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 2020. 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 subjects 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 and 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. On slide four, you'll see a quick overview of U.S. Global Investors. 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 1968 and has a longstanding 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. Now, let's go to Frank Holmes, CEO and CIO for an overview of the period. Frank?

Thank you, Holly. Well, this is going in after 30 years living in Texas and launching a China fund, the first China Opportunity Fund and then the Eastern European Fund. So, yes, the sort of long experience started in gold in 68. But in the past 30 years, we've truly evolved to have an expertise on global investing. And we strive to be this go-to stock for exposure to emerging markets, resource gold, and digital currencies. We're debt-free. We have a strong balance sheet with a reflexive cost structure and monthly dividends and return equity discipline. But even with these strengths, we still want to remind and thank investors for their loyalty and their long-term support. The top institutional holders, the Royce Funds, the Parrot, and Financial Investment Management Group have been steady long-term investors as active money managers, and we thank them. And also for other pools of capital, which is much more index-oriented, it's the BlackRock and Vanguard. Next, please. So even with this bear market, which we're going to talk a bit more in the mutual fund world, we're still dealing with the growth and we still try to do everything we can to be innovative in this space. So even during this period, we've been able to maintain 10 years of paying a dividend and we pay monthly dividend. It's a modest yield, but it's higher than five-year government bonds. Next, please. The board approved a repurchase of up to 2.75 million of the outstanding common stock in the open market through December 31st, 2020. And during the three months ended December 31st, 2019, the company repurchased only 2,000 shares of its Class A shares using approximately $3,000. And that's because we buy when volatility expands on a daily basis. It's a simple algorithm that buys on down days. And we may suspend or discontinue at any time. Next, please. The balance sheet. So as you can see, to give you a reflection of both our marketable securities, our short-term bond funds, and our cash position, and the other part, which is creating, it still remains healthy. We've had some drains on it, on cost structures in the past year, in particular managing The overall stock market, when we have several of our funds have what's called a fulcrum fee. And that fee is when you outperform your index, you get a bonus. And when you underperform, you have to write a check to go back. And that was probably one of the biggest negatives last year. As the overall market became very concentrated, what we're witnessing even the year to date is five technology stocks are almost 20% of the S&P 500. So we're talking about 1% is almost 20% of the market. And if you don't have those stocks in your portfolio, then you're going to be underperforming an S&P. And then automatically, according to the Fulcrum fee model, you have to give back. And you can't own in a mutual fund only five concentrated bets. You have to have 21 names. So that is something that we continuously wrestle with in our overall fund's and a number of other investors. that basically made what was originally long-term investments all of a sudden have to go mark-to-market every quarter. And that's created greater volatility in our earnings. And so I think it's important. I'm going to try to highlight as we go further on, such as what the write-downs we took in the last quarter. Many of these stocks have had two of them in particular gold spot has doubled since December 31st and high volatility. blockchain is also up almost four times year to date. And so we've had a major rebound in those investments. And if they hold their position, then this is something that's going to continuously create sort of volatility in our overall earnings. Next, please. So the overall average assets on our scene do maintain themselves. going sideways. Next, please. Number of mutual funds. This is really important for the listeners. The mutual fund world continues to see more exiting than people entering the industry. We're seeing, as you see the red, dark red is merged mutual funds and then funds being liquidated. So there's an unprecedented number of funds being merged and being liquidated that surpassed the opening of new mutual funds. And this trend is also being witnessed in Europe and it's being witnessed in Canada. And I think this is important for the sort of Uberization of mutual funds because the ETFs are more tax efficient and people can get in and out all day long rather than wait once a day pricing. Next, please. So it's another sort of visual to understand the total net assets of ETFs and exchanges continues to grow and it continues to, most of its growth is taking money away from the mutual fund world. Next, please. But in that space, we've survived and we finally had GoAU, our gold quant approach to picking gold stocks. It's out of a universe of 100 names. Thank you for joining us. The largest GDXJ and GDX ETFs because it was smarter and it was more selective and it would outperform 92% of the time. And so we launched it and we've been able to outperform the GDX and GDXJ and that's what's important. It finally started to take off this year with the rally in gold. And so we're very happy about it. It's no longer a cash in cash out. It was a loser in a cash flow positioning. And you have to get over 50 million at 60, 65 basis points to basically stop losing cash and supporting an ETF. So we're happy it's growing and we're thrilled for these shareholders. It's delivering exactly what the model suggested it would. And we all know that past performance don't guarantee your future results. But I'm thrilled to put my name to GoAU. Next, please. So the trading volume is also very important. It's up almost 700 percent, the daily trading volume. And last year in June, new liquidity rules came out for mutual funds and it's had a collateral effect. and many more. Big platforms such as the Merrill Lynch's of the world, et cetera, will not put the ETF on your platform. It's a combination of daily trading volume and size of the fund. So the fact that we've gone through 40 million and we have very, very strong daily volume, that's been able to get this fast track the process of going you on these other distribution platforms. Next, please. and this is the visual, you know, Raymond James, Oppenheimer and Jeannie Montgomery Scott. The fact that GoAU has been added to these trading platforms only enhances its ability to be able to grow. Next, please. What's really also amazing is that gold ended 2019 again on a high note. Gold has beaten the market so far this century. It's performed for the past 20 years, 80% of the time, and it was up last year. And the fact that even though it has still so many CFA money managers, generalists in the marketplace and talking heads on Bloomberg and CNBC are quick to be anti-gold as an asset class. But gold has been a very important asset class, especially when governments are trying to use only monetary policy to stimulate growth. by flooding the system with lots of paper money. Next, please. So that's the visual showing you that over the past 20 years, 80% of the time, gold has been up. Next. But what's really important when it comes to these asset classes is to know their volatility. And what you can see here is that gold in the S&P 500 over one day or 10 days have almost or they have the same volatility. And that's really important for investors because so often the talking heads say that gold is so volatile when in fact it has the same volatility as the S&P 500. Now, gold stocks, that's a different. Gold stocks have much more volatility and they're much more like biotechnology companies if you looked at just volatility data points and emerging markets. So emerging markets, gold stocks and biotechnology are very similar. They have much greater volatility than the S&P 500 or bullion itself. Now, Bitcoin and Ethereum, that's another case. Bitcoin is much more volatile than the stock market or gold and so is Ethereum. and that is very important cue for the listeners today to understand our investment in Hive and how it creates greater volatility with growth. Next, please. So I'm going to really try to walk investors through the major events that have happened. I just spent a week at Harvard with a group of other CEOs from 50 different countries and it was interesting for me because a year ago, Maybe 10% of the cases were digital on AI and Bitcoin. And this year, 25% of the cases were on Bitcoin, cryptocurrencies, ICOs, and AI. And all these digital companies, all these public companies have had digital errors and how that can be disruptive to your business model or getting hacked and how you're not dealing with it. And what I thought in that case is so important to highlight here for you is that Bitcoin moves down a lot of sentiment. And I thought it was also interesting that Bitcoin has gone through what they call a crypto winter. And the crypto winter lasted about 15 months. And most of the coins, particularly Bitcoin, the biggest and then second biggest, Ethereum, they fell up to 90%. And what was interesting for me was that the winter for AI was over a decade. But that hasn't happened here. And the dynamics for pricing is very different than, say, AI. The cost of doing AI work and the cloud is dropped by 90%. So that's why AI is taken off as an application and which is sort of a different factor. But the fact is, when costs drop with that amount, it has a big impact on any asset class. What we're seeing here is that Bitcoin You can see all of a sudden Fidelity, not Fidelity, but during this whole process, Fidelity keeps mapping out their growth. They keep presenting at conferences, which is really important for understanding what we're looking at is trying to launch an ETF, but quickly found out that it was just a no-go due to great concerns by the SEC, and I understand totally, and the Ontario Securities Commission, over anti-money laundering laws. AMLs is the buzzword. and so we made a pivot and we invested and launched as a call on this sort of new industry that is exploding and and high blockchain itself had this incredible success story of growth and then it fell naturally along with bitcoin and ethereum pricing and what's important i'll try to highlight this improved recently but what you're seeing on this visual is that Facebook came out and stopped advertising. And we also had JP Morgan having many negative articles on anti-Bitcoin during this whole winter season. And it's important for you to recognize that Facebook stopped it because it looks back, looking back, it's because they're coming up with their own stable coin, Libra. And JP Morgan was working on their own stable coin, and then when JP Morgan a year ago in February launched it, that was the bottom for Bitcoin prices and Bitcoin prices then surged and then Facebook came out and announced Libra and then Bitcoin surged to $14,000 and then we had all the other central banks going against Libra. They're very concerned because they would have information on two billion people around the world. They could become a decentralized currency. And too much power of that would be going to Facebook, which was of great concern. And we saw Bitcoin and Ethereum sell off. So it's important to recognize that the sentiment of regulators having meetings in Congress or the SEC with politicians, that news being announced, that the coin sells off until the date of that meeting with the government officials. And then it seems to rally from there. Next, please. But the positive news continues, and we're seeing Tethered launches a U.S. stablecoin. There's also a gold coin backed by gold. VanEck reports why institutionals should be holding Bitcoin. And we are seeing that some pension funds are allocating to this alternative asset class. And what they want is the virgin coin, as it's known, the first coin, the Genesis coin. And when you're a miner like high blockchain is, Every time you validate a transaction, you get paid not in cash, but you get paid in that coin. So if you're validating a Bitcoin transaction, you get paid in what's called a Genesis or a Virgin Bitcoin. If you're doing it for Ethereum, then you get a new Ethereum coins every time you validate those transactions. So out of nowhere, you have these coins that have been untainted, no AML concerns, and Hyde gets a request for... paying a slight premium for their coins, particularly Ethereum coins. Next, please. So it was about 18 months ago I became the interim CEO, took on the responsibilities. U.S. Global basically rented my time to the company, allowed me to go and help turn around the company and reposition. Next visual, please. And We went through an incredible journey of getting clarity on transparency and costs and corporate governance issues with the largest shareholder, Genesis Mining. Tragically, it went into a proxy battle. We prevailed and we signed a peace and prosperity agreement and we started taking over facilities and Sweden was the first because it's the largest Industrial Scale Mining of Ethereum that I'm aware of on the planet, a public mining company. And so we finally got really control of all the cost structures and got all the numbers. And I'm happy to say that you can see there's been a turnaround. And what we're witnessing is that the volume had changed in particular coming into January. And a big reason for that was that the large institutional client in Canada for whatever reason, Redemptions, I'm not sure. But they were just, which surprised me, a digital computer seller. That is, they didn't try to arrange that, have locks to sell their big position. They just sold like it was a Gatling gun every day, knocking down the price. And they took it right down to 10 cents by year end. And as soon as that selling, that cloud was taken away, The valuations of Hive all of a sudden changed dramatically. The volume started to change dramatically and you can see the sort of spike. So I'm really happy to see that turn. I'm happy for growth shareholders because we have a major stake in this company and we had to deal with those write downs with those new accounting rules. So they did hurt our overall position last year, but it looks like we've made a big turn. Next, please. So Hive Aspiro Performed is the first public company in the space. When it went public in 2017, it attracted, Canada attracted over a billion dollars for other blockchain mining companies and went out to copy what our business model was. But I think that what we did is we truly captured the imagination and those gold mining investors and traders that did not want to open an account at some Crypto Exchange, because of all the negative news, used Hive as a proxy. And that's what we've seen. Hive became the darling. It became the proxy. Supposedly, we opened 14,000 accounts in our first year. So it became very liquid trading in Germany, over the counter in the U.S., and actively in Canada. And as you can see, in particular this year at date, Hive has just far surpassed Any of the other companies. And it's also tied into transparency and better news where we can make press releases over changing the company and the vision. And I think the last part was the selling of overhang. All of a sudden, you started seeing the stock rebound. Next, please. So when you're mining, what are the biggest costs? You try to lock in your electricity costs. So we made a recent press release this week that electricity costs have been We hedged our electricity costs because of the extreme warm, unusual weather in Europe. And that was advantageous because it's close to two cents a kilowatt, which is a lot cheaper than places in Canada and the U.S. But the other big cost that you have to do when you're mining is called the network hash rate. And the network hash rate is how many people are competing to try to unlock that crypto code and be part of that blockchain process. And you get these new coins. The more people come in, the more competition there is. Well, it's been very stable. So we've had a windfall because energy prices have fallen for us from a year ago. And two, what they call a network hash rate has remained stable. And three, there were changes to the algorithm for mining for Ethereum. that gave us more coins. They basically stopped ASICS chips from being able to mine Ethereum GPU chips has been the focus, so it's been very beneficial to us. Next, please. Now, this is a big turnaround. This is very significant. As you can see, year to date, Hive has gone from taking a 10 cents to 47 cents yesterday. On Friday last week, it traded 30 million shares. I think yesterday was 17 or 20 million shares. And the big breakout took place when Ethereum broke out. In mid-January, Ethereum went above its 50-day moving average, and Hive went above its 50-day moving average. And all of a sudden, investors are coming back in at a greater scale to use Ethereum as using Hive as their proxy for Ethereum. and so our costs are probably like 125 and now Ethereum is over 225. So we're making $100 for every coin we mine. So that becomes a very high gross margin business and that's reflected showing up in the stock. Next, please. So this is Hive's performance over three months. You know, Hive did hurt us last year. and that Mark to Mark rules and it hurt us in the last quarter, but I'm happy to share with you is that we have made a big comeback and we're above. Next, please. Next slide, please. So latest updates, high blockchain announces completion of transition of block based on November the 7th. December the 18th, blockchain shareholders approved resolutions and shareholder meeting. January the 14th, We announced a 20% increase in Ether coins buying daily. So we get this bump of 20%. Now we get a drop of over almost, I would say 40% in energy costs. So we have expanding profit margin and the coin is also rallying. So we're in a sort of perfect reverse scenario from last year where the stars are aligned for highs. Thank you. Next, please. Now I want to turn it over to Lisa to walk through the financial operation of the mutual funds. As I talked earlier, we're doing everything to streamline our cost structure in the mutual fund world, and we have some strategies for doing that this quarter, which we'll announce later as we fine-tune that strategy. And most important is let's recap last quarter. Lisa?

Thank you, Frank. Good morning. Before I discuss the results of operations for the quarter, I'd like to discuss the pending sale of our 65% Canadian subsidiary, Galileo Global Equity Advisors. On December 30, 2019, USGI entered into a binding letter of intent with Galileo. Pursuant to its capital restructuring, Galileo agreed to purchase all of the common shares owned by USGI for a million Canadian dollars. The transaction is subject to regulatory approval and other closing conditions. and it is anticipated that the transaction will close on or about March 2, 2020. The results of Galileo are reflected as discontinued operations and a consolidated statement of operations. Now I'll discuss the results of operations for quarter ending December 31, 2019. Beginning on slide 31, we recorded total operating revenues of $887,000 for the quarter, which is an increase of $94,000, or 12%, from the $793,000 from the same quarter last year. The increase is primarily due to decreases in performance fees paid out, lower fee waivers, and higher assets under management in the USGIF Equity Fund. Operating expenses for the current quarter were $1.4 million, a decrease of $251,000, or 15%, primarily for the following reasons. Employee compensation and benefits decreased $155,000, or 20%, mainly due to decreases in bonuses, and general administrative expenses decreased 103,000, or 13%, primarily due to decreases in fund expenses. We see our operating loss for the quarter ending December 31, 2019 as a loss of $511,000, but this is an improvement of $345,000 compared to the same period for the fiscal year 2019. On slide 32, we see that other income loss for the quarter was a loss of 440,000 and this is mainly related to unrealized losses investments as Frank has discussed. Losses from continuing operations was a loss of 926,000 which was an improvement of 2.6 million from the quarter ended December 31st, 2018. Loss from discontinuing operations was 117,000 for the quarter. Net loss attributable to USGI after taxes for the quarter is a million dollars. and as you can see on slide 33, this is a loss of six cents per share. Moving to slide 34, we see we still have a strong balance sheet which includes a high level of cash and unrestricted marketable securities that combine to make up 60% of our total assets. As you can see on page 35, we still have no long-term debt or only long-term liabilities or lease obligations and the company has net working capital of 10.2 million and a current ratio of eight to one.