U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended December 31, 2021, representing fiscal 2022 second quarter. Comparative periods ended December 31, 2020. Amounts are in thousands except per-share data and percentages.
Business Context
U.S. Global Investors provides investment management and administrative services to mutual funds and exchange-traded funds and invests corporate cash for its own account. Advisory revenue is primarily based on assets under management (AUM), while investment income is affected by market values and transaction timing.
Total AUM was approximately $3.8 billion at December 31, 2021, up $255.8 million, or 7.2%, from December 31, 2020, but down $439.1 million, or 10.4%, from June 30, 2021. The year-over-year increase was primarily driven by ETF inflows, particularly the U.S. Global Jets ETF.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2021 | Three Months Ended Dec. 31, 2020 | Six Months Ended Dec. 31, 2021 | Six Months Ended Dec. 31, 2020 |
|---|---|---|---|---|
| Operating revenue | $6,574 | $4,721 | $13,095 | $7,966 |
| Operating income | $2,939 | $75 | $5,806 | $1,012 |
| Operating margin | 44.7% | 1.6% | 44.3% | 12.7% |
| Investment income | $1,579 | $20,702 | $1,545 | $21,700 |
| Income before taxes | $4,529 | $21,725 | $7,433 | $23,699 |
| Net income | $3,590 | $16,661 | $5,980 | $18,605 |
| Net margin | 54.6% | 352.9% | 45.7% | 233.5% |
| Diluted EPS | $0.24 | $1.10 | $0.40 | $1.23 |
| Cash flow from operations | Not separately provided | Not separately provided | $5,493 | $596 |
Operating margins and net margins are calculated from reported amounts. The unusually high prior-year net margins reflected substantial investment gains rather than recurring operating performance.
Financial Condition, Liquidity and Debt
- Cash and cash equivalents were $23,179 at December 31, 2021, compared with $14,436 at June 30, 2021. Cash, cash equivalents and restricted cash totaled $24,179.
- Net working capital was approximately $29,862, and the current ratio was 9.7 to 1.
- Total assets were $64,191, compared with $62,277 at June 30, 2021. Shareholders’ equity was $59,029, up from $54,324.
- Total liabilities were $5,162, including $1,732 of deferred tax liabilities. The filing does not report outstanding conventional debt.
- The Company had access to a $1 million working-capital credit facility, collateralized by restricted cash, which was unused at December 31, 2021. The facility expires May 31, 2022, and management intends to renew it annually.
- Operating cash flow of $5,493, investment-sale proceeds of $2,850 and principal repayments on debt securities of $1,500 were the principal sources of the increase in cash.
- The Board continued a monthly dividend of $0.0075 per share through March 2022. Expected January-through-March 2022 dividends were approximately $338.
Material Changes Versus the Prior Comparable Period
- Three-month operating revenue increased $1,853, or 39.3%; six-month operating revenue increased $5,129, or 64.4%. Advisory fees increased primarily because of higher ETF AUM and base management fees.
- Three-month operating expenses decreased $1,011, or 21.8%, primarily because of lower employee compensation and bonuses. Six-month operating expenses increased $335, or 4.8%, due mainly to higher general and administrative expenses.
- Three-month net income fell $13,071, or 78.5%; six-month net income fell $12,625, or 67.9%. The decline was driven by substantially lower investment gains.
- Investment income declined from $20,702 to $1,579 for the quarter and from $21,700 to $1,545 for the six-month period. The prior-year periods benefited from large realized and unrealized gains, including $15,043 of realized gains in each comparative period.
- The six-month period included $2,462 of unrealized investment losses in the cash-flow reconciliation, compared with $6,460 of unrealized gains in the prior-year period. Current-period investment income nevertheless included $1,853 of realized gains on sales, $1,170 of gains on principal payments, and $1,104 of dividend and interest income.
- The prior-year periods included a $444 gain from forgiveness of the PPP loan; no PPP balance remained at December 31, 2021.
- Investments carried at recurring fair value declined to $30.5 million from $35.3 million at June 30, 2021. Approximately $22.3 million was invested in HIVE Blockchain Technologies warrants and convertible debentures, classified as Level 3.
Outlook, Risks and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management believes existing cash, investments and available financing are sufficient for foreseeable operating needs.
- Revenue and results remain sensitive to AUM levels, financial-market performance, investor activity, performance fees and fund redemptions. Management noted that average AUM for the six months was $4.0 billion, compared with $2.4 billion in the prior-year period.
- COVID-19-related economic and market disruption remains an identified risk. The Company cannot reliably estimate the duration or financial impact of the pandemic.
- Cryptocurrency-related securities create significant concentration and valuation risk. HIVE warrants were valued at $7.3 million and HIVE embedded derivatives at $2.0 million at December 31, 2021. Management disclosed that cryptocurrency markets and HIVE’s share price may remain highly volatile.
- A hypothetical 25% change in the value of equity securities and HIVE embedded derivatives would have produced an estimated after-tax change in net income of approximately $3.1 million and $392,000, respectively; these scenarios are not forecasts.
- The Company disclosed that disclosure controls were not effective at December 31, 2021 because of a material weakness involving review of tax-related journal entries. Remediation efforts were being developed and overseen by the Audit Committee.
- A separate material weakness involving valuation controls for complex hybrid investments was reported as remediated by December 31, 2021, following revised procedures and use of specialized valuation methods or independent pricing services.
- The Company’s investment advisory and related contracts with USGIF and U.S.-based ETFs were renewed through September 2022. Fee waivers and expense reimbursements for USGIF totaled $319,000 for the six months.
- The Company disclosed ordinary-course litigation and contingency exposure but stated that liabilities beyond recorded accruals are not expected to have a material adverse effect.
Investor Verification Priorities
- Verify the sustainability of ETF-driven AUM growth and the concentration of advisory revenue in the Jets ETF.
- Assess recurring operating profitability separately from volatile corporate investment gains and losses.
- Review the valuation assumptions and concentration risk associated with HIVE warrants, convertible debentures and other Level 3 investments.
- Monitor remediation of the tax-related material weakness and the effectiveness of related internal controls in subsequent filings.
- Confirm renewal of the $1 million credit facility before its May 31, 2022 expiration and the continuation of the monthly dividend after March 2022.
- Evaluate the effect of COVID-19, market declines, interest rates, foreign currency movements and investor redemptions on AUM, revenue and liquidity.