SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to________
COMMISSION FILE NUMBER: 0-29346
FRMO CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3754422
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
30 HAIGHTS CROSS ROAD, CHAPPAQUA, NY 10414
(Address of principal executive offices) (Zip Code)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (914) 632-6730
--------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at July 12, 2005: 36,083,774
FRMO CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2004
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial 2
Statements........................................................................................ 3
Balance Sheets - May 31, 2004 (Unaudited) and February 29, 2004 .................................. 3
Statements of Income (Unaudited) - Three months ended May 31, 2004 and 2003....................... 4
Statements of Cash Flows (Unaudited) - Three months ended May 31, 2004 and 2003................... 5
Notes to Financial Statements (Unaudited)......................................................... 6
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............. 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 10
ITEM 4. Controls and Procedures .......................................................................... 10
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 11
SIGNATURES......................................................................................................... 11
CERTIFICATIONS..................................................................................................... 12
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FRMO CORP.
BALANCE SHEETS
MAY 31, FEBRUARY 29,
2004 2004
--------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 522,280 $ 406,110
Accounts receivable 24,000 41,637
Investment in marketable securities 20,700 36,900
--------------------------------------------
Total current assets 566,980 484,647
--------------------------------------------
Other assets:
Intangible assets, net of accumulated
amortization 54,527 56,458
--------------------------------------------
Total other assets 54,527 56,458
--------------------------------------------
Total assets $ 621,507 $ 541,105
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 26,885 $ 20,187
Income taxes payable 29,180 22,112
Deferred income 12,455 12,031
--------------------------------------------
Total current liabilities 68,520 54,330
Stockholders' equity:
Preferred stock - $.001 par value;
Authorized - 2,000,000 shares;
Issued and outstanding - 50 shares Series R -- --
Common stock - $.001 par value;
Authorized - 90,000,000 shares;
Issued and outstanding - 36,083,774 shares 36,083 36,083
Capital in excess of par value 3,337,136 3,334,136
Unrealized (loss) gain on marketable securities (15,164) 1,036
Retained earnings 188,557 109,145
--------------------------------------------
3,546,612 3,480,400
Less: Receivables from shareholders for
common stock issuance 2,993,625 2,993,625
--------------------------------------------
Total stockholders' equity 552,987 486,775
--------------------------------------------
Total liabilities and stockholders' equity $ 621,507 $ 541,105
============================================
See notes to interim financial statements.
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FRMO CORP.
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
2004 2003
----------------------------------
Revenues
Consulting $ 40,132 $ 18,526
Research fees 29,262 3,730
Subscription fees 1,909 1,000
Income from investments in
unconsolidated subsidiaries 48,757 --
----------------------------------
Total income 120,060 23,256
----------------------------------
Costs and expenses
Amortization 1,931 1,931
Contributed services 3,000 3,000
Accounting 2,500 2,250
Shareholder reporting 6,000 5,000
Office expenses 118 --
Other 60 82
----------------------------------
Total costs and expenses 13,609 12,263
----------------------------------
Income from operations 106,451 10,993
Dividend income 11,080 276
----------------------------------
Income from operations before provision
for income taxes 117,531 11,269
Provision for income taxes 38,118 3,194
----------------------------------
Net income $ 79,413 $ 8,075
==================================
Basic earnings per common share $ 0.01 $ 0.00
==================================
Diluted earnings per common share $ 0.01 $ 0.00
==================================
Average shares of common stock outstanding:
Basic 6,147,524 3,897,524
==================================
Diluted 6,197,524 3,947,524
==================================
See notes to interim financial statements.
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FRMO CORP.
Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
MAY 31,
2004 2003
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 79,413 $ 8,075
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of research agreements 1,931 1,931
Non-cash compensation 3,000 3,000
Changes in operating assets and liabilities:
Other current assets 17,637 8,500
Accounts payable and accrued expenses 13,765 (7,309)
Deferred income 424 (675)
--------------------------------
Net cash provided by operating activities and
net increase in cash and cash equivalents 116,170 13,522
Cash and cash equivalents, beginning of period 406,110 135,003
--------------------------------
Cash and cash equivalents, end of period $ 522,280 $ 148,525
================================
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ -- $ --
================================
Income taxes paid $ 31,050 $ 12,926
================================
See notes to interim financial statements.
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FRMO CORP.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2004
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information in response to the requirements of Article 10 of
Regulation S-X. Accordingly they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring items) necessary to present fairly the financial
position as of May 31, 2004; results of operations for the three months ended
May 31, 2004 and 2003; and cash flows for the three months ended May 31, 2004
and 2003. For further information, refer to the Company's financial statements
and notes thereto included in the Company's Form 10-K for the year ended
February 29, 2004. The balance sheet at February 29, 2004 was derived from the
audited financial statements as of that date. Results of operations for interim
periods are not necessarily indicative of annual results of operations.
2. INTANGIBLE ASSETS
RESEARCH AGREEMENTS
In March 2001, the Company acquired the research service fees that Horizon
Research Group receives from The Kinetics Paradigm Fund in exchange for 80,003
shares of common stock. The value of the shares issued in this transaction was
$51,003. The Company is amortizing the cost of The Kinetics Paradigm Fund
research agreement over ten years using the straight-line method.
SUBSCRIPTION REVENUES
In October 2001, the Company acquired a 2% interest in the subscription
revenues from subscribers to The Capital Structure Arbitrage Report that Horizon
Research Group and another third party receive. Consideration for this interest
consisted of the issuance of 50 shares of Series R preferred stock. The value of
the shares issued in both of these transactions aggregated $26,250. The Company
is amortizing the purchase of these subscription agreements over ten years using
the straight-line method. At the time of these transactions, a 2% interest in
the subscription revenues amounted to $3,018 per annum.
Intangible assets consist of the following:
MAY 31, FEBRUARY 29,
2004 2004
-------------------------------------
Research agreements $ 51,003 $ 51,003
Subscription revenue 26,250 26,250
-------------------------------------
77,253 77,253
Less accumulated amortization 22,726 20,795
-------------------------------------
Intangible assets, net $ 54,527 $ 56,458
=====================================
For each of the three months ended May 31, 2004 and 2003, amortization of
intangible assets was $1,931.
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FRMO CORP.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2004
(UNAUDITED)
3. NET INCOME PER COMMON SHARE AND PER COMMON SHARE EQUIVALENT
Basic earnings per common share for the three months ended May 31, 2004 and 2003
are calculated by dividing net income by weighted average common shares
outstanding during the period. Diluted earnings per common share for the three
months ended May 31, 2004 and 2003, are calculated by dividing net income by
weighted average common shares outstanding during the period plus dilutive
potential common shares, which are determined as follows:
THREE MONTHS ENDED
MAY 31,
2004 2003
----------------------------------
Weighted average common shares 6,147,524 3,897,524
Effect of dilutive securities:
Conversion of preferred stock 50,000 50,000
----------------------------------
Dilutive potential common shares 6,197,524 3,947,524
==================================
4. COMPENSATION FOR CONTRIBUTED SERVICES
Two officers/shareholders performed services for the Company during the three
months ended May 31, 2004 and 2003 for which no compensation was paid. The
Company recorded a charge to operations for these contributed services of $3,000
and a corresponding credit to paid-in-capital for each period.
5. INCOME TAXES
The provision for income taxes consist of the following:
THREE MONTHS ENDED
MAY 31,
2004 2003
------------------------------------
Current:
Federal $ 28,475 $ 1,954
State 9,643 1,240
------------------------------------
Total current 38,118 3,194
------------------------------------
Deferred:
Federal -- --
State -- --
------------------------------------
Total deferred -- --
------------------------------------
Total $ 38,118 $ 3,194
====================================
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
All statements contained herein that are not historical facts, including but not
limited to, statements regarding future operations, financial condition and
liquidity, capital requirements and the Company's future business plans are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are changes in the financial markets, which affect investment
managers, investors, mutual funds and the Company's consulting clients, and
other risk factors described herein and in the Company's reports filed and to be
filed from time to time with the Commission. The discussion and analysis below
is based on the Company's unaudited Financial Statements for the three months
ended May 31, 2004 and 2003. The following should be read in conjunction with
the Management's Discussion and Analysis of results of operations and financial
condition included in Form 10-K for the year ended February 29, 2004.
OVERVIEW
By reason of the spin-off transaction described in Form 10-K for the year ended
February 28, 2002, the Company had a new start in terms of its continuing
business and its financial statements. After the spin-off, its balance sheet
consisted of $10,000 in assets, no liabilities and 1,800,000 shares of common
stock. On January 23, 2001 the Company issued an additional 34,200,000 shares of
common stock for $3,258,000 to be paid as set forth in Item 1 of Form 10-K for
the year ended February 28, 2001.
Since its new start on January 23, 2001, FRMO completed the following
transactions through May 31, 2004:
i. The Company invested $5,000 in FRM NY Capital, LLC, a limited
liability venture capital company whereby the substantial investment
of financial capital will be made by unrelated parties but where FRM
will have a carried interest based on leveraging the creative
services of its personnel (its intellectual capital).
ii. A consulting agreement was signed effective January 1, 2001, whereby
FRMO is currently receiving approximately $27,000 a year from the
manager of Santa Monica Partners, LP, a director and shareholder of
FRM, for access to consultations with the Company's personnel
designated by Murray Stahl and Steven Bregman. Santa Monica
Partners, L.P. is a private fund, which owns 218,000 shares of
common stock of FRM.
iii. In March 2001 FRMO acquired the research service fees that Horizon
Research Group had received from The Kinetics Paradigm Fund in
exchange for 80,003 shares of FRMO common stock. Management believes
that the growth of that Fund in the current fiscal year and future
years will increase the current level of research fees for which the
stock consideration was paid. The Paradigm Fund outperformed the S&P
500 Index by approximately 13 percentage points in its first fiscal
year of operation, Calendar 2000. From inception through Calendar
2003, it outperformed the S&P 500 Index by 68 percentage points, or
in the parlance of investment professionals, by 6,800 basis points.
In May 2003, The New Paradigm Fund was assigned a five-star rating
by Morningstar, Inc., the fund rating service. This is Morningstar's
highest rating and is often the basis on which mutual fund investors
seek to select funds.
iv. In October 2001, FRMO acquired a 2% interest in the subscription
revenues from The Capital Structure Arbitrage Report that Horizon
Research Group and another third party receive, in exchange for 50
shares of Series R preferred stock. While the subscriptions were
minimal at the time, they have advanced and management believes that
they will continue to expand in future years.
v. In February 2002, FRMO acquired a 7.71% interest in Kinetics
Advisors, LLC and the Finder's Fee Share Interest from the Stahl
Bregman Group, in exchange for 315 shares of FRMO common stock.
Kinetics Advisors, LLC controls and provides investment advice to
Kinetics Partners, LP, a hedge fund and to Kinetics Fund, Inc., an
offshore version of Kinetics Partners. While these funds were quite
small at the time of acquisition, they have expanded significantly
and management believes that they will continue to grow in future
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years. During its first year of operation in 2000, and in 2001,
Kinetics Partners returned 23.7 and 21.6 percentage points more than
the S&P 500 Index, net of management and incentive fees. In 2002, it
outperformed the S&P 500 Index by 33 percentage points. Through
December 31, 2003, it has outperformed the S&P 500 Index by a
further 23 percentage points. On a cumulative basis, over the 3-year
4-month period from inception through year-end 2003, the Kinetics
Partners Fund has returned 92%, whereas the S&P 500 Index has lost
(23%).
RESULTS OF OPERATIONS
2004 PERIOD COMPARED TO THE 2003 PERIOD
The Company's revenues from operations for the three months ended May 31, 2004
("2004") were $120,100, an increase of $96,800 or 416% as compared to the three
months ended May 31, 2003 ("2003"). The net increase in the three-month period
was due to increases in consulting, research and subscription revenues, as well
as revenue from investments in unconsolidated subsidiaries (Kinetics Advisors,
LLC) from which there was no revenue in the 2003 quarter.
Costs and expenses from operations were $13,600 during the three months ended in
May 2004, an increase of $1,300 or (11%) from the comparable 2003 period. The
result for the three-month period was primarily due to an increase in accounting
and shareholder reporting expenses, as well as by office expenses for which
there was no expense in the comparable 2003 quarter.
For the reasons noted above, the Company's net income for the three months ended
May 31, 2004 increased by $71,300 to $79,400, as compared to net income of
$8,100 in 2003.
Some discussion is required with respect to an asset that is presently carried
at zero cost on the FRMO balance sheet and which had a negligible accounting
impact on fiscal 2003 earnings, yet which had a quite measurable impact (40% of
revenues) on the May 2004 quarter and has had a much more significant economic
impact on FRMO. This is the investment in Kinetics Advisors, LLC, ("Kinetics
Advisors"), which was acquired in February 2002 (as discussed in Part I, Item 1,
under the heading Specific Business Activities, of this Form 10-K). This
investment takes the form of a minority interest in Kinetics Advisors, which
controls and provides investment advice to two hedge funds. Kinetics Advisors
has elected to reinvest in these two funds the major portion of the fees to
which it is entitled from them. As a consequence, FRMO does not receive its
proportional interest in those fees until such time that Kinetics Advisors
itself elects to or is required to receive them. Under generally accepted
accounting principles, as they applied in fiscal 2003 and 2004, FRMO must record
this investment on a cost basis, which was $0 as of May 31, 2004. However, on an
economic basis, FRMO's proportional share of Kinetics Advisors' capital accounts
in those funds was approximately $702,000 (pre-tax and unaudited) as of May 31,
2004. FRMO's proportional share of the increase in the value of Kinetics
Advisors' capital accounts in those funds during the period, predominantly from
fee income and appreciation (also pre-tax and unaudited), was approximately
$81,000 during the quarter ended May 2004. In accordance with EITF 03-16,
"Accounting for Investments in Limited Liability Companies", the Company will
change its accounting policy regarding this investment effective September 1,
2004 to the equity method.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's activities during the three months ended May 31, 2004 resulted in
an increase in cash of $116,000. This increase was due to income, after
adjusting for amortization and contributed services, of $74,700, increased by
$25,300 due to fluctuations in operating assets and liabilities primarily caused
by timing differences. In 2002, the Company started recording non-cash
compensation for contributed services from two of its executives. In 2001, those
executives, who are responsible for all of the company's operations, agreed not
to draw any salaries during the period of formation. There were no cash flows
provided by or used in investing or financing activities during both of the
three-month periods ended in 2003 and 2002. The Company expects its business to
develop without the outlay of cash, since growth is expected to be a function of
its intellectual property as presently represented by consulting, research and
subscription fees as well as its asset-based general partner interest.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On January 23, 2001 the Company issued 34,200,000 shares of $.001 par value
stock for $3,258,000. Only $39,375 was paid for at the time, and the balance
remaining as of May 31, 2004 of $2,993,625 will be paid to the Company as set
forth in Item 1 of Form 10-K for the year ended February 28, 2001. The Company's
market risk arises principally from the obligations of the shareholders to pay
for the shares of common stock of the Company based on dividends from outside
sources and the income generated from the management of the mutual and hedge
funds.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
31.1 - Certification by the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification by the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 - Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
b) REPORTS ON FORM 8-K None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRMO CORP.
By: __________________________________
Steven Bregman
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: July 12, 2004
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