Earnings Call Transcript - GROW Q3 2022

Holly Schoenfeldt, Director of Marketing

Good morning, everyone. Thank you for joining us today for our webcast announcing U.S. Global Investors Results For Third Quarter Ended March 31, 2022. I'm Holly Schoenfeldt. As seen on Slide number 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. On Slide 3, we would love to offer anyone to end today, one of our JETS, GOAU Archives and SEA JETS. In addition, we have Jet Luggage tags available. All you have to do is send us an e-mail with your physical mailing address to info@usfunds.com. Moving on to Slide number 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-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. Moving on to Slide number 5. I will briefly review our company. U.S. Global Investors 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, emerging markets and cryptocurrencies. Moving on to Slide number 6. I would like to hand the presentation over to Frank Holmes to review what we believe is one of our most helpful visuals when it comes to investing, not only in GROW but in any asset class.

Frank Holmes, CEO and Chief Investment Officer

Thank you, Holly. When discussing capital markets, understanding volatility is crucial, as risk and volatility are closely connected. This update presents a statistical view of 1-day volatility, which is typically around 1% for the S&P 70% of the time. If there are significant movements, such as a 3% change in a day, it often indicates a likelihood of a market bounce the following day. Considering a 10-day volatility, movements of plus or minus 3% signal that gold and the stock market behave similarly, which may surprise many. Asset managers generally see a daily fluctuation of about 2% and 5% over 10 days. Focusing on airlines, which represent a significant part of our portfolio through our ETF JETS, we compare this to the Arca Airline Global Index, which frequently experiences daily changes of 2% and 7% over ten days. Oil prices influence this index heavily since oil is a primary cost for the airline industry, exhibiting greater daily volatility. In the crypto space, Bitcoin's volatility is around plus or minus 3%, while Tesla shows similar fluctuations. Our investments span across high blockchain, gold, and airlines, with airlines comprising the bulk of our assets. We are continually expanding assets under management, and information on our performance can be easily accessed via resources like Yahoo Finance or Bloomberg. Our operational goal is to serve as an inflation hedge via gold funds and capitalize on airline recovery from our substantial investments in the sector. The JETS ETF is not only listed on the New York Stock Exchange but also in other jurisdictions, facilitating a wider institutional reach. A key player in our crypto investments is high blockchain, known for its volatility which sometimes attracts more attention than our core cash flow. I would like to acknowledge our institutional shareholders, especially Royce Funds, long-term supporters of our company, alongside firms such as Parrot Capital and Heartland Funds, who specialize in small-cap stocks. BlackRock Institutional Trust and the Vanguard index also hold a significant stake in our company, but the most engaged investors are Royce, Parrot, and Heartland Advisors. In 2021, we raised our dividends by 200%. We've consistently paid a monthly dividend since 2007, currently yielding 1.69% at a share price of $5.32. If the stock declines, the dividend yield will increase. The monthly dividend payment has been set at 0.0075 and is approved through June 2022. Additionally, we have initiated a share repurchase program, increasing our annual buyback limit from $2.75 million to $5 million, which allowed us to repurchase nearly 19,500 shares for about $97,000 in cash in the last quarter. The Board can modify or halt this program at any time, but Lisa will provide further details on the stock buyback later in the presentation. As of the end of March, GROW managed $4.1 billion in assets and generated $6.2 million in quarterly operating revenue. Last year was positive for the stock due to our investments in high blockchain amidst concerns over crypto mining. Despite Bitcoin's fluctuations, we are committed to focusing on the continued growth of our assets under management. The JETS ETF has shown stability in asset flows, regardless of challenges like COVID-related shutdowns, indicating consistent trading activity related to oil price fluctuations. The recent lifting of mask mandates for domestic flights significantly boosted fund flows into the JETS ETF. We also track the mark-to-market of investments, which impacts unrealized earnings and will provide more detail if needed later. Changes in fair value in equity securities can lead to swings in our quarterly results. Large adjustments, such as a 25% rise or fall in markets, affecting sectors like gold or airlines, are not uncommon. Despite recent market turbulence, we have maintained a robust performance compared to benchmarks such as the Russell 2000 and the Dow Jones U.S. Asset Managers Index. Although we focus on improving our financial metrics, we aim to reach a cash reserve of $30 million to facilitate stock buybacks or dividend increases. Our earnings stem from both operational cash flow and realized investment gains, offering a complete picture of financial health. Strategically, we manage expectations surrounding new product launches, maintain cash reserves for growth, and look for buying opportunities during market dips. Our share repurchase history reflects our commitment to buy back stock, specifically during volatility, as shown in our recent repurchases. Understanding our payment structure is important. While salaries may be modest, bonuses are performance-based, reflecting individual achievement and teamwork. Mutual funds face net outflows, while ETFs garner continuous investment. Our early pivot to launch JETS and our engagement in high blockchain have proven beneficial. The growth of ETFs is significant, with a fivefold increase in offerings since 2011. They provide a cost-effective means of market participation and have increasingly been adopted by institutional investors. Our brand, particularly JETS, has been meticulously built over five years, with substantial outreach and marketing efforts to attract both retail and institutional investors. Our focus on gold as a hedge against rising public debt and market disruptions remains vital. Observing geopolitical factors, including Russia and China’s centralizing actions, reinforces the need for decentralized asset classes. We believe in riding the current trends toward an emphasis on decentralization and disruption. Demand for air travel has surged, indicating a robust recovery, despite challenges like rising fuel prices. Airlines face pilot shortages due to stricter regulations and aging personnel, allowing them to exercise pricing power. The JETS ETF's approval for distribution via major firms like Ameriprise further enhances its reach. Our new SkyCargo initiative, which focuses on cargo logistics, highlights a systemic shift benefiting these companies. With increasing demand for air freight, airlines are adapting to market conditions, further supporting pricing power amid supply chain disruptions. In the crypto domain, Hive's significant partnerships mark progress, as they continue to report impressive revenue growth. Our investment strategy allows us to strategically manage our cash positions while capitalizing on emerging opportunities in the cryptocurrency space. Now, I will pass it on to Lisa Callicotte for insights on our financials.

Lisa Callicotte, Chief Financial Officer

Thank you, Frank. Good morning, everyone. First, I'd like to start with just a couple of highlights on the next slide. Our average assets under management were $4.1 billion for the March 31, 2022 quarter, and this was consistent with our prior quarter and slightly up from a year ago. Also, we had total operating revenues of $6.2 million and an operating margin of 41%. Now, I'll go into more details about our results of operations for the quarter ending March 31, 2022. On the next slide, we recorded operating revenues of $6.2 million for the quarter, which is a decrease of $180,000 or 3% from $6.4 million in the same quarter last year. The decrease is primarily due to paying performance fees in the current period and receiving performance fees in the prior period. Operating expenses for the current quarter were $3.7 million, an increase of $595,000 or 19% over the same period last year, primarily due to the following reasons: General and administrative expenses increased $612,000 or 40%, primarily due to higher fund expenses and higher consulting professional fees; advertising costs increased $94,000 primarily due to the launch of the new ETF. These increases were somewhat offset by a decrease in employee compensation and benefits of $123,000. On the next slide, our operating income for the quarter ended March 31, 2022, is $2.5 million or a decrease of $775,000 compared to the same period for fiscal year 2021. We see that our other income decreased to $12 million compared to prior year and that is because in the current period we recorded unrealized losses on investments of $4.5 million compared to unrealized gains on investments of $7.1 million in the same quarter last year. This is what Frank was discussing earlier related to the volatility of our investments and how that affects our income statement. Net loss after taxes for the quarter was $846,000 or a loss of $0.06 per share. Moving on to the next couple of slides, our balance sheet is still strong. It includes high levels of cash and securities. On the following slide, we still have no long-term debt and the only long-term liabilities we have are deferred taxes. On the next slide, you can see that we had a change in cash over the last few years. Before our Jets ETF top-off, cash was at much lower levels. But in December 2020, our cash increased significantly due to the sale of Hive common stock. Then in the following quarter ending March 30, 2021, cash decreased due to the purchase of the Hive debenture. Since then, we have been increasing our cash position due to the net income, cash proceeds from sales of investments, and the payments received from the Hive debenture. At March 31, 2022, the company had net working capital of $31.8 million, which was an increase of $10.2 million or 47% since June 30, 2021, and a current ratio of 7.6:1. The increase in cash and accordingly net working capital was primarily due to net cash provided by operating activities of $9.1 million, proceeds from sales of investments of $2.9 million, and proceeds from the principal paydowns of $2.3 million. With that, I'd like to turn it over to Holly to discuss marketing and distribution.

Holly Schoenfeldt, Director of Marketing

Thank you, Lisa. On this slide, we always like to do a breakdown of our mutual fund assets. As you can see here, a majority of those assets are in emerging markets and natural resources, while 26% are in domestic equity and fixed income. Similarly, if you look at assets by distribution channel, you can see that 82% come from retail, while 18% are from institutional. I would like to invite all of our GROW shareholders to an upcoming webcast. We will be hosting in conjunction with ETF trends on gold and gold mining stocks with a discussion around our GOAU ETF as well. This will be taking place on May 23 at 1:00 p.m. Central Time, and you can sign up by visiting etftrends.com or sending us an email at info@usfunds.com. Moving on to the next slide. Don’t forget that our educational content does not only come in the form of the Frank Talk blog or the Investor Alert newsletter. We love educating our shareholders through video content as well. So, make sure you subscribe to our YouTube page to get video updates on everything from gold to airlines and the shipping industry. Lastly, as we wrap up today's presentation, I want to remind everyone that we share a majority of our new content, as well as announcements about upcoming events across all of our social media platforms. Make sure to check those out when you get a chance. As a reminder to our audience, if you have any follow-up questions today, please email those to info@usfunds.com. I now want to hand the presentation back to Frank for any closing comments.

Frank Holmes, CEO and Chief Investment Officer

Thank you, Holly, and thank you all shareholders for staying with us and any new ones who have joined us. Thank you.