U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, the first quarter of fiscal 2022. The filing was dated January 11, 2022. The company provides investment management services for mutual funds and ETFs and invests corporate cash for its own account.
Financial performance and condition
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Operating revenue | $6.521 million | $3.245 million | +101.0% |
| Operating income | $2.867 million | $0.937 million | +206.0% |
| Operating margin | 44.0% | 28.9% | Improved |
| Income before taxes | $2.904 million | $1.974 million | +47.1% |
| Net income | $2.390 million | $1.944 million | +22.9% |
| Net margin | 36.6% | 59.9% | Declined |
| Diluted EPS | $0.16 | $0.13 | +23.1% |
| Net cash from operating activities | $2.402 million | $0.906 million | +165.2% |
- Revenue mix: Advisory fees were $6.470 million, including $5.316 million from ETFs, $966,000 from USGIF advisory fees and $188,000 of USGIF performance fees. Administrative services fees were $51,000.
- Expenses: Operating expenses increased 58.3% to $3.654 million. Employee compensation and benefits doubled to $1.924 million, primarily because of higher bonuses. General and administrative expense increased 28.3% to $1.598 million, largely because of higher ETF-related and directors’ expenses.
- Investment results: Investment income was a $34,000 loss versus $998,000 of income in the prior-year quarter. Current-quarter results included $2.358 million of unrealized losses on fair-valued securities, $438,000 of embedded-derivative losses, $1.809 million of realized gains on securities sales and $602,000 of gains from principal repayments.
- Liquidity: September 30 cash and cash equivalents were $19.755 million, with an additional $1.000 million of restricted cash. Net working capital was approximately $26.7 million and the current ratio was 7.5 to 1.
- Debt and credit: The company had no outstanding borrowings. Its $1.0 million working-capital facility was unused, secured by restricted cash, and subject to covenants with which the company reported compliance.
- Capital and investments: Total assets were $61.917 million and shareholders’ equity was $56.061 million. Investments carried at fair value totaled $30.8 million, approximately 49.7% of total assets, including substantial Level 3 exposure to HIVE Blockchain Technologies securities.
Material changes versus the prior comparable period
- Total assets under management increased 89.6% year over year to approximately $4.3 billion, primarily due to inflows into ETFs, especially the U.S. Global Jets ETF. Average AUM increased to approximately $4.0 billion from $2.0 billion.
- ETF revenue increased substantially, contributing approximately $5.3 million of operating revenue compared with $2.3 million in the prior-year quarter.
- USGIF period-end AUM declined to $445.1 million from $478.9 million, reflecting market depreciation and net shareholder redemptions. The company also reported higher USGIF performance fees.
- Operating income grew faster than revenue because revenue growth exceeded expense growth. However, net margin declined because the prior-year period benefited from investment gains and the current quarter recorded investment losses.
- Cash and cash equivalents increased 36.8% from June 30, 2021, primarily from operating cash flow, investment sale proceeds and principal repayments.
- The monthly dividend was increased to $0.0075 per share for October through December 2021 and subsequently continued through March 2022, subject to future board review. The company repurchased 13,647 Class A shares for $82,000 during the quarter.
Guidance, outlook, risks and unusual items
- The filing provides no formal revenue or earnings guidance. Management expects results to remain sensitive to market performance, investor activity, AUM levels, performance fees and corporate investment valuations.
- COVID-19 remains an economic and market risk. Prolonged market disruption could reduce AUM-based fees, investment values, cash flows and operating results.
- Cryptocurrency-related investments create significant concentration and valuation risk. HIVE warrants and related convertible-debt instruments were valued at approximately $23.2 million in total at September 30, 2021, with significant Level 3 valuation inputs.
- The company disclosed material weaknesses in internal control over financial reporting. One relates to valuation controls for complex hybrid investments and previously led to a restatement; the other relates to ineffective review controls over tax-related journal entries. Remediation was in progress and disclosure controls were deemed ineffective as of September 30, 2021.
- Management stated that claims and litigation may arise in the ordinary course but believed liabilities beyond recorded accruals would not have a material adverse effect. The filing text does not provide a specific material litigation exposure.
- Investment advisory contracts for USGIF and the U.S.-based ETFs were renewed through September 2022. Fee waivers and expense reimbursements for USGIF totaled $158,000 in the quarter and may vary in the future.
Important facts for investors to verify
- Validate the sustainability of the sharp ETF-driven AUM and revenue growth, particularly the concentration in the Jets ETF.
- Assess the sensitivity of earnings and book value to HIVE, cryptocurrency markets, Level 3 valuation assumptions and foreign currency movements.
- Review remediation progress and audit implications of the two disclosed material weaknesses, including the prior restatement involving complex investments.
- Reconcile operating cash flow with reported earnings, given the significant effect of realized and unrealized investment gains and losses.
- Confirm the continuation of the $0.0075 monthly dividend and the availability of the share repurchase authorization, both of which remain subject to board discretion and business conditions.