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: November 30, 2001
[ ] 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
or organization) Identification No.)
271 NORTH AVENUE, NEW ROCHELLE, NY 10801
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 636-3432
(Former name, former address and former fiscal year,
if changed since last report)
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 January 11, 2002: 36,083,459
FRMO CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2001
Page No.
PART I
Item 1. Financial Statements................................ 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 14
PART II
Item 6. Exhibits and reports on form 8-K.................... 15
1
FRMO Corp
Index to Financial Statements
PART I
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets -- November 30, 2001 (unaudited) and February 28, 2001... 3
Statements of Operations (unaudited) -- Nine months and three
months ended November 30, 2001 and 2000.............................. 5
Statement of Stockholders' Equity (unaudited) --
Nine months ended November 30, 2001 ................................. 6
Statements of Cash Flows (unaudited) --
Nine months ended November 30, 2001 and 2000......................... 7
Notes to Financial Statements (unaudited)............................... 8
2
FRMO Corp.
Balance Sheets
NOVEMBER 30, FEBRUARY 28,
2001 2001
---------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash & cash equivalents $ 75,061 $44,957
Consulting fees receivable - 1,800
Other current assets - 1,137
---------------------------
Total current assets 75,061 47,894
---------------------------
Other assets:
Intangible assets, net of accumulated
amortization of $6,430 127,119 -
Investment in FRM NY Capital, LLC 5,000 5,000
---------------------------
Total other assets 132,119 5,000
---------------------------
Total assets $207,180 $52,894
===========================
See notes to interim financial statements.
3
FRMO Corp.
Balance Sheets (continued)
NOVEMBER 30, FEBRUARY 28,
2001 2001
--------------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,571 $ 4,070
Income taxes payable 883 -
Deferred income 2,345 -
--------------------------
Total current liabilities 17,799 4,070
--------------------------
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 - 36,083,459 shares at
November 30, 2001 and 36,000,000 shares at
February 28, 2001 36,083 36,000
Capital in excess of par value 3,365,376 3,232,000
Retained earnings (accumulated deficit) 6,547 (551)
--------------------------
3,408,006 3,267,449
Less: Receivables from shareholders for
common stock issuance 3,218,625 3,218,625
--------------------------
Total stockholders' equity 189,381 48,824
--------------------------
Total liabilities and stockholders' equity $ 207,180 $ 52,894
==========================
See notes to interim financial statements.
4
FRMO Corp.
Statements of Operations
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2001 2000 2001 2000
-------------------------- --------------------------
REVENUES
Consulting $ 17,949 $ - $ 43,607 $ -
Research fees 2,811 - 5,170 -
Subscription fees 3,018 - 3,018 -
Investments 963 - 963 -
-------------------------- --------------------------
Total income 24,741 - 52,758 -
-------------------------- --------------------------
COSTS AND EXPENSES
Amortization 2,920 - 6,340 -
Accounting 1,000 - 3,600 -
Shareholder reporting 6,338 - 29,889 -
Office expenses 1,563 - 4,620 -
Other 24 - 319 -
-------------------------- --------------------------
Total costs and expenses 11,845 - 44,768 -
-------------------------- --------------------------
Income from operations 12,896 - 7,990 -
Dividend income 296 - 1,062 -
-------------------------- --------------------------
Income from operations before provision
for income taxes 13,192 - 9,052 -
Provision for income taxes 1,954 - 1,954 -
-------------------------- --------------------------
Net income $ 11,238 $ - $ 7,098 $ -
========================== ==========================
Basic earnings per common share $ 0.00 $ - $ 0.00 $ -
========================== ==========================
Diluted earnings per common share $ 0.00 $ - $ 0.00 $ -
========================== ==========================
Average shares of common stock outstanding:
Basic 3,897,209 1,800,000 3,887,338 1,800,000
========================== ==========================
Diluted 3,929,077 1,800,000 3,897,883 1,800,000
========================== ==========================
See notes to interim financial statements.
5
FRMO Corp.
Statement of Stockholders' Equity
(unaudited)
RECEIVABLES
RETAINED FROM
SERIES R ADDITIONAL EARNINGS SHAREHOLDERS TOTAL COMPRE-
PREFERRED STOCK COMMON STOCK PAID-IN (ACCUMULATED FOR COMMON STOCKHOLDERS' HENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) STOCK ISSUANCE EQUITY INCOME
-------------------------------------------------------------------------------------------- -------
Balance, February 28, 2001 - $ - 36,000,000 $36,000 $3,232,000 $ (551) $(3,218,625) $ 48,824
Issuance of new stock
for the assignment of
research agreements - - 83,459 83 83,376 - - 83,459
Issuance of new stock
for the assignment of
subscription revenue 50 - - - 50,000 - - 50,000
Net income - - - - - 7,098 - 7,098 $ 7,098
-------
Comprehensive income - - - - - - - - $ 7,098
-------------------------------------------------------------------------------------------- =======
Balance, November 30, 2001 50 $ - 36,083,459 $36,083 $3,365,376 $6,547 $(3,218,625) $189,381
============================================================================================
See notes to interim financial statements.
6
FRMO Corp.
Statements of Cash Flows
(unaudited)
NINE MONTHS ENDED
NOVEMBER 30,
2001 2000
-----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,098 $ -
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of research agreements 6,340 -
Deferred income 2,345
Changes in operating assets and liabilities:
Consulting fees receivable 1,800
Other current assets 1,137 -
Accounts payable and accrued expenses 11,384 -
-----------------
Net cash provided by operating activities 30,104 -
-----------------
Net increase in cash and cash equivalents 30,104 -
Cash and cash equivalents, beginning of period 44,957 10,000
-----------------
Cash and cash equivalents, end of period $ 75,061 $10,000
=================
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ - $ -
=================
Income taxes paid $ 155 $ -
=================
NONCASH INVESTING AND FINANCING ACTIVITIES
Preferred stock issued in consideration for the acquisition
of research agreements $ 50,000 $ -
=================
Common stock issued in consideration for the assignment
of subscription revenues $ 83,459 $ -
=================
See notes to interim financial statements.
7
FRMO Corp.
Notes to Financial Statements
(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 November 30, 2001; results of operations for the nine months and
three months ended November 30, 2001 and 2000; cash flows for the nine months
ended November 30, 2001 and 2000; and changes in stockholders' equity for the
nine months ended November 30, 2001. 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 28, 2001. The balance sheet at February 28,
2001 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. ORGANIZATION OF THE COMPANY
FRMO CORP. (the "Company or "FRM") was incorporated in November 1993 under the
laws of the State of Delaware under the name of PSI Settlement Corp, (initially
changed to FRM Nexus, Inc. and to FRMO Corp on November 29, 2001). One of the
Company's former subsidiaries was MFC Development Corp.("MFC"). On August 31,
2000, FRM transferred to MFC all of its assets (except for $10,000), including
all the shares of its wholly owned subsidiaries subject to all of its
liabilities which were assumed by MFC. This transfer was made in contemplation
of a spin-off of MFC.
On August 31, 2000, FRM filed Form 8-K with the Securities and Exchange
Commission, which disclosed that FRM contemplated distributing to its
shareholders one share of MFC common stock for each share of FRM's 1,800,000
shares of outstanding common stock at the close of business on November 1, 2000
(the record date). The MFC shares were distributed on January 23, 2001.
Because FRM and MFC were under common control, the spin-off transaction has been
accounted for on FRM's books in a manner similar to a reverse pooling of
interests with FRM having a new start on January 23, 2001 with $10,000 in
assets, no liabilities and 1,800,000 shares of common stock outstanding. The
Statements of Operations reflect the spin-off, as of the beginning of the
periods presented, with no operations until January 23, 2001.
8
FRMO Corp.
Notes to Financial Statements (continued)
(unaudited)
2. ORGANIZATION OF THE COMPANY (CONTINUED)
On November 29, 2000, the Company increased authorized capital stock from
2,000,000 shares common stock, par value $.10 per share to 2,000,000 shares
preferred stock, par value $.001 per share and 90,000,000 shares common stock,
par value $.001 per share. Stockholders' equity for prior periods was restated
to reflect this change.
On January 23, 2001, 34,200,000 shares of common stock were issued to the FRM
Control Group. Murray Stahl and Steven Bregman, Chairman and President of the
Company, respectively, are the principal persons in the FRM Control Group, which
also include Lestar Partners, LLC and Lawrence J. Goldstein, who purchased the
shares for the consideration set forth in Note 5 of the Financial Statements
included in the Form 10-K for the year ended February 28, 2001.
On July 2, 2001, the Company authorized the establishment of Series R preferred
stock. The number of authorized shares is 5,000 with a par value of $.001 per
share. These shares are each convertible to 1,000 shares of the Company's common
stock at the option of the Company at any time and at the option of the holder
after March 1, 2006. The Company may redeem the shares at $1,000 per share at
any time after March 1, 2011 and shall be required to redeem them at $1,000 per
share upon the request of a holder after March 1, 2012. These shares have one
vote per share on all matters that common stock can vote upon. Upon liquidation,
there is preference to the extent of $1,000 per share. No dividends may be paid
on common stock unless a dividend per share of 1,000% of common stock dividends
are paid on the preferred stock.
3. INTANGIBLE ASSETS
RESEARCH AGREEMENTS
In March 2001, the Company acquired the research service fees that Horizon
Research Group receives from The New Paradigm Fund in exchange for 80,003 shares
of common stock. In May 2001, the Company acquired the research service fees
that Horizon Research Group receives from The Middle East Growth Fund in
exchange for 3,456 shares of common stock. The shares in both of these
transactions were issued at the rate of $1.00 per share. The Company is
amortizing the cost of these research agreements over ten years using the
straight line method.
9
FRMO Corp.
Notes to Financial Statements (continued)
(unaudited)
3. INTANGIBLE ASSETS (CONTINUED)
SUBSCRIPTION REVENUES
In October 2001, the Company acquired a 2% interest in the subscription revenues
from subscribers to The Convertible/High Yield 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 shares
in both of these transactions were issued at the rate of $1,000 per share. The
Company will amortize 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:
NOVEMBER 30, FEBRUARY 28,
2001 2001
---------------------------
Research agreements $ 83,459 $ -
Subscription revenue 50,000 -
---------------------------
133,459 -
Less accumulated amortization 6,340 -
---------------------------
Intangible assets, net $127,119 $ -
===========================
For the three months and nine months ended November 30, 2001, amortization of
intangible assets was $2,920 and $6,340.
4. EARNINGS PER SHARE
Basic earnings per common share for the three months and nine months ended
November 30, 2001 and 2000, are calculated by dividing net income by weighted
average common shares outstanding during the period. Diluted earnings per common
share for the three months and nine months ended November 30, 2001, 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 NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2001 2000 2001 2000
--------------------- ---------------------
Weighted average common shares 3,897,209 1,800,000 3,887,338 1,800,000
Effect of dilutive securities:
Conversion of preferred stock 31,868 - 10,545 -
--------------------- ---------------------
Dilutive potential common shares 3,929,077 1,800,000 3,897,883 1,800,000
===================== =====================
10
FRMO Corp.
Notes to Financial Statements (continued)
(unaudited)
5. INCOME TAXES
The provision for income taxes consist of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2001 2000 2001 2000
-------------------- ---------------------
Current:
Federal $ 1,253 $ - $ 1,253 $ -
State 701 - 701 -
-------------------- ---------------------
Total current 1,954 - 1,954 -
-------------------- ---------------------
Deferred:
Federal - - - -
State - - - -
-------------------- ---------------------
Total deferred - - - -
-------------------- ---------------------
Total $ 1,954 $ - $ 1,954 $ -
==================== =====================
11
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
and nine months ended November 30, 2001 and 2000. 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 28, 2001.
OVERVIEW
By reason of the spin-off transaction described in Note 2, 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, FRM completed the following
transactions through November 30, 2001:
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 has been signed effective January 1, 2001
whereby FRM will receive $21,600 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 FRM acquired the research service fees that Horizon
Research Group had received from The New Paradigm Fund in exchange for
80,003 shares of FRM 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 New Paradigm Fund outperformed the S & P 500 Index by
approximately 13 percentage points in its first fiscal year of
operation,
12
Calendar 2000. During the first half of 2001, it outperformed the S & P
500 Index by a further 13.9 percentage points.
iv. In May 2001, FRM acquired the research service fees that Horizon
Research Group will receive from The Middle East Growth Fund in
exchange for 3,456 shares of FRM common stock. While the fees are
minimal at the present time, management believes that they will grow in
future years.
v. In October 2001, FRM acquired a 2% interest in the subscription
revenues from subscribers to The Convertible/High Yield Arbitrage
Report that Horizon Research Group and another third party receive in
exchange for 50 shares of Series R preferred stock. While the
subscriptions are minimal at the present time, management believes that
they will grow in future years.
vi. FRM has established three programs based on different investment
strategies for which consultant fees are paid to the Company that are
asset based in nature. One program is a private hedge fund of
accredited investors including the Company operated by a limited
partnership in which FRM will be the General Partner. A second program
involves managers of private investment funds who will implement an
investment strategy designed for those funds whereby consulting fees
are paid to the Company or for its personnel who may be outsourced to
the managers. The third program is to enhance the growth of small
mutual funds, which will enter into new research agreements with FRMO
to focus on the funds' market sector or corporate strategy. These
programs are new, are in a development stage and are not necessarily
expected to provide substantial revenues in the current fiscal year,
although one such program is currently active.
RESULTS OF OPERATIONS
2001 PERIOD COMPARED TO THE 2000 PERIOD
Due to the new start of FRM on January 23, 2001 and the accounting for the
spin-off as a reverse pooling, there were no operations prior to January 23,
2001.
The Company's revenues from operations increased by $25,000 for the three months
ended November 30, 2001 ("2001") from $0 for the three months ended November 30,
2000 ("2000"). Revenues increased by $53,000 for the nine months ended November
30, 2001 ("2001") from $0 for the nine months ended November 30, 2000 ("2000").
The increases in both periods were due to income from (i) research fees, (ii)
consulting fees, which included the consulting agreement with the manager of
Santa Monica Partners, L.P., (iii) subscription fees and (iv) from its minority
interest ownership of FRM NY Capital, LLC.
Costs and expenses increased by $12,000 and $45,000 in both the three month and
nine month periods ended in 2001, as compared to $0 for both periods in 2000.
The increases in both periods in 2001 were due primarily to shareholder
reporting expenses, accounting fees, amortization and office expenses.
13
For the reasons noted above, the Company's net income for the three months and
nine months ended November 30, 2001 increased by $11,000 and $7,000 as compared
to net income of $0 for the same periods in 2000.
LIQUIDITY AND CAPITAL RESOURCES
As part of the spin-off agreement, the Company retained $10,000 in cash. The
Company's activities during the nine months ended November 30, 2001, resulted in
an increase in cash of $30,000. The $30,000 increase in cash in 2001 was due to
net income (after adjusting for amortization) of $13,000 and $17,000 net
increase of payables and deferrals over receivables, which are normal
fluctuations primarily caused by timing differences. There were no cash flows
provided by or used in investing or financing activities during the nine months
ended in 2001 and 2000. The Company expects its business with prospective new
clients to develop without the outlay of cash since the growth will come from
the services of its officers who will not receive salaries until the Company's
operations and revenues warrant the payment.
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 of
$3,218,625 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 believes that its present cash
resources will be sufficient on a short-term basis and over the next 12 months
to fund continued expansion of its business.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities", effective March 1, 2001. The adoption of this Statement
has not had any material effect on the Company's results of operations or
financial position.
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 of
$3,218,625 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 mutual funds. The events of September 11, 2001 have not
had a material effect on the Company's operations.
14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS.
None
b) REPORTS ON FORM 8k.
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: /S/ VICTOR BRODSKY
---------------------------
Victor Brodsky
Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: January 11, 2002
15