FRMO Corporation (PNK:FRMO) Q3 2024 Earnings Call Transcript

FRMO Corporation (PNK:FRMO) Q3 2024 Earnings Call Transcript April 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 Corp website at www.frmocorp.com.

Today’s discussion will be led by Murray Stahl, Chairman and Chief Executive Officer, and Steven Bregman, President and Chief Financial Officer. They will review key points related to the fiscal 2024 third quarter earnings. And now I’ll turn the discussion over to Mr. Stahl.

Murray Stahl: Okay. Thank you, Therese, and thank you everybody for joining us. I’ll just start off. I’ll just make a couple of highlight points about our financials, which I think you’ll find interesting. And then I’m going to answer some questions I always get, but I never get them in real time online. Now I only get them as I encounter people. And they ask them then it’s too bad because the answer only goes to one person. I really think I should share it with everyone, so that’s what I’m going to do. So as far as financial statements go, I believe, if I’m not mistaken, that our stockholders’ equity attributable to the company of $219.4 million is the highest we have ever had. And our total assets, which is total liabilities and stockholders’ equity of $388 million, I think that’s about as high as we ever had.

So it’s getting to be big sums of money. But what it these financial statements don’t do is they don’t show you detail behind them. So an important detail and I’ll get to some questions about that detail momentarily. An important detail is that we’re actually building a crypto business, and we’re on the way to becoming a crypto operating company. So the components of that are, we now own 1,655,000 shares of Winland, and I think that’s something like 35% of the shares. We keep filing 10b5 plans, and we have one on right now, which is in a quiet period. And I think May 1st, it recommences. So Winland is now largely a crypto minor. We also have a smaller investment in Consensus Mining. Consensus Mining, if everything goes right in a few months is actually going to have a listing, and that’s also a crypto mining company.

We also — if you look at our balance sheet, you’ll see about $1.3 million of digital mining assets. So we actually mine for ourselves. And put it all together, it would not be a small cryptocurrency mining company, if it weren’t diffused into three different pockets. And — but the three elements are generally speaking, getting bigger gradually. We also have, as you can see from our cryptocurrency holding summary, we have a fair amount of cryptocurrency holdings either directly or indirectly, some in ETFs and some directly. So I’ll just speak about what we’ve been doing in these things and what we’ve not been doing in these things. So the crypto has been, I dare say, pretty successful. So one question, which I get, and it will require a little bit of a lengthy answer is, the balance sheet cash, which is $38.8 million.

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Q&A Session

Why do you need as people frequently ask, but never on this call. Why do you need $38 million of cash seems to be always around that amount. Why not take the bulk of that and put it into Bitcoin. And that requires a little bit of explanation. We don’t want to be a Bitcoin holding company. We want to be a cryptocurrency mining company. And that’s an important distinction. Let’s start with this. If we were to put the $38 million into one of the various ETFs that have been improved since the last — these meetings. This is what happens to, in long run, to a cryptocurrency ETF. Cryptocurrency produces no interest, no dividends. The fees are small, but they are fees. So the fees can only be paid by selling a little bit of crypto. So what happened is even that the fund gets a lot of money, the fund that we’ve traded in net asset value.

The number of crypto coins per share or per unit, if you prefer, is always going to go down. Salient distinction, but not the only distinction with the cryptocurrency mining company is. If you do it right, the crypto per share is going up. So you’re producing crypto. And there are some very interesting performance aspects as well. So it’s theoretically possible in a year, cryptocurrency can actually go down by 20%, but you might have mined 10% more coins. And if those are indeed the numbers, you are an equilibrium. So crypto has a different risk reward pattern than your typical ETF. But the more salient point is, of course, that you’re going to be producing more crypto. You’re organically growing your net asset value, your net asset value. So if you can continue to organically grow your net asset value and you do it with regularity, you’re likely to trade at a premium to book value or premium to net asset value, which is a lot better than just trading at a net asset value level.

So it’s a very different outcome for shareholders. Another aspect, which you might find interesting. Winland and Consensus don’t nearly mine Bitcoin. Winland and Consensus are mining Bitcoin, Litecoin and Bitcoin Cash. And also, anyone who mines Litecoin is also mining Dogecoin. Why is anyone who mines Litecoin mining Dogecoin because Litecoin is a merged mine coin. And as a merged mine coin, for the same electricity, you’re mining two coins instead of one. So you could, for example, take the Dogecoin, which is what we’ve chosen to do, pay all the expenses of mining and keep Litecoin, and it’s very profitable. But the profit of mining is not the only dimension of that, which means daily operational profit. The idea is, it’s theoretically possible.

And before I say it, let me just point out that I’m probably the only person who even believes this. The lesser coins, in my humble opinion, have potentially more upside than Bitcoin, which I think has a lot of upside. The reason it might have more upside is because the size of the other networks are very small. So for example, the Bitcoin network is now over 600 exahash. An exahash, by the way, is one followed by 18 zeroes, so it’s a big number. In ordinary parlance, you’d say, quintillion. Litecoin, as an example, has in round numbers one petahash network hash rate. So one petahash is one 600,000th meaning that the Bitcoin network is 600,000 times size of Litecoin network, which explains why Bitcoin has a much bigger market capitalization.

But if you could get the hash rate to go from one petahash to two petahash, which is a rounding error in Bitcoin, could double the size of the network and probably double the value of the network. Bitcoin Cash has an aggregate network hash rate of about 2.5 exahash. So it’s less than 0.5% the size of the Bitcoin network. It’s theoretically possible for — in a whole host of scenarios for processing power to move from Bitcoin to Bitcoin Cash and it has happened, although in the small scale over the last year or two. That small scale, which most people can ignore, would indicate, and it’s happened that Bitcoin Cash actually significantly outperformed Bitcoin over last year as an example. It’s possible that Bitcoin Cash, which doesn’t have a use case right now, might find a use case.

Anyway, the network is sufficiently small, although still secure, you could make a case for it. and you can make an excellent performance case for it. So we have that. Now if you’re going to build a mining business, you have to build it gradually and slowly. The intention is, you have a lot of cash as they say to me in any event, why not put it to work? Well, here’s why not put it to work because you have to assume that every three or four years, your mining equipment is going to be obsolete. Now the estimated use for licensed equipment is actually less than three years. So a lot of it’s going to wear out. But if it doesn’t wear out, in our case, we’ve been very lucky. It hasn’t worn out. Every four years is a halving. So the common feature behind Bitcoin, Bitcoin Cash and Litecoin is a halving every four years.

Halving means that every four years, your block reward is cut in half. That’s why they call it a halving. But your cost of mining remains the same. So costs remain the same. Your revenue is cut by 50%. What business could endure that every four years. So what you need to be in position to do is you need to be able to replace your entire network, no less every four years and sometimes even more frequently than that. Now the other side of that is when you replace your network, the equipment you replace your network with is much, much more efficient in its electric power usage and actually in its durability. So you’re buying every dollar you spend for equipment buys more processing power or put another way, the cost of one terahash of processing power is constantly falling.

So for the same amount of money, that you had bought a Bitcoin miner eight years ago, today, you could probably buy 12, maybe even 14, and they’re much better. So if you invest a lot of money in one iteration, you have no way of knowing when there’s going to be a technological breakthrough. All you know is that in short order, there will be. So you’ll have no capital reserve to replace your equipment. And you see that’s actually what’s going on in a lot of the mining companies right now. Capital was raised, capital was invested. We are in Bitcoin three days away from the halving. At the current price of Bitcoin, most iterations of equipment are not going to be profitable. Now maybe next three days, the price of Bitcoin goes up and revenue is up.

But assuming it’s not, those machines had to be turned off. So if you placed orders to be delivered over many future months. By the way, when you do that, it’s actually a natural futures curve in equipment purchases. So if you order equipment for August delivery, August 2024, it’s actually meaningfully cheaper than if you order equipment for May 2024 delivery and you get a much better deal on it. So you always want to be in that position. So what’s going to happen is if the scenario proves to be true that the leading equipment generations over the last three or four years are going to be made effectively obsolete and inoperable by the halving. The modern generation equipment is going to take over. So let’s just say there’s a having. Your revenue is cut in half, Bitcoin price is unchanged, but if half machines are turned off, the people you were competing with for the block reward, some of them melt away and in the simplistic instance, you’ll get twice as much block reward measured in coins as you were getting before, even though the actual block reward itself is less, meaning you’ll get proportionately less than actually less.

So what will happen is you will be in equilibrium, you may even be in an improved profit position. So you dare not invest a lot of money any one time because if you do that, you’ve lost all your strategic flexibility. Now the negative thing from a shareholder point of view is it takes a long time to build a cryptocurrency business in that way. But I think if you were to compare, you can’t see Consensus yet because it’s publicly traded, but you can’t see Winland. So you at least have a window on how things work in a gradualistic cryptocurrency mining effort. I dare say it’s actually been very, very successful. So I think our holdings are roughly 35% of Winland May 1st, I believe, is the day of the activation and new 10b5 plan, and we’ll continue with our policy.

So I dare say, in crypto, we’re ready for just about any conceivable scenario. So we’re staying away from bold moves. All that notwithstanding, we still buy modest amounts of crypto. And were we ever to attain the majority interest of Winland, we would have to consolidate that. And it would improve our crypto holdings. I believe in our cryptocurrency holdings review which I have in front of me. I believe, correct me if I’m wrong, Therese. We’re not specifically disclosing Winland or our share of Winland and Consensus cash. Is that correct? Or am I not correct as far as that goes?

Therese Byars: I think that’s correct, Murray.

Murray Stahl: Okay. Good. All right. So let’s just go to another topic which has been thrilling, at least, is Texas Pacific Land Corp, you might observe that we actually bought more shares of Texas Pacific. There was a dispute and it’s resolved for better or real. But at the end of the day, there are incredibly few companies in the world, maybe even none. I only hesitate to say that because I don’t know every company in the world, but there are very few companies in the world that have the quality of TPL in any business and especially in commodities. So let me just point out a couple of aspects of that. Most businesses, they’ll trade at a certain price earnings ratio, and in a certain sense, it’s a little bit of illusion. Why there’s a little bit of illusion?

I’m making up a number here, but if you bought a business at 12 times earnings. Yes, it’s 12 times earnings and its GAAP earnings, but it’s not as if you can take the entirety of the earnings if you wish to and disperse it to shareholders. You can’t do that. So different companies have different ratios. But in the end of the day, you have to reinvest a goodly portion and in many cases, more than goodly portion of the earnings to maintain the resiliency of the business. Now all you have to do is look at the financial statements in TPL. You’ll say the capital expenditures are de minimis. So the earnings, at least in principle, are available to be used for shareholders. In theory, they can buy back stock. In theory, they can make acquisitions.

But there are acquisitions that are in there with a view to growing the business or they can just be paid out in for dividends. Very, very few companies have that faculty. Also longevity of the business, because what is the business? It’s oil royalties, it’s land, which is easements on land, and it’s water, both source water and produced water and land is forever. Water is forever. There were no other businesses that have those characteristics. So even commodity-based businesses, so let’s make two points. The first point is just regular business. Most businesses either provide a service or make a product? And how many businesses, even the best, I can say they’re unchanged after many years, the business changes, competitors arise, the product becomes obsolete, maybe more capitalists be invested to maintain the edge.

I think historically, very few companies have maintained the edge over the course of decades. In these kind of businesses, you really don’t have to. Now let’s turn to commodity companies. Commodity companies, you might not be aware of this, but most commodities have negative real rates of return. So for example, you couldn’t do this in reality, but you could certainly do it theoretically. Let’s say, you measured wheat. I just wrote something saying published, but one of the facts I put in the paper was the price of wheat in 1866,1867, Department of Agriculture, United States Department of Agriculture, actually maintains records of prices in a planting season because that’s the relevant statistics from their point of view. Right after the Civil War, the price of wheat was $2.06 a bushel.

On the eve of the First World War, price was considerably less than $1. So people naively say that investing in commodities for a long period of time, they’re inflation beneficiaries, well, they’re not. Now I could go to the lowest price recorded and last 100-plus years of wheat, which is 1932, 1933, planting year, where the wheat price actually declined, I think, $0.38 a bushel. And can you imagine looking at wheat prices in 1932 or ’33 and seeing a price of $0.38 a bushel. And there are people who were alive in 1932, ’33, they actually had — were old enough to have lived through the Civil War. There were even people who actually fought in the Civil War. And they’re thinking about inflation, what might have been they are thinking about inflation.

And even today, the price of wheat is maybe $5.5 a bushel. So what is the actual rate of return? It’s a fraction of the rate of inflation for that time period. Now one of the reasons it’s a fraction inflation. I can give you statistics on all the commodities. I won’t do it because you’ll find it boring, but I think you should look these things up for yourself. So what do producers of commodities, remember, these are capital-intensive commodity companies. What is their number one mission to a) produce more of the substances which, of course, increases the supply and much, much more importantly b) what is b) reduce the cost of extraction of that commodity where it’s a gold company, a copper company, whatever. And not — in most instances, they don’t really reduce the cost — the producing commodity in nominal terms, but they do succeed in reducing it in real terms.

So the cost of extraction is usually going down in real terms, and wheat is an example of that. Then the price is not going to advance at a rate commensurate with inflation. Now, you couldn’t, in reality have bought wheat in 1866, ’67 planting year and kept it because a lot of commodities just don’t have unlimited life. As a matter of fact, most commodities don’t have unlimited life. So even oil, I guess you could say it has unlimited life, only if it’s in the ground. You have to use it if it comes to the surface because the cost of storing it, imagine if they could store oil from 1866, ’67 to now. What was the point? The cost of storage basically overwhelmed what the cost of production was. You’re not going to make money. So most commodities have negative real rates of return.

Land is an exception. Land has a positive real rate of return. The other big exemption is water. Water has a positive rate of return of time because you wouldn’t call it storage, but land is land. It’s not really being stored in the conventional sense of the word, but it’s not going anywhere. Water is the same thing. It’s underground unless you bring it to the surface, it doesn’t get used at all. But if you do bring to the surface, it has a natural refresh rate. And that’s why in the world of inflation beneficiaries or inflation protection, if you prefer, that’s why it’s so important. That’s why we’re so enthusiastic about. And we look forward to owning it for a long period of time to come. So to give you an overview of what we’re doing. I asked myself a couple of questions that I never seem to get in the real world, which is this forum, but I hope you found that interesting.

But now let’s go to the real world. I’m sure you have questions, which have been presubmitted. I don’t know what they are, and I’d be delighted to answer whatever anyone would like to post to me. So if you will accommodate that, Therese, I’ll be glad to answer any questions.

Therese Byars: It’s my pleasure. The first question begins. Thanks for all your work and congratulations on the Scott’s Liquid Gold transaction. I had a quick Miami International Holdings accounting question. Could you help me understand the change in the MIH direct account balance from the first quarter of 2024 at $4.7 million to the second quarter of 2024 at $7 million and there is more. I understand the investment is held at cost, but I see based on the top five holdings documents that FRMO’s shares of MIH increased from 1.821 million in Q1 2024 to 1.824 million in the second quarter of 2024. Even if we conservatively assume all these — all of that increase in MIH’s directly attributable to FRMO’s balance sheet versus South LaSalle, the incremental purchase price seems very high versus a $7-ish share valuation given to MIH a few years ago.

Was the change in the MIH direct balance due to a contribution from FRMO into MIH? And if so, why? If it was due to direct purchases, can you help me understand where my math above is erroneous, if at all? And Judy actually provided some more information, Judy Yellin, would you like me to read that?

Murray Stahl: Please. Always welcome it.

Therese Byars: She’s the fund controller. And — there is — this is what she said. There is no difference in the number of MIH shares held directly by FRMO and Fromex from the first quarter to the second quarter. South LaSalle Partners LP did purchase almost 500,000 additional shares in November 2023. And while FRMO’s investment in South Lasalle was down about 2% by the end of the second quarter due to additional inflows in South LaSalle by outside investors is still amounts to an extra 3,000 shares owned indirectly. You can see this in the top five files from August 31st, 2023, and November 30th, 2023. Further, the MIH shares are not held at cost. We’ve been marking them monthly. The price we used for August 31st, 2023, was $7.18 per share.

And for November 30th, 2023, we used $10.66. At year-end, we used $10.30 with the help of an outside valuation firm, and we’ll continue to use that pricing through March 31st, 2024, when we’ll get a new valuation from the outside valuation firm. That’s it from Judy.

Murray Stahl: Okay. So basically, I’ll add a little color to that. So the funds, South LaSalle, which we’re invested in, had the opportunity. Every now and then, somebody, don’t forget, MIAX is a private company. And people waiting for an IPO. And every now and then, someone takes position. The IPO has not yet happened. Therefore, the IPO will never happen. I don’t necessarily agree with that, but such as the position and the people who actually believe that will offer shares up from time to time at preposterously low prices. So we would be remiss in our duty if we didn’t buy them. And the fund raised some money, and we participate in that. But basically, the bulk of the change in value is the increase in value. Now why is there — how does that value get determined?

It has two components to it. First component is we have an independent valuation assessment where just — it’s compared to publicly traded exchanges and it’s very conservative, in my view, but such it is. And then the second amount of it is. Every now and then, the company was a private placement. And that is not at the $7 price. So that gets taken into account in the valuation. That’s how we arrived at that. So it’s actually a pretty good investment for us. I don’t know what to value what the price we’re using. Don’t forget, a lot of our shares came from the merger between, Minneapolis Grain Exchange, which we were a big holder of into MIAX and a lot of them came from the merger of Bermuda Stock Exchange into MIAX, and we were big holders of both of those companies.

So I don’t remember what valuation we were using way back in a day, but it was considerably beneath the current valuation. And all you really have to do even I know it’s a private company, but if you go into MIAX website, you look at the volume, you could see how robust the growth has been and a lot of valuation even though it’s not precise, so you can get a real sense of how much advances changes in volume because volume is the most important dynamic of an exchange. So I hope that addresses that. Other questions?

Therese Byars: Yes. Some of the commentary on the issue of noncontrolling interest confuses me and seems a bit contradictory. Perhaps Murray could comment on his thoughts as to how best to value the company, particularly with respect to the net asset value of about $4 a share without noncontrolling and about $8 including noncontrolling. I’m trying to value of the company from my point of view, and in particular, what I would get as a public shareholder, if FRMO were dissolved as of November 30th, 2023 with the proceeds being exactly what is on the balance sheet. If I’m interpreting yours and Murray’s comments correctly, I as a public shareholder, would get $4.69, not the $8. Do you agree? If so, that reconciles Murray’s comment that the stock is selling for more than book, i.e., $7 plus versus $4.69 or about 160% of book value for the public shareholders? Thanks for humoring my efforts at clarity.