FRMO Corp | Investing along Murray Stahl & Steve Bregman

FRMO Corporation (OTCMKTS: FRMO) is the publicly traded investment vehicle of Murray Stahl and Steve Bregman. FRMO Corp owns a significant stake in Horizon Kinetics, an asset management company, controlled by Stahl and Bregman as well as various other smaller investments.

The company was originally incorporated in Delaware in 1993. In 2001, FRMO spun off its operations and Stahl and Bregman took over the shell. Since that time, FRMO has focused its activities on making strategic investments in public and private companies and providing investment-related advisory services.

FRMO Corp Write-ups

The Origin of FRMO Corp.

A company called FRM Nexus (which stood for Food Services, Real Estate Development and Medical Financing) was formed in 1993. On August 31, 2000, FRM filed Form 8-K with the Securities and Exchange Commission, disclosing its intention to spin-off all its operating assets to its shareholders.

The disclosure also announced a change of control, with Kinetics Asset Management and a group represented by Murray Stahl and Steve Bregman taking over the reins. The spin-off was completed on January 21, 2001. On November 29, 2001, the company changed its name to FRMO Corp.

FRMO stands for Financial Risk Management Organization.

Murray Stahl and Steve Bregman

Murray Stahl and Steve Bregman came from the asset management industry. They were involved in Horizon Research Group and Kinetics Asset Management, both operationally and through ownership:

Murray Stahl: “Let me explain a little bit about who I am. I started in this business in 1978, so I date myself somewhat. I started at Bankers Trust Company, which is now actually part of Deutsche Bank. I started as a lowly computer programmer. I became an industry specialist, you could say a stock analyst. Then they made me a portfolio manager of a fund. I eventually ran 3 funds. I was on the bank’s investment strategy committee.

16-year career, my life is going great. Then some of my colleagues suggested that I should start my own company. So we quit to start our own company. Then called Horizon Asset Management. In 1994, now Horizon Kinetics.”

– From Murray Stahl’s Presentation on Value Creation from Value Destruction

After the Spin-Off, the newly named FRMO Corp was basically a shell with $10,000 in cash and 1,800,000 shares of common equity ($0.00056 per share).

Subsequently, the company issued new shares in a private placement. In total, 34,200,000 shares of common stock were issued for $3,258,000 ($0.095 per share). 28,8 million of those shares were issued to the Stahl Bregman group. The transaction is pretty interesting for two reasons. Firstly, Stahl and Bregman overpaid for their FRMO stock ($0.095 vs $0.00056 in NAV of existing shares). Secondly, they didn’t actually pay for the shares upfront but paid with future cash flows they would receive from their stake in Kinetics:

The 28,800,000 shares were issued to the Stahl Bregman Group on January 23, 2001 but are held in escrow and delivered as paid at the rate of ten cents ($.10) per share. The Stahl Bregman Group is obligated to pay to FRM the after tax amount (fixed at 54% of the dividend) of all dividends they receive from Kinetics until the total $2,880,000 has been paid. The Stahl Bregman Group expects the $2,880,000 to be paid to FRM in about five years. The installment payments depend on actual future dividends received from Kinetics.

– FRMO Corp 2001 Annual Report

Then they went to work.

Intellectual Capital

Murray Stahl and Steve Bregman explained their vision with FRMO Corp. in the company’s letter to shareholders in 2002:

All of our assets are examples of intellectual capital. The level of business activity can be increased without the creation of expenses. FRMO merely provides a management expertise. The firm in its first year has built a foundation. Its next challenge is to build a structure upon this foundation. Management will be engaged in this effort in the course of the next year.

– From the FRMO Corp. 2001 Letter to Shareholders (June, 2002)

In the first year of operation, FRMO Corp. made various agreements with other investment managers and investment vehicles. This included:

  • FRMO received a 7.71% interest in Kinetics Advisors in exchange of 315 shares of FRMO common stock and a 2% interest in the subscription fees of a Horizon Research Group publication called The Convertible/High Yield Arbitrage Report in exchange for 50 shares of FRMO common stock.
  • One of the most important deals for FRMO was an acquisition of research service fees that Horizon Research Group received from The New Paradigm Fund (later renamed the Paradigm Fund) in exchange for 80.003 shares of FRMO common stock. At the time, the fund had less than $11 million in assets under management.
  • FRMO also acquired research service fees from Horizon Research Group from a fund called the Middle East Growth Fund in exchange for 3,456 common shares.
  • An agreement whereby Stahl and Bregman would provide consulting services to Santa Monica Partners LP in exchange for $21,600 per year. Santa Monica is, to this day, a shareholder in FRMO.
  • Various other fee sharing deals.

By the end of February 2002, the balance sheet of FRMO Corp. consisted of intangible assets that included the fee & carried interest-sharing agreements and a grand total of $83 thousand in cash. 

FRMO Corp Balance Sheet 2002
At the end of February 2002, FRMO Corp had $83,000 in cash and $161,068 in total assets.

Now fast forward to 2004.

Since 2002, no new agreements have been made, but Stahl and Bregman have updated the description of the company a bit. The company description in the FRMO 2004 annual report goes as follows:

FRMO Corp. is an intellectual capital firm. The experience of its management has been in the analysis of public companies within a framework of identifying investment strategies and techniques that reduce risk. The business will include identification of assets, particularly in the early stages of the expression of their ultimate value, and the participation with them in ways that are calculated to increase the value of the shareholders’ interest in FRMO. Such assets are expected to include, but are not limited to, those whose values and earnings are based on intellectual capital. Of the many varieties of capital upon which investors have earned returns, ranging from real estate to silicon, perhaps the highest returns on capital have been earned on intellectual capital. It is the goal of FRMO to maximize its return on this form of asset. The identification of any business opportunities will follow the process employed by Horizon Research Group to select and evaluate investment opportunities and strategies.

At the end of February 2004, shareholders equity has grown to $486,775 and the company has roughly the same amount in cash and marketable securities. The company now has just over 36 million shares outstanding, so book value is just about 9.6 cents if we factor in the shares that have been issued to the Stahl Bregman Group, but are yet to be paid for. 

But it’s not all sunshine and roses. In a Letter to Shareholders, dated June 16 2005, Steve Bregman explains that FRMO Corp is not able to produce audited financial statements, conforming to SEC regulations. To make a long story short, due to changes in accounting guidelines, FRMO was now required to consolidate its 8.44% stake in Kinetics Advisers, LLC into its operating results. 

Horizon Advisers was the investment manager of two hedge funds. The two hedge funds were audited, but the LLC was a private company and hence not audited. Additionally, the LLC had different reporting period than FRMO. As a result, it was not possible for the auditor of FRMO to reconcile, and produce consolidated financial statements of the two entities that were compliant with the SEC. 

We don’t see another FRMO annual report until 2009. During the dark period, the share count has increased by a little less than 70 thousand shares. At the same time, shareholders equity has surpassed $26 million, bringing book value per share to $0.70. 

FRMO Corp 10 Years of Book Value Growth
FRMO Corp – The First 10 Years

On May 1, 2011, Kinetics Advisers merged with Horizon Asset management, forming Horizon Kinetics LLC. As a result, the ownership stake of FRMO Corp in the merged entity just about 0.5%. As a consequence of the merger, FRMO management was now hopeful of being able to submit a fully GAAP compliant financial statements going forward. 

On March 9, 2012, Steve Bregman pens an interim letter to shareholders. Since the merger took place on May 1, whilst FRMO’s calendar year started on March 1, FRMO would not be able to show a fully compliant 2011 comparison in its 2012 financial statements (due to the one month overlap). As a result, the SEC did not accept FRMO’s proposal to wait a year to show fully compliant financial statements and required that FRMO de‐register for the Nasdaq exchange. 

On January 17, 2012, FRMO undertook a reverse/forward stock split in order to reduce the number of shareholders of record below 300, thereby permitting the company to de‐register in accordance with the SEC’s directive. Subsequently, the company changed it Fiscal Year to end on May 31 and listed its shares on OTC Markets, a leading over‐the‐counter marketplace for equity securities. 

Currently, FRMO Corp has a market cap of around $290 million. Yet, the company is still listed on the OTC Market. 

The Horizon Kinetics Revenue Interest

In 2013, Horizon Kinetics and FRMO simplified their revenue stream arrangement. As previously explained, FRMO owned stakes in various revenue streams that were connected to sources, ranging from research fees to specific mutual funds and hedge funds and subscription fees from research publications. FRMO swapped all its revenue interests for a single interest equal to 4.199% of the gross revenues of Horizon Kinetics.

I think it is safe to say that the HK Revenue Stream is a unique asset. Frankly, there existing no asset similar to this in the public markets. Normally, when asset management companies offer a piece of themselves to the public markets, it is through structures that isolate the upside exposure of the partners. The shareholders get paid once the partners have taken their share.

The HK Revenue Share is unique in the sense that it comes directly from the revenues of Horizon Kinetics, essentially before the partners are getting paid. The revenue stream is and will remain volatile from period to period. A big component of the revenue stream consists of our performance fees paid to Horizon Kinetics, which are highly unpredictable.

Furthermore, the asset management industry as a whole is going through a transition, with funds flowing to passive strategies, such as ETFs, that operate with a much lower cost base. Horizon Kinetics ability to generate fees have gone down over the last few years and might continue to do so in the future.

The revenue stream and the HK equity share are valued at about the same amount on the FRMO balance sheet. Yet, I would posit the revenue stream is many times more valuable than the equity stake. While the operations of Horizon Kinetics could easily become unprofitable, for example, if AUM were to drastically decrease, it is mathematically impossible for the revenue stream to be a number less than zero.

Business Model 

Normally, when a company sells a revenue or a royalty stream, the lines are drawn pretty clearly in the sand. In the case of FRMO and Horizon Kinetics, the lines are somewhat more blurry. FRMO owns a revenue stream in Horizon Kinetics and provides intellectual capital to Horizon Kinetics. But said intellectual capital consists mainly of the combined experience and brain power of Stahl and Bregman.

During the 3Q2019 Conference Call, Murray Stahl went on to explain in a bit more detail the interaction between FRMO Corp and Horizon Kinetics.

Question: Over the last few years you seem to be taking many of the individual assets, like some of the exchanges that were on FRMO’s balance sheet and putting them in HK funds. Is this what will happen to most of the investments? Even the short selling of path-depend ETFs. Do you see this as a net benefit for FRMO? We obviously get a benefit from the fees clients pay in the funds. But do we have to pay the fees as well?

Murray Stahl: Okay. Here’s how it works: We get an idea and we start doing it with FRMO’s capital. To the extent we are doing it with FRMO’s capital, we are not paying any fees.

To the extent that we have an investment, let’s say, in the Polestar Fund, we don’t pay the performance fee. We get back dispensation. Obviously, to the extent that there is an audit and other things that we are going to participate pro rata because that’s a benefit for everyone, but we don’t pay the performance fees. Whatever we do with FRMO’s accounts, we don’t pay a fee on it.

So it had an investment management rationale on an operational sense. Because we are trying to figure out how operationally to orchestrate an investment. And let’s say in the case of the path-dependent funds, there are a lot of things to figure out.

You have to figure out margin availability. You have to figure out if goes against you, will you get a margin call. So, it made absolutely no economic sense from Horizons point of view, taking in any clients funds. And we really haven’t had the operations worked out. We can theorize all we want but until you actually do it, you don’t know.

So, for example, in one case I can think of, we thought we have it very well figured out and the prime broker really would not want to give us a straight answer about what the margin requirements are for various securities that kept changing.

We never had a problem, we never had a margin call, but we wanted to know just philosophically just how far we could take this thing. We never actually got a straight answer, but we figured out how to work it out.

Legalistically, you could say: that’s an investment. But I would say that in a broader sense, that’s an operation. Because we are trying to figure out how to develop a fund for our client base. And the only way we can do it is to buy or sell an asset. There is no other way that can happen. So I would call it an operation, but maybe I’m not using the word in its properly defined sense.

In any event, for whatever it’s worth, that was the intent. Now, the investments themselves, to the extent that we made them, we didn’t in most cases deposit them in funds. So, let’s say the actual investment we made, let’s say in the exchanges, we still own them directly. We might have orchestrated Horizon’s funds around the same ideas, but we kept our investments out of the funds because we owned them directly and to the extent, we own them directly we don’t pay any fees.

– From the 3Q2019 FRMO Conference Call

Speciality Investment Products

One of the qualities that I see in FRMO Corp is the ability of Murray Stahl and Steve Bregman to embrace change. There are many conventional active investment managers that have come under severe duress in recent years. In many cases, the distress has been caused by the inability of those asset managers to create distinctive investment products. In a sense, the movement to passive products has, to some degree exposed many investment managers as to the closet indexers that they are.

Horizon Kinetics, through the leadership of Stahl and Bregman, seem to have realized early on, that if they were to survive they would need to be truly contrarian.

  • The mutual funds that are managed by Kinetics Funds are pretty eclectic and highly unconventional when compared to the benchmark indices. As an example, the Paradigm Fund, which is by far the biggest of Kinetics Funds, has a 40% position in Texas Pacific Land Trust and a portfolio turnover ratio of just 1%.
  • Horizon Kinetics has also been very active in developing new strategies and products. The company created an Owner Operator index and partnered with Virtus for an index fund. They created an investment strategy that is based on shorting path-dependent ETFs and took over the management of a closed-end mutual fund that was about to be liquidated.
  • FRMO is also one of the first conventional asset management company that started publishing research and experimenting with cryptocurrency. Horizon Kinetics is now actively managing investments products into cryptocurrency mining. Based on comments by Murray Stahl, I think it is likely that Horizon Kinetics will expand the mining strategies through a Closed-End fund or even a master limited partnership.

Assets and Investments

A list of FRMO Corp’s main investments and assets: 

Horizon Kinetics

FRMO Corp’s principal investment is its stake in Horizon Kinetics, which consists of ownership interest and a revenue sharing interest. Horizon was co-founded by Murray Stahl and Steven Bregman, who are officers and principal stockholders of the Company. Horizon is an investment advisory and independent research firm, the research activities serving primarily institutional investors.

Horizon provides an in-depth analysis of information-poor, under-researched companies and strategies to identify the complex or overlooked situations that can offer an advantage to the investor.

Kinetics Funds

Kinetics Asset Management LLC serves as investment adviser to Kinetics Mutual Funds, Inc., a series of nine mutual funds with combined assets under management of $1.5 billion as of June 30, 2018.

The Funds’ investment team is led by Peter Doyle and Murray Stahl. The investment team consists of 17 seasoned investment professionals that have an average tenure of 15 years with the Firm and 25 years in the industry. The firm and employee invest significant capital alongside its investors.

Renn Fund

Horizon Kinetics became the investment manager of Renn Fund in June 2017. Renn Fund is Closed-End Fund that trades on the Nasdaq Exchange. At the beginning of 2020, the Fund had about $12 million in total assets. 

Horizon Kinetics Hard Assets

Horizon Kinetics Hard Assets is a New York limited liability company formed by Horizon, and certain officers, principal stockholders and directors of the Company for the purpose of investing in companies that own ‘hard assets’ with intrinsic value such as commodities including oil, natural gas, precious metals as well as land assets including industrial and commercial real estate, and other similar assets.

FRMO owns about 15% in HKHA, yet it is required to consolidate it in its financial statements. About 99% of the asset value of HKHA derives from its stake in Texas Pacific Land Trust. 

Investments in Exchanges

Stahl and Bregman favour, what they refer to as, Croupier Business Models or companies that serve as intermediaries between buyers and sellers. FRMO Corp holds stakes in several exchanges for securities and other financial instruments. Current holdings include:

  • The Bermuda Stock Exchange (BSX)
  • Minneapolis Grain Exchange (MGEX)
  • OneChicago, LLC
  • CNSX Markets, Inc.
  • Miami International Holdings, Inc.
  • National Stock Exchange Holdings, Inc

Investments in Cryptocurrencies

Through both FRMO directly and indirectly through various Horizon Kinetics portfolios, FRMO holds an interest in cryptocurrencies and cryptocurrency mining operations. FRMO Corp acquired 353 shares of Digital Currency Group, Inc. for $76,261 on February 26, 2016.

Winland Holdings (WELX)

FRMO Corp owns 15% of the outstanding shares of Winland Holdings (WELX). Winland was originally named Winland Electronics, as the operating company specialises in environment monitoring solutions and sensors. In 2018, Winland changed its structure by moving Winland Electronics to a subsidiary and changing the name of the holding company to Winland Electronics. Subsequently, the holding company has begun investing in bankruptcy claims and corporate claims.

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