Horizon Kinetics Holding

Good afternoon. Thank you for joining us on this call. My name is Mark Herndon, CFO of Horizon Kinetics. We are pleased to have you here to join us for this call that will cover the results for our quarter and year ended December 31st, 2024. But first, a reminder that today's presentation may include forward-looking statements. Alliance on forward-looking statements involve certain risks and uncertainties, including but not limited to uncertainty about the future security evaluations or our performance. During the course of today's call, words such as expect, anticipate, believe, and intend may be used in our discussion of our goals and events in the future. Management cannot provide any assurance that future results will be as described in our forward-looking statements. Furthermore, 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 a consumer's It should 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 equal or exceed past performance of the investments. We encourage you to read our filings with the SEC on our Form 10-K as well as our other filings, which describe the risks and uncertainties associated with managing our business. The company does not assume any obligation to update any forward-looking statements made today. These filings can also be found at the OTC Markets website, and our press releases or other information is at our corporate website at www.hkholdingco.com. Today's discussion will be led by Murray Stahl, Horizon Kinetics Chairman and CEO. I will also be available to answer applicable questions and will moderate the questions. If you would like to ask a question, you will need to be logged into the GoToMeeting platform. Those of you that are on a telephone connection will be in listen-only mode. Again, for those of you who are on the GoToMeeting platform, you can submit the question via the chat function. Please direct those questions to the presenters, where I will summarize and relay as best I can so that we can address as many questions as possible. And with that, I will turn it over to Murray for a few opening remarks.

Okay. Thanks, Mark. Thanks, everybody, for joining us today. So normally when I do these sorts of calls, I start with general remarks, and I'm going to have general remarks, but this time, because it's our first time presenting Horizon to the public really in our year-end results, I'm going to be a little bit less general in the beginning than I normally am. Let's start with Horizon's earnings for 2024 were a record for anything we've done in 30-year history of Horizon. That's great. And the balance sheet figures were all sort of record. So that's great. And now we're going to go to a few things that are less general. We'll come back to the general. So in order to understand what's going on on the horizon, the first thing you need to understand is we now have consolidated investment statements. What does that mean? That means that our earnings are consolidated with some of the funds we managed. So the balance sheet amounts are greater in consolidation mode than the way we would look at it in terms of just the assets that pertain to horizon qua horizon. That's the first thing to understand. Let me give you an example or two, if I might. So the way the earnings are presented in the Form 10-K, this would be the income statement that you might see on page 26 the revenue number is a little over 57 million dollars we wouldn't look at it that way and in point of fact if you were to go to page 38 i apologize for doing it to the outset by the way because it's not the way i normally like to work but i think it's necessary for understanding purposes so if you did it if you had this Document in front of you, which I guess you could have we go in the SEC website and look at you'll see on page 30 on page 38 you will see The revenue presented the way we would look at it internally that revenue number is over 113 million dollars so what's the difference difference is the performance fees and So performance fees, which obviously were over half our revenues, very, very substantial. And we need to pay our own marketing staff commissions on those fees. So you look at our income statement, what you'll see is you'll see a certain revenue number. Then you'll see all of our expenses. And then the 60 odd million dollars performance fees, where is it? It's embedded in the investment gains. So you can't really understand how profitable a business horizon really is unless you understand the accounting treatment. When Mark Hurden gets a chance to speak, he'll explain to you why it's done that way. And I mean, the short answer is, of course, it's those are the rules. We have to do it. But there it has a logic. And he'll explain that. So it's not so easy. to read the financial statements the way they're presented here. Anyway, a lot of our, the highest margin revenue that we have, which is our performance fees, actually appears, and this is the salient point, it appears below the operating income line, not above the operating income line. So operating margin is actually extraordinarily high, even by the standards of investment management. Another interesting thing about the performance fees, they were so large. To be honest about it, we ourselves, during the course of the year, we didn't plan performance fees that were this large. They were higher than even we had anticipated. That's a nice problem to have, but as a publicly traded company, we need to pay the taxes to our government prior to actually collecting the fees. So the fees we would actually receive in January, because we don't know the precise amount until December 31st, but taxes are due on December 15th. So interestingly enough, they were so large, they almost exhausted all our cash reserves, which is kind of interesting. We didn't think that could ever happen. Now we never had a liquidity problem. We have plenty of assets, we could get plenty of liquidity. It was never an issue. But we really don't want to sell assets that we're delighted to hold and pay even more taxes just for the privilege of paying the taxes in cash. That situation didn't require selling, but for a couple of days there, we did wonder. So we almost didn't have the money to pay our own taxes. It's hard to imagine such a circumstance, but it almost happened. So that we'll have to do better in thinking that through in the future. Another interesting thing, which was a nice issue. So as a publicly traded company now, you have more detail about this later, our taxes, state and local taxes, are not going to be computed on the old basis. The old basis was the taxes are due to the authority in the jurisdiction where the service or prop was produced. And since we're in New York City and New York State, of course, we're in the highest of tax brackets. In the future, our taxes are going to be computed based on where the service or product is consumed. Because a lot of our clients are not residents of the state of New York, a lot of Manhattan residents in states where there are no income taxes, or if there are income taxes, state income taxes, local income taxes, they're actually very low, they're in the future, which is 2025, the year we're in now, we'll actually get some, in my opinion, decent tax deductions, or tax advantages, I should say, not deductions. So that's kind of nice. So what else should I tell you? The first thing is, I would certainly advise on pages 37 and 38, you pay very close attention to the consolidate and the deconsolidate statements. And make sure you familiarize yourselves with both sets of financials, because they're both important. So it's not, you can't content yourself with just looking at her income statement and balance sheet that's presented. And that brings us to some now back to general points that I'd like to expound on a little bit. Now, I'll turn it over to Mark. I'll give you more detailed accounting information. So the first thing is, had we achieved record earnings when we really weren't raising tremendous amounts of assets? And the answer, of course, is our goal wasn't to raise a lot of money. Our goal was to make a lot of money. Those are two entirely different things. So let me explain. Number one, had we raised egregious amounts of money, there's a number beyond which, if we go that way through raising money, we're going to basically outrun our own capacity, meaning the best investment ideas we have will become smaller positions. We'll have to fill in the balance very large liquid companies. There's nothing wrong with very large liquid companies, except that they're not likely to have the returns you can get in special situations. So it's very, very important to be mindful of that. Another important thing to be mindful of, and this relates to the tax question, it relates to it both in the client's sense and our own capital sense. So look at our balance sheet and look at our deferred tax liability. Can you imagine if we had high turnover as opposed to low turnover, but we would have paid those taxes. And the only way we can pay those taxes is by selling off assets. And we sold off assets they wouldn't have appreciated. So I didn't do it, but it's possible to calculate if we had the standard 100% plus turnover rate of the average manager, I think it's fair to say, well, I didn't calculate number of specificity. Our capital position would be much, much lower than what it is. And therefore, if you accept that proposition, by extension, because we're doing exactly what the clients do, or you could say phrased alternatively, the clients are getting what we're getting, meaning we're eating our own cooking, clients would be in the same position. So how are they going to pay their taxes? Well, they would have to withdraw funds from us. would have less money and further reduced by the fact that they have to withdraw money from the various investment products to pay the taxes if you were to look at um horizon mechanics in that dimension as a capital accumulation vehicle you'd see in that scenario a great diminution of return so when we talk about the earnings We record earnings. We didn't do ourselves justice because we're talking about the earnings as operating earnings and they're very high. There are records, but there's also return from our own capital or the accumulation of capital by just leaving it alone, letting it grow. So they're really big earnings. And if we, if it kept, if, um, going on this rate, it could be very substantial and not, um, very prolonged period of time. So that's something I want to leave you with. And I have one other thought, and then I'll turn it over to my colleague. We have some digital assets which have done reasonably well in this fund. Later in Q&A, I'm sure people will have questions about Bitcoin and digital assets in general. There is this sister company that we're trying to bring public called Consensus Mining that is important to us from the point of view of what we intend to do in cryptocurrency. So it's on the verge, I'm told, of being a listed company. And assuming we make it, and I'm pretty sure we're going to make it, but there can be no guarantees. In the future, I'll make more reference to it. So the mining business in crypto is a great business. Done properly. Done properly means you have to be mindful to create a very low cost environment. That's been done. And you have to be a little creative in the way you go about mining. So in the world of cryptocurrency mining, the shortest distance between two points is not necessarily a straight line. And hopefully next time we do this call, I'll be able to enlighten you much more about what we're doing there. I just want to let you know that that's an interesting part of our strategy, and we're on the verge of doing something really unique, which is coming public. And a lot of things are going to follow from that. So I'm just giving you a highlight for the future. No guarantee it's going to be successful, but it's looking good at the moment. And with that, those are the highlights. I'll turn it over to Mark Herndon. He can give you more detailed information on the accounting and how we got to where we got. If you'd like to take it away, Mark.

Okay, sure. I'll do that. And some of the points that I'll go over will reiterate some of the points that you've made. And I just, you know, Again, I think it's important that for those of you on the phone, you hear it a couple of different ways so that we can just hammer on the point and the differences between the past and where we're at now in terms of our reporting. And we've provided a lot of information since our last call. So as a short recap, we recently obviously released the form 10K. So that's the annual results. Prior to that, we released a press release that has those annual results as well as a comparison to our prior presentation as supplementary information. And then we also filed a 10QA, which reflects what we had previously reported for the third quarter of 2024 and reflects it under the current basis so that you'll have that trend line to look at. Now, importantly, our historical presentation was based on what I'll use the term advisor-only financial statements, so that's kind of the legacy Horizon Kinetics. So during our year-end process, you know, this first year-end as a public company, we concluded that due to our role and ownership level in certain of these proprietary funds, that they should be consolidated into our financial statement presentation and then all of our applicable filings with SEC. And consistent with what we reported in February, you may remember we found an 8K in February, you know, notifying shareholders of this circumstance. It is a presentational change, and that change did not impact the company's earnings that are available to HKHC shareholders or the shareholders' equity to HKHC shareholders. What it did change was that we included the assets from those funds, proprietary funds, that we consolidated on our balance sheet into a new line item. So you'll see a line item or several line items applicable specific to the funds on our balance sheet, assets and liabilities. And then we also have a new line item called redeemable non-controlling interest. So it's a bit of a technical term, but what that essentially represents is our client's account balances that are, of course, supported by those assets in those funds. The other notable change you'll see, and Maria alluded to this earlier as well, is that the management fees charged to those consolidated investment products under GAAP, those revenues are eliminated for consolidation. So since that fund is presented within the context of that set of financial statements, it's akin to an intercompany transaction, which are normally eliminated. But, however, the economic benefit related to those fees to the HKAC shareholders remains in our financial statements. That economic benefit is reflected through a smaller allocation of the investment returns of those consolidated investment products to the redeemable non-patrol and interest. It's smaller than what they would have otherwise received. And that's an important point and distinction. Outside of that complexity, the results for the quarter were, you know, we believe, as we indicated, favorable. We had revenues of $19 million for the quarter and $57 million for the annual period under the consolidation model. And as you can see in the supplementary schedules, under the advisory-only model, that is without the consolidation of the investment products adjustments, we had the annual revenues of $113 million. You may also notice the results of our consolidated entity were favorably impacted by the addition of the funds, which had approximately $860 million of investment returns. And of that $860 million of investment returns, about $702 million was allocated to our clients through that redeemable non-control and interest line. And so to reiterate the point again, the difference between those two values represents really two events here. that's important to an HKHC shareholder. One is the incentive fees that are charged on those investment returns, and the second is around economic interest in those funds. And there's a table deep within the MD&A portion of the 10-K that will also outline that circumstance. large event for the year, and Murray touched on this as well, and it's an additional complexity in our financial statements relates to income taxes. And we disclosed this in our last call, where the financial statements reflected a cumulative adjustment for converting from a pass-through entity to a C-Corp in 2024, resulting in that approximately $60 million deferred tax liability at the time, as well as an expense at that time. This amount would only be realized upon selling of the underlying securities, which is the tax efficiency point that Marie was talking about. Moving forward, you will see that deferred tax line item increase or decrease in an offsetting manner as those securities increase or decrease over time. But again, that's not a cash impact. That's an accounting convention to recognize that as potential taxes. The company only paid approximately $11 million in taxes in 2024 as compared to that $104 million of income tax expense, and that's due largely to this deferred income tax relationship. And then, you know, and that's it. I'll turn it back over to you to see if I created any confusion there or if there was other points you'd like to address before we turn to Q&A.