U.S. Global Investors, Inc.

Good morning and thank you for joining us today for our webcast announcing U.S. Global Investors results for the second quarter of fiscal 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 in 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. Quickly, I'll review about U.S. Global. We are an innovative investment manager with vast experience in global markets and specialized sectors. We were founded as an investment club, and 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 expertise in gold and precious metals, natural resources, and emerging markets. and now let's go to Frank Holmes, CEO and CIO, for an overview of the period. Frank?

Thank you, Holly. Thank you, everyone. Happy Valentine's Day. We'll talk a bit about that love trade when we get to gold, but right now our strengths are we're the go-to stock for exposure in emerging markets, resources, gold and digital currencies. And I'm going to talk about that, the volatility of the digital currencies. and our investments there, rather than trying to launch an ETF, have impacted the volatility of our own stock, and I think that's important, positive and negatively. Debt-free, strong balance sheet with a reflexive cost structure, and monthly dividends to return on equity discipline. In the next visual, I want to thank all of our shareholders, those in particular and I see the active fund managers that have been very loyal through this whole period. The Royce Funds, the Financial Investment Management Group out of Michigan and Parrot Capital and Vanguard and BlackRock has brought me in their index funds, but I just want to really thank active fund managers because I realized, and I'll talk about it a little later, that just the challenges of being an active fund manager and some of the issues with this whole phenomenon of ETFs and what we're doing in that space. But I think the other important part is that we've consistently paid for more than 10 years a dividend. It's modest. The yield is more attractive than the S&P 500. And we can continue to buy back stock. Basically, it's a quant approach and we buy back stocks as the stock is more volatile. and we may suspend or discontinue any time. For the last quarter, we bought back a minimum amount of 11,000 shares, which is approximately $13,000. Our balance sheet, as you can see, has lots of securities and investments and that's something that's important for us as we fall for this bear market that's in the financial asset class, in particular small fund managers. When you take a look at them as public companies and the number of RIAs in the space, they're actually shrinking. And this is all part of this sort of big shift that's taking place and the burden of expensive regulatory costs. But we want to highlight the next visual, which is the volatility, which Lisa is going to comment on. It has a lot to do with how you're reporting your investments. and the volatility of our investments in particular, high blockchain, had a material impact the last quarter on our reporting. So the next one is to show you that the assets, they're declining. They seem to have slowed down in that decline. Last year we had a strong dollar. Emerging markets came under great pressure and I thought on a relative basis we held up overall because we had two headwinds against us. One was the money leaving emerging markets and B, the money that was predominantly going into U.S. ETFs. So from that end, we held up on a relative basis. Still, we've got to find that magic button that turned this around so that we've got this asset growth. The next visual is the highlight. It's not just a A U.S. global experience. It is also a phenomenon that, excuse me, I've got these allergies that come through, and it's made my voice a little raspy this morning. But follow the money as outflows from domestic equity mutual funds have gone to ETFs, and 90% of these are just going to ones that are basically free. And I find it sort of hypocritical, that is, You cannot, and I cannot, induce an investor to put money into our funds by offering them a toaster. And the banks used to do that. I remember when I first moved to Texas that you could get a toaster if you opened up an account. And you just couldn't do that in the fund business, so that was an inducement. But you can induce them with cheap fees, which basically is still an inducement. A flawed process that is just cheaper is better, and that's one reason why when we've gone into the ETF space, we've remained with smart beta, and we're really happy to see that our indexes that were used have outperformed their asset classes, be it Jets, Airline ETF, it's far outperformed the global index for the New York Stock Exchange, and same thing with GoAU, GoGold. but the idea that just cheaper is better when it comes to investing is really remarkable that that's where the assets are flowing and that means that money is going into bigger money is going into these indexes that are buying overvalued stocks and less money is going into undervalued stocks so that active manager is basically that used to be like an arbitrage of buying the cheaper stocks and selling the more expensive stocks and a lot of performance has nothing to do with Picking good stocks in the short term has to do with just fund flows. So these are new dynamics that investors have to be really aware of. And in this race to the bottom, everyone ends up last. The seismic shift in indexes come with some unexpected consequences, including price distortion. We've seen this in the gold business. We saw in the GDX and GDXJ that these are two big gold equity ETFs, and they end up having to own each other. Then they went to have to unwind that, along with owning too much, more than 20% of 20 public companies. And that unwinding, which took a year to basically accumulate, was unwound in three days, damaged the small cap gold stocks. It has a collateral damage of our active funds. Nothing to do with good or bad stocks. And then last year, we had Vanguard abort and get out if it had anything to do with gold. and a lot of gold fund investors that jumped in, bought their index because it was cheaper than ours, but we outperformed them and lo and behold, they just didn't stay with gold and that was part of almost a bottom, but they really hurt. They blew out $2 billion worth of gold stocks and in our gold ETF, Go Gold, Go AU, This is the New York Stock Exchange. We saw the biggest activity of stocks going in and out of that particular ETF. Why? Because the pounding of a lot of stocks became undervalued, but it does impact the sentiment, the psychological factor of investors. But we'll see how it unfolds. I think that when the big correction happens in the equity markets, we're going to see some massive distortions with the S&P 500. because the trillion dollars of stock buybacks means the floats are smaller, money's going into overvalued stocks at a rapid rate, and if they go to rebalance that, it will have massive distortion. We have witnessed this as case studies in the gold market. But talking about this, the sharing insights in the financial media, industrial experts on a range of topics. I speak around the world, from Latin America Summit to Fox News in New York, or Kitco which has the largest following for people looking for gold information in the world and on a weekly basis do their touchdown pass. So we have a great exposure in that space as educators and that's what's really important to us. So here's the next visual, free ETFs but not free toaster. So that's the sort of contrarian thought process for investors to recognize. and it will just create a distortion in capital and just the fact now we're seeing that the big warehouses will not allow a multi-million dollar account to buy stocks under 200 million dollar market caps or give margin under 10 dollars so that whole small cap space is being orphaned with all these interpretations of regulations and rules by this sort of slew of compliance officers that have no experience and understanding of how capital is formed how people come together savers investors to speculate or to invest in income it's just rules upon rules and so I like to highlight that it eventually is going to come back to hurt those investors but here's the next one because I'm very proud of because despite headwinds, gold continued to outperform in 2018. And on a regular basis, in particular, the CNBC in New York is so different than the culture of Asia, where there's a cultural affinity for gold versus the UK, which has a more balanced view for gold. Gold is bad. Gold is too volatile. But the facts are, in the DNA of volatility, a bullion. is both the same as the S&P 500. So it is not more volatile. But since this century started, it is outperformed by a wide margin of the S&P 500. And so when I show this now, well, short term it hasn't. And there's always an excuse. But here we are going at 18 years of a spectacular track record. And we've always advocated the 10% golden rule that investors have 10% exposure into the asset. and we've also allowed small retail investors to be able to invest so that means we have to have higher expense ratios because the cost of having funds has just gone up dramatically and small fund shareholders just cost more money and but still we've given them that avenue to participate in gold and gold related stocks so I remain that gold is such an important asset class, especially with the growth of Chindia around the world. China and India, affectionately known as, they're a macro force not to ignore. They are 40% of the world's population. They have rising GDPs per capita, which are highly correlated to the next visual of the love trade. And love is about 60% of the consumption of gold each year. Fears what dominates the media in New York, getting to get out of gold based on fear, but I think that's what's really important is that people recognize love. Now we just finished basically the Chinese New Year and we usually get a big run-up into it and we get the spoofers in the gold market trying to manipulate the price of gold down during Chinese holidays or the first week of October. but there's been litigation and I think we're seeing a slowdown in that sort of coming into those markets because gold has actually been relatively stable during this Chinese New Year cycle. So what drives this fear trade? It's a binomial model and I continue to try to educate investors all over the world that government policy, it doesn't matter who's on the left or right, who's the president, who's the head of the Federal Reserve, it's monetary and fiscal. Today it's Jerome Powell as the chairman of the Federal Reserve, So it's real interest rates and money supply. And we're seeing that the bulk of this debt unwinding has created more volatility in the capital markets. And then the other side, we have fiscal policy, which is tax of regulation and spending. Trade wars are basically a form of taxation. And so they actually slow down an economy. Rising tariffs are not good for global economic growth. Lower corporate taxes are. So you have sort of a, on the fiscal side, a washed trade. And I've seen this since the year 2000, when gold has actually taken off, has been since 9-11, with the Patriot Act, has been this incredible growth in AML, anti-money laundering laws. The regulations continue to grow globally. Most of the rest of the countries of the world are afraid of dealing with the U.S. So like in Switzerland, they won't even allow you to have an account over there. And it goes on the process of even for corporations and doing business. So we have a trade war when it comes to the flow of money. And it's been growing. But interesting enough, gold is the fourth most liquid asset class in the world. And it is a form of money. And it has grown as you're seeing these global regulatory changes. A.M.L. Wars take place. That's impacted. So I think that gold is an interesting asset class to diversify your portfolio. And I think the unwinding of QE is really, as a monetary aggregate, is having an impact on the volatility of stocks. So here's the next visual. Life is all about managing expectations. And I think it's important for you to recognize bullion is about the same as the S&P 500. Crude oil is extremely volatile. Emerging markets are also volatile, but I point out that gold stocks are the most volatile if you're looking at that. And so investors will be looking at the days when you have gold down more than 1%. If it's down 2% a day, usually that's a lower risk day to take on a position. and vice versa. If it's up 2% or 3% a day, it's usually a time to take some profits. That's all based on regressional math. And why is this important to you and to our shareholders of Grow? Is that volatility is showing up in 70% of the daily trading in the stock market are quants. It's quant driven. And quants look at this DNA of volatility and they apply it to their asset classes and look for correlations. that are not directly cause and effects that you would normally think of but they just look for patterns of corporations and they call how long will that last for and they do what is called a gamma that that idea is good for maybe one day or seven days and that is showing up with press releases of how stocks can be impacted up or down. Now to jump over to the crypto world. So I was trying to launch a ETF in that space and recognize quickly that the regulators do to these AML and KYC know your client rules were really pushing back about allowing and I understand why an ETF that would own Bitcoin because they're concerned with some hacker would turn around and be able to get paid in Bitcoin and maybe that showed up in the in the listed ETF but being as it may is a rational reason I had all this knowledge and so I launched was a co-investor in launching a high blockchain which was the first industrial scale mining of virgin coins in Iceland and then Sweden. And this truly caught the imagination of capital markets. It allowed investors the first time to directly play and all of a sudden the DNA of our volatility of growth changed with Hive and Hive grew dramatically in three months of the last quarter of 2017, raised $200 million, predominantly from institutions at three different stages, deployed it, and we had this huge revenue and cash flow, but it declined naturally what it would with the decline between 70% and 90% for Bitcoin and Ethereum. But this next visual is to show you that the major event suppressing the price has a lot to do with global synchronized regulatory attacks against that industry. and it basically started with the launch of the CME futures contract which allowed institutions to basically use suppression to push down the price. We've seen this in gold, but it never lasts long because Gold is so deep and gold is so wide. It is the fourth most liquid asset class in the world. But you can spoof markets in the futures market. It's been well known. There's been lots of litigation. We've written about this. We've commented about this. So you're seeing in the Bitcoin, I think it's a bear market. What's interesting to me is that still the enthusiasm The conferences are packed. I would never get 2,000 people out for a gold conference if gold had fallen 90%. It just wouldn't happen. Or if the S&P fell 30%, no one's going to come out to a small-cap or a big-cap gold equity conference. So people are very sentiment driven but this ecosystem of crypto around the world is really quite fascinating to me and I saw in India where the Supreme Court ruled against the Federal Reserve basically of India to stop one crypto exchange and then immediately a week later they came out with they're doing their own cryptocurrency as a country. So we're seeing many countries looking and exploring this probably the Bank of England is the most advanced and most positive and constructive. And we're still seeing during this bear market fidelity deploying tens of millions of dollars in infrastructure build out. We're seeing Ivy League institutional universities basically buying for their pension funds and some of these cryptocurrencies. We're seeing Goldman Sachs deploying capital. So there's lots of money. There's lots of people attending these conferences. So that ecosystem has not gone away. And interesting also enough is that most of it is a cash economy. And so it's not leveraged. So it can easily surge back. When you have a debt crisis like we had in 2008 or the emerging market crisis of 97-98, it takes four years to repair that damage. And we saw last week ago, Friday, Bitcoin was up 17% and high jumped 70% in a day. It moves just with that and grows up with it. So we've become a proxy. A high blockchain is a derivative play on this space. It moves in the same DNA volatility. And the second derivative of that appears to be growth. That is so important for investors to recognize what's moving our stock up and down. It used to be gold. It used to be predominantly gold. We were up and down with the movement of gold relative to our gold funds. and I've come back to this sort of educational piece of suppression of gold. You can see that the decoupling took place in 2012, the QE2 and QE3s, and now the QE3 is now being unwound. We're seeing gold all of a sudden get a base, which is unusual because of real interest rates, but I have been mentioning all over the world that last year was a phenomena of real interest rates in the U.S. spread between what Japanese government would pay you versus what the U.S. government would pay you versus what the EU countries would pay you. That differential was so great that in fact gold should have been like $700 an ounce and gold and the dollar should have been up another 20% because of that spread differential. So you're seeing this diversification take place Stay tuned to usfunds.com. We read about it a lot. We commented about it a lot. And I think it's important for you. And you can go on and take a look at Hive, at Genesis Mining, and learn more if you're interested on the blockchain and crypto world. So as I mentioned, rather than spend a lot of time and effort launching an ETF in that space, we launched Hive Blockchain. Now I'd like to come back to that volatility. As you can see, the one-day volatility of Bitcoin is 5% versus bullion 1%, and the S&P is 1% and Ethereum. So the one-day and the 10-day volatility of these cryptocurrencies is substantially greater, and that's what impacts the overall asset class. And so you can see here that investors appear to be using Hive as a proxy for Bitcoin and Ether, and you can see that Hive has come down just like with the currency. The next visual is just to give you some highlights regarding high blockchain technology and so build out. And now what we're doing is just striving to cut costs, cut costs everywhere. And that's the biggest thing with all these blockchain companies, like anyone that's in the mutual fund world that has small funds. You know, the idea there is to thrive in another day, you have to survive in the short term. And so that's one reason why we're always assessing costs. and I'm going to turn it over to hardworking Mrs. Dynamite of the financial world and a bear market for the fund gold fund business, Lisa Callicotte.

Thank you, Frank. Good morning. Before I summarize our results of operations, I'd like to discuss the investment accounting pronouncement that we adopted this year. Slide 28 notes changes in the accounting rules related to our investments that is expected to cause our earnings to be more volatile. We adopted Accounting Standard Update ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, as of July 1, 2018. This amended the guidance and the classification and measurement of investments in equity securities and certain disclosures. Starting in this fiscal year, some of our corporate investments are accounted for differently than in the past. There is no longer an Available for Sale classification for equity securities with readily determinable fair values. And as part of the adoption of the new standard, we made a required cumulative effect adjustment and reclassified $3.1 million in unrealized net gains and $1 million in related deferred tax expense out of accumulated comprehensive income and into retained earnings. Effective July 1, 2018, changes in fair values of investments formally classified as Available for Sale are now reported through earnings rather than comprehensive income. This includes any changes in the market value of our investment in hikes. The impact to earnings for this change for the quarter ending December 31, 2018 was an investment loss of $2.8 million. These losses are related to unrealized declines in securities formerly classified as available for sale and previously would have reduced our comprehensive income rather than investment income. The majority of this amount is related to our decline in market value in our investment in Hive. And though we had an investment loss related to Hive for the quarter ending December 31, 2018, as of yesterday, the market value of the company's investment in Hive was higher than our cost. What shareholders need to understand is that no matter if an investment is short-term or long-term in nature, the change in market value will be reported quarterly and cause our income to be more volatile. Slide 29 summarizes our investment in Hive. At December 31, 2018, the investment in Hive was included in investments in securities at fair value, non-current on our balance sheet. We own 10 million shares of Hive, which is approximately 3% of the outstanding shares at quarter ends. The cost of the investment was $2.4 million, and the market value at December 31 was $1.9 million. Now, I'll discuss the results of operations for our quarter ending December 31, 2018. Beginning on page 30, we recorded total operating revenues of $1.8 million, which is a decrease of $194,000, or 10%, from the $2 million in the same quarter last year. The decrease is primarily due to decreases in assets under management related to market depreciation and shareholder redemption, and it was somewhat offset by an increase in annual performance fees earned. Operating expenses for the current quarter were $2.1 million, a decrease of $21,000, or 1%. primarily due to the following reasons. Employee compensation and benefits decreased 167,000, or 15%, mainly due to decreases in bonuses. And the decrease was somewhat offset by increases in general and administrative expenses of 137,000, or 15%, primarily due to increases in fund and consulting expenses. We see our operating loss at the quarter end is $322,000. On slide 31, we see that other income loss for the quarter was a loss of $3.4 million, which was mainly related to unrealized losses on investments, including investments formerly classified as available for sale. Other income and loss decreased $4.9 million from the same quarter in the prior year. Investment income decreased $3.6 million compared to the second quarter in the prior year, primarily due to unrealized losses of $3.4 million, $57,000 of impairment losses in the current period, compared to unrealized gains of $60,000 and realized losses of $58,000 in the prior period. Also, the second quarter of fiscal year 2018, we recorded income from equity investments of $1.2 million versus a loss of $48,000 in the second quarter of fiscal year 2019. Net loss attributable to USJI after taxes for the quarter ending is $3.2 million, a loss of $0.21 per share, which is a decrease of $4 million compared to the income of $749,005 per share and the same quarter in fiscal year 2018. Moving to page 32, we see we still have a strong balance sheet. It includes a high level of cash and unrestricted securities that combine to make up 76% of our total assets. And on page 33, we still have no long-term debt. The company has a net working capital of $15 million and a current ratio of 10.2 to 1. With that, I'll turn it over to Holly.