Q1 2025 Investor Letter

Dear Investors,

Given the recent volatility due primarily to the new administration’s reciprocal tariffs announced on April 2nd, we wanted to update you on our current thoughts regarding the economy and your portfolios. While we focus primarily on the individual companies in your portfolios and their business prospects, we feel that it is necessary to comment on the macroeconomic policies being proposed and implemented by the new administration.

Private Sector Dominance versus government spending

In our opinion, most government spending is unproductive and therefore should not be included in gross domestic product (GDP). It is merely a transfer from taxpayers to recipients chosen by bureaucrats. As the government spends beyond its means, deficits and government debt accumulates, and money creation (the primary cause of inflation - Charts below) is used to plug the holes. The result is lower purchasing power for the citizens. The new administration seeks to reduce the Government deficit by at least $1 trillion.

Fed Balance Sheet (Money Creation)

Consumer Price Index (Inflation)

Deregulation

While a base level of regulation is necessary, the code of federal regulations (CFR) has grown from 22,877 pages in 1960 to approximately 190,000 pages today. This regulatory burden hinders business formation, employment, and growth. Less regulation will ultimately increase business formation and growth, which is good for the economy.

Tax Cuts

Tax cuts result in higher cash flows to both individuals and businesses. We believe that businesses and individuals can spend money in a more productive manner than the government. More capital in the hands of individuals and businesses will ultimately result in more spending and investment, which is good for the economy.

Tariffs

We disagree with tariffs from an economic freedom perspective.

Henry Hazlitt, author of Economics in One Lesson argues that tariffs, while intended to protect domestic industries, can often lead to unintended consequences. They may increase costs for consumers, reduce overall economic efficiency, and discourage international trade. Hazlitt emphasizes the importance of understanding the "seen" and "unseen" effects of tariffs - meaning that while tariffs may visibly benefit certain industries, they often harm others indirectly, such as consumers facing higher prices or exporters dealing with retaliatory measures.

From a free market perspective, we would prefer no tariffs globally. The United States has had some of the lowest tariff rates for the last 40 years.

From what we understand, the current tariff proposals are being used to:

• Strengthen U.S. supply chain sovereignty

• Negotiate lower and fair tariffs globally

• To balance free and fair trade and regain balance versus China

The United States has the largest economy globally at $30.3 trillion, 1.5X the size of China, 6X the size of Germany, 7 X the size of Japan and India, and 8 to 10X the size of the UK, France, Italy, Canada, Brazil and Russia. It is essentially the consumer of first and last resort for the world.

Per Treasury Secretary Scott Bessent: “Access to cheap goods is not the essence of the American Dream. The American Dream is rooted in the concept that any citizen can achieve prosperity, upward mobility, and economic security. For too long, the designers of multilateral trade deals have lost sight of this. International economic relations that do not work for the American people must be re-examined.“

“This is what tariffs are designed to address – leveling the playing field such that the international trading system begins to reward ingenuity, security, rule of law, and stability, not wage suppression, currency manipulation, intellectual property theft, non-tariff barriers and draconian regulations. To the extent that another country's practices harm our own economy and people the United States will respond. This is the America First Trade Policy. “

Real GDP Growth of 3%

Lower regulation, lower taxes, and lower inflation will ultimately increase cash flows for businesses who will hire more employees and invest for the future resulting in real growth (adjusted for inflation), rather than growth driven by more money in the system chasing the same amount of goods driving prices higher (inflationary growth).

Affordable Energy

The administration's energy policies seek to boost domestic fossil fuel production, including oil, natural gas, and coal while seeking to help develop future, more economic sources of power.

Conclusion

The first derivative effects of these policies such as lower employment in the government and related (education and healthcare) sectors and now the “tariff tantrum” are negative and the market seems to be discounting the worst-case scenario. The second derivative effects of less government spending, less regulation, lower taxes, and higher real growth from the private sector can be powerful.

Portfolio Holdings

During these time periods we continue to focus on the companies we own in your portfolios, many of which have new products and services that will continue to do well regardless of the macro-economic environment. Below we have written a short synopsis of every company in your portfolio. In general, we have a high weighting to healthcare which tends to be recession resistant.

1. Alpha Cognition Inc. (ACOG) – Alpha Cognition is a pharmaceutical company whose lead drug ZUNVEYL was approved by the FDA in July 2024 for Alzheimer’s disease treatment. This drug is only the second oral therapy approved and significantly reduces nausea, vomiting and insomnia side effects which are common with other competitive Alzheimer’s treatments. Alzheimer’s affects 7 million people in the U.S. with 55% of patients discontinuing treatment within a year due to severe side effects. The initial target market represents over $2 billion in sales potential. The drug is targeted at patients with mild-to-moderate disease and aims to improve cognitive function and slow the progression of Alzheimer’s. The management team has a strong track record of over 140 commercial drug launches completed to date. With a market cap of only $120 million we believe there is significant room for appreciation.

2. Actuate Therapeutics Inc. (ACTU) – Actuate is a clinical stage biopharmaceutical company developing a treatment for metastatic pancreatic ductal carcinoma. This market opportunity is worth $1.5 billion if approved. Currently, the asset is in a Phase 2 randomized, controlled trial. We believe the stock could trade multiples higher if the dataset demonstrates significant overall survival benefit versus the control arm. The data will be announced within the coming weeks. The company is also interested in evaluating the asset in other tumors which could contribute further upside to the current opportunity.

3. Atlas Energy Solutions Inc. (AESI) – Atlas operates as the largest proppant (frac sand) and proppant logistics company in in the Permian Basin. In addition, they provide electric power generators to oil production companies in the Permian Basin. Atlas would be a beneficiary of increased energy production in the United States. It currently has a dividend yield of 7.2%.

4. Aeluma Inc. (ALMU) – Aeluma is a semiconductor company that specializes in high-performance optoelectronics and electronic devices. They focus on developing innovative technologies for sensing and communication applications, using compound semiconductor materials Indium Gallium Arsenide on large-diameter silicon substrates. This approach enhances performance and scalability, making their products suitable for various industries, including mobile, automotive, AI, defense and aerospace, AR/VR, quantum computing, and communication.

5. Axsome Therapeutics Inc. (AXSM) – Axsome is a biopharmaceutical company focused on central nervous system conditions such as Alzheimer’s Disease Agitation, Major Depressive Disorder, Migraines, and Fibromyalgia. Their products target a broad range of serious conditions that impact over 150 million people in the United States. Axsome has 3 products commercially available today with 3 others in the late stages of approval. These products have the potential to provide over $16 billion in peak sales in comparison to Asxome’s $385 million of revenue in 2024 (from $0 in 2021). The 3 drugs in late stages of approval include the treatment of Alzheimer’s Disease Agitation which has data readouts later in Q1 2025, one for the treatment of Fibromyalgia, and another for Attention Deficit Disorder. We believe the company is an attractive acquisition candidate for a larger pharmaceutical company and we continue to hold AXSM stock as a large weighting in investor portfolios.

6. Brainsway (BWAY) – Brainsway is a global medical technology company specializing in mental health treatments. They sell non-invasive neurostimulation devices using Deep TMS (transcranial magnetic stimulation) for the treatment of depression, OCD, addiction, and PTSD. The treatment is noninvasive, has no systematic side effects and involves short 20-minute sessions. The treatments are aimed towards individuals who haven’t responded to traditional therapies. The company has been growing at 20% annually and is highly profitable. With $50 million of cash and no debt the company trades for 1.9x EV/Revenues versus peers in the 3-5x range.

7. CVRx Inc. (CVRX) – CVRx is a medical device company that specializes in neuromodulation solutions for cardiovascular diseases. Their flagship product, Barostim, is an implantable device designed to improve symptoms of heart failure by stimulating baroreceptors - natural sensors in the body that regulate heart, kidney, and vascular functions. This therapy helps reduce the heart's workload and enhances its efficiency, offering relief to patients who haven't responded well to medications. For example, these patients are typically out of breath from basic everyday tasks such as walking up stairs. The next catalyst for the stock is a permanent reimbursement decision expected in June/July of this year. Currently, the CVRx device charges a temporary reimbursement code which it has used for the last few years. The company has new management with experience at Abbot and Medtronic. Johnson & Johnson is the largest shareholder and owns ~19% of the company. The stock trades for 3x EV/Revenues for 25% revenue growth and best in class margins versus comps trading at 4-5x EV/Revenues for 5% revenue growth. This market is worth $2.2 billion in the U.S. annually, of which CVRx makes up about $65 million today. We believe CVRx is on its way to becoming the standard of care in heart failure patient.

8. Delcath Systems Inc. (DCTH) – Delcath specializes in interventional oncology. Their products deliver high-dose chemotherapy directly to the liver while minimizing side effects through advanced filtration techniques.

9. Elutia Inc. (ELUT) – Elutia is a company that specializes in drug-eluting biomatrix technologies. Their product is an antibiotic-eluting bio envelope for cardiac implantable electronic devices (CIEDs) and neurostimulators, which help reduce post-surgical complications such as infections and device migration. The competitor in the industry has a synthetic (plastic) envelope which was purchased by Medtronic for $200 million. Medtronic also manufactures their own CIED implants, so they have a synthetic pouch they combine with it. Boston Scientific, however, also manufactures CIEDs but doesn’t want to use Medtronic’s pouch in the same procedure. This creates a competitive opportunity for Elutia to sell their products directly to Boston or be an acquisition target. Elutia’s antibiotic eluting envelope was FDA approved on June 17th, 2024, so it is still in the process of ramping up. The current market cap of Elutia is $119 million, a significant discount to what Medtronic paid for the competitor.

10. Diamondback Energy (FANG) – is a top 3 producer of oil in the Permian Basin along with Exxon and Occidental Petroleum. They benefit from increased oil production in the United States. Thay have historically paid a dividend yield of 5%. In addition, they have repurchased shares and have paid special dividends.

11. Genius Sports Inc. (GENI) – Genius Sports is a global leader in sports technology, data, and broadcasting. They participate in the global sports betting industry. Their services include real-time data collection, AI-driven analytics, immersive betting experiences, and personalized marketing. They work with major sports organizations like the NFL, NBA, English Premier League, as well as brands like Coca-Cola and ESPN. Their customers include all the major sportsbooks in the U.S. including DraftKings, Fan Duel and Caesars. They collect the data from the leagues and sell it to all of their sports book customers. Genius enables in-game betting for sportsbooks with real-time data, a key initiative to drive higher frequencies of betting and greater volume to sportsbook platforms. Genius has sustained 20% growth and expanding margins to 20% today and has over $135m in cash and no debt. Genius trades at a discount to its nearest competitor, Sportradar Group, despite faster revenue growth.

12. Graham Corporation (GHM) - Graham, a company we identified in 2023 at $13 per share, has been a top performer in investor portfolios. Historically, Graham has supplied industrial equipment like vacuum and heat transfer products for the global refining and petrochemical markets. With new management and an acquisition in 2021, Graham has diversified the business serving the defense, space, and new energy markets. The strategic focus has been on growing the defense business over the past 2 years. Graham sells critical propulsion equipment to the U.S. Navy for their nuclear submarines. They are the only supplier of the equipment they produce, giving them pricing power and margin enhancement as more subs are built. The U.S. has created the Pacific Deterrence Initiative (PDI) specifically aimed at deterring potential aggression from China in the Pacific Ocean, by bolstering U.S. military presence, and infrastructure. One of the ways the U.S. is accomplishing this is by growing and upgrading its fleet of Columbia and Virginia Class Nuclear Submarines. The U.S. has committed to building 11 more Columbia Class subs and 32 Virginia Class subs equating to $1.2-1.4 billion in projected revenue for Graham. These buildouts are expected to last through 2050. Graham carries a backlog of $385 million, of which 80% is for the defense industry. Their annual revenues are expected to be $200 million this year, giving them multi-year visibility. Graham has transformed from being highly cyclical to highly predictable over the last few years. We trimmed Graham stock in January and continue to hold a smaller weighting in investor portfolios.

13. Karat Packaging Inc. (KRT) – Manufactures and distributes disposable products for the restaurants and foodservices industry. Customers include In-N-Out, Chipotle, Panda Express, Chick-Fil-A, Cane’s, Dutch Bros, Sonic, and Chili’s. Co-founders Alan Yu and Marvin Cheng are now CEO and COO and combined own 65% of the company. Karat pays a quarterly dividend of $0.40 (~6.4% yield). Karat is a $460 million revenue company addressing a $20 billion market opportunity. We believe they can grow to at least $1B+ in revenue over time. The stock trades at 8.9x EBTIDA with competitors trading at over 10x EBITDA. Karat should ultimately trade at a premium to peers due to industry leading gross margins, faster revenue growth and market share gains. The company has more than doubled the size of the salesforce over the last 2 years, but this is not reflected in revenue growth due to pricing headwinds which have turned into a tailwind in 2025.

14. Myomo Inc. (MYO) - Myomo manufactures a powered arm and hand brace to help restore function to paralyzed or weakened upper extremities due to stroke, nerve injury or disease. With 600,000 potential patients, the market opportunity for Myomo is $24 billion.

15. NeuroPace Inc. (NPCE) – NeuroPace is a medical device company dedicated to improving the lives of people with epilepsy. Their flagship product, the RNS System, is an FDA approved brain-responsive neurostimulation device. It continuously monitors brain activity, detects abnormal patterns that may lead to seizures, and delivers brief electrical pulses to prevent them in real-time. This personalized approach is designed for adults with drug-resistant focal epilepsy. The annual market opportunity is over $2 billion, compared to NeuroPace’s revenues of $80 million in 2024. We believe NeuroPace will ultimately capture the majority of this market.

16. ODDITY Tech Ltd. (ODD) – Oddity is a consumer makeup company focused on the global beauty and wellness industry. Some of their well-known brands include Il Makiage, which offers high quality makeup products, and SpoiledChild, which focuses on skincare and wellness solutions. Oddity will be launching an additional brand in the second half of this year. Oddity Tech also operates Oddity Labs, a biotechnology center that uses AI-driven molecule discovery to develop novel ingredients for their products. Oddity markets their products on most social media platforms. The company has $100 million in cash, no debt and is highly profitable.

17. Orion Group Holdings Inc. (ORN) – Orion provides specialty marine and concrete construction and engineering services in North America and Pacific regions. Management is confident in the $16 billion pipeline they have, up from $3b when management joined two years ago. This pipeline should result in larger orders and a growing backlog in 2025. There are multiple multi-billion-dollar Navy RFPs for China deterrence in the Pacific that represent transformative opportunities. Orion recently won a $435 million Pearl Harbor dry dock (the largest construction project in Navy history) and we think outstanding RFPs such as the $8 billion Hawaii Multiple Award Construction Contract (25% addressable by ORN) and the $15 billion PDI-MACC RFP (50% addressable) as well as other opportunities represent transformative catalysts for the company. The US Navy is committed to improving their dry dock and port infrastructure in case of global conflict and few contractors are able to complete work of this scale. Separately, Orion’s concrete segment builds concrete foundations for data centers and other large buildings such as Costco. They are working on 29 projects, up from 24 last quarter, and have 14 more in the pipeline. Projects can range from $5-10 million (foundations) to $50-60 million on larger projects. ORN trades at 4.8x EV/EBITDA vs peers at 10-15x. We think Orion will continue to grow at 20%+ for years to come and we see a path to a $12+ stock over time as they execute (versus $5.33 on 4/1/25).

18. Perma-Fix Environmental Services Inc. (PESI) – provides hazardous and nuclear waste treatment, disposal, and other services for government and commercial clients. PESI has historically generated $70-100 million in revenue with modest profitability. We think this is poised to change with multiple transformative opportunities through 2025. The largest of these opportunities being the Hanford nuclear waste cleanup following the decades of plutonium production that began for the Manhattan Project. The U.S. Department of Energy (DOE) is set to begin nuclear waste treatment at the site by August of 2025. PESI is one of the contractors to win initial work for a minimum of 10 years which should add $70 million of annual revenue at strong margins. There is another $50 million of potential awards as the DOE looks to outsource more treatment in the coming years. Other opportunities include service contracts which last 5-10 years including DOE facilities, Navy vessels ($100+ million annually), and other countries looking to treat and dispose of nuclear waste accumulated over decades. On November 1st, PESI won a subcontractor position on a $3 billion, 10-year contract to cleanup nuclear waste in West Valley, NY. We think this can generate $30 million annually over the next 10 years. Other contracts are expected to be decided in the coming months and could serve as catalysts for the stock. Additionally, PESI is developing a treatment system to capitalize on the coming $200 billion PFAS clean up opportunity. PFAS are the “forever chemicals” that do not break down in the environment and can contaminate air, water, and soil. The barriers to entry are high due to the extensive permits and licenses needed to dispose of nuclear waste. PESI holds 40+ patents for treatment, has 30+ years of experience, and has completed $2+ billion of services work over the years. We purchased PESI at $9.75 on May 22nd when the company raised $20 million for capacity expansion. PESI was added to the Russell 2000 in 2024. We believe PESI is on the path towards $275+ million in revenue, $75 million in EBITDA and $3.00 in EPS in the coming years, which we estimate would result in a $50+ stock price.

19. Rein Therapeutics (RNTX) – Rein is a clinical-stage biopharmaceutical company focused on developing innovative therapies for unmet medical needs, particularly in orphan pulmonary and fibrosis indications. Rein’s Idiopathic Pulmonary Fibrosis drug has shown antifibrotic characteristics and has multi-billion-dollar blockbuster potential.

20. Uniti Group Inc. (UNIT) – Uniti is a real estate investment trust (REIT) that focuses on acquiring, constructing, and managing mission-critical communications infrastructure. They are a leading provider of fiber optic networks and wireless solutions for the communications industry. Uniti owns an extensive network of fiber across the United States. Their services cater to telecommunications companies, data centers, and enterprises, helping to bridge the digital divide and support the growing demand for high-speed connectivity. Uniti is also involved in expanding fiber-to-the-home (FTTH) networks, particularly in underserved Tier II and III markets. Uniti has strong earnings growth expected and has paid a 5% dividend yield historically.

21. TELA Bio Inc. (TELA) – TELA is a commercial stage medical device company focused on providing soft-tissue reconstructive solutions for hernia repair, abdominal wall reconstruction, and facial and reconstructive plastic surgery. TELA’s primary product is a surgical mesh product called OviTex. OviTex is produced using biological material with polymer fibers, resulting in a lower infection rate (biologic material) and lower hernia reoccurrence rate (strength of polymer) than traditional synthetic meshes (plastic). OviTex also costs about 20-40% less than comparable products on the market. TELA competes with companies like Medtronic, Allergan, and C.R. Bard. C.R. Bard currently settled over 38 thousand lawsuits for their synthetic hernia mesh which has been known to cause severe side effects and chronic pain. TELA has recently had success in hiring C.R. Bard sales representatives due to what they believe is having the best hernia repair product in the industry. We forecast that TELA will continue to take share in the $2 billion annual U.S. hernia repair market. Currently, they can sell to roughly 6,000 hospitals with their first two GPOs. We believe TELA will continue to gain market share and is an attractive buyout candidate for one of the larger medical technology companies who can plug TELAs products into their large existing salesforces. TELA’s peers with similar growth rates and margins trade at 5-10x EV/Revenues while TELA trades at 0.5x EV/Revenues. We believe that TELA will begin to close this gap as investors realize TELA has a superior product and value proposition in the $2 billion annual hernia/reconstructive market their products address.

22. Zeta Global Holdings Corp. (ZETA) – Zeta is a marketing technology software company which benefits from multiple market tailwinds in the advertising industry. Zeta’s software platform combined with artificial intelligence helps companies' market more efficiently by targeting ads based on specific demographics. The Zeta marketing platform helps customers deliver advertisements through all channels such as email, social media, web, chat, connected TV and video. Zeta is unique in that their platform doesn’t use cookies. This reduces risk from a regulatory and customer standpoint as they are not impacted by these issues. Consequently, they can take market share from competitors like Adobe, Salesforce, and Oracle who have all made legacy acquisitions to enter the space (valuations of 8-20x EV/Revenues). Oracle announced they would be exiting the advertising business on their Q4 2024 earnings call, creating an incremental revenue opportunity for Zeta. Despite broader softness in software spending, Zeta remains unaffected, citing a healthy demand environment. The company was founded by former Apple CEO, John Scully, and the management team has a strong track record of performance (the company has beaten their revenue guidance for 14 consecutive quarters since their IPO in 2021). Zeta’s stock has been volatile throughout the past few months as investors digested a short report in November. Zeta trades at a significant discount to peers in the software industry at only 2x EV/Revenues vs. 5-10x, despite stronger growth and operating margins.

    
    
    
    

    DISCLOSURES: GROW Funds LLC is a California registered investment advisory firm. Registration does not imply any level of skill or training. Neither the information within this email nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities. Investors should have long-term financial objectives. Past performance is no guarantee of future returns.

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