? Because the aggregate hash rate, meaning number of machines you’re competing with in the entire bitcoin system is ever growing. So if you want – even if it wasn’t halving, you have to grow your equipment sets first problem. The – so if you have to have twice as many machines to get the same number of coins, it’s another way of saying it’s mathematically the same as if the cost of mining just went up.

And that’s, by the way, one of the reasons that bitcoin goes up over time. So halving plays a very important role, and it would be ever cognizant of that. So with the halving, if everything else was stable, which it never is, but if it was, it would be predictable, very high return security, probably no security is as predictable or as high return that you’re ever going to encounter. So the second factor is because you can think of it as if you need twice many machines to get the same number of bitcoin, therefore, your costs are rising, you’ve got to be very, very cognizant of your usage of electric power. So you have to have machines that will be ever more economical electric power usage. So no one seems to believe me when I say this, but I’ll repeat it, yes, again, that yet again, the last seven or eight years.

the electric power usage per transaction is down 96%. Doesn’t mean the electric power usage of entire system is down at all. Electric power usage system is up, electric power usage per transaction is down 96%. And that has to continue, and I probably will continue. And the reason that’s relevant for going slow in terms of buying equipment is, when that happens, your equipment could be obsoleted. So what you’d like to do is you’d like to constantly be growing your – the amount of crypto you have, which I think we’ve done, if you look at all the quarterly statements. And you’d like to be doing it in such a way that you’re always in a position to buy the most up-to-date equipment. And you bought a small enough equipment so that you’ve managed to use it completely and thoroughly during the cycle.

So we’ve been very careful buying equipment. One of the things you’ll see in our cryptocurrency mining operations, we’re now operating fully depreciated equipment. How long we’ll be operating that is a question that I don’t know the answer to, but the goal was to get to the point where we can operate properly, fully depreciated equipment. Our policy is to depreciate new equipment over a 2-year cycle and used equipment over a year or sometimes 1.5 years. So we’re very conservative of our depreciation. In Consensus Mining, I believe, in the round numbers, we’re up to 266, roughly, I’ll look this up, for you in a second because I wrote it down. I beg your pardon. We’re up to 265 bitcoins Consensus Mining. We also – in Consensus Mining as the most recent reckoning, this is data as several days ago, but I think it will relevant.

We have 6,618 Litecoin. Litecoin, you might be aware, is basically the same monetary policy as bitcoin is just started later. So at the moment, it has a modestly higher inflation rate, but lend up the same – at the same point as Bitcoin. It’s actually not more profitable to mine Litecoin than mine bitcoin. And you can make an argument for Litecoin. If Litecoin ever were to have the kind of use cases that bitcoin is going to have or at least some of it, the Litecoin aggregate hash rate would grow in relation to bitcoin’s adequate hash – aggregate hash rate and you make a lot of money of it. And also, we own as of several days ago, in other words, most recent reckoning, we own 265 – excuse me, 38.9 I beg your pardon, 38.9 Bitcoin Cash. Now Bitcoin Cash is an interesting sort of animal because Bitcoin Cash has the exact same monetary policy as bitcoin itself.

It’s just that the bitcoin hash rate, Bitcoin Cash hash rate, is maybe half of 1% the size of the bitcoin hash rate. Therefore, the market capitalization of Bitcoin Cash is something like 0.5% or 1% of the bitcoin hash rate and the bitcoin market capitalization. And as I said, if there was ever a use case for a bigger block size that one day, there might be you can make a lot of money in Bitcoin Cash. So it’s kind of interesting. One of the reasons is going back to Litecoin, that Litecoin is more profitable than bitcoin, is Litecoin is merged mining, it’s both good and bad one the same mining rig, you can mine two coins. You can mine Litecoin and you can buy a Dogecoin. Dogecoin has a very profligate monetary policy. I personally don’t find it all that interesting.

So we get paid entirely in Litecoin. We take our block reward entirely in Litecoin. Now the more expensive Dogecoin is the more of your electric bills you can pay with Dogecoin and therefore, the less money it cost to mine Litecoin, therefore, the less valuable Litecoin is. So theoretically, since I would assert Dogecoin has a profligate monetary policy, Dogecoin is going to underperform Litecoin. Dogecoin might even go down in value if it gets diluted enough, and to the degree, Dogecoin underperforms Litecoin, Litecoin is worth more money. And just for that reason, you may make money of it. Anyway, we are in the process of buying some L7 miners, which is what mines Litecoin for Winland. So Winland, before very many eight weeks are out, we’ll be mining Litecoin as well as bitcoin.

I think we’re the first of the publicly traded miners to mine material amounts of Litecoin. I don’t think any other publicly traded miners do that. Now Winland is public, Consensus is going to be public, hopefully, not too distant future, so you’ll be able to see their financial statements. And I hope you’ll be impressed with degree of liquidity we maintain. And I hope you’ll be impressed with degree to which we consistently increase the crypto holdings, which is very different than what other companies do. And we intend to increase our exposure in this field. So the crypto business is alive, it’s healthy and it’s growing and – we didn’t know seven or eight years ago when you started the venture if crypto was a viable business or not. We just thought we knew enough about it to be able to make some reasonable assertions about it and make some money at.