U.S. Global Investors, Inc. — Form 10-Q Summary
Business Context and Reporting Period
U.S. Global Investors, Inc. is an investment management company providing advisory and administrative services to ETFs and U.S. Global Investors Funds, while also investing corporate cash. This fiscal second-quarter filing covers the three and six months ended December 31, 2023, with comparisons to the corresponding periods ended December 31, 2022.
Total assets under management were approximately $2.1 billion at December 31, 2023, down from $2.4 billion at December 31, 2022. Average assets under management declined to $2.0 billion for the six months ended December 31, 2023, from $2.7 billion in the prior-year period.
Financial Performance and Position
| Metric | Three months ended Dec. 31, 2023 | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2023 | Six months ended Dec. 31, 2022 |
|---|---|---|---|---|
| Operating revenue | $2.818 million | $3.728 million | $5.951 million | $8.140 million |
| Operating income | $192,000 | $908,000 | $406,000 | $2.493 million |
| Net investment income | $1.416 million | $116,000 | $903,000 | $(1.344) million |
| Net income | $1.229 million | $847,000 | $1.053 million | $900,000 |
| Diluted EPS | $0.09 | $0.06 | $0.07 | $0.06 |
| Operating margin | 6.8% | 24.4% | 6.8% | 30.6% |
| Net margin | 43.6% | 22.7% | 17.7% | 11.1% |
Operating revenue declined 24.4% in the quarter and 26.9% year to date, primarily because of lower ETF assets and reduced base management fees. Operating expenses declined 6.9% in the quarter and 1.8% year to date, including lower employee compensation.
Cash flow from operating activities was $910,000 for the six months ended December 31, 2023, compared with $1.128 million in the prior-year period. Investing activities provided $2.955 million, primarily from security sales and principal paydowns. Financing activities used $1.800 million, including $1.171 million for share repurchases and $648,000 for dividends. Ending cash, cash equivalents and restricted cash totaled $28.466 million.
At December 31, 2023, cash and cash equivalents were $27.466 million, restricted cash was $1.000 million, and net working capital was approximately $38.3 million. The current ratio was 18.8 to 1. The company had no borrowings outstanding under its $1.0 million credit facility, which expires May 31, 2024, and was in compliance with its covenants. Financing lease liabilities totaled $54,000. Shareholders’ equity was $50.890 million, compared with $52.196 million at June 30, 2023.
Material Changes Versus the Prior Comparable Period
- Quarterly net income increased 45.1% to $1.229 million despite the revenue decline, primarily because net investment income rose to $1.416 million from $116,000.
- Six-month net income increased 17.0% to $1.053 million, reflecting the change from a $1.344 million investment loss to $903,000 of investment income.
- ETF advisory revenue declined substantially, with six-month ETF fees falling to $5.171 million from $7.218 million.
- USGIF assets under management ended the quarter at $289.9 million, compared with $343.0 million a year earlier; six-month net redemptions were $33.4 million.
- Recurring fair-value investments declined to $17.3 million from $20.2 million at June 30, 2023. The portfolio includes $5.8 million of HIVE convertible debentures and $2,000 of HIVE warrants.
- The company repurchased 394,508 Class A shares for $1.2 million during the six months, compared with 127,372 shares for $382,000 in the prior-year period.
- Accumulated other comprehensive income declined to $963,000 from $1.348 million, primarily due to a $385,000 after-tax other comprehensive loss.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management expects current cash, investments and available financing to fund foreseeable operating needs. The monthly dividend of $0.0075 per share was authorized through March 2024, subject to future Board review. Advisory contracts with USGIF were renewed through September 2024, and U.S. ETF agreements through July 2024.
Investment income is inherently volatile and depends on market movements, investment transactions and valuation changes. HIVE-related securities are valued using Level 3 models and are exposed to cryptocurrency and equity-price volatility. A hypothetical 25% change in trading-security prices was estimated to affect after-tax net income by approximately $2.283 million, excluding the separate effect of embedded derivatives.
Other risks include declining assets under management, fund redemptions, performance-fee variability, interest-rate and foreign-currency exposure, regulatory and competitive pressures, macroeconomic conditions, geopolitical events and indirect cryptocurrency exposure. The company reports no material litigation accruals other than its uncertain-tax-position reserve.
The company adopted CECL effective July 1, 2023, recording a $232,000 initial allowance for a held-to-maturity debt security and a $183,000 after-tax reduction to beginning retained earnings. The prior-year comparative financial statements were revised for an immaterial error involving unrecorded uncertain tax liabilities.
Management concluded that disclosure controls and procedures were not effective as of December 31, 2023 because material weaknesses in internal control over financial reporting identified at fiscal year-end remained unresolved.
Important Facts for Investors to Verify
- Whether continued declines in ETF and USGIF assets under management will further reduce advisory revenue.
- The valuation, maturity, repayment status and liquidity of the HIVE convertible debentures and other Level 3 investments.
- The effect of market, cryptocurrency, interest-rate and foreign-currency volatility on investment income and equity.
- Whether the $1.0 million credit facility is renewed by its May 31, 2024 expiration date.
- Whether the Board continues the $0.0075 monthly dividend after March 2024 and maintains the share-repurchase program.
- Management’s remediation progress concerning the disclosed material weaknesses in internal controls.
- The adequacy of the $546,000 reserve for uncertain tax positions and any future tax effects.