Earnings Call Transcript - GROW Q3 2020

Holly Schoenfeldt, Marketing and Public Relations Manager

Good morning and thank you for joining us for our webcast announcing U.S. Global Investors Results for the Third Quarter of Fiscal Year 2020. I'm Holly Schoenfeldt. If you have any questions during the technical difficulty, enter them in the questions area of the control panel sidebar, 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. 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 products, including the first no-load gold fund. U.S. Global is well known for its 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 CIO

Thank you, Holly. Good morning, everyone. Thank you for participating and hearing our story. As highlighted, our go-to stock has always been gold and then it evolved into digital currencies with our substantial investment in HIVE. I'll talk about that in a few minutes. But our balance sheet remains very, very strong. We have a reflexive cost structure and monthly different returns on equity discipline. We've maintained a very low yield and we've also bought back our stock, doing so on an algorithm that is used on down days and is mathematically driven. I want to really thank all these institutions, particularly the Royce Funds, Perritt Capital Management, and Financial & Investment Management Group. Paul Celeron has been a long-term loyal investor, and BlackRock and Vanguard have become much more of indexed funds that have invested in U.S. Global Investors. Regarding dividends, we have paid dividends for 10 years monthly. The current yield at $1.53 was 1.96%, which is slightly higher than what people are making on money market funds today. We went through everything to try to maintain it, but there are always guidelines and rules with the share repurchase program in motion. The Board approved a repurchase of up to $2.75 million of its outstanding common stock on the open market until the end of this year, December 31, 2020. During the three months ended March 31, the company repurchased 69,000 Class A shares using cash of approximately $68,000, which was more than the previous quarter, due to having to deal with meltdown in the capital markets. This program may be suspended or discontinued at any time, and if we make any changes, we will send out press releases in a normal fashion. The balance sheet remains healthy and strong with no debt. I want to discuss some factors that have impacted our financials and continue to do so. The next visual shows we have 10 million shares of HIVE; we were co-investors in launching this company. We realized several years ago that we couldn't launch an ETF in this space due to concerns from regulatory bodies about bringing Bitcoin into an ETF listed at the New York Stock Exchange. That just wasn't going to happen, not even in Canada. So we took that intellectual capital and invested in the creation of the first crypto mining company, which started off in Iceland and Sweden. What's happened with HIVE Blockchain is that it is very volatile. It moves with an 82% correlation to Ethereum price and is now tracking with Bitcoin due to a recent acquisition. This year alone, as Ethereum rose from $125 to $280, HIVE Blockchain increased 453%. When Ethereum fell from $280 to around $115, HIVE corrected 65%. Ethereum then ran again, starting in March to just recently over $200, and HIVE immediately began to run with it. This impacts every three months. We can have a great win one quarter and then a marked downturn in our earnings due to mark-to-market fluctuations. Lisa will elaborate on this, but it's important to understand that launching an ETF with flows can be up and down and volatile, which could influence management fees. This has been our proxy into this space. I'm happy to see that other companies, like Touchwood, have been able to be the best performers among crypto mining companies. HIVE was the very first company; many me-too and copycat firms came along, but HIVE continues to serve as a proxy for Ethereum and Bitcoin markets. It's crucial for all investors to recognize that each asset class has its own unique volatility. With growth stocks, we need to acknowledge the volatility we face. Looking at the S&P 500, which approximately mirrors the volatility of bullion, one-day volatility is nearly the same at 1%. However, gold stocks are much more volatile. On a daily basis, they fluctuate by plus or minus 3% compared to 1% for bullion. This variance persists over a 10-day timeframe. When it comes to Bitcoin and Ethereum, they exhibit far greater volatility. Bitcoin is five times more volatile than the S&P or gold on a daily basis, while Ethereum reaches four times greater volatility. Significant data points suggest that this volatility impacts HIVE, as it closely correlates from 82% to 90% with these crypto prices. New rules, initiated about a year ago regarding mark-to-market EBITDA, require long-term investments to adhere to the mark-to-market paradigm. Our earnings per share for the quarter reflected a loss of $0.11. This summary is part of the larger picture; positive components are also at play. The upcoming visual displays the quarterly average assets under management. This average doesn't show end-of-quarter or month-end flows, but it indicates that our divestiture of Galileo and the assets of U.S. Global were slightly rising in March. This growth can be attributed to the GOAU and gold assets, which are key variables. Equally critical is the JETS fund, which, by March's end, had risen beyond $1 billion in total complex. It takes several months for this capital movement to reflect in earnings. However, we’ve seen unprecedented inflows, and the interviews we've conducted suggest that even in down markets, funds attracted significant assets; bad news was good news for JETS. This kind of influx had similar results for HACK, another ETF which gained momentum only post-cyber hacks affecting companies like Sony. With JETS, we witnessed a 50% drop followed by a surge of investment. Hedge funds are hedging their portfolios by going long on JETS to offset the risks associated with shorting individual airlines. I’ll highlight key drivers: learning from previous crises, such as 9/11, SARS in 2003, or the March 2009 financial crisis, reminds us of the need to support the airline industry—given its direct correlation to job creation, especially with one in fifteen jobs tied to aviation. The CARES Act has taken steps to bolster this sector. In an era where airlines are suffering, Las Vegas, for example, is experiencing over 200,000 empty hotel beds and significant job losses within its tourism-heavy economy. Notably, back in March, President Trump halted all foreign flights into the U.S., leading to a significant downturn in air travel, which hit a low of approximately 80,000 flights. Thankfully, we are witnessing a rebound. Additionally, the online brokerage boom created unexpected positivity. Remarkably, firms like Charles Schwab reported an influx of over 600,000 new accounts, and TD Ameritrade reported similar figures, not even accounting for Robinhood, which boasts many more accounts. This awakening to trading has manifested in shifts toward risky commodities like oil and aviation ETFs, given their volatility, aligning JETS with market trends. The visuals presented highlight how the airline stocks are currently undervalued, similar to historical low points such as post-9/11. Airline stocks typically experience a resurgence six months following crises; however, each situation is distinct, impacted by available assistance and stimuli. We have observed unprecedented monetary support across G20 countries in response to current economic challenges. New TSA tracking data analyzing passenger volumes provides equitable insight into market behaviors. This data indicates that daily screenings have shown improvement from their nadir in mid-April. However, it’s crucial to note that we still face significant lagging indicators. The core of travel trends will inspire recovery. Recent trends on Google searches about tourism and travel also signal positive momentum that may resemble previous peaks seen in Asia. As Buffett wisely indicated, predicting economic success isn't foolproof; he admits to missing key tech investments. His methodical approach to cautious investments underscores the potential for future airline rebounds, diversified across various stocks. Simultaneously, we also explore innovative pathways via ETFs such as JETS—a true proxy, akin to HIVE within the crypto space. Notably, analysts, including Bill Miller, are expressing optimism about aviation, citing confidence in vaccine development. I can’t help but find humor in Buffett’s skeptical view toward Bitcoin, creating a playful juxtaposition in investor conversations. As we analyze the economic outlook, understanding where recovery may lead will determine next steps. It appears to be a dynamic period ahead in terms of economic recovery, prompting anticipation of how airlines and related assets might respond.

Lisa Callicotte, CFO

Thank you, Frank. Good morning. Before I discuss the results of our operations for the quarter, I'd like to discuss the finalization of the sale of our 65% Canadian subsidiary, Galileo Global Equity Advisors. On March 2, 2020, Galileo purchased all of its common stock owned by USGI for CAD$1 million, which is about US$746,000. The results from Galileo through March 2nd are reflected in discontinued operations in the consolidated statement of operations. Now I will discuss the results for the quarter ending March 31, 2020. Beginning on Slide 48, we recorded total operating revenues of $914,000 for the quarter, which is an increase of $57,000 or 7% from the $857,000 in the same quarter last year. The increase is primarily due to an increase in the ETF assets under management as we've discussed. However, we also had decreases in performance being paid out, somewhat offset by lower assets under management in our USGIS mutual fund. Operating expenses for the quarter were $1.9 million, an increase of $364,000 or 24% from the same quarter the prior year, primarily due to an increase in general and administrative expenses of $338,000 or 45%, due to business development costs tied to increased ETF assets. Our operating loss for the quarter ending March 31, 2020, was $979,000, a decrease of $307,000 compared to the same quarter for the fiscal year 2019. On Slide 49, other income and loss for the quarter was a loss of $503,000. As Frank discussed, we record changes in our investment value in this line item, which has been volatile and is expected to remain so in the future. The $503,000 loss stemmed from unrealized losses in investments. Loss for continuing operations reached $1.5 million, plus a loss from discontinued operations of $85,000, which was related to Galileo. Net loss attributable to USGI after taxes for the quarter is $1.6 million, translating to a loss of $0.11 per share. Moving on to Slide 51, our balance sheet remains strong, including a high level of cash and unrestricted marketable securities that combined make up 68% of our total assets. As seen on Page 52, as of March 31, 2020, we had no long-term debt; the only long-term liabilities reported were lease obligations, and the company held net working capital of $10.2 million with a current ratio of 8.1. After quarter end, effective April 12, 2020, the company was approved for a loan of approximately $442,000 under the Paycheck Protection Program under the CARES Act. The company, having fewer than 25 employees, qualifies as a small business. There is a potential for forgiveness of this loan, contingent upon adherence to forgiveness criteria. USGI will work with its lender to determine how much of the loan will be forgiven. With that, I’ll turn it over to Holly.

Frank E. Holmes, CEO and CIO

Before we do that, Lisa, I do want to comment that we were in the process of downsizing at the beginning of March before these assets started to take off.

Lisa Callicotte, CFO

Yes.

Frank E. Holmes, CEO and CIO

Because we noticed other assets were declining, and it was fortunate we did not have to make any additional cuts due to the other growth from JETS and GOAU.

Lisa Callicotte, CFO

Right.

Frank E. Holmes, CEO and CIO

Thanks.

Holly Schoenfeldt, Marketing and Public Relations Manager

Thank you, Lisa. As shown on Slide 55, a majority of our mutual fund assets are in emerging markets and natural resources, while 37% are in domestic equities and fixed income. As for distribution, over three-quarters of assets come from retail investors, with 17% from institutional investors. Our sales and marketing efforts continue to focus on our mutual funds, particularly those concentrated on gold, natural resources, and emerging markets, as well as our exchange-traded funds. The company and our funds have consistently garnered invaluable publicity through media interviews. Frank Holmes often shares insights with financial outlets such as Fox Business, Bloomberg Radio, and Kitco News, among others. We continue to receive recommendations from influential financial newsletters, whose followings result in millions of visitors each month, alongside the syndication of our award-winning original content by third-party publishers. The newsletters instill trust and have gained a loyal audience. Frank Holmes’ blog, Frank Talk, is also expanding in popularity and often features commentary by prominent publications including Forbes and Kitco News, boasting millions of monthly visitors. Kitco News, recognized as the largest gold website globally with an audience of over 30 million monthly visitors, continues to showcase the Gold Game Film Show with Frank Holmes’ Gold Market Analysis, which has aired 181 episodes since its inception. At quarter end, we analyze the most visited Frank Talk blogs published over the prior year. The most visited articles in 2020 include: number one, 'Explore the World's 10 Busiest Airports'; number two, 'Should You Buy the Panic?'; and number three, 'Do U.S. Companies Have the Highest Debt to Equity Ratios Right Now?' You can sign up for the blog for free on our homepage. Our coverage helps leverage our brand by reaching millions of readers, viewers, and potential investors. U.S. Global is distinguished for its timely, balanced, and positive market insights and thought leadership, receiving numerous star awards from the Investment Management Education Alliance for excellence in Investor Education, totaling now at 88 awards. Our subscriber base continues to grow organically, now exceeding 50,000 curious investors subscribed to our investment newsletters and the Frank Talk Blog. We also see a substantial following across social media platforms. Investors can sign up at usfunds.com and we invite you to visit for insights into market trends, including those impacting gold.

Frank E. Holmes, CEO and CIO

On a historical basis, whenever you encounter negative interest rates, gold tends to rise in the associated currency. While in the U.S., individuals recognize that comments suggest that negative rates aren’t imminent, I’ll highlight that there's an additional $2 trillion on the table, given it’s an election year in America which aims to aid both businesses and getting people back to work. Therefore, I firmly believe that the price of gold is positioned to rise due to debasement across G20 countries. It isn't merely about gold rising due to military conflict; today's battle is against a virus. The global halt we've witnessed is unprecedented—no previous health crises have led to such a stop in activity. Consequently, worldwide finance ministers and central bankers operate cooperatively, issuing vast amounts of currency, thus real assets have historically preserved their value and tend to appreciate. I anticipate a formidable rerating of gold in the upcoming years. We can draw a parallel from last year, where Palladium surged from $1,000 to $2,700; a similar trajectory could be on the horizon for gold. This outlook stems from a restricted supply—mine output isn’t expanding and we essentially hit peak supply. Unlike oil, which underwent transformative shifts with new technology, no game-changing methods have surfaced for gold discovery or processing, ensuring its position as a significant asset class. Consequently, I feel very positive about this sector. Importantly, the focus should now pivot to gold stocks—which remain undervalued adhering to the past decade’s gold price movements. An evident lack of interest exists among pension funds, as illustrated in Canada where 8% of the exchange is gold-focused, contrasted with mere 1% investment by Canadian pension funds. This underweighting, tested against financial metrics we observe, positions us uniquely. For the first time, we now report positive cash flow yield for these gold producers we monitor closely. At the end of March, this rate escalated from a previously negative figure of -0.5% in September to about 1.5%. Meanwhile, the S&P 500 cash flow yield surpassed 3% at December's end but has since fallen. Gold stock narratives could shift successfully, provided the respective companies avoid poorly planned acquisitions that dilute their performance metrics; this is what our gold equity ETF—GOAU—prioritizes.

Holly Schoenfeldt, Marketing and Public Relations Manager

Perfect. Thank you, Frank. Lisa, I have a question for you. How should GROW shareholders expect the recent success of the JET ETF to be reflected in the company's earnings? Will it primarily show up next quarter end?

Lisa Callicotte, CFO

It really depends on when we get to create in our ETF. We did that at the end, starting at the end of March. However, revenue is based on assets under management, so operating revenues will increase. Those increases will be offset by business development costs related to the ETF creation. As such, there’s a timeline delay before the asset under management translates into net income. That delay could span several months. Therefore, we anticipate that the net positive effects from the recent increases in JETS should fully reflect in net income after a few months, likely by the quarter ending September 2020.

Holly Schoenfeldt, Marketing and Public Relations Manager

Okay, great. Thank you. I have another question for you, Frank. Given your continuous travel for due diligence and conferences, what is your personal perspective on the state of business air travel? What are you hearing from your fellow road warriors about air travel right now?

Frank E. Holmes, CEO and CIO

The key takeaway is to monitor tracking data. I'm delighted that TSA has introduced a mechanism for tracking passengers, akin to monitoring fund flows. Concerns foretell that major airlines might require an additional $10 billion each to weather this storm, but trends point upwards—people are traveling again. I fear media distortion may complicate perceptions about travel safety, yet distancing and cleanliness remain essential practices. I mask up for grocery shopping and adhere to strict sanitation practices. The industry shows promise to rebound. However, the dynamic of business travel is critical: for Southwest Airlines, business travel constitutes about one-third of their revenue sources, while other airlines rely on it for up to 60% of their profits. Significant impacts may arise from commercial real estate, with more individuals opting for remote work. Observations on Zoom fatigue have emerged, where extensive usage leads to mental fatigue. My perspective is that a return to business travel is crucial, as travel fosters relationships vital for commerce. In Europe, conditions vary significantly, underscoring the issues with travel restrictions and reentry, like in Quebec where provincial border patrols hinder free movement. These complications will eventually resolve, pointing towards a collective tendency to move swiftly post 9/11 and 2008/09 crises, generating further support for the airline sector.

Holly Schoenfeldt, Marketing and Public Relations Manager

Great. Thank you, Frank. Thank you, everyone, for your questions. This concludes the U.S. Global Investors webcast for the third quarter of fiscal year 2020. This presentation will be available on our website. Thank you all for your participation today.