U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, the first quarter of fiscal 2021. The filing was signed November 5, 2020. The company provides investment management services to mutual funds and ETFs and invests for its own account. Results exclude the Canadian Galileo business, which was sold on March 2, 2020 and reported as discontinued operations.
Financial Performance and Position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Operating revenues | $3.245 million | $0.804 million | +303.6% |
| Operating income (loss) | $0.937 million | $(0.668) million | Improved |
| Investment income (loss) | $0.998 million | $(3.030) million | Improved |
| Income from continuing operations | $1.944 million | $(3.479) million | Improved |
| Net income attributable to U.S. Global | $1.944 million | $(3.567) million | Improved by approximately $5.5 million |
| Diluted EPS | $0.13 | $(0.24) | Improved |
| Net cash from operating activities | $0.906 million | $0.061 million | Improved |
Operating margin was approximately 28.9% in Q1 FY2021, compared with a negative margin in the prior-year period. Net income benefited materially from approximately $994,000 of net unrealized gains on investments still held at quarter-end. Operating expenses increased 56.8% to $2.308 million, primarily because of higher ETF expenses, business development costs and employee bonuses.
- Assets under management: Approximately $2.2 billion at September 30, 2020, compared with $498.0 million a year earlier and $1.7 billion at June 30, 2020. The increase was driven primarily by inflows into the U.S. Global Jets ETF.
- Investments: Securities at fair value totaled $12.6 million, or 60.5% of total assets. Other investments totaled $1.3 million and equity-method investments totaled $182,000.
- Balance sheet: Total assets were $20.789 million and shareholders’ equity was $18.600 million at September 30, 2020.
- Liquidity: Cash and cash equivalents were $2.623 million, restricted cash was $1.000 million, and current assets were $11.410 million versus current liabilities of $2.130 million. Net working capital was approximately $9.3 million and the current ratio was 5.4 to 1.
- Debt: The company had a $442,000 PPP loan classified as current, bearing 1% interest, and had applied for forgiveness. It also had an unused $1.0 million revolving credit facility collateralized by $1.0 million of restricted cash.
- Cash flows: Operating cash flow was $906,000. Investing activities used $130,000, financing activities used $114,000, including $113,000 of dividends, and cash, cash equivalents and restricted cash increased by $662,000.
Material Changes Versus the Prior Comparable Period
- Advisory fees increased to $3.195 million from $760,000. ETF advisory fees rose to $2.290 million from $121,000, primarily because of higher average ETF assets, especially in the Jets ETF.
- USGIF advisory fees increased to $896,000 from $836,000. USGIF performance fees were $9,000 in the current period versus $197,000 paid out in the prior-year period.
- Operating expenses rose by $836,000, including increases of $560,000 in general and administrative expenses and $250,000 in employee compensation and benefits.
- Investment results changed from a $3.030 million loss to $998,000 of income, primarily because of changes in unrealized gains and losses on corporate investments, including cryptocurrency-related securities.
- The prior-year quarter included a $136,000 loss from discontinued Canadian operations; the current quarter had no discontinued-operations activity.
- Fees waived or expenses borne for USGIF increased to $216,000 from $144,000.
- The company declared and paid monthly dividends of $0.0025 per share and repurchased 1,000 class A shares for $2,000 during the quarter.
Outlook, Risks and Unusual Items
- Management expects USGIF advisory and administrative contracts, renewed through September 2021, to be renewed again. ETF advisory contracts also expire in September 2021, and management anticipates renewal.
- Management stated that available cash, marketable securities and financing resources should be sufficient for foreseeable operating needs. Cash and marketable securities available for current activities totaled approximately $15.2 million.
- The COVID-19 pandemic remains a significant risk to financial markets, assets under management, corporate investments, revenues, cash flows and financial position. The company could not reasonably estimate the duration or severity of the impact.
- Investment income is inherently volatile. The portfolio includes concentrated exposure to HIVE Blockchain Technologies, cryptocurrency-related securities and other Canadian investments. The company identified HIVE at an approximate fair value of $2.7 million at quarter-end.
- A hypothetical 25% change in the value of securities at fair value would change their aggregate value from $12.571 million to approximately $15.714 million or $9.428 million. This sensitivity is not a forecast.
- The PPP loan forgiveness application remained unresolved; the filing provides no assurance that forgiveness would be granted.
- The company maintained disclosure controls and procedures that management concluded were effective, and reported no material change in internal control over financial reporting.
- The board authorized the $0.0025 monthly dividend through December 2020, subject to future review. The share repurchase program was authorized through December 31, 2020, with up to $2.75 million available for calendar-year repurchases.
Important Facts for Investors to Verify
- Whether ETF assets under management, particularly the Jets ETF, remain at elevated levels and continue to support advisory revenue.
- The market value and concentration of HIVE, cryptocurrency-related and other corporate investments, and the resulting effect on earnings and equity.
- The outcome of the PPP loan forgiveness application and any resulting cash obligation.
- Continuation of the monthly dividend and share repurchase program after their stated authorization periods.
- Renewal of the USGIF and ETF advisory contracts in September 2021.
- The effect of COVID-19-related market volatility, fee waivers and potential changes in assets under management on future revenue and margins.
- Future adoption effects of accounting standards under evaluation, including credit-loss and income-tax guidance; the filing does not provide a quantified expected impact.