Earnings Call Transcript - GROW Q1 2023

Holly Schoenfeldt, Director of Marketing

U.S. Global Investors Results for the quarter ended September 30, 2022. I'm Holly Schoenfeldt. As you can see on Slide #2, 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, Director of Marketing. Moving on to Slide #3. As always, we would love to offer anyone tuned in today one of our JETS, GOAU or SEA. In addition, we do have JETS luggage tags available, and all you have to do is send us an email with your physical mailing address to info@usfunds.com. Now on Slide #4, 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-K 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. Moving on to Slide #5, I will briefly review our company. U.S. Global is an innovative investment manager with vast experience in global markets and specialized sectors. It was originally founded as an investment club, becoming a registered investment adviser in 1968. The company has a long-standing history of global investing and launching first-of-their-kind investment products, including the first no-load gold fund. We are well known for expertise in gold and precious metals, natural resources, airlines and emerging markets. Now on Slide #6. I would like to hand the presentation over to CEO, Frank Holmes, to review what we believe is one of the most helpful visuals when it comes to investing, not only for GROW, but for any major asset class.

Frank Holmes, CEO

Thank you, Holly. And thank you for all the listeners. I definitely want to share with you this is a very important visual to understand volatility. Every asset class has its own DNA of volatility. And over time, it can change. It's not dramatic quarter-by-quarter, but over time periods of 3 years, you can see changes taking place. So what's important here is that gold bullion is really less volatile over 10 days compared to the S&P 500. It used to be the same. So I thought that was most interesting. And then when we look at asset managers like ourselves, our daily volatility is twice what the S&P 500 is and we're known for our gold funds, so we're also twice as volatile as gold bullion. And over 10 days, you can see once again, we're twice as volatile. So it's a non-event for 7% of the time, over 10 days for GROW to go up or down 9%, whereas the Dow Jones asset manager is only 6. So why is that? It's because we have other investments that also are volatile and our biggest asset class is the Jets ETF. As you can see, its daily volatility is 3%, what GROW is, but over 10 days, it's 8%. And our investments in companies like High Blockchain, which are much more volatile, so you get a sentiment move. But what's really most important for all of us is how we're doing from our revenue and cash flow and running the business. Our investment process uses a matrix of top-down macro models and bottom-up micro stock selection to determine weightings in countries, sectors, and individual securities. Our ETFs are smart beta 2.0. So we've done a lot of progressional work on portfolio construction and back-testing in addition to looking for the factors for stock picking. Also, we write and believe that government policies are precursors to change. As a result, we monitor and track the fiscal monetary policies of the world's largest countries, both in terms of economic stature and population. We focus on historical and socioeconomic cycles, and we apply both statistical and fundamental models, including growth at a reasonable price, to identify companies with superior growth and value metrics. We overlay these explicit knowledge models with case knowledge obtained from domestic and global travel for firsthand observation of local and geopolitical conditions as well as specific companies and projects. We use a matrix of statistical models to monitor market volatility. As you saw, we like to talk about the DNA volatility of different asset classes and money flows. As a result, we may maintain higher than normal cash levels. For our company's values, we respect people and teamwork, show initiative, responsiveness, curiosity to learn, and improve performance, and we are results-oriented people with a strong work ethic. Recognition of achievements is something we're very proud of in how we run this company. But what's driving growth? Well, interest rates have been a headwind for all asset classes. It's good to see that gold in the past couple of days, and particularly this week, is back above its 50-day moving average, which is bullish for gold stocks, and we're seeing a big lift today. In particular, we are the only airline and focused ETF, and our newest one is in the shipping industry. These ETFs are really important, and I want to highlight that GOAU is our gold ETF, and it has done what it’s supposed to do. It outperformed its peers, and we’re happy about that. High Blockchain is a unique investment. We couldn't launch an ETF in that space for various reasons, which we've talked about before. So we launched the first crypto mining company in the world, which has always been green only with a very strong strategy that differentiates itself from its peers. I want to take this time to thank our shareholders, in particular, the Royce Group, Vanguard, Peritt Capital Management, and Michael Corbet for their phenomenal job. We have a new investor, Keenan Wealth Management out of Florida, and Bill Nasgovitz out of Milwaukee with Heartland Advisors. Thank you all for your loyalty. Next, Peritt Capital Management presented an interesting slide looking at returns post-midterm elections. Historically, these have been reliable negatives going into midterms. After election results, we typically see the best stock market performance when there is a Democratic President and a Republican Congress, or when the Senate is split. Microcaps, in particular, are taking it on the chin this year. We think we're going to get a reset button here, which presents a lot of upside for shareholders in our industry category. Next, I’m pleased to share that we’re really happy with Stone Gig Capital; they finally got this report off. They do unique research covering GROW and many microcap stocks. We think it’s extremely helpful that they released this report at such a timely moment, especially after the big corrections in September. See, the valuation multiples and types, the methods, include equity multiples, comparable company analysis, precedent M&A work and transactions, and then enterprise value multiples. There are many different ways to assess valuations, but what makes us unique is we frequently obtain a sentiment premium that could be positive or negative. I personally own 17% of the company and approximately 99% of the voting control. Consequently, we increased the dividend last year by 200%. The stock did suffer in September from a substantial sell-off, but we have been paying dividends since 2007 and our yield is approximately 3%. The monthly dividend payment has been consistent and is approved going into the year, then reviewed by the board quarterly. Earlier this year, the Board of Directors approved an over 80% increase in the limit of its annual share buy-back program, going from $2.75 million to $5 million. For the quarter ended September, we repurchased a total of 39,965 Class A shares, using about 133,000. This may be suspended or discontinued as deemed necessary, but we are committed to buying back stock, and it’s an algorithm that buys back on down days, which is important because we believe it’s a valuable strategy. Looking ahead to the first quarter of 2023, the company remains profitable despite a challenging macro-market environment. We continue our strategy of buying back stock on down days while maintaining dividends, backed by a strong balance sheet, holding both cash and other investments. Understanding assets under management versus average account size is essential. The reason we share this is that U.S. Global has always promoted an ABC plan, originally requiring only $100 down, which in earlier days was a couple of dollars a day. I was interested when Terry Savage called me about her gardener who has been using it for almost 20 years and realized how much he had saved. During the COVID crisis, he had access to saved capital, which aided him during that time period in early 2020. But this method has driven our expense ratios higher, and to remain price competitive, we have to subsidize those expenses. We're trying to share insights here to show you that if the average account size is $40,000 and assets here reach $60 million, we can calculate a breakeven point based on the fees charged. For our ETFs, they typically breakeven at about 60 basis points. You need at least $40 million to breakeven on legal and audit expenses, but for fund investment advisory, over $100 million is required to cover those expenses. When dealing in ETFs, there are no transfer agency fees, and that expense can really drive up the expense ratio. For example, when advocating for a 10% winning in gold, if someone has a $100,000 portfolio, then only $10,000 is invested in the gold funds, which increases the expense ratio unless we guarantee and cap expenses. We have created caps on the funds, but they still appear high relatively due to our strong program for both retail and institutional investors. As of 2007, GROW had $317.9 billion in quarterly average assets, with $4.4 million in quarterly operating revenues. To value an asset management company, you could look at the ETFs. If we have $100 million at 60 basis points, it generates $600,000 for U.S. Global. At $2 billion, the revenue increases to $12 million, and at $3 billion, that goes to $18 million. After deducting expenses from $18 million, you can estimate your cash flow as gross margin. This is the simplest way to understand how the asset management business is valued daily. The GROW assets faced declines alongside broader market trends, as seen in March with $4.1 billion in June, and then we experienced a significant sell-off in September affecting all asset classes and redemptions across the fund industry. The only asset class that saw fund flows increasing were money market funds. How do we determine earnings? We previously showed that 60 basis points generates your operational cash flow and earnings, plus investments can significantly swing earnings positively or negatively due to mark-to-market or investment evaluations. Each quarter, public holdings can fluctuate, creating volatility to your earnings. Warren Buffett recommends focusing solely on a company's operational earnings since investments are long-term endeavors, leading to short-term noise. It's important to recognize that U.S. Global has healthy operational earnings alongside investment earnings. Regarding mark-to-market investments, at the end of September, the fair value was $16 million with hypothetical swings of plus or minus $3 million, which can impact overall expressed earnings. We also have options on warrants, primarily those pertaining to High Blockchain investments, which can affect our net worth. This visual highlights that in March we started a significant sell-off which persisted into April, May, June, and July, before we saw an uptick in August followed by another plunge in September due to rising global interest rates. Thus, when our funds decline with the overall market, the revenue based on 60 basis points decreases, leading to lesser operational income. This simplicity illustrates what drives U.S. Global. Moving on, domestic and global equity mutual funds faced redemptions, and you saw earlier how money market funds had positive flows affecting our business model, which Lisa Callicotte will discuss in more detail. Our earnings per share for the quarter was $0.24, down from $0.06 with the sell-off, then up to $0.03, and we just made a $0.01 for this last quarter. I'm thrilled about this because it was a challenging quarter for many reasons. This will give you insight into our performance. It's gross stock versus JETS. Sometimes we follow the price of gold and other times we follow JETS. At times, we also align closely with the performance of the crypto space, especially High Blockchain. However, most of our investment in High Blockchain has been through convertible notes, which has recently been paying us about $750,000 in principal each quarter. It used to be $15 million but is now just under $10 million, plus we earn 8% on the principal. Each quarter we are coming down from that amount, but while it doesn’t fluctuate much anymore, we do still have options through the warrants on High Blockchain, which previously had significant impacts. The primary driver here is JETS, and when we observe the notable decline in JETS, the difference for U.S. Global is also significant. However, the numbers reveal that JETS is beginning to perform better, even if we are still in a challenging phase coming out of September. I found myself questioning why that wasn’t reflected in sales. Essentially, it comes down to comparing ourselves to iShares Transportation ETF, which encompasses trains, trucks, and airlines. The index experienced earlier redemptions starting in April, while they've basically moved sideways since July. We’ve held our ground stably and have only recently faced a sell-off. It's also important to note that the number of outstanding shares declined to just around the $15 range, but we're now aiming for a push back towards a 20% increase, despite not seeing significant inflows. This situation also highlights that GROW didn't experience the anticipated surge, likely affected by the overall sell-off in crypto and the prevalent negative sentiment affecting us over time. Regardless, we continue to buy back shares on down days, and that's the approach we'll sustain. Our capital strategy revolves around managing expectations for new product launches, preserving cash for future growth opportunities, preparing for market corrections, and strategically buying back stock, as I’ve mentioned several times concerning our algorithm on down days. This slide illustrates the number of buy-backs; it increased leading into June and in September, but still notably surpassed numbers from the previous year. The compensation structure has historically featured modest base salaries. Employee bonuses are directly tied to individual and team performance. My compensation as CEO is solely based on cash flow, free cash flow, and realized gains from investments—not on potential or paper gains. Therefore, if investments decline, any sort of compensation for me decreases during those different time frames, but conversely, in markets where there’s a surge in capital gains and cash flow, I've earned bigger bonuses for that. Now I will turn it over to Lisa Callicotte.

Lisa Callicotte, CFO

Thank you, Frank. Good morning. First, I'll start with our financial highlights on Slide 34. Our quarterly average assets under management were $2.9 billion, and our operating revenues were $4.4 million. Our operating margin was at 36%. Beginning on page 35, we see our quarterly operating revenues and expenses. Total operating revenues were $4.4 million for the quarter, demonstrating a decrease of $2.1 million or 32% from last year's $6.5 million in the same quarter. This decrease, as Frank outlined, is primarily due to a decline in average assets under management. Our operating expenses decreased by 23%, mainly due to a reduction in employee compensation of $749,000 or 39%, primarily due to a decrease in bonuses and the amortization of employee stock options in the prior period. General and administrative expenses decreased $94,000 or 6% due to lower director fees related to the amortization of stock options in the prior period. On Slide 36, we find our operating income for the quarter ending September 30, 2022, is $1.6 million, a decrease from $2.9 million in the same quarter last year. Other losses for the quarter amounted to $1.4 million compared to other operating income of $37,000 in the previous year. This change occurred due to no realized gains in the present period versus realized gains in the prior one, somewhat offset by a decrease in unrealized losses in the current period. Net income after taxes for the quarter stood at $118,000, or $0.01 per share, which is a $2.3 million drop compared to the net income of $2.4 million or $0.16 per share for the same quarter in fiscal year 2022. Moving to page 37, we observe a robust balance sheet characterized by a substantial level of cash and investments. Our cash and cash equivalents were approximately $23.3 million on September 30, 2022, reflecting a $1 million or 4% increase since June 2022. On Slide 38, the value of our noncurrent investments is approximately $18.7 million. Slide 39 indicates that our liabilities decreased by approximately $543,000 since June. On Slide 40, you can observe our stockholders' equity details. As of September 30, 2022, the company had net working capital of $34.6 million, a $737,000 or 2% increase since June, with a current ratio of 10.6:1. With that, I'll turn it over to Holly.

Holly Schoenfeldt, Director of Marketing

Thank you, Lisa. All right. On the first slide in my section, we always like to do a breakdown of our mutual fund assets. As you can see here, a majority of those are in emerging markets and natural resources, while 32% are in international equity and fixed income. Similarly, if you look at assets by distribution channel, you can see that 85% of our assets come from retail, while 15% are from institutional investors. On the next slide, I'd like to highlight that our JETS ETF is performing well, especially with the TSA numbers we've been tracking, which have finally rebounded to pre-pandemic levels. Moreover, many of the top carriers in JETS have reported positive numbers for the last quarter. Also, for those who aren't aware, the JETS ETF is listed on various other exchanges, including Mexico and Peru. We have also developed a usage product for JETS, collaborating closely to sell that product with the ETF group from Europe. Continuing on to the next slide, we are pleased to report that we just attended the annual IMEA Summit in New York last week, where our marketing team received 2 more star awards for investor education, bringing our total to 92 over the years. This year particularly, we were recognized for our investor digital experience due to the redesign of our website, usfunds.com, and for overall investor education relating to our cryptocurrency content, which spans from blog posts to infographics and YouTube videos. On the following slide, I'd like to remind everyone of our upcoming webinar, set shortly after Thanksgiving on Monday, December 12, which will focus on gold markets and, more specifically, our GOAU ETF. If you're interested in registering for that, just send us an email at info@usfunds.com, and I can provide the appropriate registration link. Lastly, on the next slide, don’t forget our educational content also comes in the form of the Frank Talk blog.