Earnings Call Transcript - GROW Q1 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 First Quarter Year 2019. I'm Holly Schoenfeldt. If you have any questions during the webcast, you can 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, 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 accepts no obligation to update them in the future. On Slide 4, you'll see a quick overview of U.S. Global. 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 1960 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 expertise in gold and precious metals, natural resources, and emerging markets. And now on Slide 5, I'm going to pass it over to Frank Holmes, CEO and CIO for an overview of the period. Frank?

Frank Holmes, CEO and Chief Investment Officer

Thank you, Holly. I've just arrived from a mining conference in Miami, so I appreciate your understanding if there's some background noise. Our growth strengths include positioning ourselves as a go-to stock with exposure to emerging markets, resources, gold, and digital currencies. We are debt-free and have a solid balance sheet with a cost structure that reflects our financial health. I will discuss our streamlined team and cost structure later in the presentation, along with our monthly dividend return on capital equity. I want to express my gratitude to the top institutional holders of GROW, including Royce & Associates, Perritt Capital Management, FIM, Paul Sutherland and his team, BlackRock Institutional Trust Company, and Toroso Investments. We have consistently paid dividends for the last 10 years with a modest yield. The board has approved repurchasing up to $2.75 million of outstanding common stock. This past year, we have made minimal investments because we utilize a quantitative model that buys on down days, taking advantage of volatility; purchases only trigger on significant down days. Moving to Slide Number 9, our balance sheet remains strong and debt-free. Lisa will elaborate on that. We'll touch on how our earnings per share have been affected by volatility in long-term investments, especially during what I consider the worst quarter we've experienced due to two strategic investments. We've encountered various challenges, including early investors in these firms facing liquidity events—one even had to sell a significant amount of stock, which impacted us. However, the company remains a leader in AI machine learning, achieving growth in revenue and cash flow. We have distanced ourselves from Genesis mining, particularly as we now have control over our Swiss assets, which are performing well. Genesis mining sold a large amount of stock without prior disclosure, which we believe isn't a stable practice for capital markets. Nonetheless, we are maintaining our progress due to our liquid assets. Now, on to Slide 11, where we can review our quarterly average assets under management, which remain fairly stable. We have started to see positive inflows into our ETF, GOAU, along with some movement in gold funds, but growth is still limited as the entire industry is undergoing a significant contraction. It’s important for our shareholders to understand that we face volatility because our underlying funds, particularly gold stocks, are more volatile than the S&P 500. While bullion tends to remain steady over a rolling 12-month period, gold stocks, emerging markets, Bitcoin, and Ethereum experience greater volatility, which is reflected in our stock. One positive development is that the GOAU ETF is now available on the LPL Financial and Stifel platforms, giving us a broad national reach. Stifel has over $263 billion and 25,000 advisers, while LPL boasts over $700 billion and 6,000 advisers. We are ramping up our marketing efforts and recently hosted a successful webcast that attracted a record number of listeners interested in gold. The next visual illustrates the year-over-year growth in GOAU’s assets under management, which is nearing breakeven and has increased nearly 300%. I am surprised by the challenges we face in marketing and sharing the story of this superior product, as none of the gold funds or ETFs have matched our quant approach figures. In the following visual, I want to highlight the volatility over the past 10 days, particularly for Bitcoin and Ethereum, which heavily influence major investments, including our 10 million shares. The next visual highlights key events affecting Bitcoin prices, demonstrating a pattern driven by sentiment. For example, after Facebook’s recent testimony before Congress, the market reacted negatively, only to recover shortly after, showcasing the sentiment-driven behavior we are experiencing. The situation on Slide Number 17 reveals a steady increase in cryptocurrency wallet users, surpassing 36 million created to date. Last year, I announced my role as Interim CEO, and I am still in this position while searching for a permanent CEO. Some interviews have taken place, and Holly's latest update on Slide Number 19 is highly recommended. It has been an incredible year for us. We started with only two employees, but we've now attracted an exceptional director of IPO, and a CEO with expertise we’ve not previously had in our company. We are liquid with plenty of cash, and our stock does not reflect the strong fundamentals currently in place. We firmly believe that AI machine learning requires the GPU chips we possess in Sweden, so our outlook remains positive. Lastly, I'd like to address the recent proxy battle involving Genesis mining, which claimed it had outlived its usefulness. However, we believe there is still potential for growth and complete transparency within the company. Historically, our stock has shown a high correlation to Ethereum but has recently diverged. The primary seller in July has been active in the market, but we remain hopeful that once these sellers are out, our company’s strong fundamentals will prevail. Another major investment we have made focuses on the important technology of AI and machine learning, which involves GoldSpot. Now, I will hand it over to Lisa.

Lisa Callicotte, Chief Financial Officer

Thank you, Frank. Good morning. Now I'll discuss the results of operations for the quarter ending September 30, 2019. Beginning on Page 24, we recorded total operating revenue of $904,000 for the quarter, which is a decrease of $319,000 or 26% from the $1.2 million in the same quarter last year. This decrease is primarily due to decreases in assets under management related to shareholder redemption. Operating expenses for the current quarter were $1.7 million, a decrease of $187,000, or 10%, primarily due to the following reasons: employee compensation and benefits decreased $58,000 or 7%, mainly due to decreases in salary expenses; and general and administrative expenses decreased $107,000 or 11%, primarily due to decreases in fund expenses. We see our operating loss for the quarter ending September 30, 2019 is $815,000. On Slide 25, we see that other income and loss for the quarter was a loss of $3 million, which was mainly related to unrealized losses on investment. Non-operating losses increased $2.1 million compared to the same quarter in the prior year. The net loss attributable to USGI after taxes for the quarter was $3.6 million, a loss of $0.24 per share, which is a decrease of $2.4 million compared to the net loss of $1.1 million or $0.08 per share for the same quarter in the prior fiscal year. Moving to Slide 26, we still have a strong balance sheet which includes high levels of cash and unrestricted marketable securities that combined made up 67% of our total assets. And on Page 27, we see that we still have no long-term debt, and our only long-term liability is our lease obligations. The company had a net working capital of $10.7 million and a current ratio of 8.9:1. With that, I'll turn it over to Holly.

Holly Schoenfeldt, Marketing and Public Relations Manager

Thanks, Lisa. Before we jump into our sales and marketing efforts, I wanted to briefly go over some of the recent trends in the mutual funds and ETF industry just to help us better understand where we are and where we're headed next. So on Slide 30, you can see the number of mutual funds entering and exiting the industry. And this chart comes from the 2019 ICI Fact Book. It shows that a total of 345 mutual funds opened in the year 2018. Fewer equity and taxable bond fund launches contributed to the decline in the number of new mutual funds offered from 2017 to 2018. Slide 31 shows net new cash flow going into mutual funds, which presents a headwind for us. You can see that overall demand for mutual funds, as measured by net new cash flow, weakened considerably in 2019. On Slide 32, we'll shift our focus over to exchange-traded funds. The U.S. ETF market was $3.4 trillion in total net assets at year-end 2018 and remained the largest in the world, with the vast majority of assets in U.S. ETFs. Also in funds registered with and regulated by the SEC under the Investment Company Act of 1940. Growth here remains essentially flat, although still positive. On Slide 33, a majority of our mutual fund assets are in emerging markets and natural resources, while 32% are in domestic equities and fixed income. 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 ETFs. Helping in these efforts is Tadas Misiunas, who joined the team in 2019, to head up institutional sales here at U.S. Global. 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 outlets like Fox Business, Bloomberg Radio, and Kitco News, just to name a few. We continue to receive recommendations by influential financial newsletter writers as well, along with sharing syndication of our award-winning original content by third-party publishers. The newsletters have a loyal following and receive millions of visitors every month. Frank Holmes' CEO blog, Frank Talk, continues to grow in popularity as well. His commentary is often featured by prominent publications, including Forbes, Kitco News, and equities.com, each with millions of monthly visitors. At quarter-end, we like to look at the most visited Frank Talk blog posts over the last year, regardless of the year they were actually written in. So on this slide, you will see that the most visited articles for the one-year period remain the same; number one, the top 10 countries with the largest gold reserves; number two, top 10 gold-producing countries; and then number three, what does it take to be in the top 1%? You can sign up for the blog for free on our homepage. All of this coverage helped us leverage our brand by reaching millions of readers, viewers, and potential investors. Our website, usfunds.com, was visited 508,000 times from September 2018 through September 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. Just last month, we were awarded three more, bringing the total to 88. Our subscriber base continues to grow organically, and we currently have over 50,000 curious investors subscribed to investment newsletters and the Frank Talk blog. We also continue to see a large following across all of our social media platforms. 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. Now, I want to pass it over to Joseph Guyer, our Senior Financial Writer to review some of the macro trends we're monitoring closely and which we often cover throughout the content on usfunds.com.

Joseph Guyer, Senior Financial Writer

Thank you, Holly. So on Slide 44, we're looking at one of the two main drivers of gold prices, and that's the love trade, the other being the fear trade. Of those two, the most significant is the love trade. It accounts for about 16% of global demand every single year. This is something we've discussed quite a lot for loyal readers of Frank Talk and Investor Alert. We’ve seen a strong correlation between rising incomes in China and India over the years and higher gold prices. In India specifically, there are days that are considered auspicious to buy gold and to give gold as gifts. Hindus around the world just celebrated Diwali, and coming up in China is the Chinese New Year, during which it's also customary to buy gold and give gifts of gold jewelry. It's important to note that jewelry buying in India was down slightly in the third quarter according to the World Gold Council, due to higher gold prices, which had an impact on purchases in that country. Since 2010, central banks around the world have become net buyers of gold from previously being net sellers. They're trying to diversify away from the U.S. dollar. Year-to-date, actually through the end of the third quarter, purchases surpassed 500 tonnes, more than any other equivalent period, and 12% up from last year. Again, that's according to the World Gold Council's recent report on the third quarter. The fear trade, which accounts for about 40% of global demand for gold, includes fear of interest rate uncertainty, taxes, or currency devaluation. More recently, we've seen a rise in the amount of negative yielding debt around the world. At the end of August, it hit $17 trillion; it's come down since then to about $14 trillion. But that's the price of money right now; it's actually below zero, which has encouraged gold buying. The U.S. is currently engaged in a trade war with China, and there's talk that this could be coming to an end sooner rather than later, as the U.S. and China account for about 40% of global GDP. This trade situation has significantly impacted various sectors and industries. The Purchasing Managers Index (PMI) has decreased considerably mainly due to this trade war. You can also see here how the trade war has impacted GDP growth, and it is estimated to continue to affect GDP growth around the world. Many of you listening might know that inflation is a strong contributor to gold prices rising; it is very constructive for gold. Inflation has been muted recently according to the U.S. government, with the Consumer Price Index (CPI) showing little movement. However, if you look at the price of consumer goods at stores like Walmart and Target, the CPI doesn't accurately capture the prices people are really paying for day-to-day items. A recent study surveyed 76 items at Walmart and Target year-over-year. In June, prices were up more than 4% to 5%, surpassing what the government is reporting for inflation. On a final note, Ray Dalio recently commented that the world has gone mad with so much free money. An interesting chart shows gold returns during the worst 15 months of the S&P 500 dating back to 1971. In every single one of those periods, gold outperformed the S&P, establishing that this yellow metal serves as a good hedge against volatility and market declines. Gold equities are currently undervalued and have room for growth. Gold miners are relatively suppressed compared to the price of gold. That is all.

Holly Schoenfeldt, Marketing and Public Relations Manager

Thank you, Joseph. As we wrap up today's presentation, I want to remind everyone, you can enter questions that you have in the control panel on your screen. Also, you can submit questions directly to us at any time by emailing info at usfunds.com. We will be following up with questions this round within the next few days. With that being said, this concludes U.S. Global Investors' webcast for the first quarter of fiscal year 2020. This presentation will be available on our website at usfunds.com. Thank you all for your participation.