U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: The filing is for the quarter and nine months ended March 31, 2021, corresponding to the company’s fiscal 2021 third quarter. The request metadata references “2020 Q3,” but the filing itself clearly identifies March 31, 2021.
Business context
U.S. Global Investors provides investment management services to U.S. Global Investors Funds and two exchange-traded funds, including the U.S. Global Jets ETF. It also invests corporate funds for its own account. Assets under management were approximately $4.6 billion at March 31, 2021, compared with $665.1 million a year earlier and $1.7 billion at June 30, 2020. The increase was driven primarily by inflows into the Jets ETF.
The company’s former Canadian investment-management subsidiary, Galileo, was sold effective March 2, 2020. Its prior-period results are presented as discontinued operations.
Financial performance and key metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Operating revenue | $6.4 million, versus $0.9 million | $14.8 million, versus $2.6 million |
| Operating income (loss) | $3.4 million, versus $(1.0) million | $4.8 million, versus $(2.2) million |
| Investment income (loss) | $15.5 million, versus $(0.4) million | $37.2 million, versus $(3.9) million |
| Net income attributable to U.S. Global | $14.2 million, or $0.94 per share, versus a $1.6 million loss, or $(0.11) per share | $32.8 million, or $2.18 per share, versus a $6.2 million loss, or $(0.41) per share |
| Income tax expense | $4.6 million | $9.7 million |
Operating margin was approximately 52.8% for the quarter and 32.6% for the nine-month period, compared with negative margins in the prior-year periods. Net margins were approximately 223.8% and 222.3%, respectively, reflecting substantial investment gains in addition to operating earnings.
- Advisory fees increased to $6.3 million for the quarter and $14.2 million for the nine months, primarily from higher ETF assets and fees from the Jets ETF.
- Operating expenses rose 58.6% year over year in the quarter and 109.0% for the nine months, mainly due to higher employee compensation, bonuses, ETF expenses and business-development costs.
- Investment gains included $13.5 million of unrealized gains in the quarter and $20.1 million for the nine months. Nine-month investment income also included $15.0 million of realized gain from the sale of the company’s HIVE common-stock investment.
- The company recognized $444,000 of other operating revenue from forgiveness of its Paycheck Protection Program loan and accrued interest.
Cash flow, balance sheet, debt and liquidity
- Net cash provided by operating activities was $1.9 million for the nine months ended March 31, 2021, compared with $351,000 in the prior-year period.
- Net cash provided by investing activities was $6.2 million, including $22.4 million of proceeds from investment sales and $16.0 million of purchases of available-for-sale and held-to-maturity investments.
- Ending cash, cash equivalents and restricted cash totaled $10.5 million, including $9.5 million of unrestricted cash and $1.0 million of restricted cash.
- Total assets were $61.1 million, compared with $18.8 million at June 30, 2020. Shareholders’ equity was $50.6 million, compared with $16.8 million.
- Current assets were $19.9 million and current liabilities were $5.8 million, producing approximately $14.1 million of net working capital and a 3.4-to-1 current ratio.
- The company had no borrowings outstanding at March 31, 2021. Its $1.0 million credit facility was unused, secured by $1.0 million of restricted cash, and scheduled to expire May 31, 2021. Management intended to renew it annually.
- Investments in securities at fair value totaled $42.4 million, or 69.5% of total assets. The portfolio included approximately $16.5 million of HIVE convertible debentures and $12.6 million of HIVE warrants.
Material changes versus the prior comparable period
- Revenue growth was driven by a significant expansion in ETF assets under management, particularly the Jets ETF.
- The company shifted from prior-year operating and investment losses to substantial operating income and investment gains.
- Corporate investment balances increased materially, and the investment portfolio became more exposed to market, cryptocurrency and valuation volatility.
- Cash and total assets increased substantially, while the company remained effectively debt-free after PPP loan forgiveness.
- USGIF advisory and administrative agreements were renewed through September 2021; ETF advisory contracts also expire in September 2021, and management expects renewal.
- The company repurchased 19,900 Class A shares for $127,000 during the quarter and 35,996 shares for $189,000 year to date. The repurchase authorization permits up to $2.75 million of purchases during calendar 2021.
Outlook, risks and unusual items
- Management stated that current cash, investments and available financing should be sufficient for foreseeable operating needs. Investment purchases, dividends and share repurchases are discretionary and may be reduced or discontinued.
- COVID-19 remains a material risk because market declines can reduce assets under management, advisory revenue and the value of corporate investments. The filing does not provide a reliable estimate of the pandemic’s future financial impact.
- Investment income is inherently volatile. A significant portion of the quarter’s and year-to-date earnings came from unrealized gains, which may reverse with market conditions.
- The HIVE-related investments and the equity-method investment in Galileo New Economy Fund expose the company to significant cryptocurrency, technology, foreign currency and valuation risks.
- A hypothetical 25% change in the fair value of equity securities would have resulted in an estimated after-tax increase or decrease in net income of approximately $4.9 million.
- The company has contractual and voluntary fee waivers for certain funds. Fees waived or expenses borne totaled $153,000 for the quarter and $554,000 for the nine months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Jets ETF’s unusually large asset inflows and resulting advisory revenue are sustainable.
- The current market value, liquidity and concentration of the HIVE debentures and warrants, and the sensitivity of earnings to cryptocurrency-related securities.
- The proportion of reported earnings attributable to realized and unrealized investment gains rather than recurring advisory operations.
- Renewal of the ETF and USGIF advisory contracts in September 2021 and continuation of applicable fee waivers.
- Renewal of the $1.0 million credit facility after its May 31, 2021 expiration date.
- The board’s continuation of the $0.0050 monthly dividend after June 2021 and any changes to the share-repurchase program.
- Future tax effects from realized and unrealized investment gains and the $4.7 million deferred tax liability reported at March 31, 2021.