Echo Lake Capital Criticizes Independent Board Members of U.S. Global Investors, Inc.

NEW YORK, NY / ACCESSWIRE / April 28, 2022 / Earlier today Ephraim Fields of Echo Lake Capital issued a letter to the independent Board of Directors of U.S. Global Investors, Inc. (NASDAQ:GROW). Mr. Fields believes the company's common stock is severely undervalued and provided several suggestions he believes can be quickly implemented that would create significant and immediate long-term shareholder value. Mr. Fields believes the company has an actual enterprise value of approximately $25 million which he believes is too low for a highly profitable company with $4 billion of AUM, a valuable ETF business (including but not limited to JETS), and a very healthy balance sheet.

Mr. Fields also criticized the Board of Directors for not being more proactive and believes they collectively lack the financial incentive and skill set necessary to act in the best interests of all shareholders.

A full copy of the letter can be found below:

CONTACT:

Ephraim Fields
[email protected]

April 28, 2022

To: Thomas F. Lydon, Jr.

Jerold H. Rubinstein

Roy D. Terracina

Many U.S. Global Investors, Inc. ("GROW" or the "Company") investors believe the company is overcapitalized, vastly undervalued and has significant non-core assets that should be monetized. Based on our calculations (which assumes monetization of the company's non-core Investments and office building and implies an enterprise value of approximately $25 million), GROW's stock is trading at a mere 2.0x LTM operating income, which seems quite low for a highly profitable company with $4 billion of AUM, a valuable ETF business (including but not limited to JETS), and a very healthy balance sheet.

The stock's poor valuation should not come as a surprise to you since during each of the Company's last five earnings calls Mr. Frank Holmes, the Company's CEO, has said the following:

Feb. 18, 2022: Q2 Earnings Call - "So we are undervalued…"

Jan. 12, 2022: Q1 Earnings Call - "I believe that we're extremely undervalued."

Dec. 9, 2021: Q4 Earnings Call - "no doubt we're extremely undervalued."

May 10, 2021: Q3 Earnings Call - "we're going to educate investors why we're undervalued…"

Feb. 5, 2021: Q2 Earnings Call - "yes, I do think we are undervalued."

Assuming you agree with Mr. Holmes' above comments, we wonder why the Board of Directors (the "Board") has not been more proactive in seeking to improve GROW's valuation and create shareholder value. We believe the answer is because:

1. Your very limited personal stock ownership and generous Board compensation create a dynamic whereby your financial incentives are not aligned with those of all shareholders.
2. You collectively lack the skill set necessary to effectively guide GROW and to act in the best interests of all shareholders.

We believe your financial incentives are not aligned with all shareholders because even though the three of you have collectively been on the Board for 83 years, you collectively own only 84,100 shares. Considering how few shares you personally own, we doubt you are highly motivated to act in the best interests of shareholders. We also wonder why, despite being paid millions of dollars in Board fees by GROW's shareholders, you have chosen to own so few shares.

Our concerns about your limited stock ownership are further exacerbated by the generous compensation you receive as Board Directors. In FY 2021 the Board held four meetings and your Board compensation averaged $230,000 per person, which seems excessive to us considering your historic performance as well as GROW's small size. As a frame of refence, in FY 2021 your combined Board compensation of $689,000 equaled 8% of GROW's operating income. We are concerned that this type of incentive structure may not motivate you to act in the best interests of all shareholders but rather to act in the best interests of Mr. Holmes who has complete control over who serves on the Board and has repeatedly supported your Board candidacy.

We can't help but wonder how your relationship with Mr. Holmes impacted his compensation last year. In FY 2021 Mr. Holmes' total compensation was $4.0 million, which was equivalent to 50% of GROW's operating income. His compensation for that one year alone equaled 5% of GROW's current equity market capitalization and 15% of our estimate of GROW's current enterprise value. It is difficult for us to believe that paying Mr. Holmes that much money was necessary or in the best interests of shareholders.

As previously mentioned, we are concerned that you lack the skill set necessary to effectively guide GROW and act in the best interests of its shareholders. If necessary our future letters will detail what we believe are your failures at GROW and explain why other aspects of your backgrounds give us grave concerns about your Board candidacy. In the interim we note that apparently it has been a long time since the Board underwent a "refresher" to ensure that the Board consists of the most qualified candidates.

The following table lists your ages, number of years you have served on the Board, how many GROW shares you own, the current value of those shares and your FY 2021 Board compensation.

We believe GROW's depressed valuation indicates the investment community has lost faith in your ability and/or willingness to take the steps necessary to create long-term shareholder value. Fortunately, we believe there are several initiatives you could easily implement that would resolve this problem and create immediate and significant long-term shareholder value.

1. Return significant amounts of capital to shareholders through a buyback and/or special dividend. We believe GROW is overcapitalized and will have even more excess capital if the Board monetizes non-core assets as we suggest below. While the company has had a buyback in place for a very long time, a close examination reveals the buyback has barely been used and in our opinion is far too small. We can think of no better use of capital than returning it to its rightful owners, the shareholders.
2. Monetize the HIVE convertible debenture and warrants. We believe the HIVE investment hurts GROW's valuation because it gives the investment community the mistaken impression that GROW is a cryptocurrency play. In reality, GROW generates no operating income from its HIVE investment. Furthermore, if GROW investors want to own HIVE, they can do so by purchasing HIVE stock in the open market.. there is no need for investors to get exposure to HIVE through GROW.
3. Monetize all other assets that are not related to operating the ETF and mutual fund business. The market is not giving GROW an appropriate value for these assets and there is no strategic reason for GROW to retain these assets.
4. Sell or obtain a prudently sized mortgage for GROW's headquarters which we believe management has stated is worth approximately $6 million. We question why this asset has remained unlevered during a period of such low interest rates and why the Company needs to own a building that it does not even fully utilize.
5. Significantly reduce operating expenses. We believe Board and management compensation is too high and that other expenses can be dramatically reduced without harming the company's long-term prospects. We also believe the company should carefully assess its growth investments considering GROW competes against several much larger companies.
6. Forbid related party transactions and prohibit GROW from investing in any entity in which Mr. Holmes is also invested. We find these transactions to be unnecessary and more importantly harmful to GROW shareholders as these transactions can create the perception that corporate assets are not being used in the best interests of GROW shareholders.
7. Require Mr. Holmes to immediately relinquish all executive roles at HIVE. We believe GROW shareholders would benefit greatly if Mr. Holmes spent more time on GROW and less time on HIVE.
8. Require Board members and senior management to personally purchase a significant number of GROW shares in the open market in order to better align their incentives with those of all shareholders.

Despite our grave concerns about the Board, GROW has some very attractive assets that should be valued at much higher levels in the public market. We also believe GROW is subscale and could easily be sold for significantly more than its current enterprise value.

We are not the first investors to have raised these issues but we hope you will now act with a great sense of urgency and implement the suggestions we listed above. It is time for GROW's leadership to begin making decisions that will benefit all shareholders, not just a select few individuals.

Sincerely,

Ephraim Fields

Echo Lake Capital

SOURCE: Echo Lake Capital