Description

High level thesis: “Look over here!”

Orphaned closely held security run by a transparent management team that owns various assets that have the potential to return multiples. By the time many of the assets are ‘re-rated’ the stock will be up-listed.

If this doesn't interest you, Go check out my DISH write up.

Ticker: FRMO

Market Cap: ~$300mm

Investment duration: ~few years

Reported book value as of October 20, 2020: $116mm (non-controlling interest of $44mm)

Quick hitter thesis (I touch on these below):

Orphaned stock that actually has a fair amount going for it...

• Agriculture exchange consolidation
• Texas Pacific Land Trust (ticker TPL)
• Possible up-listing over the next 12-18 months
• Bitcoin beneficiary via owning coins as well as mining operations via joint venture (ticker WELX)
• Two known brilliant thinkers who have created a sound product in Horizon Kinetics and have a following, and they are taking on their next commercial product that should add another annuity type stream to the income statement, and so much more.
• Btw, it is also a business that should benefit from money debasement / printing and business positioned to potentially benefit from inflation down the road
• Keep reading…

Situation Overview:

I have been accumulating FRMO common stock for many months now. I wait by the phone from the brokers that trade this security, and they have called only a handful of times, leading me to buy this electronically in small batches. All of that said, I think the current equity value range using the 1 year average price of $5.75 to the current price level of nearly $7/share is a reasonable entry versus downside of $4-$4.50 per share (which could easily be hit on an illiquid market drawdown) versus upside of potentially ~$18-$24 per share or ~150%-240%. There is no need to discuss my actual bull case of ~10-15x ($3-$5bn equity value), as value investors must have the supporting math…and even then they likely can’t buy into the dream scenario as it involves inflation, bitcoin (it’s not a store of value’ and fraud blah blah blah- that’s not the point of this discussion/write-up), NOLs, future product roadmap that hasn’t been presented in print yet.

Over the last several months I have been researching several ways to play the theme of money printing, and the potential for rising inflation in the future. Various situations popped on my radar, but FRMO seemed like not only a beneficiary, but also a story that is transitioning from complex to simple, with the potential to become a viable investment opportunity after a future up-listing.

Even if inflation doesn't fit into your macro lense, the write up may still resonate with you as a catalytic investment.

As many value investors know, Murray Stahl and Steven Bregman have their paws in a lot of different things, and are very sharp. Punch line tease…

It’s all about an investment in fixed float and FLOWS FLOWS FLOWS.

Place to read and learn more:

https://frmocorp.com/

https://frmocorp.com/_content/10q/FRMO_Corp_Q1_2021.pdf

https://frmocorp.com/_content/letters/2020.pdf

Some of the more interesting excerpts supporting the quick hitter thesis (source: management commentary in italics, conference call transcripts, filings reading, et al)

Money debasement / printing (pasting a few interesting charts from various sources – below is from Crescat Capital):

Bitcoin / Crypto from 2016: some value ascribed

Among the Digital Currency Group’s (“DCG”) assets, it owns Grayscale, which operates the Bitcoin Investment Trust (symbol: GBTC). DCG operates Genesis, which is a cryptocurrency trading firm. It also operates CoinDesk, which is a cryptocurrency news and research company. DCG also takes minority positions in a variety of cryptocurrency-related companies. One of these is Bitpay, which is a bitcoin payment service provider. Another is Elliptic, which identifies illegal activity on the bitcoin blockchain. Another investment is in Coinbase which, among other offerings, provides insured electronic wallet services.

FRMO owns ~550k shares of GBTC. DGC is marked at $76k

https://dcg.co/who-we-are/

https://dcg.co/portfolio/

Winland / crypto mining business: zero value ascribed

The other thing I'd like to say is that you might find interesting. We've -- subsequent to September 30, we're investing $2,700 to try to build our own cryptocurrency mining machines. Obviously, if we fail, it's only $2,700. We're going to give it a try, and I actually believe we can do it. And if we do, it opens up a different kind of opportunity for us in the world of mining. I think we've gotten a lot of experience just through the last couple of years, we've learned a lot. And I think we did actually -- if we could do this, if we could pull it off, it would really greatly raise our return on invested capital.

It'll also have implications for our investment in Winland Electronics. So as you probably know, we bought some more shares of Winland. We're up to a 28.39% ownership. Winland itself, now with its mining, has, as of this recording, this is September 30, again, 2.9898 Bitcoin. So we round it and we call it 3. Our proportional ownership, if this is even important to you, is 0.8488. So if you want to add nearly 1 Bitcoin to the -- on a look-through basis, you can do that. I don't know if it's going to change your calculations, but there it is.

FRMO  continues to build its inventory of cryptocurrency mining equipment, with a purchase of 90 Bitmain S19  95 TH/S bitcoin miners expected to be put into service this month. In the aggregate, these newly acquired miners

will produce an operating hashrate of 8.55 petahash per second (PH/S) and will operate with an energy efficiency of 34.5 ± 5% joules per terahash (J/TH). This is in addition to FRM0’s pre-existing bitcoin operating hashrate of

approximately 13 PH/S, now bringing the Company’s total bitcoin operating hashrate to 21.55 PH/S.

Pull up ticker WELX. Will this remain a ~$5-$10mm market cap as FRMO continues to contribute assets for shares they likely don't exit for years? 

Mined Crypto:

# of Coins

Bitcoin 62.84

Ethereum 34.98

Ethereum Classic 661.7

Zcash 2.0

Litecoin 494.0

Bitcoin cash 1.1

Btw, even if you don't believe in digital currency, crypto, Bitcoin, etc... FRMO is clearly going to grow this 'widget' business...which happens to be Bitcoin mining.

Agriculture exchange consolidation: value $25mm vs stale mark

https://www.startribune.com/the-last-of-its-kind-the-minneapolis-grain-exchange-is-being-sold/573069372/ -

Texas Pacific Land Trust:

Catalyst: Potential for c-corp conversion, index addition(s), and see below for punchline.

New Product Introduction(s): zero value ascribed

What are we working on? A couple of interesting things. Number one, we are in 30 days, going to launch an ETF. The first time we ever launched an ETF, and the theme of the ETF is going to be inflation-oriented. And we're doing it for a couple of reasons. Number one, we think we're going to have some inflation. I could be wrong about that, but we think that we're going to have some inflation. Secondarily, whether we're right or wrong, and that's merely a forecast. The popular indexes have moved so radically away from any inflation beneficiaries that inflation beneficiary just as a proportion of the index or the popular index, in any event, is fairly de minimis. So the world needs a product like that. And then it's actively managed as opposed to passively managed.

A - Therese Byars 

Okay. Recently, HK has filed for an ETF. Will it be a standalone or are you considering a family of ETFs? And how will they be marketed against the large ETF family, so they become -- they could become largely held and potentially reach $1 billion or more?

A - Murray Stahl 

Well, let's say --

A - Therese Byars 

One more --

A - Murray Stahl 

Yes. Okay. Yes, please.

A - Therese Byars 

Can I tag on; how do you consider the crypto ETF and can offer more participate?

A - Murray Stahl 

Okay. To begin with, as I mentioned, we filed for an ETF, and hopefully, if everything goes right, more or less 30 days, you never know exactly because you're dealing with the regulators. More or less 30 days from now, we will have an ETF. We wouldn't be doing it just to have one ETF. There is going to be other ETFs that follow it. I know you'd like me to tell you what they are, but I think we have some pretty good ideas. If I tell you right now, there are people with more resources, it's a great idea, if somebody could be listening to this call, and they'll do the ETFs. It's not that I have any great secrets, but I don't think it's a great idea to tell you what it is, although I would love to share it with you.

But I don't think it's so it's such a bright idea. We've actually hired a couple of people that are going to market it. The preliminary results, you never know how much money you're going to get. Preliminary results of what we believe we're going to get on the first day, actually exceed my expectations. So, I'm not saying we're getting $1 billion, but it actually exceeds my expectations.

Everything we're going to do in all the ETFs, they're going to be unique

Up-listing: provide liquidity

A - Therese Byars {BIO 18353417 }

Okay. Different subject. Does FRMO still have plans to move from pink sheet listing to, perhaps, a higher OTC markets listing or one of the larger exchanges?

A - Murray Stahl {BIO 4095900 }

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. But it just wasn't something we're working on right now.

Punch Line:

Why does any of the above really matter?

Answer: Because Murray Stahl and Steven Bregman are creating an inflation ETF, whereby they will drop in / contribute many of the above assets held within FRMO that have fairly defined floats and low average daily trading volume.

Why does this matter?

Answer: because Murray and Steven have a following that will likely attract flows into this ETF and other products they may introduce. Assets Under Management is anyone’s guess, but I expect it to be successful over the next 12-18 months.

Why does this matter?

Answer: Because flows and flows and flows are going to buy their new exchange traded actively managed product that will like be multiples larger than the book value of their various assets and also likely re-mark many of the FRMO assets they hold.

Final Answer: Forced buying + Lack of sellers = Liquidity mismatch + (rising asset prices) + share repuchase (yes they have made some token share repurchases).

=

FRMO stock is likely going higher.

Risk(s):

ETF product(s) does not receive regulatory approval

ETF AUM doesn't grow

Catalyst

Let's Go!