U.S. Global Investors, Inc.
Q2 2018 Earnings Call Transcript

Published: 16 Feb 2018

[Holly Schoenfeldt:]

Good morning. Thank you for joining us today for our webcast announcing U.S. Global Investors' results for the second quarter of fiscal year 2018. I’m Holly Schoenfeldt. If you have any question 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; Susan McGee, President, General Counsel, and Chief Compliance Officer; and Lisa Callicotte, Chief Financial Officer. During this webcast, we may make forward-looking statements about our relative business outlook. Any forward-looking statement 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 statement. Any such statements are made as of today, and U.S. Global Investors accepts no obligation to update them in the future. Now let’s go to Frank Holmes, CEO and CIO, for an overview of the period. Frank?

[Frank Holmes:]

Thank you, Holly. I think it’s – everyone knows that is listening that we’re well known for our boutique sort of entrepreneurial investment adviser. We are in San Antonio. We have our own building. We have cash on our balance sheet, and we’ve made a strategic investment in the blockchain build-out which we’re going to walk through this presentation. So I’d like to hop to the next slide. So we strive to be the go-to stock for exposure to emerging markets, resources, and now it’s digital currencies. We’re the first public company to be mining – investing in a company that is mining virgin coins in Iceland and Sweden and expanding, which I’ll go a little more in this presentation. Excuse me, I’ve got a bit of allergies here. We’re debt-free, and that’s really important. We have a strong balance sheet and a reflexive cost structure. We’ve maintained a monthly dividend and return on equity discipline. Our top institutional holders, I’d like to thank them all for maintaining, and we’ve got – some new investors have come in to invest in GROW, and I want to thank them, and they’re long-term investors that participated in, I guess, you call it the pivotal turnaround of U.S. global. Next, please. So consistently paid more than 10 years of the dividend. It’s a modest yield because the stocks appreciated. Next visual, please. The board approved a repurchase of up to $2.75 million of its outstanding common stock on the open market through calendar 2018. For the 3 months ended December 31, the company repurchased 36,000 Class A shares using cash of $117,000. We may suspend or discontinue at any time just for basic important disclosure. Next, please. So you can see the balance sheet I mentioned to you earlier, and we have no debt. You can see the investment in blockchain technology. It’s got a significant increase in our overall balance sheet. Next, please. Earnings, earnings per share quarterly. Lisa Callicotte, our CFO, will go into more detail on describing that, but you can see that we’ve made a change positively, and so we feel very comfortable as we’ve gone through this pivot change. Next, please. Quarterly average assets under management have stabilized. It’s been very challenging. Mutual fund regulation and cost continue to be a big impediment. Money is going into ETFs, it’s predominant through a couple of the majors. And there’s a basic price war. It’s not about performance. It’s about just who’s the cheapest, and that’s what we’re weathering through. But I think it’s a – we have other plans as to how we’re going to manage this with some unique products, which we’ve launched in Canada, which has a different ability to form capital for credit investors. And that’s also one of the reasons why the success of HIVE Blockchain and why many of the blockchain technology companies that have funding in Canada because of a different structure – formation of capital. Credit investors, there are only 25,000, not 150,000. Whole periods on securities are capped at 4.5 months, so it facilitates the ability to raise capital for new venturers. The next visual. I think it’s really important. The general consensus of the media, main media, I would say, about 90% of the time is negative on gold. And even though the gold is outperforming S&P since the year 2000 2

[Lisa Callicotte:]

Good morning, everyone. Before I summarize our results of operations, I’d like to discuss the accounting treatment related to our direct and indirect investments in HIVE. USGI, through its wholly owned subsidiaries, U.S. Global Investors Canada Limited, directly owns 10 million shares of HIVE. These shares are included in investment securities available for sale on our balance sheet. Unrealized gains and losses on available-for-sale securities are excluded from earnings, and recorded in other comprehensive income, a separate component of shareholders' equity, until realized. These shares are restricted for resale until March 2018, and are also subject to Canadian insider regulation. USGI Canada also owns an investment in the Galileo Partners Funds. At December 31, 2017, USGI Canada owned approximately 30% of the Galileo Partners Fund. And the Partners Fund owns 6.5 million shares of HIVE. The investment in the Galileo Fund is accounted for under the equity method of accounting. Under this method, the company’s proportional share of the fund’s net income and loss, which primarily consist of realized and unrealized gains and losses on investment decreased by fund expenses is recognized in our earnings. Therefore, the direct and indirect investment in HIVE are accounted for differently. Now I’ll discuss the results of operations for our quarter ending December 31, 2017. Beginning on Page 37, we recorded total operating revenues of $2 million for the quarter. This was a 21% increase from the $1.6 million we reported for the same quarter last year. The increase was primarily due to an increase in the Galileo performance fees related to the Galileo Partners Fund, annual performance fees calculated at calendar year-end. Also, our ETF advisory fees increased due to increase in our ETF average assets. These increases were somewhat offset by an increase in the USGIF performance fees paid out and a decrease in base advisory fees of USGIF and Galileo as a result of lower assets under management, largely due to shareholder redemption. Our operating expenses for the quarter were $2.1 million, which is an increase of $266,000 or 14%. The increase is primarily due to an increase in employee compensation and benefits due to increases in bonuses. We see we have an operating loss of $149,000 for the quarter ending December 31, 2017, versus an operating loss of $234,000 for the same quarter in the prior year. On Page 38, our other income is $1.5 million for the quarter compared to $249,000 for the quarter ending December 31, 2016. $1.2 million of this increase is related to our investment in the Galileo Partners Fund, accounted for under the equity method of accounting. Net income attributable to USGI after taxes for the quarter is $749,000 or $0.05 per share. Moving on to Page 39. We see – we still have strong balance sheet. We own our own building. We have cash and marketable securities of $32.8 million that combined to make up 73% of our total assets. As you can see, compared to June 30, 2017, our trading securities decreased $2.3 million, mainly due to liquidation and trading securities and purchases of available-for-sale securities. Investment securities available-for-sale increased $19 million. This is a line item that includes our directly owned HIVE shares that are valued at $19.1 million at December 31, 2017. This value includes unrealized gains of approximately $16.7 million that is recorded in comprehensive income as a separate component of shareholders' equity. As you can see on Page 14, we have long-term deferred tax liabilities, and these are related to our door unrealized gains on our HIVE investments. But we still have no long-term debt. And the company has a net working capital of $13.41 million – $13.41 million, and a current ratio, 19.62

[Susan McGee:]

Thank you, Lisa. As you can see, a majority of our mutual fund assets are in emerging markets and natural resources, while 31% are in domestic equities and fixed income. And for distributions, we have more than 3/4 of our assets coming from retail investors and the other 3/4 coming from institutional investors. Our sales and marketing efforts continue to focus on our mutual funds, including our funds that concentrate on gold, natural resources and emerging markets as well as our exchange-traded funds. We believe and continue to believe that investors appreciate the expertise that we offer. And we’re pleased that Thomson Reuters Lipper, which is a trusted financial authority, has recognized us with the Lipper Award for 2017. And you can find more information about our funds on our website, which is usfunds.com. The company and our funds continue to receive an invaluable amount of viral publicity that is gained through our media interviews. Frank Holmes often shares his insights with financial outlets like CNBC Asia, Bloomberg Television, CNN TV in Canada to name a few. And 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. These newsletters have very loyal following, and they receive millions of visitors each month. Frank Holmes our CEO , Frank Talk , also continues to grow in popularity. His commentary is often featured by prominent publications including Forbes, Seeking Alpha, ValueWalk, Kitco News, and these have millions of monthly visitors. We do call Frank a globetrotter because he, along with others in our investment team, do travel around the world to share our thought leadership. And we also interact frequently with loyal followers through Facebook, Twitter, LinkedIn, Instagram, Pinterest. In December, we launched a new video series that supplements our award-winning Frank Talk blog. It’s called Frank Talk Live, and it features Frank Holmes as he dives into market moving the rest of the week and he shares his thoughts on trending financial topics. Each clip is around clip is around 1to 2 minutes, and we are already seeing syndication of these videos to third-party sites. And of course, all of this coverage helps us leverage our brand because it helps us reach millions of readers, viewers and potential investors. Our website, usfunds.com, was visited over 500,000 times last year from curious individuals from all over the world. We are known for our timely and balanced market insights and thought leadership, and the company has been awarded several STAR awards by the Mutual Fund Education Alliance, and we added 3 more in 2017, including an award for Best Overall Retail Communication within the small funds category. The MFEA STAR Awards recognizes excellence in investor education, and that is what we try to focus on. Our weekly free Investor Alert newsletter has been named the best electronic newsletter 6x, and today, the company’s earned a total of 83 of those STAR awards. Investors can sign up at usfunds.com and join over 30,000 subscribers who are receiving our award- winning Investor Alert and Advisor Alert e-newsletters as well as our CEO blog, Frank Talk. And now we would like to open it up to questions.

[Holly Schoenfeldt:]

And just as a reminder, to our audience, you can enter questions in the control panel on your screen. And we do have a few questions to start with, so I will direct the first one to you, Frank. And that is – does the company have any plans to look for further deals in the blockchain or cryptocurrency market right now?

[Frank Holmes:]

Yes. We’re looking at other unique opportunities and funds through the specialty funds in Canada. They allow you to, as I’ve said earlier, the credit investors, the minimum is much lower. And Canada has become – because of HIVE, Canada has attracted over $3 billion of blockchain funding from merchant banks to companies that are involved in artificial intelligence, to machine learning, to identification for AML, ability to go in to be able to track and using blockchain. There’s other many sort of exciting opportunities that we’re seeing. But the bigger part is right now is our funds in Canada.

[Holly Schoenfeldt:]

Great. We have another question that says have you seen growth trading in line with the price of gold still? Or has it primarily moved in line with the crypto market lately?

[Frank Holmes:]

Well, I think the point in part – it’s a good question. It’s historically moved with the price of gold, and you saw there that the price of gold volatility is daily basis plus or minus 1%. And the gold stocks are 2 to 3x that. But cryptocurrency is a massive magnitude, plus or minus 7% a day. And our volatility, and our trading volume daily, has exploded from 20,000 to 200,000 to 2 million a day on a very small 15 million share of load. So it’s become a proxy for this crypto world. And – so that’s all I can share with you. It’s those who do not want to trade in that crypto world, buy and sell 24/7, you can do it Ethereum, et cetera. They’re showing up as using HIVE and grow as a proxy.

[Holly Schoenfeldt:]

All right. Thank you. And there’s one last question here. Should GROW shareholders be concerned about the volatility in the crypto space continuing?

[Frank Holmes:]

Well, if they’re afraid of volatility, then you’re absolutely – yes, you should be afraid. But if you understand the volatility, then you shouldn’t be. Volatility is, in fact, if you understand it, that’s why we published the managing expectations. Where volatility becomes of a great concern is when you have a leveraged balance sheet. When we go back and look at the crash of 2008, it was those brokerage firms which were leveraged 33.1, other financial institutions which are leveraged 20

[Holly Schoenfeldt:]

All right. Thank you, Frank. This concludes U.S. Global Investors' webcast for the second quarter of 2018. The presentation will be available on our website at triple www.usfunds. com. Thank you all for your participation today.