U.S. Global Investors, Inc. (NASDAQ:GROW) Q3 2022 Earnings Conference Call May 10, 2022 8:30 AM ET
Holly Schoenfeldt - Marketing & Public Relations Manager
Frank Holmes - Chief Executive Officer & Chief Investment Officer
Lisa Callicotte - Chief Financial Officer
Conference Call Participants
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, as you can see 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, as always, 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 email@example.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.
Thank you, Holly. The DNA of volatility is another way of looking at capital markets and risk and volatility are all intertwined. And this is a visual update statistically of looking at what 1-day volatility is 70% of the time. And for the S&P, it's 1%. So whenever it's up more than that or down like 3% in a day that mathematically odds favor for a bounce the next day. The other part is a 10-day volatility whenever it's plus or minus 3%.
As you know notice that gold in the stock market are actually the same, which shocks a lot of people, whereas asset managers index, it's minus or plus 2% on a daily basis and 5% over 10 days. The airlines, which we have a huge asset class in our portfolio, New York -- listed on the New York Stock Exchange, our ETF JETS. But this is to compare to the Arca Airline Global Index, and it's nonevent for to go up or down 2% a day and 7% over a 10-day period. What influences this index the most is this the rotation in oil, and oil has a greater volatility on a daily basis 10-day and oil is the largest cost to the airlines industry.
Bitcoin is plus or minus 3% is having a rough day. And we took the 10 day for it is plus or minus 11%. And Tesla is the same as bitcoin. Any there was even more volatile and GROW is basically as volatile as a Helium. When you look at over 1 day or over a 10-day period, it's because of our investments in high blockchain, in the gold space and also in the airlines and airlines representing the largest component of our overall assets today.
What's driving GROW, growing assets under management? And is every day, you can download and get this information from Yahoo Finance or a Bloomberg in particular, and I'm going to walk you through how most people calculate with our potential operating revenue is going to be. And the goal is an inflation hedge because of our gold funds and the airline recovery because of our substantial investment in the airlines industry and having JETS ETF listen not only the New York Stock Exchange, but it is listed in Mexico City, it is also listed in Lima, Peru. -- which means institutions combined in these other jurisdictions. And it's also in partnership with high-end ETF in London, the just ETF was listed in the London Stock Exchange.
And then the key investment in the crypto space has been high blockchain, which is exceedingly volatile, which has impacted our overall performance of our stock and sometimes creates a sort of more of an interest in what's happening with crypto than our underlying operating cash flow. But nevertheless, and more important is I really want to thank our top institutional shareholders. In particular, those at Royce funds have been long-term partners in our company. And paired capital management as a specialist firm in small micro-cap stocks and also alternative asset classes like gold. And then there's the Heartland funds.
Also a small cap value specialist with a phenomenal track record. And then we have the BlackRock Institutional Trust and the Vanguard index. -- who they're basically having a good percentage, but the real, I'd say, the active investors here are Royce and Parrot and Heartland Advisors. And I want to thank all of you for anyone that's invested in U.S. Global.
I myself own approximately 17% of the company. So when we look back, we've increased our dividends by 200% in 2021. The company has paid a monthly dividend since 2007. Current yield at a share price of $5.32 April 22 was 1.69%. Stock goes down, that dividend yield is rising. The monthly dividend payment is 0.0075. It's been approved through June of '22, is reviewed by the Board quarterly. The other thing that we've done is had a share repurchase program in motion. And on February 25 of this year, 2022, the Board of Directors of the company approved over an 80% increase to the limit of its annual share buyback program from $2.75 million to $5 million.
And for the quarter ended March 31, 2022, the company repurchased 19,487 shares of its Class A shares using cash of approximately 97,000. And the Board made suspend or discontinue this at any time. But I think what's important for investors is Lisa will go on to later in the presentation, more granular detail on the stock buyback. And really, this number for the past quarter is predominantly when the new program was implemented in the month of March.
Next, please. Is GROW as a ticker, $4.1 billion in assets as of the end of March and $6.2 million in quarterly operating revenue. The stock price had a heck of a run last year because of the investment in high blockchain and the whole crypto space when it ran at $12 and trained its whole flow. And okay Melonn must with negative concerns and crypto mining. And even though Hive has the strongest ESG footprint and green only energy, it tumbled down with all the other crypto mining stocks.
And as Bitcoin as it shows you here, it's 60,000, Hive hits $7, grow went to $12. The quarterly average assets under management, and that's something I want to focus on this presentation today for shareholders. Even with Omicron coming along in the fears and the shutdowns and opening up again, and now we have China with another continued lockdown. The assets of JETS remain pretty stable, and there's lots of trading activity with the price of oil. The price of oil falls, then just goes up. The price of oil rises just goes down, people are shorting going long, tremendous tag traffic, trading because of its liquidity. And I think it's important because it also then attracts larger institutional investors. The big news this past quarter was taking -- was the removal of mass for flying domestic flights, and that had a big surge in fund flows into the JETS ETF.
Now, something else that's in the financials that are filed is how mark-to-market of investments impacts non-realized earnings. This is in detail and Lisa can any time go into detail of people need it down the road. But it's basically showing you a 25% increase or a 25% decrease in the equity securities at fair value and the embedded derivatives of fair value, in particular, are the warrants that we own on high blockchain. Those warrants value beyond intrinsic value have to do with Black shows. So it has a bigger valuation and therefore, has a greater volatility to it in dollar terms.
So what this is really to help you to understand is that each quarter, this mark-to-market of long-term investments, unrealized gains and losses do impact your quarter-over-quarter results and your annual results. This is just a hypothetical case study to show you what happens when it's 25%. And that we know could happen very quickly with capital markets, in particular, the asset classes, which we are known for. gold. It's nothing for it to go up or down 25% in a quarter, the airlines and also when it comes to the crypto space. Well, we're really happy that we got all our financials out, and we saw that building our cash and what our numbers were grow versus a small-cap asset managers, we far outperformed for the quarter.
And I think that's just important for investors, and I'm going to walk you through some financial granularity. But we're thrilled that we've been able to sort of maintain our positioning and outperforming. And even with the meltdown in the past day, we still, on a relative basis, how far outperformed this year, the Russell 2000 that Dow Jones U.S. Asset Managers Index. So a, looking at the quarter -- this is actually the end of December. But when we look at those numbers and we'll get them updated for this quarter end as all the numbers come in. But you can see here that our P/E ratio is the lowest, and it is compared to Imbesco and WisdomTree, 40% of BESCO's assets are the QQQ and WisdomTree, which is predominantly is only ETFs, they have a higher PE ratio. And ours is 80%. So I would expect that we would have a bigger P/E ratio. And I think that, that's what's going to happen as we go through and continue to build cost in our balance sheet and launch new products.
Now for investors to understand, I mentioned earlier, it's easy to take a look at our performance of our assets each day of fund flows coming in and out. And the total asset picture is easy to download, which fund managers, I know do. And if we have $100 million in assets and it's a 60 basis points is the expense ratio, then the adviser's revenue was $600,000 per $100 million. And as you can see, at $4 billion, it's $24 million in revenue, deduct your cost and you basically have what your free cash flow is. So our goal is to get back and actually surpass September of 2011, when our balance sheet was flushed with cash, it had $28 million in cash and cash equivalents. And you can see in March of 2020, and this excludes the investments we had in other companies such as Hive and Thunderbird, etcetera. But just as our cash and cash equivalents, -- at the bottom, basically, of the capital markets due to COVID, we had $2.1 million in cash. A year later, we had $9.5 million, and now we have $26 million in cash, which is great. And so -- but our goal is to get to $30 million. And then the Board can make decisions with the additional free cash flow to buy back more stock or to increase the dividend.
So earnings; earnings come from 2 factors. Operational earnings, basically our cash flow, investment earnings are realized and unrealized. And that's the mark-to-market phenomena that we talked about earlier that you must be reporting to be in compliance with GAAP. And so when you add those together, you get earnings. So what's important for U.S. Global is that our operating earnings are very healthy, robust and strong, even with the big capital meltdown that took place in the first quarter of 2022. Our capital structure and our capital strategy is quite simple: managed expectations for new product launches. This requires cash, manage and preserve cash for future growth opportunities and market corrections like we're experiencing today. And strategically buyback stock using an algorithm on down days, discussed and reviewed with the Board on a regular basis. This is what our strategy is, and we're sticking to it.
Now this to me is an important visual to give you a history of buying back grow stock. And if you take a look at September 2021, we purchased back about 81,000 worth of stock, 13,000 shares. And then it fell during December, and we -- it was less down race, but you can see we bought back only 54,000. So the more volatile growth is the more we're going to buy back. That's basically the algorithm is saying. And what the Board has done is increase the commitment to buy back even more on the down days. And when we come to March 2022, as you can see, we bought back $97,000 worth, which is 19,000 shares. But in the January and February, the new plan had not been able to launch until we had the financials up and that basically is the month of March.
So going forward, we expect to be bridging back much more stock on these down days. This is another simple visualization of looking at the numbers. As you can see here, in 2021, we bought back $181,000 for the stock. And in 2022, it's $233,000 worth of stock and with an 80% increase in the amount of stock being bought back, then I think we're going to see substantially more stock based on the algorithm. And based on the volatility, if we do not have high volatility, it does impact the algorithm. Understanding compensation structure, employee-based salaries historically have been modest. However, employee bonuses are tied directly to the individual's accomplishments and hard work and focused work ethic. We have 7 core values that tie to the individual. And then there's team results and team efforts so leaders can definitely with further education earn bonuses in addition to stock options and cash bonuses.
Myself, the CEO, I received bonuses based on realized earnings and based on free cash flow and earnings and realized gains from investments, not from unrealized only when something is going to follow the bottom line. This is something in talking to some of the new -- relatively new institutional investors that understand what's going on in capital markets. So mutual funds continue to see net redemptions and declined, and ETFs continue to have fund flows. And thank God, we pivoted in 2015 to go and launched chats as I've mentioned before, we tried in the interim to launch a bitcoin ETF, but realized it wasn't going to happen.
So we launched the first crypto mining company, High Blockchain, which has been a significant and important investment for our company, and it's our proxy in the blockchain crypto build-out in that ecosystem of the world. The next visual is just showing the epic growth in ETFs. As you can see since 2011, the last time we had this abundance of cash or in the direction of $26 million, we had $28 million back then. We've seen over a 5-fold increase in the number of ETFs.
So ETFs are definitely for tax efficiency and for many other reasons, less expensive to operate are garnering more and more assets in -- for funds for saving and also institutional money is much more rapidly is using ETFs as a way to participate in capital markets. And I thought it was most posting during COVID March of 2020 that ahead of the Federal Reserve, Powell came in and was using ETFs in the debt market, in the mini bond market to get interest rates down for tax-free states and for rolling over debt and also corporate bonds to basically influence the yields, even though Fed funds have gone to zero, there are still relatively high yields, but it was ETFs.
So you're seeing the Federal Reserve and other central banks in particular countries like Japan, and Sweden, 15% of the stock market is actually owned by the Central Bank and predominantly done through ETF format. So building a brand, JET ETF, basically, I'm sharing with you, it took 5 years to build a strong brand and product. And just the back of the envelope, these are minimum numbers, 25 webcasts, 250 media interviews, 20 conferences that travel to and sponsorships and participating in and over 60 one-on-one meetings or virtual calls from retail to institutions or brokers and RAs. That's what it takes place. And it's a big build-out. It takes many years to build that brand name. And we had a whole theory of how we're going to cater to a different story for millennials to hedge funds.
Hedge funds on at Paris trading. So some hedge funds want to short American Airlines because the price of oil is going up, but they want to that risk, so they went long JET ETF. Then there's the value investors like the Bill millers of the world that were along the airlines because there was a great car investment, also a great deep value for him. Oil traders traded back and forth, the opposite to which way oil is going. There's a growth at a reasonable price. And when you compare trains and trucks, JETS are always a lot less expensive than trains and trucks.
And then you have the day trader because of its DNA volatility. It has options, does cover writing on it. It's an incredible product, how it's caught the imagination from institutional to retail investors. And we've also expanded it into Mexico City. As I mentioned earlier, in Peru and London. We have ambitions for other places to be launching to really build a moat around the just ETF product. The other big thing is Go Gold. And this is something you see by the crypto world of really trying to explain to people the magnitude of U.S. public debt outstanding that if we go back to just before 2008, $8.1 trillion. It's now $30 trillion. And if you go back even further, we're going to hundreds of billions to now $30 trillion. So the idea feet and not having some form of a hedge against it like gold and now it's become Bitcoin, Ethereum or other asset classes that are decentralized asset classes.
And I think the operative word is very important. I wrote about a couple of weeks ago about understanding that Brexit was part of being decentralized away from the EU. We're seeing where people are really upset about Putin's Russia and dating Ukraine, which is centralization, which is making the -- trying to recoup the USSR, China, what is doing into Hong Kong. This is all centralization. And there is a global trend that's anti-globalization. And it's all about being disruptive by being a decentralized depending upon your own nation for its own products and services. So hopefully, we can see we're trying to ride that wave out. But it means there's still a tremendous amount of money printing and Go Gold is just an incredible product to really appreciate the quantamental approach, which we build JETSon that Gogo is outperforming its peers.
While we were early in selling Russia from this EVO door, we sold of our Russian list of stocks leaving only positions in oil produced LUKOIL in a small position and a co-producer. Our withdrawal came early and well timed because of a quant-driven disciplines and a unique insight from our Polish portfolio analysts that the weekend before the evasion, we had sold 99-point-some-odd percent of our holdings, whereas BlackRock lost $17 billion in just a few weeks following the attack, they were slower to move due to the passive indexing investment process. So this is a real tip of the hat for the power and importance of active asset management and be able to monitor crisis. And as you see in our prospectus of our mutual funds that we believe that government policies are a precursor to change. Thus, we attract and monitor both monitoring and fiscal policies, and we definitely saw the invasion coming early and enough to get out of all of our Russian stocks.
Mass mandates and air travel demand has already been seen increasing. What's really important for the sentiment is the TSA data comes out every day. I started in March of 2020. It's been a phenomenal trending indicator. People apply a 50-day moving average. So when it's above that 50 days, they go long JETS, when it falls below, they're out. So you can see there's been tremendous volatility of last year trades in and out and up to March of this year, that sort of weekly volatility has slowed down. But this is one of the best indicators to look at the growth of the airlines. And what we're seeing now globally is binge travel. Binge-binge. Like when we were stuck at home with COVID watching Netflix, we binge Netflix, and binge-eating potato chips. Well, now it's binge-travel and many people are reported paying outrageous prices to travel and they don't care because they don't know if they're going to be locked down again next year.
So, it's really quite fascinating to see that even with rising fuel prices and even with a sphere of a slowing economy that the airlines industry remains very strong. In fact, there's a shortage of pilots, and that's because for many reasons, but a lot of them are older and mature and they brought in new guidelines that a pilot just couldn't come from the Air Force immediately start flying unless they had more than thousands of hours of experience, that passive knowledge and that comes back from the great example that you can get your driver's license. It doesn't mean you're a good driver.
And the same thing they found for pilots, you can get your pilot's license, it doesn't mean you're a great pilot. And so, they want more and more hours and thousands of hours before they let you fly a passenger jet. However, there's just not enough of them. So, this is creating pricing power for the airlines and that's what's also happening with cargo. But what we're really happy is not only the distribution globally for the brand name. Just recently the Jets ETF approved on Ameriprise and for those who are not aware, there's one of the largest independent firms with a national footprint managing over $1 trillion with 12,000 advisers.
Now, we launched our recent [indiscernible] skycargo, which is 70% cargo ships and 30% cargo jets because we believe that there's a systemic risk that's happened in supply exchange that's not going away and it's given tremendous pricing power to anything that's cargo-related and these companies are reporting incredible earnings and it's not going away. But people think it's just a short-term phenomenon. I strongly disagree. So, the full year demand for airfreight increased 18% compared to 2020 and I would share with you that we know from sending equipment from China over to Sweden and Norway for high blockchain, it was going at 5% a month every time we're setting over equipment. So, we're now seeing the other airlines converting some of their older planes into cargo because they're so profitable. I believe that this sort of binge demand around the world, but the ability to move products that 80% of all of our products come from cargo ships and anything that's disruptive in China coming across automatically gives these companies tremendous pricing power.
So the CETF is a big win for us and in fact, the market unravels and it went up, then slightly dipped below and now it's back, was back up. These cargo ships and airlines are going to see a wonderful future. And did you know that 80% of the volume of the world's trading goods is carried by C and for developing countries, that percentage can even be higher? And with the supply line disruptions not going away and the invasion of Ukraine, that only gave them more pricing power. So, this is a classic example for the quarter, how well you can see here that CETF did versus the overall markets.
Normal disclosures; so, Hive announced a supply agreement with Intel, which is the first for Intel that only deal with a company with a strong ESG green footprint and Hive has the strongest. So, it's agreed to purchase high-performing ASIC chips, which are about 40% less expensive than Chinese chips and 40% more efficient that will incorporate in the state-of-the-art mining equipment that's custom built for Hive.
Now the Hive convertible debentures. It was such a complex analysis for the auditors, which was really frustrating for all shareholders and for management, but we did get it done. But it was an interesting structure because it protected growing the down siding, allow us to replenish our cash position and this is showing you that that note has been paying us interest on a monthly basis and then we take a look at it, it has paid us over $1.3 million, and the principal paybacks are pushing, what, $3.6 million? So, the total cash return is $4.9 million in the past 12 months. Anything below its convertible price, merely we get our money back cash. So, it gives us the options on the upside, which we convert into the stock and we also have five million warrants for that. But in the down periods and down drafts, it gives us the ability to pile cash in our balance sheet. This is an important because Hive is still a strategic investment I shared with the Grow shareholders.
Hive provides April 2022 production update, 2 exahash [ph] means we're mining about 9.2 Bitcoin a day, which is about 1% of the global hash rate where 6.1 terahash will be Ethereum mining. So when you add our Bitcoin production on a monthly basis and our Ethereum, we're basically been putting Bitcoin on the balance sheet for a cost of $4,000. Hive reported record-revenue of $68 million, up 40% from last year. Net income, $64 million; gross mining margins of 90%, mined over 697 Bitcoin and over 7,100 Ether and digital assets on the balance sheet were $168 million.
Now I'm going to turn it over because I've been very long-winded with lots of important content to share with you to Lisa Callicotte has been hard working and getting these financials out to you on a timing basis.
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 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 the $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 cost increased $94,000 primarily due to the launch of the new ETF. But these increases were somewhat offset by a decrease of employee compensation and benefits of $123,000.
On the next slide, we see 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. And 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. We see that our balance sheet is still strong. It includes high levels of cash and securities. And then on the following slide, we see that 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 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 [ph]. But 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, 2020, 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.
Thank you, Lisa. On this slide, we always like to do a breakdown of our mutual fund assets. So, 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. And on this slide, 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 the discussion around our GOAU ETF as well. And this will be taking place on May 23 at 1:00 p.m. Central Time, and you can sign up either by visiting etftrends.com or sending us an e-mail at firstname.lastname@example.org.
Moving on to the next slide. Don't forget that our educational content does not only come in the form of the Frank Talk [ph] 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.
And lastly, as we wrap up today's presentation, I do 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 platform. So, make sure to check those out when you get a chance. And just as a reminder to our audience, if you have any follow-up questions today, please e-mail those to email@example.com.
I now want to hand the presentation back to Frank for any closing comments. Frank?
Thank you, Holly, and thank you all shareholders for staying with us and any new ones have come and joined us. Thank you.
End of Q&A