U.S. Global Investors, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended September 30, 2022, the company’s fiscal first quarter of fiscal 2023. U.S. Global Investors provides investment management and administrative services to ETFs and U.S. Global Investors Funds and invests corporate funds for its own account. The filing was dated November 10, 2022.
Financial performance and condition
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Operating revenues | $4.412 million | $6.521 million | Down 32.3% |
| Operating income | $1.585 million | $2.867 million | Down 44.7% |
| Net income | $118,000 | $2.390 million | Down approximately $2.3 million |
| Diluted EPS | $0.01 | $0.16 | Down $0.15 |
| Net cash from operating activities | $1.175 million | $2.402 million | Down $1.227 million |
| Ending cash, cash equivalents and restricted cash | $24.287 million | $20.755 million | Up $3.532 million year over year |
Operating margin was approximately 35.9%, compared with 44.0% in the prior-year quarter. Net margin was approximately 2.7%, compared with 36.6%.
- Advisory fees decreased to $4.377 million from $6.470 million. ETF advisory fees declined to $3.913 million from $5.316 million, while USGIF advisory fees declined to $610,000 from $966,000. USGIF performance fees were negative $146,000 versus positive performance fees of $188,000.
- Operating expenses declined 22.6% to $2.827 million, primarily because employee compensation and benefits fell 38.9% to $1.175 million. No stock-based compensation expense was recorded in the current quarter, compared with $388,000 in the prior-year quarter.
- Investment loss was $1.447 million, compared with a $34,000 loss in the prior-year quarter. The current period included $1.917 million of unrealized equity-security losses, $469,000 of realized gains on debt-security principal payments, and $1.839 million of downward adjustments or impairments on other investments.
- Total assets were $59.323 million and shareholders’ equity was $55.667 million at September 30, 2022. Net working capital was approximately $34.6 million, with a current ratio of 10.6 to 1.
- Investments carried at fair value on a recurring basis totaled $27.0 million, or approximately 45.6% of total assets. Other investments totaled $2.6 million and held-to-maturity debt investments totaled $1.0 million.
- The company had $23.287 million of unrestricted cash and $1.0 million of restricted cash. The $1.0 million credit facility was unused, and the company reported compliance with its covenants. Lease liabilities totaled approximately $87,000; the filing does not identify material funded debt.
Material changes versus the prior comparable period
- Total assets under management declined 45.9% year over year to approximately $2.3 billion at September 30, 2022, from $4.3 billion. Average assets under management declined to $2.9 billion from $4.0 billion.
- Assets under management also declined 20.9% from approximately $2.9 billion at June 30, 2022, primarily reflecting market depreciation and net redemptions.
- USGIF assets under management decreased to $326.8 million from $445.1 million at September 30, 2021. The company reported both market depreciation and net shareholder redemptions during the quarter.
- Net cash provided by operating activities decreased to $1.175 million from $2.402 million. Investing activities provided $261,000, while financing activities used $463,000, including $336,000 of dividends and $133,000 of share repurchases.
- Other comprehensive loss was $491,000, reducing accumulated comprehensive income to $3.785 million from $4.276 million at June 30, 2022.
Outlook, risks, contingencies and unusual items
- The filing provides no formal revenue, earnings or assets-under-management guidance. Management stated that current cash, investments and available financing should be sufficient for foreseeable operating needs.
- The Board authorized a monthly dividend of $0.0075 per share through December 2022, subject to future review. The dividend remains discretionary.
- The annual share-repurchase authorization is $5.0 million. The company repurchased 39,965 Class A shares for $133,000 during the quarter; the plan may be suspended or discontinued.
- Management identified market, credit, liquidity, interest-rate, foreign-currency, inflation, geopolitical and regulatory risks. Declines in financial markets could reduce assets under management, fee revenue and the value of corporate investments.
- The company has substantial exposure to HIVE Blockchain Technologies through warrants and convertible debentures. These securities were valued at approximately $13.4 million at September 30, 2022, and use Level 3 valuation inputs, including volatility assumptions. Cryptocurrency-related securities remain highly volatile.
- The $1.0 million credit facility expires May 31, 2023; management intends to renew it annually. The facility is secured by restricted cash and remained undrawn.
- The company waived or absorbed $220,000 of USGIF fees and expenses during the quarter, compared with $158,000 in the prior-year quarter. Future waivers are discretionary and difficult to predict.
- Management stated that no material changes occurred in previously disclosed risk factors. Disclosure controls and procedures were assessed as effective, with no material change in internal control over financial reporting.
- Management believes pending claims and contingencies will not have a material adverse effect, although unfavorable outcomes remain possible. The filing also notes that the effects of COVID-19 or other future outbreaks cannot be reasonably estimated.
Important facts for investors to verify
- Whether assets under management stabilize or continue to decline, particularly in the ETF and USGIF businesses.
- The valuation, liquidity and concentration risk of the HIVE warrants and convertible debentures, including sensitivity to cryptocurrency and HIVE share-price volatility.
- The sustainability of the $0.0075 monthly dividend given sharply lower earnings and discretionary dividend authority.
- The extent and duration of fee waivers and expense reimbursements, including the contractual caps scheduled through April 2023.
- Renewal of the $1.0 million credit facility before its May 31, 2023 expiration and continued compliance with its covenants.
- Future realized and unrealized investment gains or losses, which materially affected the quarter’s earnings and may remain volatile.