Earnings Call Transcript - GROW Q2 2020

Holly Schoenfeldt, Marketing and Public Relations Manager

Good morning and thank you for joining us today for our webcast announcing U.S. Global Investors Results for the Second Quarter of Fiscal Year 2020. I'm Holly Schoenfeldt. If you have any questions during the webcast, you can enter them in the questions area of the control panel side bar, which is normally to the right of your screen. Also, you may download a PDF of today's slides by clicking on the red handout button. The presenters for today's program are Frank Holmes, U.S. Global Investors’ CEO and Chief Investment Officer; Lisa Callicotte, Chief Financial Officer; and myself, Holly Schoenfeldt, Marketing and Public Relations Manager. During this webcast, we may make forward-looking statements about our relative business outlook. Any forward-looking statements and all other statements made during this webcast that don't pertain to historical facts are subject to risks and uncertainties that may materially affect actual results. Please refer to our press release and corresponding Form 10-Q filing for more detail on factors that could cause actual results to differ materially from any described today in forward-looking statements. Any such statements are made as of today, and U.S. Global Investors accepts no obligation to update them in the future. On Slide 4, you'll see a quick overview of U.S. Global Investors. We are an innovative investment manager with vast experience in global markets and specialized sectors. Founded as an investment club, the Company became a registered investment advisor in 1968 and has a long standing history of global investing and launching first of their kind investment product, including the first no-load gold fund. U.S. Global is well known for expertise in gold and precious metals, natural resources and emerging markets. Now let's go to Frank Holmes, CEO and CIO for an overview of the period. Frank?

Frank E. Holmes, CEO and Chief Investment Officer

Thank you, Holly. After 30 years in Texas and launching both the first China opportunity fund and the Eastern European Fund, my long experience began in gold in 1968. Over the past 30 years, we have developed significant expertise in global investing. We aim to be the preferred option for exposure to emerging markets, resource gold, and digital currencies. Our company is debt free and has a strong balance sheet with a manageable cost structure and multiple dividends reflecting equity discipline. We appreciate our investors' loyalty and long-term support, especially the top institutional holders like the Royce funds, Perritt, and Financial Investment Management Group. Even with a challenging market, we continue to focus on innovation. We have maintained a consistent dividend payment for ten years, providing a modest yield that exceeds five-year government bonds. The Board has approved a repurchase of up to 2.75 million of our outstanding common stock through December 31, 2020. In the three months ending December 31, 2019, we repurchased only 2,000 shares of Class A shares, spending approximately $3,000. We buy during times of market volatility, following a simple algorithm that automatically purchases on down days. Our balance sheet remains healthy, reflecting our marketable securities, short-term bond funds, and cash position, though we've faced some cost challenges in the past year, especially with funds that have a fulcrum fee structure. This fee structure rewards performance but can also lead to paybacks in underperformance, especially in a concentrated market. Currently, a small number of technology stocks represent a significant portion of the S&P 500. If our portfolio lacks these winning stocks, it might lead to underperformance. Thus, it's crucial to maintain a diversified portfolio across multiple names. Earnings per share have experienced volatility, which we’ve discussed previously. If you're new to our company, I encourage you to reach out to U.S. Global for clarity on the adjustments we've made, especially the impact of marking to market investments. Some of our stocks, like GROW, have seen significant rebounds recently. The mutual fund industry is witnessing more exits than entries, with an unprecedented number of funds being merged or liquidated, a trend mirrored in Europe and Canada. This suggests a shift towards more efficient ETF options, which allow for greater flexibility in trading compared to traditional mutual funds. Despite challenging market conditions, our GOAU product, which employs a quantitative approach to gold stocks, has shown promising results. It was designed to outperform the GDX and GDXJ by being more selective. We are pleased to see its growth this year, reflecting our strategy. Trading volume for our ETF has increased significantly, and new liquidity rules for mutual funds have indirectly benefited us. As we achieve higher trading volumes, we enhance our position in various trading platforms. Gold has shown strong performance this century, maintaining its status as a valuable asset class despite skepticism from some market commentators. A visual representation would illustrate that gold and the S&P 500 share similar volatility levels, contrary to the perception that gold is excessively volatile. In contrast, gold stocks and emerging markets exhibit higher volatility. I wanted to highlight recent developments in our industry. I participated in a week-long program at Harvard, where discussions on digital assets and AI showed a rise in interest in cryptocurrencies. Bitcoin has seen significant volatility but is beginning to recover, fueled by positive sentiment among investors and institutional interest in this asset class. As Interim CEO, I took on the responsibility of steering U.S. Global through various challenges, including governance issues. We’ve gained improved control over our cost structures and operations. Our stock has begun to rebound as the market reacts positively to these adjustments. We have hedged our electricity costs, benefiting from recent changes in the energy market, and this aligns favorably with our mining operations. We've also seen an increase in the coins we mine daily, contributing to improved profit margins. Now, I'd like to pass the discussion over to Lisa, who will provide an overview of our mutual fund operations and the strategies we are implementing to streamline our costs moving forward.

Lisa Callicotte, Chief Financial Officer

Thank you, Frank. Good morning. Before I discuss the results of operations for the quarter I'd like to discuss the pending sale of our 65% Canadian subsidiary Galileo Global Equity Advisors. On December 30, 2019, USGI entered into a binding Letter of Intent with Galileo. Pursuant to its capital restructuring Galileo agreed to purchase all of the common shares owned by USGI for 1 million Canadian dollars. The transaction is subject to regulatory approval and other closing conditions, and it is anticipated that the transaction will close on or about March 2, 2020. The result of Galileo is reflected as discontinued operations in a consolidated statement of operations. Now I'll discuss the results of operations for the quarter ending December 31, 2019. Beginning on Slide 31 we reported total operating revenues of 887,000 for the quarter, which is an increase of 94,000 or 12% from the 793,000 from the same quarter last year. The increase is primarily due to decreases in performance fees paid out, lower fee waivers, and higher assets under management in the USGI equity fund. Operating expenses for the current quarter were 1.4 million, a decrease of 251,000 or 15%, primarily for the following reason; employee compensation and benefits decreased 155,000 or 20% mainly due to decreases in bonuses and general administrative expenses decreased 103,000 or 13% primarily due to decreases in fund expenses. We see our operating loss for the quarter ending December 31, 2019 as a loss of 511,000, but this is an improvement of 345,000 compared to the same period for the fiscal year 2019. On Slide 32 we see that other income loss for the quarter was a loss of 440,000 and this is mainly related to unrealized losses and investments as Frank has discussed. Losses from continuing operations was a loss of 926,000 which was an improvement of 2.6 million from the quarter ended December 31, 2018. Loss from discontinuing operations was 117,000 for the quarter. Net loss attributable to USGI after taxes for the quarter is $1 million and as you can see on slide 33 this is a loss of $0.06 per share. Moving to Slide 34 we see we still have a strong balance sheet which includes a high level of cash and unrestricted marketable securities that combined to make up 60% of our total assets. As you can see on page 35 we still have no long-term debt; our only long-term liabilities are lease obligations, and the company has net working capital of 10.2 million and a current ratio of eight to one.

Holly Schoenfeldt, Marketing and Public Relations Manager

Thank you, Lisa. Alright, as you can see on Slide 38 a majority of our mutual fund assets are in emerging markets and natural resources while 31% are in domestic equities and fixed income and then as for distribution more than three quarters of assets come from retail investors with 18% coming from institutional investors. Our sales and marketing efforts have continued to focus on our mutual funds including those concentrated on gold, natural resources, and emerging markets as well as our ETF. The company and our funds continue to receive an invaluable amount of viral publicity gained through media interviews. Frank Holmes often shares his insights with financial news outlets like Fox Business, Bloomberg Radio, and Kicker News just to name a few. We continue to receive recommendations by influential financial newsletter writers as well along with sharing and syndication of our award-winning original content by third-party publishers. The newsletters have loyal followings and received millions of visitors every month. Frank Holmes' CEO blog Frank Talks continues to grow in popularity as well. His commentary is often featured by prominent publications including Forbes, Kitco, and Equities.com each with millions of monthly visitors. Kitco News, the biggest gold website in the world with an audience of over 30 million monthly visitors continues to feature the Gold Game Film Show with Frank Holmes gold market analysis. Since the show's beginning, 177 episodes have aired. At quarter end, we also like to look at the most visited spring talks blog post published over the past year and on this slide you can see that the most visited articles in 2019 are as follows; number one, hard truths and resource investing according to Bob Moriarty; number two, This AI Company is the future of gold exploration; and number three, three mining stocks for investors seeking gold exposure. And you can sign up for the blog for free on our homepage usfunds.com. In all of this coverage helps us leverage our brand by reaching millions of readers, viewers, and potential investors in our website USfunds.com was visited 681,000 times in 2019 by curious investors from all over the world. U.S. Global is well known for timely, balanced, and positive market insights and our thought leadership. The company has been awarded numerous star awards by the Investment Management Education Alliance over the years, for excellence in investor education. And just last month we added three more awards bringing the total to 88. Our subscriber base continues to grow organically and we currently have over 50,000 serious investors subscribe to our investment newsletter and the Frank Talk blog. We also continue to see a large following across all of our social media platform. Investors can sign up at usfunds.com and join these subscribers to receive the award-winning investor alert e-newsletter as well as Frank Talk. And briefly as we wrap up today's presentation we do want to open it up to questions and just as a reminder you can enter questions in the control panel on your screen and you can also submit questions directly to us anytime by emailing info@usfunds.com. And for those we will be following up with all questions within a few days.

Unidentified Analyst, Analyst

And I do have a few questions to begin with. The first one is for you Frank and it says how is the Coronavirus impacting investments in some of your global funds or your airline ETF?

Frank E. Holmes, CEO and Chief Investment Officer

I would say the Coronavirus has a more negative effect than SARS because it led to flight cancellations and had a larger impact, especially from Asia and the Asian airlines. While the U.S. did cancel some flights, I don't believe it had as significant an effect as initially expected. We observed the Jets ETF decline due to sentiment around this situation, but the U.S. economy remains very strong. Recent employment numbers have come out, and we see that PMIs have turned positive, which is encouraging as long as they stay above 50 and continue to show growth. I believe the airline industry is highly undervalued. Once a solution is found for this tragic disease, airlines are likely to see a significant upward move as Asia recovers. China is taking significant measures to control it, and I think the situation will resolve itself.

Unidentified Analyst, Analyst

Great. Thank you for that. I also have a question for Lisa that said how will the Galileo transaction affect the USGI financials?

Lisa Callicotte, Chief Financial Officer

So after the transaction is complete USGI will no longer consolidate the Galileo assets and liabilities on our balance sheet and we won't be including that 65% of Galileo's income or loss in our income statement. So when we're looking at the March 31, 2020 financials there won't be any discontinued assets or liabilities listed on the balance sheet and in the statements of operations for the three and nine months it will only include our portion of income or loss through the transaction date. So after that date we will no longer be recognizing any portion of Galileo's gain or loss in our income statement.

Unidentified Analyst, Analyst

Okay, thank you Lisa. Frank I have another question for you.

Frank E. Holmes, CEO and Chief Investment Officer

I would just like to add, you know that we put up about a million dollars, how many years ago was it Lisa, nine years ago, approximately…

Unidentified Analyst, Analyst

Okay, thank you Frank. Yes, so there is another question for you Frank that says how do you see the recent resurgence in HIVE impacting GROW this year?

Frank E. Holmes, CEO and Chief Investment Officer

Well I think it's pretty simple. So luckily we have I believe it's 10 million shares, Lisa.

Lisa Callicotte, Chief Financial Officer

Yes.

Frank E. Holmes, CEO and Chief Investment Officer

That the advice that GROW has. So those 10 million shares have gone from $1 million valuation to $4.7 million valuation so far this quarter. And I think that that was sort of the difficulty that we have but that's just the reality is that that asset class is going to go mark-to-market every quarter. And so that will show up. So anyone doing the calculation it's easy for them to make that determination.

Unidentified Analyst, Analyst

Okay, great. And we have time for one more here Frank. It says overall what global catalysts do you see potentially moving GROW in 2020?

Frank E. Holmes, CEO and Chief Investment Officer

I believe our gold funds are performing well, and GOAU stands out as a smarter option that deserves to be a $0.5 billion ETF. Achieving that size could generate $3 million in revenue, making our investment advisory business highly profitable. Our aim is to position this fund as the strategic choice for those interested in gold ETFs, as it operates in a more intelligent manner. This might serve as a wakeup call for platforms and could act as a significant catalyst. With gold approaching $1900, I see this as inevitable due to global monetary and fiscal policy decisions. There are no real constraints on fiscal policy, and efforts to stimulate economic growth through cheap money make real assets like gold more attractive. Additionally, the crypto space is an essential part of those alternative asset classes. Regarding gold investment, the advancements in AI—particularly through initiatives like Gold Spot—have led to remarkable discoveries, similar to how fracking transformed the oil industry in the U.S. These two investments might prove to be very strategic for us in the next couple of years. I'm pleased with HIVE Blockchain, despite the time and money invested, as it constitutes about 3% of the global Ethereum production. As countries discuss their own currencies, they often reference Ethereum as a foundational element. Many ICOs utilize this platform, and we're key players in it. I believe HIVE could drive significant growth once regulations stabilize globally for digital currencies, leading to increased adoption. That’s my perspective on our growth opportunities. Thank you.

Holly Schoenfeldt, Marketing and Public Relations Manager

Wonderful. Thanks Frank. And thank you all for your questions today. This concludes U.S. Global Investors Webcast for the second quarter of fiscal year 2020. This presentation will be available on our website usfunds.com. Thank you all for your participation today.