Thérèse Byars - Corporate Secretary Murray Stahl - CEO Steven Bregman - President, CFO & COO

Thank you, David. Good afternoon, everyone.

This is Thérèse Byars speaking, and I'm the Corporate Secretary of FRMO Corp. We appreciate all of you joining us for today's 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 exceed -- 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 2019 first quarter earnings.

A summary transcript of this call will be posted on the FRMO website in the coming weeks. A replay of this call will be available for one month beginning at 7:15 this evening.

To listen to the replay you may dial the following; for domestic callers, it's 1-888-203-1112; for international toll-number; 719-457-0820, when prompted, key-in the passcode, 6149821. These dial-in numbers are noted in the FRMO press release stated October 12, 2018 which may be found on the FRMO website by clicking the link called information statements and announcements.

The press release can also be viewed on the OTC Markets website by typing in the ticker symbol, FMRO, and clicking on the news link. And now, I'll turn the discussion over to Mr.Stahl.

Thank you, Thérèse, and thank you everybody for joining us. I thought I'd commence today by reviewing income statement balance sheet in the sense that showing you how to read it because there is some new accounting guidelines, and if you don't know how to read it I would imagine it looks fairly bizarre.

So let's begin with the balance sheet. Cash is pretty straightforward, the cash receivables is pretty straightforward, if you come to equity securities at fair value, it's still less than straightforward because -- please understand that we are -- FRMO I should say is an investor in something HK Hard Assets; Horizon Kinetics Hard Assets.

Horizon Kinetics Hard Assets is something we consolidate on the balance sheet but FRMO doesn't own the entirety of that partnerships. So the accounting practice is as follows; you take all of the assets, whatever they are, allow them [ph] half of the equity securities and you put them on the equity securities category on our balance sheet.

And then, on the liability side, you backout non-controlling interests, you will see all the way down right above shareholders equity non-controlling interest. So if someone doesn't pay attention to that, it's very easy to get the idea that we really are sitting here with $52.6 million in equity securities; we're not sitting there with $56 million equity securities, it's a lower number.

Why do we even consolidate this? Why do we -- why don't we just be a partner like we were partner in the other funds?

Because this is a partnership that FRMO is actually running and that is actually appropriate accounting treatment; so which we'll see in the future is -- you will see other partnerships FRMO is actually running, meaning we're not relying on any outside parties, we're doing it entirely on our own. Why do we want to do that?

Well, it really is to do with the idea of permanent capital as opposed to leading capital. Before I get to that, let me just turn to the income statement because I'd like to make some comments about that, in terms of how to read it; and then we'll go to more cerebral matters.

So, you look at the revenue number. Under the newly adopted accounting guidelines; things like unrealized gains from securities or investments in partnership, the extent you have them you are required to report them as revenue.

Now it's really bizarre to think about this revenue in one sense because clearly what goes up can come down; so theoretically, if these numbers were negative we could actually have -- at least we really hope it never happens, we actually have negative revenue which is really bizarre. But that my friends is the accounting treatment and we have no alternative to live with it.

I don't want you to get the idea that in three months we somehow obtain nearly $15 million in actual revenue; the revenue [indiscernible] less than that later on go into what constitutes the outcome we understood as definition of revenue. So, why we want to have these partnerships?

Now, before we get to that question, how do we get the money to invest in the various things we invested in? And so did came for the HK -- Horizon Kinetics revenue share, some of it came from the investment we made in Horizon Kinetics, meaning we get dividends from Horizon Kinetics or we get a revenue share from -- or the top from Horizon Kinetics.

We also have short sell events which you will see on the books as we have about $11.8 million on a cost basis, and about $6.5 million on a market value basis. Over the years, we've realized some profits, in some cases these were option positions that we -- we were actually short of options.

A lot of our investments came from that -- I think all our investments really came from those three revenue sources. And in addition to that we generated a fair amount of cash happily from selling investments, so we didn't spend all the money we got.

This short sale position is kind of interesting, you don't pay taxes till you cover them, so they are very tax efficient, we get tax-free loan. Now we build up to be at these positions in these funds; the very same thing we did in FRMO, we'd like to rephrase it in the funds themselves.

So we're going to use security positions to the extent we can as collateral and happy at more short positions and generate yet more cash; that cash if and when we generate is going to be reflected on the balance sheet because it's going to be consolidated. And the idea is to grow our investments, the idea is not to take this cash and spend it on security ideas that we have, and the idea is not to spend on [indiscernible] unless there is some kind of economic crisis, we can buy business really cheap, tested therefore [ph].

And maybe we'll get that chance, maybe we won't get that chance, that's our so-called [indiscernible]; and we have a really good target, we'll move, till that time we'll try to accumulate cash. We've also used a little bit of cash, almost around the year -- and along you see computer equipment, that's actual mining equipment that we operate.

Subsequent to quarter end, we made better investment on mining equipment; about next quarter it's going to increase, it won't be a big number but the idea is to gradually grow the mining business because there is actually a very high return on the equity business. Ultimately, crypto is something -- it's really important to us; looking for other ways to enter that business, minor way is we have this small investment in digital currency group.

Other minor way is, we have these investments in cryptocurrency mining entities, it's just a start of something we hope be successful and get there; that's basically what we're doing as far as that goes now. The asset management business -- and we've talked about this a lot and it's worth more stressing is now characterized by permanent capital in the way HK Hard Assets is characterized.

We'd love to have more HK Hard Assets. Only people so far we've led into HK Hard Assets are people that we know who share our philosophy of [indiscernible], and a lot of that money in HK Hard Assets actually comes from the people who run FRMO.

So we made a deal with ourselves. However, ultimately we will find a way [ph] that can turn into an interesting business into itself.

The regular business -- the investment management business is characterized by lower fees, now they have -- believe it or not, zero-fee index funds. How they compete the zero-fee index funds in a diversified portfolio basis, and you've seen probably from looking at index fund companies that the flows in indexes starting to weigh-in because no matter how big it is, end of the day, it's finite number and that is becoming problematic.

So if you're going to be investment management business in future -- and it has a bright future, you got to do something very, very different -- tend to diversify portfolio. No way to do it unless you start with your own money and show people the way, this is the way.

Horizon just did -- Horizon Kinetics just closed the second Cryptocurrency Mining LLC, placed over $8 million; this is a fee-paying vehicle unlike the first vehicle, and it's important to us because this is a permanent capital vehicle. If it works, and we think it is going to work -- we expect to see more of them, and in fact one day those LLCs will actually be related to securities.

Just a question in time [ph]; we've also observed that last couple of months since we had the -- last month we have the shareholder meeting, there have been some further announcements about cryptocurrency custody which is the next thing on the critical path to making cryptocurrency use the generalized way out [ph]. So this is going to be in our humble opinion, in not too distant future, a bonafide asset class, and we like it, it has a lot of return potential.

It's one thing to say here internally, and say you know, I remember you saying this; that -- for the investment world, the institutional world, to take cryptocurrency seriously, you need one party with suitable gravitas to do it. And -- of course once they do, whichever one that is, either it will be [indiscernible] or Fidelity or some other so-called big player, then the dam breaks and they all rush-in.

It's one thing to say it and then here we are six months later, and it's happening just like that. I can turn on Bloomberg Radio the morning and then I talk about another one this morning, yesterday it was Fidelity working on a custody solutions and so forth.

Maybe we got off to old reasons of why this is; so what you're going to likely to see from Horizon Kinetics which we're likely to see in FRMO is more unique investments that other people don't make. Now one thing is worthwhile on the subject of cryptocurrency is of course where that we had a big exposure to cryptocurrency, we haven't sold $1 of crypto, not one.

And of course, you are aware what happened to cryptocurrency prices from December 31 to the most recent data, balance sheet data, meaning it's down a lot; I don't remember the exact number but it's got to be somewhere between negative 16% to 17%, I don't think I'm straining far from reality. And you can see we sized it right, we didn't fail to increase shareholders equity, even living through that.

Now we have a little secret weapon, it's worthwhile sharing with you; and that secret weapon is really long-term investment because when we make X dollars profit as you see in this balance sheet, cryptocurrency in evaluated market, understand that there is an offsetting at some degree to defer tax liability. So when cryptocurrency goes down in value, we take that in inflation for tax liabilities going down as well.

So we get to share some of our depreciation as we're with United States government which is only fair since they took it upon themselves to share the profits with us in the good times. So the tax system is actually ironically, from a mathematical standpoint, an interesting way of dampening volatility.

It's really government's effort, [indiscernible] of volatility control. So when you look at the financial statements, and you're looking in relation to crypto, please keep that in mind.

Now the other thing we bought, we burdened the ways our new -- ways our cryptocurrency exposure, do you know where it is? What is the cryptocurrency exposure and Horizon multi-strategy?

[Indiscernible]. Yes, as active because they can see on the financial statements the footnotes, how much money we have and multi-strategy, we're back into it via dollars.

In the meantime, while you're backing into it, in the Polestar front [ph], the position and size is about 8% in round numbers, to give you some information of how to look at it and the CRYP [ph] Fund, I think traditionally the size is something like 17%, and multi-strategy it is -- I believe it's over 5%. I think a little bit more, okay, but I will have to check.

In the meantime, while he is checking, few words about crypto and why it's such an important asset class, and so forth, but it's worthwhile stressing it. The bond asset class consider these numbers, let's see you brought in round numbers, a 10-year treasury bond and with yields little over 3%, let's just call 3%.

Pay the tax rate that you think is appropriate for you, meaning you duck that, now maybe you're at 1.6%. What's the inflation rate?

It's higher. It guarantees also purchasing power; that can't be the anchor to wind [ph] of diversified portfolio.

So you could say, okay, what are the rate less than 3%? What if it was 6%?

So 6%, apply to tax rate; whatever it is, and where are you now? Maybe you're at 3.50%.

The inflation rate generously calculated is 2.90% but some people think the inflation rate is higher than that, Steve will debate that question. However, what happens if the rate were really 6%?

Many states of America has $71.5 trillion of debt, not only it's balance sheet or some of it is on it's balance sheet, $71.5 trillion has all the debt of any type from treasury bonds to car loans, student loans, whatever. Through the average rate on that we're 6%, so [indiscernible] $71.5 trillion, mostly 0.06% [ph], it's $4.29 trillion, entire GDP is $20.5 trillion.

So pay $20.5 trillion and takeaway $4.29 trillion. The real GDP is considerably less, meaning we're looking at the GDP that we have in theory achieved but we really need to look at the GDP that will be available for consumption, GDP is consumption but a part of it is really monies that we can't use because we have to pay that debt to the country, we ourselves can see from our balance sheet we don't really have any debt.

It doesn't affect us; which really means that the debt burden is spread, not evenly across the population, it's construed [ph] on some subset of populations, raise the rate to 6% and all sorts of stresses on the system begin to be revealed. That's not a good situation, it's not a good stage for the equity market, [indiscernible] high valuation, it's not a good situation for the economy, and it's a good reason why we have a lot of cash in investment.

By the way, did you get the number? I knew you would if you were -- that number is?

Direct invest in cryptocurrency is 14%. Okay, well I suspected $18 million [ph], you know that.

So from that if you take numbers like AVU [ph], you take 21.4 and multiply by the market value of the multi-strategy fund and you take 0.08 and multiply by the market value of the post-R [ph] fund, you take roughly 0.17 and multiply by the market value of the Group A fund which is really called CDK; you will more or less get our crypto exposure. We have a little bit of crypto assets held at the FRMO level since your pay include crypto exposure to usual currency group and the cryptocurrency mining entities, and of course the computer equipment which are being used, a pretty good idea, we offer few hundred dollars, won't be offline much.

I think next time if I don't forget to bring it, I'll bring the exact points that we have full denominations, we'll share it -- just -- I apologize, I forgot to bring it. It's not a tremendous number but it's worthwhile including.

Anyway, you're going to see a lot more cryptocurrency work in not too distant future. Now, I'll turn to go for questions, if you have.

I think Steve, do you want to add?

There was a question about the consultancies and advisory fees; it's a revenue item on the income statement and the question was whether that will come solely from FRMO's 4.199% interest in the Horizon revenue stream? And if not, what percentage comes from that?

Okay, I'll give the exact number. So for the quarter you can see it's one the income statement, the consultancy fees were $540,000.

There is $2,000 that really board fee, that's my board fee on being on the Minneapolis Grain Exchange Board. So of the balance, there is $10,000 roughly consulting fees that comes from something other -- the HK revenue share, the HK revenue sharing number I'm rounding is $519,000.

Maybe 96% of that revenue line is the HK revenue for this space.

It's also a little bit less than $11,000; so far in the quarter and cryptocurrency mining revenue, that goes in the mix. And those with older things up and the way we look at -- the Directors fees and the consultancy and advisory fees comes to $542,000.

The next question we have is the balance sheet cash. You want to deal it?

We adjusted it a little bit but this question really deals with why don't we start buying back FRMO stocks. You will be aware looking at our proxy statement; we as shows FRMO, we owned bulk of FRMO.

So please understand that if we buyback diminimus amount, it's not going to matter, we buyback a substantial amount to take the company private. So we have almost enough money on the balance sheet to buyback all shares that we don't own.

But then we wouldn't be a public company, be a private company and we want to be a public company, so we really need to be judicious in how we do it. That said, Horizon Kinetics, which also has liquid assets in it's balance sheet which we don't see here because Horizon Kinetics is unconsolidated.

Horizon Kinetics has over $80 million of liquid assets in it's balance sheet, and Horizon Kinetics is generally speaking buying it's shares of FRMO with it's cash, and they didn't bring with me how many shares we own in Horizon Kinetics but next time I won't neglect to bring it. And we are of course long-term holders for FRMO there, we have to -- there is a public filing, I forgot what it's called but it's one of these plans where you buy every day irrespective of what the market price is, you file it with the SEC, it's going through a year and it's a two-week hiatus.

And then you start again, I think we just had our two-week hiatus and we started again, buying for next 12 months. And I believe we buy 500 shares each and every trading day unless for some reason FRMO doesn't trade.

That's what we're doing with our balance sheet cash, and as far as the balance of it is, they are waiting for opportunity, and you want to spend that money, you can be very aggressive but you want to do it in a stress point; this is not a stress point, hopefully we won't be in a stress point in which case we have a nice problem, I have a lot of cash, we'll figure out something to do with it.

But we're earning many, many multiples more on that cash [indiscernible].

That is true. I think we're getting a whole 2% plus.

Anyway, it's better than worse.

You can say that.

Anyway, those are the two questions we actually got. So we covered what we're doing strategically, we covered the changes in income statement and balance sheet, how to read it, covered the cash, answered a question or two, and -- those are the main things we wanted to cover.

Do you have anything else you wanted to?

Not as such. It's been an honor and a pleasure working for FRMO and it's shareholders.

Of course, I say the same and we look forward to your questions and your queries, and we'll rephrase this of course in three months. And look forward to working further.

Thanks so much for attending.

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and thank you for joining us this afternoon.