Horizon Kinetics Holding

Good afternoon, everyone. Thank you for joining us on this call. My name is Mark Herndon, Chief Financial Officer of Verizon Kinetics. We are pleased to have you join us for our call that will cover our results for the third quarter of 2025. But first, a reminder that today's presentation may include forward-looking statements. Reliance on forward-looking statements involves certain risks and uncertainties, including but not limited to uncertainty about the future security valuations 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 or events in the future. Management cannot provide any assurances that future results will be 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 security, particularly 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 future results. It should not 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 Chief Executive Officer. I will also be available to answer questions, applicable questions, and will moderate the questions. If you would like to ask a question, you will need to be logged in and connected to the GoToMeeting platform. Those of you on a telephone connection will be in listen-only mode. So, again, for those of you that are on the GoToMeeting platform, you can submit the questions via the chat function. Please direct those questions to the presenters while I will summarize and relay as best I can so that we can address as many questions as possible. With that, I'll turn it over to Murray to start us off.

Okay, thank you, Mark, and thank you all for joining us. So I will lay out the format for today. So when there's a minute or two, I'm going to turn it over to Mark Herndon. He's going to review the financials, then I'll take it over, I'll take it back. And I might go into a little detail of a financial high point that I think is Merit's note. And then... I will talk about strategy and how we're going forward and some interesting things that we are in the process of doing and some other things that we hope to be doing. So, with that, Mark, you can describe the financial results and you can relay it to me after that.

Great. And as a reminder for everyone, our form 10-Q update continues to be our required GAP presentation that includes certain proprietary funds as consolidated entities, and our press release continues to present both that gap presentation as well as a supplement that provides our financial statements excluding those funds. We call that the advisor-only presentation. Consistent with what we have previously reported, this is a presentational matter that does not impact the company's earnings available to HKHC shareholders or the shareholders' equity of HKHC. The consolidated results present higher total assets as we include the investment assets of those funds that we've consolidated on our balance sheet, as well as a line item called redeemable non-controlling interest. That line item essentially represents our client's account balances that are supported by the assets of those funds, which you'll see identified in our financial statements as consolidated investment products. Another notable difference is the treatment of management fees charged to those Consolidated investment products. Under DAP, those revenues are eliminated for consolidation since the fund is presented within the financial statements. It is akin to an intercompany transaction. However, the economic benefit resulting to HKHC shareholders remains, and that economic benefit is reflected through a smaller allocation of the investment returns of the consolidated investment products to the redeemable non-controlling interest than what they would otherwise have received. You can also see the impact of those items and a table within the ND&A of our 10Q filing. Our results this quarter continue to be favorable for HKHC shareholders. The company recorded revenues of $17.9 million for the quarter, a $4.8 million or 37% increase from the third quarter of 2024. The year-to-date period was similarly higher with a $55.8 million of revenues thus far in 2025, which was 49% higher than 2024's year-to-date period. These increases are primarily the result of the overall increase in AUM across the portfolio of investment products and client accounts compared to 2024. At the advisor-only level, as presented in the supplemental table within the press release, operating income was $5.5 million for the third quarter, up from $1.5 million in the prior year, and the year-to-date period was $16.1 million as compared to $5.4 million in the prior year. These results were driven primarily by the revenue growth we just mentioned. Overall, the company's net income was $0.39 per share for the quarter and $1.05 per share for the year-to-date period. And please note that our net income or loss is often impacted by swings and unrealized gains or losses associated with certain investments, including digital assets. This quarter, that included an aggregate of $10.1 million of unrealized losses related to our investment securities and equity holdings in our property. proprietary funds. Those unrealized losses compare to the third quarter of 2024, which had unrealized gains aggregating about $31.6 million. This is an illustration of what we have previously noted for you that may result in seeing volatility from quarter to quarter as a result of unrealized gains or losses in various holdings, including those digital assets, which is primarily Bitcoins. I should also note that the third quarter of 2024, last year, also included the cumulative tax adjustment for converting from a taxpayer entity to a C-Corp, which resulted in an approximately $60 million deferred tax liability and expense upon the adoption of that status. That deferred tax value on the balance sheet changes quarterly based on movements in the underlying cumulative tax differences, including investment holdings or applicable tax rates. From a cash perspective, the company has paid approximately $4 million in income taxes in 2025 year-to-date. From a balance sheet perspective, the company continues to have substantial cash investments, including amounts outside of the consolidated investment products, and we have no third-party debt. Our long-term liabilities are limited to various long-term office space leases. The company's board recently declared a 10.6 per share dividend, excuse me, 10.6 cents per share dividend, which reflects a 49% increase from the prior quarter's dividend. This dividend will be paid on December 17th for shareholders of record as of November 25th. That concludes the prepared remarks. I'll turn it back over to you, Murray, to say a few words before we get into Q&A.

Okay. Thanks, Mark. And so... You've heard that we are required to present our financials on a consolidated basis. I personally think it's important to look at the unconsolidated results, and those can be found in the 10-Q, starting on pages 17, 18, and so forth. So let me just point out a few things there. And then we'll talk about some operating matters. So you will observe that on September 30th, we had on our balance sheet, this consolidated company balance. This is the company equity, not the consolidated equity. We had $37 million in cash. At the same period of time, a year ago, December 31st, We had $14 million in cash. And caused us a little problem, you might recall, because we had these performance fees. So it's very nice to have performance fees. The problem, the only problem with performance fees, of course, is that the United States Treasury would like to get its money on an estimated accrued basis, but we don't have access to that money until we've actually finalized the numbers. So it was a little bit of a... an issue, not a big issue, a little bit of an issue, to actually raise the cash needed to pay the taxes that would be applicable for our performance fees, which we delight in getting. Now, that impacted last year's dividend policy because we didn't want to be caught in that circumstance again. Now, in principle, we had no possibility whatsoever in lacking liquidity because we have a large and liquid securities portfolio. We could have sold securities. The problem with selling the securities is they're at gains, and anything we sell at a gain would require even more taxes, which we'd very much like to minimize. So I say these things for two reasons. One, of course – call your attention to the cash balance and the effect on last year's dividend policy. You'll note that the dividend we just announced is higher than what we paid last year, even though we haven't accrued a performance fee yet, although we might in the future. And the second thing is just to make you comfortable with looking at the financial statements the way we look at the financial statements, which is to focus them on the operating company. The operating company for the year-to-date period, and it's the year-to-date period that I would argue is more important than the quarterly period. This is more important than the quarterly period is because with the possibly performance fees and with fluctuations in markets, there's only so many conclusions one can draw from the individual quarterly results. So, I personally like to focus upon the year-to-date results In this particular case, the operating income line, which you will find on page 18, the operating income line is $16.1 million approximately. So, that's when my attention is drawn to the financial statement. That's the first number I look at. You'll see below the operating line, there are all sorts of things, entries, and sometimes they're positive. and sometimes they're negative, has an accounting impact in as much as we don't really bear the full brunt of negativity because we unaccrue certain tax liabilities. So, just like we share our profits with the United States Treasury, we will also share our mark-to-market losses with the United States Treasury as well. It's never as grievous as the below the line numbers appear to suggest. And I think the numbers should be understood in that context accordingly. Now, a lot of interesting things have happened year to date. I'll call your attention to only several. One is we launched a Japan owner-operator ETF in the month of May. And that ETF has now achieved $25 million in assets and management. Now, obviously, $25 million in assets and management is not going to radically change our profitability. We also, some years back, you might recall, we launched another ETF called the Blockchain Development ETF. That ETF has more or less about $20 million in ETFs, even the aggregation of those are not going to radically change our profitability. However, you will observe that our largest expense, again, for the income statement, is our largest single expense, is sales and distribution marketing. Employee compensation is even a bigger expense, but a lot of employee compensation is marketing-related because the biggest user we have is marketing. And that brings up the biggest problem in asset management companies, which is raising assets. The dilemma that every asset manager wrestles with is how much time will be devoted to raising assets in management because That is the amount of time you're going to subtract from investing portfolios and doing the research. What we'd like to do is we'd like to minimize the amount of time we spend marketing so we can maximize the amount of time we spend doing research and investing so that we can have as good results as we possibly can. So the object of the exercise in your paying ETF, into blockchain ETF was to see if we could raise money reputationally. In other words, the products get a reputation, the products were not marketed in a traditional sense. They spread word of mouth. And we're looking to see what we did right in attracting the assets. Now, obviously, if they had a lot more assets or alternatively, if new assets come in, they're coming in through that modality, it's an incredibly high margin business. So it's a success, as it were, and we hope to make it a bigger success. If that success does materialize, the conclusion one would draw is our margins would expand, hopefully expand considerably. Now, it turns out that in the first quarter, So 2026, just around the corner, we're going to launch another ETF. And we haven't really officially publicly announced what it's going to be, but personally I'm pretty excited about it. And it'll be the same approach, word of mouth approach. We'll see how far we can come with all that. And in addition to margins, the biggest challenge you really have in asset management is the challenge of indexation. Active management, in of itself, doesn't really have the scalability of indexation. Indexation, obviously, since the S&P 500 has hundreds of trillions, has trillions upon trillions of dollars of market value, not hundreds of trillions. I think the market capitalization S&P 500 is $64 trillion or thereabouts. So obviously it's a big number. So go from $1 billion of assets to $5 billion of assets. It's not a problem. That's scalable. In the world of active management, you're only going to find so many good, unrecognized ideas. You have to realize this limit to how much money you can invest in them. Therefore, it's not scalable. Therefore, you have to continually to buy us new products. So that's one of the challenges. We'd like to spend our time finding new investments rather than scaling our existing investments. And towards that end, we've come to the conclusion that we'd like to separate as much as possible raising capital from managing capital. That brings me to another thing I think you'll find intriguing. you will observe that we brought a company public called Consensus Mining, trade symbol CNSG over the counter. As a market capitalization of more or less $80 million. Horizon is the manager of the cryptocurrency in that portfolio. What do we mean by management? Now, Horizon manages the mining of cryptocurrencies. In consensus mining, we do something called scripts mining, which is basically to mine two cryptocurrencies simultaneously with one electric current. It's not the place or the time to go into the detail unless somebody asks a question. Okay, so we'll go into detail, but we do that and far as i can tell it's actually pretty successful so the amount of crypto is growing but it's growing organically it's not growing from marketing if the company were to require capital and maybe one day that time will come that'll be the prerogative of that company so horizon is the manager and Ryzen gets a fee. At the moment, that fee is de minimis. Why is it de minimis? Because we're looking to incubate consensus mining, but in the fall of the time, contractually, that will pay a substantial fee. It will be not substantial in relation to investment management fees as they are known to exist, but will be substantial relative to the de minimis quantities we get right now. We do the exact same thing with Woodland Holdings, which at the moment is 44%, excuse me, 44% plus owned by our colleagues at FMO Corporation. So, there are two businesses. In total, the assets are crypto assets plus the devices that we use to mine crypto assets. And I believe, if I'm not mistaken, the aggregation of the assets were over $50 million. If we were to charge a fulsome fee, that would be a 1%. And the number was $50 million of assets. I mentioned 1% of $50 million is $500,000. So at that quantity, $500,000 would come right to the bottom line. There'd be some taxes on it. So you can see We're building the potential for operating leverage, and we're separating, to the degree that we can, the raising of capital and the managing of capital, something that just about everybody in investment management business has reflected upon. And to the best of my knowledge, and please correct me if I err in saying this, but I'm not familiar. with anyone successfully addressing that question. So I think we're up to some really interesting things. We will wait for the new year to see what our new ETF does. Of course, at that time, I will report back to you. And we are mining new crypto coins every day, which of course adds to our assets in the crypto context. And I think we're up to some interesting things. So rather than continue, I'll stop here, and I'll open up for questions if anybody has any questions. And as per tradition, we will stay around, answer every question until we resolve several questions. So if there are some questions, I'd be delighted to answer them.

Yes, we have a handful of questions already in, and I'll remind our listeners that if you're on the GoToMeeting platform, submit a question, and we'll include them in the next share. Going back to a topic you mentioned a minute ago about the Japanese fund, the question was simply can you clarify the percentage of the AUM, which, as you mentioned, we publicly disclosed the assets under management for the fund. It's on our website. It's about $25 million, which is obviously a small portion of the $10.4 billion of AUM. But I do want our listeners to understand that you can find that information on our website. Is there anything else you want to talk about in terms of the opportunity of the Japanese market overall?

Well, I suppose I'd be remiss if I didn't do at least a little bit of marketing since I'm already on the call. And let me put it this way. So virtually everybody in the world of investing is a devotee. of diversification. So, I will share a statistic with you. If you put a European index and just by coincidence, 13% of the European equity index is pharmaceuticals. And if you took the pharmaceutical companies and looked at their revenues and disaggregated them by geographic exposure, you will find that not quite but almost two-thirds of the revenue comes from the United States. Now, obviously, certain parts may not equal a whole. So if two-thirds or almost two-thirds revenue comes from the United States, everything else is much less the United States. Therefore, the United States and the European pharmaceutical companies are the biggest exposure. So I think it's legitimate to ask, in a very real sense, yes, of course, they dominate Europe. Are they really European companies? Now, you're really getting a different exposure, and that's Europe. Let's turn our attention to Japan. So, big companies in Japan, Toyota, Sony, SoftBank, Mitsubishi, UFJ. If you look at their financial statements, you will find the lion's share of their exposures. geographically come from the United States. So how can it be that one buys an index in Japan with a view to diversifying away from American exposure, and one buys a stock like Sony, because it's part of the index, and Sony happens to have well over half of its revenue originating in the United States of America. So I think we're entitled to ask, is it a Japanese company or is it an American company? So one of the virtues of Japan ETF, I don't want to make it too much of a silly point of the Japan ETF. This is a Horizon Mechanics call, not a Japan ETF marketing call. But in any event, what's the point of investing abroad to for personal verification if your revenue is actually going to originate in the United States of America. This is an ETF where the companies do the lion's share, virtually all of their business in Japan. So for better or worse, this is really a Japan ETF. And in relation to Japan ETFs that are largely comprised of the biggest companies in Japan, which are global multinational, it is distinctly different, and I think, It is superior. They have other attributes that I think may make it further superior, but I'll leave it there. You can get a sense of what we're trying to do. We're trying to develop very, very unique products, and I think Japan owner-operator ETF is one such product. So I'll leave it there.

Okay. And then with respect to our own portfolio, we've had a couple of questions come in, a perennial favorite, to talk about the TPL stock. One of the questions is just simply how much of our AUM does TPL make up? And the other is a question about if, as a firm, we have been selling TPL stock. And, of course, I understand that with some regulated products from time to time, there may be sales around the mutual fund or individual clients might provide instructions, but I don't believe anything has changed on that front, but I wanted to see if you would expand on our views about TPL in general.

Yeah, so the only time we really sell it is where we're compelled to. So there may be cases like we have it in a certain portfolio, and there are regulations about what your exposure can be, and you have no choice. You have to reduce it, not reducing it for any fundamental reasons. If the exposure is too high by regulation, is appreciated well we'll have to reduce the exposure and of course we're mindful of regulations but not selling it for any fundamental reasons as far as fundamentals go my opinion of course and feel free to disregard i think the fundamentals are fabulous i really do i think they're absolutely fabulous so you can take that for what it's worth but i couldn't be more excited about future prospects so you might want to let me leave it there, but if you have more detailed questions to the degree I can answer them, I'll be delighted to answer them.

Okay. The next question is also about our portfolio. The commenter has noted the drop in LandBridge stock following a stock offering to their existing shareholders, and they were asking, is that an expression of doubt about data centers or Or the volume of data centers come into that area?

Or just? Well, let's say about that. Yes. So first of all, you may be interested to observe. So on October 10, I just for some reason, I have to remember, I just remember that on October 20, October 10, LandBridge traded in round numbers at $49 a share. It's not exactly $49 a share, so forgive me for generalizing, but roughly $49 a share. Some number of days ago, Lambridge traded $85 a share. Today, Lambridge trades at roughly $62 a share. So clearly, in a little over a month, That's a pretty big, that's a pretty big movement. Up and down, that's a pretty big range. So right now, without being too precise about it, just in the middle of the range. Interesting enough, today, because the matter was brought to my attention, Landbridge traded as low as 58. as high as 62 in a fraction. Even in one day, that's a pretty big range. So, if it had something to do with the fundamentals, what can possibly happen in a 24-hour time period regarding data centers for any company? And if it did happen, it would surely be momentous and it would be disclosed because it would have to be disclosed. So, basically, In my humble opinion, this is just my humble, I underscore the word humble opinion, I think it's a function in the modern age of how people do research. So basically, a typical person does research. I'm not like this, but a lot of other people seem to be. They have a screen that they look at constantly, and they have the prices of securities. Some are up, some are down. And some are more or less unchanged. And LandBridge is supposed to be active in data centers. They're waiting for an announcement. And they haven't seen the announcement yet. So I can only imagine the reason thusly. Perhaps there never will be data centers. And if there never will be data centers, then why am I paying X for these shares? They must surely be worth much less. and perhaps I should sell them. And on the other hand, there are days when people come to the exact opposite conclusion, as you can see from the ranges of prices in a very brief period of time, I might add, that I just quoted you. So now, let me impose upon you the following heuristic. Let's make believe, just for the sake of argument, I don't believe this, but just for the sake of argument, that we'll never, ever, in the course of history no matter how many millennia how many eons the world will see until the sun is extinguished and light becomes impossible on planet let's say there's never going to be a data center on language never going to happen okay so do you actually think that the company wouldn't prosper anyway all it would mean is data center is going to be somewhere else I'm just playing where it's going to be in a moment. But you can't run a data center without power, and you can't run power plants without water. And the only place you can build things of the appropriate magnitude are a place like West Texas. And it's happening. So up in Lubbock, Fermi is building its data center and starting with, I think, 1.2 gigawatts. And eventually, in Lubbock, they're going to have over 11 gigawatts. And then there is, I think it's a 2.2 gigawatt plant in Sweetwater, Texas, which is supposed to be energized in April, I believe. I could quote other numbers. A plant, a data center is being built for Lubbock. Meta Platforms, aka Facebook, in Richland Parish, Louisiana. And that's going to start, I think, at 2.5 gigawatts. It's either 2.2 gigawatts or 2.5 gigawatts. And so you've scaled up to 5 gigawatts. The reason we're mentioning those numbers is as follows. The most data-centered dense area of the United States of America is the Washington, D.C., Northern Virginia metro area. If you looked up every data center in that area, every single one, and added them up, it's 3.9 gigawatts. I know because I did it. So, you just can't build a two or three gigawatt data center in an area that you can't get the electric power. You could get electric power. You couldn't get the water. I'll explain why you need the water in a second. You don't need the water so much to cool the data center. You need the water to generate power. So you need a site. If you're going to build these magnificent structures and the power plants to go with them, you have to have a site with a lot of water and not a lot of people. So over the course of civilization, as you probably know, the people, wherever they are in the world, they have a tendency to move where there's a lot of water. So there aren't too many places in the world where you can get water and you don't have to deal with people. And one of the few areas is West Texas. So now before I go more into water and why you need the water, I'm going to give you one other physical fact to understand this question. Let's say, merely for the sake of argument, I decided to build a two gigawatt data center, okay? I'm going to give you a hypothetical question, and I'm going to answer it, so it's rhetorical. So, if I'm going to build a two gigawatt data center, how many gigawatts of power plant do I need to service it, okay? If I asked virtually any person, they'll say, well, if you have a two gigawatt data center, you obviously require a two gigawatt power plant. And as reasonable as the answer appears to most people, that is wrong. Why is it wrong? Well, for two primary reasons. First thing is that no power plant can possibly be up and running 24-7. It has to go down sometimes either for scheduled maintenance or unscheduled maintenance. So when it goes down, you have to have backup power. So, since you have to power a data center, it can never be down, at minimum, you need another 2 gigawatts. So, therefore, a 2 gigawatt data center will require 4 gigawatts of power. Okay? Now, so now, okay, so I have a little 4 gigawatt power plant, and it might go down on a moment's notice. So, I have to have both things running simultaneously. One is the power plant that's feeding the data center. The other is the so-called spinning reserve. There's other backup power needed. Then you have to deal with another issue, which is called PUE, power usage effectiveness. What does that mean? That means if I had a two gigawatt data center, and I had one power plant, two gigawatts, I couldn't possibly energize that power plant. Let's forget about the issue of the redundancy for backup. Why? Because the amount of power you're drawing, the wattage you're drawing, is so enormous, even though the power is only moving a short distance, that much of the power is being lost as heat. So basically, the electrons in the wire are hitting each other, and they're hitting the walls of the cable, and a lot of power is being dissipated because of that, and that's expressed as heat. It's the same concept as when you charge your cell phone and you touch your phone, you touch the charging device, you'll see it's warm. So you're not using all the power that comes from the outlet. So it's being lost. It's the same concept, except it's not a small device. It's two gigawatts. So the general number you'd use is the coefficient is 1.58. That's your power usage effectiveness. What does that mean? If you had a two gigawatt data center, You have to draw 1.58 times 2, or 3.16 gigawatts. You need 3.16 gigawatts to energize a 2-gigawatt data center. That's how much power you need. So, it's just enormous. Okay, that answers the power question. Now, the water. Why in the world do you need water? People think, well, you need water to cool the data center. But they can get around that. They have various ways of mitigating the amount of water they need. That's all true. I won't go into details because we're not in real agreement, but we're in general agreement. You don't need a lot of water to cool a data center, even though you do need some. But the power plant. So the power plant, whether your data, whether your power source is coal, which you wouldn't use, or it's nuclear, or it's natural gas, All those three things are thermal. What does that mean, thermal? It means whatever your fuel source is, you're generating heat to boil water. So you generate heat to boil water. What happens when you boil water? Well, it turns into steam. What happens to the steam? It goes through the turbine and spins the turbine. And that, without explaining how the rotors and the stator actually generate power, let's just leave it at tower is generated. But in order to generate it at a constant rate, the steam has to move through a turbine at a constant rate. So, how do you ensure that it's at a constant rate? Well, you have to basically condense the steam on the other side of the turbine. So, if the temperature is lower on the other side of the turbine, there's going to be a temperature differential known in physics as temperature gradient. and the steam is going to move from the hot area to the cold area at a constant rate, the same way water would flow through a pipe at a constant rate. That's how it's done. So how in the world are you going to condense the steam? There's only two ways to do it. Way number one, what some people refer to as an open-loop system. How does an open-loop system work? Well, it's open, meaning you expose the water to air, You expose the steam, rather, to the air, to the ambient temperature of the environment. And because steam is at 212 degrees Fahrenheit, when you expose it to the air, it's temperature is going to cool. It's going to condense to water. But it won't 100% condense to water. Some of it's going to evaporate. That's why when you look at a power plant and you see this big smokestack and you see white smoke coming out of it, that's steam. You're losing some of the water. So you need this water. to be replaced. At what rate do you have to replace the water? The number is so big that I won't even tell you what the number is. I'll give you a homework assignment. Just go to the website of the American Electric Power Association and look it up. It's a big number. Even though you're condensing 90% of the steam, maybe more than 90% of the steam, it's still a big number. You've got to have a lot of water. That's the way the thing works. What's the other way of doing it? Well, the other way of doing it is a closed-loop system. So, basically, the steam never leaves the pipe, and the steam is routed back to the front of the turbine, okay? But it's lost some of its heat energy, so it's going to be fired up again through the boiler. One, to lose some of its energy just because heat is dissipating through the pipe. But you've got to keep boiling the water. So you still have to condense the steam back into water. Now, it's not going to evaporate because it's in the pipe. So how are you going to get the steam in the pipe to be recondensed to water when it's not exposed to air? Well, what do you do? You pour water on the pipe. because the water is what's known in physics as a heat transfer fluid. And the water on top of the pipe turns into steam and evaporates. So you need a lot of water. So the operative thing is, no matter how you do it, so everyone's looking for an announcement. I put this two gigawatt data center on my property. But the operative thing is the water. Believe me, there'll be announcements eventually. So the opposite thing is to allow for the water. Now, you can't draw the water out at a rate in excess of the natural refresh rate, or you'd destroy the aquifer. So if your neighbor, having been fortunate enough to have a data center on your neighbor's property, your neighbor is unlikely, and by the way, it's not the data center, it's the power plant that counts, not the data center, because it's the power plant that's using the water. But whether it's on your property or not, it's on your neighbor's property. Sure, your neighbor is getting the ground rent, but the real money is the water. And since your neighbor can't draw the water at greater natural refresh rate because your neighbor doesn't want to destroy the aquifer, your neighbor is going to have to collaborate with you and take water from you anyway. So you're all going to share in it. So I just told you this. If people realize that, the stock will probably not be fluctuating the way it does. But, unfortunately, we don't live in that universe, and, well, the stock price is what the stock price is. So you see what their expectations are, and you see the reality, in my humble opinion, I misquoted the word humble, of course, they ought not to be as excitable as they are at the moment, is my opinion. I suppose, my concluding remark on that subject. But you can follow up and ask me more questions on that if I haven't been sufficiently concise and clear.

Okay. We're going to stay on the forward-looking investment horizon here a little bit. The question is then, over the next three to five years, do you foresee the global AI build-out leading to net inflation due to capex spending or net deflation due to productivity gains?

Neither. Neither. I just wrote about this. I don't think it's out yet, but I'll give you my investment thesis. The biggest exposure in the S&P 500, it's obviously technology stocks. Whether it's Microsoft or Meta Platforms or Google, aka Alphabet, or whether it's NVIDIA or maybe Broadcom, maybe an AMD, you can add it up. You can see what it amounts to. It's the biggest exposure. So if you simply take the earnings of the big data center companies, they just reported them, a week and a half ago, get the cash flow statements. And what you will see is you will see very large capital expenditures. They're connected with data centers, all right, but they're not building data centers. they're just like if you're a big company you want to rent office space you don't build the building but you're still responsible for buying your furniture you're still responsible for buying your computers and communication devices and electronics and office furniture and so on and so forth same with data center so the big companies basically what they're buying is they're buying electronics they're buying the service from whom are they buying the service well nvidia AMD, Broadcom, et cetera, et cetera, okay? So, if the data centers are going to continue to be populated, well, the cap expenditures are going to be high, and your free cash flow is not going to be very high. So, because your free cash flow, your earnings might be higher than what they otherwise would have been, but your free cash flow is going to be lower, and that's going to affect the valuation in a negative way. Even the earnings go up. So you might say, well, but the capital expenditures will go on only for a brief period of time, and then they'll cease because the data centers will be built. And there we have a problem. And that problem is only – I've written about this. This problem is only dawning on the market right now. That's why the market is so tenuous. Two possibilities. Either that assessment is correct. or it's incorrect. Let's say, just for the sake of argument, the assessment is correct. So, Amazon, Microsoft et al., will significantly reduce their capital expenditures, but they're buying the equipment that goes into the data centers. So, if they're going to reduce their capital expenditures, it must logically follow that they're going to reduce their purchases from NVIDIA and Broadcom and AMD et al., And that segment of the market will fall on down and will probably offset because the market capitalizations and the weighting of the S&P are just about as big as the companies who are buying that stuff. So if indeed the capital expenditures are going to decline, it's making a problem for a subset of technology, which is big enough because the valuation is very high, to create a real market problem. Possibility number two. the capital expenditures keep going up. Why would they keep going up endlessly? Well, a simple reason. Because NVIDIA asserts, and they assert with very good reason, that they're doing what Intel had done a quarter century ago, which is they're obsoleting their equipment every 24 months. So the current iteration, the Grace Blackwell 200 GPU, graphics processing unit, it will soon give way to the Rubin Vera equipment. So you have to get rid of your Grease Blackswell 200s. You have to buy new stuff, just like Intel was doing a long time ago. So if they intend to do this, which they obviously do intend because they do say that, well, then you always got to stay with the state of the art. And if you always have to stay with the state of the art, the state of the art is going to be obsoleted every 24 months, and your capital expenditures will never end. you'll never really have free cash flow, and that's horrible. So you might say, well, but in that case, if that proposition is true, well, then I'll just go buy NVIDIA, because NVIDIA has a real intriguing advantage relative to what Intel had, because Intel, as you might recall, Intel had the problem of, yes, they obsolete their microprocessor, yes, The new generations of PCs, personal computers, will be required to include or embed the new Intel microprocessor, but they had to build a home to wafer fabrication plant. So what good was it to have more earnings, but they had less free cash flow? So to what end? But NVIDIA, you will undoubtedly argue, doesn't do that because NVIDIA doesn't make chips. Yes, they make a few chips on a experimental basis, but they don't master these chips. They have some minimal wafer fabrication facilities, but the chips are made by Taiwan Semiconductor. Only their wafer fabrication facilities will be obsolete. So, therefore, NVIDIA is in an unbeatable position, but not really, because you think Taiwan Semiconductor will live without a payback in its capital. For the privilege of making the chips, they will charge accordingly, and that will create a problem for NVIDIA. So, you see, no matter which way you go, there is a logical contradiction in the entire movement. And logical contradiction dates back, and this will explain our horizon exposures, the logical contradiction goes back 10, 12, 15 years. Because the premise was you can build a gigantic business, like the technology business, without using resources. from other segments of portfolio. And for a while, they were actually doing it. It's a very ahistorical view. So, for example, historically, the automobile was invented. You could have been a big believer in the automobile more than 125 years ago, and you never had to buy an automobile stock because you could have bought Exxon or some other oil company, and they needed the gasoline. So you might as well have concluded I'm going to invest in automobiles by buying oil companies. And Exxon actually would have been a big choice, a good choice. Then it was called Standard Oil of New Jersey, but nevertheless, you get the idea. And there are other things you could have done. So you didn't necessarily need to buy the automobile companies, other segments of the economy prospered. So, for example, they had to build roads. They were gravel companies, cement companies, construction companies. And some of those were actually very prosperous. You could have had a whole portfolio investing in the evolution of the automobile and never bought an actual automobile company. But strangely, that didn't happen in technology. It didn't happen in technology because the iPhone invention, you could run the iPhone, the smartphone, all these brilliant, beautiful devices on the existing fiber optic cable of telephone systems. So for 10 or 12 years, You can expand the business with minimal capital expenditure because you are building on an existing network. So Netflix, for example, Netflix, there are nights that Netflix uses 25% of the internet bandwidth in the United States of America. But they don't have a lot of capital expenditures because the fiber optic cable is already in the ground. That's a very ahistorical, unusual situation. now we're coming into the different world the different world of high performance computer note how we do not say artificial intelligence but high speed of a high um high performance computing because that's really what it is we're going to need other things and we're going to need water and we're going to need natural gas and there's only a handful of ways to get them and At Horizon, we got them, and we're staying with them. So just a matter of time, you know, the world is moving in the direction to make these, all of them, extraordinarily lucrative investments. So you don't even have to do anything. All you need to do is think it through. And perhaps, just perhaps, I may advance the proposition, maybe that's why Lambridge, for whatever reason, was actually up today, not down. Anyway, I'll leave it there, but I'm willing to elaborate if someone wants to propose a more involved question.

Okay. And I may have glossed over a question earlier. This is just a factual question of what percentage does TPL make up of our AUM? And I can just let our investors know. We disclosed that last year in our 10-K. This is roughly 41% as of December 31st, 2024. That's one of our risk factors. It's, you know, come down a bit since then, but I don't believe we've put out an updated number. But generally speaking, that's about where it is.

Right. So basically, yes, because when we get new assets, yes, because let me just elaborate, if I may, when you get new assets from management, we obviously can't buy and we wouldn't buy TPL assets. at that allocation. So new assets, dilute it. And for example, Japan ETF, say what you will about it, positive or negative, doesn't have any TPL in it. And similarly speaking, the blockchain development fund has no TPL in it. So as we raise new assets, there are different investment products that don't have any TPL. So we'll get diluted over time, even without selling.

So we have a series of questions now that are turning back to just the Horizon Kinetics holding company stock. And this one is very simple. What is your single highest priority for deploying free cash flow right now?

Single highest priority? Well, we are obviously we have the 70% payout ratio. So we're taking 70% of our net income and we're paying it out to shareholders. So I think it's fair to say our biggest priority is rewarding the shareholders.

Along that same line, there's a question about governance structures, what governance structures are in place to ensure minority shareholders can fully participate in the long-term compounding of HKHC's capital allocation strategy, which I suspect we'll talk a little bit more about dividend there.

Well, dividend is one thing, and so obviously everybody gets to participate. And We're long-term investors. We encourage people to be a long-term investor. We're open about it. I think we're open. I'd like to believe we're open. And I don't have quite the answer to your question to hand. Usually I do, but if I don't, I'd be delighted to get the information and engage with you and get you an answer. So we're pretty much an open book. We have no plan to take the company private. If maybe that's what you're thinking about, then we might. take come through private again we're not planning on doing anything like that or no plans to do that you might observe in the last open period i personally bought some stock you know right now i can't buy stock today obviously because i'm having this call and we'll see what i do when the next open period is but um i don't know what else to say um yeah it's available it's really welcome long-term investors

Yeah, it's really the same structure as any other public company, really. Okay, so the next question is a little bit more specific back to our financial statements. And, again, this one is a little specific to our lease obligations. The question is around new or extended lease obligations that are listed in Note 10. Is that all from New York office space? And if I may, just to put a couple clarifications around that for our listeners, Our lease obligations are for office space broadly over multiple locations, not necessarily just in New York City. What you see in Note 10, the contractual obligations table within Note 10, includes the run-out of existing New York City offices through early 2027, as well as two other previously existing office space leases and one new 10-year lease in Connecticut for additional office space. While we've disclosed additional office space agreements, which are in both New Jersey and New York, those leases have not yet commenced. We haven't taken occupancy for those locations yet. So those are omitted from what you see in that table and note 10, but rather the broad terms are disclosed in the narrative sentences below that note. We'll let you know also that that lease obligation in New York City is for different space than what we are currently in. The new lease is for 15 years, which is why you probably see this gross number that you may see in the notes, total payments over that long-term timeframe. And I'll emphasize to you now that the cash payments that we will be making eventually are actually less than what we're currently paying in New York City. So that is a very long setup, but I'll just turn to you to ask Would you like to comment on how we plan to use that New York City office space or in general?

Yes. So, basically, we came to the conclusion that if you've been to our offices, we're in three separate floors. That creates one problem, and then there's a second problem. The first problem is it's very inefficient. We have three lobbies. We have three reception areas. You actually pay for the elevator entrance. So there's a lot of wasted space. So it's very inefficient. If you allow more efficient, we could be on one floor. So part of the reason was to save money by going to one floor. The other thing is the current lease we're responsible for paying for all sorts of ancillary services that in another location, you wouldn't be responsible for paying, and that's a savings as well. So basically, in terms of the usable floor space, we would have a better arrangement. In terms of the ambiance, it's better. And in terms of the monthly obligation, because you pay monthly, it worked out to be 35% cheaper. So everybody can have a better experience, and we save 35%, it seems like everybody should be happy. And speaking as a very large shareholder, it made me happy. And so that's where we're going. We also have another issue that the new space is going to solve. So you might be aware, I myself do a lot of meetings. We call roundtables and other things where I invite investors to come in. The existing accommodations don't normally allow for the attendance that we would otherwise have. So we have to limit it. And a lot of people like to come in and hear what we have to say and it's kind of foolhardy to not let them do it because it's also a source of new business among other things. So we needed to find a space where we wouldn't be so limited. And We found such a space, and that's what's happening as far as that goes. Have we left anything out, Mark?

Yeah, we have a couple more. We've had a couple questions come in around the mechanics of our disposal of the consumer products division. This person references specifically the Scott's Liquid Gold sale, and I did want to just spend a minute to set this up as well. Many people get confused about the Staff Liquor Goals corporate entity that we merged with in 2024, which is actually different than the namesake brand that they had disposed of, you know, well prior to our transaction with them. The two brands that we had were called Kids and Pets and Messy Pets, and due to their relatively small size, the revenues associated with that, those brands were reported within our other revenue lines in the past. And as a group, again, we called it the consumer products group as opposed to the individual brands. But the question was about, you know, were there multiple bidders and can we share more details about the sale and, you know, where the $2.5 million fair value, where is it recorded on the balance sheet? I can If you'd like to comment on it broadly, I can also give a couple specifics if you'd like.

Yeah, well, so basically we did get some cash, and then we're also getting a long-term royalty. We like royalties. Long-term royalty gives us some upside. Obviously, we're never going to have the scale to be in consumer products. So basically disposing of the inventory, getting some cash and disposing the ongoing expenses or limiting the ongoing expenses, which we did, and getting a long-term royalty. So now it's just cash flow over a very long period of time, and you can maybe elaborate on that, Mark.

Sure, I'd be happy to. One thing, just mechanically, the $2.5 million fair value that you referenced is in the other assets sort of down the balance sheet line a bit. And I would say one of the things we talked about is just that there's some parameters around the royalty arrangement that this percentage, we have a little higher percentage in the early years, a little lower in the outer years, and a minimum of $1.5 million and a maximum of $5.25 million over this long-term period. But I think we came to the conclusion that the additional focus that this buyer can bring to it, that that is going to bring more to us from those brands in terms of royalty income than we would have achieved by just continuing to own and operate it ourselves as a standalone operation. I think that's the last question specific to HKHC. There has been just one more that came in while we were talking about that. Around, sorry, looking for the question again. AI as currently defined Oh, I'm sorry. It says, Murray does not believe we have AI as currently defined by the industry. Do you foresee any super intelligence being created in the near future? Are we on that trajectory? Okay.

So let me just explain. Obviously, it's more than just mechanics. So in the colloquial, artificial intelligence is taking the mean. the average person, machines that think like human beings. And the problem is it's very difficult and many would argue it's impossible to get a machine to think like a human being. So, why is that true? Because a human being, even though human beings do many, many foolish things, a human being has the ability, at least in principle, recognize the limitations of human thought, which is not to say to recognize the limitations of that individual's human thought, but the limitations of thought itself. So, for example, without giving you a treatise on epistemology, there are certain inherent contradictions in thought. So, for example, there's what's called the Cretan liar paradox, also known as the Epimenides paradox. It goes something like this. Epimenides, the Cretan, says all Cretans are liars. Well, he is a Cretan. And therefore, if that statement is true, he must be lying. So therefore, all Cretans are really telling the truth. But everything he says is a lie. It's an inherent contradiction. How do you resolve it? And the answer is it's unresolvable. In mathematics, you find the same thing. You find something called Goodell's incompleteless theorem that was discovered that you can't complete. There are certain mathematical propositions that you cannot completely prove. So proof that there are certain things that can be proven. Or you could have in mathematics also the Cantor infinity paradox. No matter how big a number you come up with, It's always going to be bigger because you can add 1 to it. So, if you can add 1 to it, why can't you add infinity to infinity? Why can't you make infinity squared or infinity cubed or infinity to 100th power and so on and so forth? So, you never get the end of it and how do you ultimately talk about finite universe if numbers are infinite?

And it goes on and on like that.

Well, when you get into really complicated questions, We have to deal with that. But you also have to deal with it, and I gave an example of this at a recent roundtable, so I'll recapitulate it for your amusement. Let's take a more, these are all abstruse, very refined questions, and maybe we shouldn't even be talking about them. Let's do a simple exercise, what some people call artificial intelligence, and I will describe the exercise, and I'll tell you where we got it from. It's a chat GPT exercise. The exercise is as follows. You ask the computer to make a list of all the books written by Winston S. Churchill. Okay? So we're not talking about the Cantor Infinity Paradox or the Goodell Incompleteness Theorem or the Creep Liar Paradox. There's a certain number of books that Winston Churchill wrote and you've got to look it up. The problem came up because at the Roosevelt, the Franklin, President Franklin Roosevelt's home at Hyde Park that I visited not long ago, they redid it. And in the study, because President Roosevelt was friends with Winston Churchill, they decided to put in the study all the books of Winston S. Churchill. That's a cool exhibit. Trouble is, If there were books in there that said they were written by Winston Churchill, they were not written by Winston Churchill. And if you keyed in ChatGPT, give me a list of the works of Winston Churchill, until recently, they may have corrected it because it was pointed out to them, but until recently, they gave you works that were not written by Winston Churchill that they said were written by Winston Churchill. How can I make such a mistake? We're not talking about complicated things. Because if Winston Churchill was alive, And Winston Churchill's writing books, just so happens there were two Winston S. Churchill's writing books. One was Winston Churchill, the orator, the statesman that you know. The other was the American novelist known as Winston S. Churchill, lived in the city of Boston. And in his era, he was a best-selling novelist. Now, how is Chachi P.T. to know there are two Winston Churchills, not one? Interestingly enough, Winston Churchill, during his life, corresponded with a novelist. And he wrote, I'm going to paraphrase the letter that he wrote. And the letter was written before Winston Churchill became prime minister. So he said, I intend one day to be the prime minister of the United Kingdom. And it wouldn't be great if you ran for president and you won and we could meet as Winston S. Churchill each year. You as the President of the United States of America and I as the President of the United Kingdom. That would be pretty intriguing. Alas, that's not the way history was written. But ChatGP doesn't know that. So you see the problem is every nuance of every bit of data has to be pointed out to the computer. And all that data has to be cataloged properly. And all that data has to be manipulated in some ways producing a query. That's why the typical chat GPT query takes 10 times the amount of lecture power than a simple Google query. So you will say to me as rejoinder, as most people inevitably do, well, one day they'll figure out a way to use less power for more elaborate queries. and you will not be right if you say that why because if you look inside a computer a computer is basically just a big electromagnet the data it's expressed in binary forms it switches on and off zeros and ones in other words the data is simply electrons so you can't process more data by using less electrons because data are electrons you can't use more electrons The question is, for society, if you want to have those privileges, which I personally don't need them, but I'm a minority one. Everybody else seems to want them. Well, if you want them, if you want autonomous driving and you want to watch movies at 3 a.m. and you want to write book reports on Shakespeare without having read Hamlet, well, that's fine. But you better be prepared to use a lot of electric power. And this world is running out of it. So as I said, I'm a minority of one. I don't need this stuff personally. But everybody else seems to want it. So since my vote doesn't count for anything, it is what it is. It's going to be the way it's going to be. And you know what the outcome is. So sometime, not just in the future, the best guess is sometime in the year 2028, we're running out of electric power. And there's nothing anybody can do to stop it. That's where we are. Now, if it went the other way, let's just say, just for the sake of argument, mind you, went the other way, went the Murray Stalway. So, it went the Murray Stalway, instead of reading a book on a device, you might just buy the book and just put it on a bookshelf. And that doesn't use any electric power. The problem with that, to show you that everything has its problems, believe it or not, there are 5 million books published in the world every year. How would you ever build a library to contain them all? If you could, how would anybody be able to use it? It's just too many books. So you can't flip through them. You can flip through some, but basically, you have to have some sort of electronic means of surveying them and extracting data from them that's useful. Therefore, there's no alternative but to go to high-performance computing, which everyone calls artificial intelligence. That's not artificial intelligence. It's merely data sorting. I hope sorry for the elaborate answer but it required it and I hope you found it helpful with respect to your question okay that's that's great I do not have any further questions coming from the web or in advance okay excellent so I take it that that is they say in the movie business a wrap is it a wrap I think it's a wrap I think it's a wrap Okay, good. So in that case, I'm going to thank everybody for listening. I thank you all for your support. And, of course, you know what happens, that we hang up this phone and someone's going to think about something they wanted to ask, forgot to ask. Please do not hesitate to contact us if such an event occurs. If you have a question, we will get you an answer. Until then, of course, we'll reprise this in about 90 days. So until that time, thank you so much for attending. We look forward to seeing you at the next. Right.