U S GLOBAL INVESTORS INC quarterly report, Q2 FY2021

U.S. Global Investors, Inc. — Fiscal 2021 Second Quarter 10-Q Summary

Reporting period: Quarter and six months ended December 31, 2020; filed February 4, 2021. The company provides investment management services to mutual funds and ETFs and invests corporate cash for its own account. Results include continuing operations; the Galileo Canadian investment-management business was sold in March 2020 and is presented as discontinued operations.

Financial Performance and Position

Metric	Three months ended Dec. 31, 2020	Three months ended Dec. 31, 2019	Six months ended Dec. 31, 2020	Six months ended Dec. 31, 2019
Operating revenue	$5.2 million	$0.9 million	$8.4 million	$1.7 million
Operating income (loss)	$0.5 million	$(0.5) million	$1.5 million	$(1.2) million
Investment income (loss)	$20.7 million	$(0.5) million	$21.7 million	$(3.5) million
Net income attributable to U.S. Global	$16.7 million	$(1.0) million	$18.6 million	$(4.6) million
Diluted EPS	$1.10	$(0.06)	$1.23	$(0.30)
Net cash provided by operating activities	Not separately provided	Not separately provided	$0.6 million	$0.5 million

Margins: Operating margin was approximately 10.1% for the quarter and 17.3% for the six-month period, compared with negative operating margins in the prior-year periods. Reported net margins were approximately 322.6% and 221.2%, respectively, largely because of substantial investment gains rather than recurring operating revenue.

Advisory fees were $4.7 million for the quarter and $7.9 million for six months, driven primarily by ETF fees. ETF advisory fees were $3.6 million for the quarter and $5.9 million for six months.
Investment income included $15.0 million of realized gains from the sale of the company’s HIVE Blockchain investment and approximately $5.5 million of unrealized gains on securities still held during the quarter.
Total assets under management were approximately $3.5 billion at December 31, 2020, up 550.2% from $543.6 million at December 31, 2019 and 106.3% from $1.7 billion at June 30, 2020. The increase was primarily attributable to inflows into the U.S. Global Jets ETF.
Cash and cash equivalents were $21.6 million, restricted cash was $1.0 million, and total cash, cash equivalents and restricted cash were $22.6 million at December 31, 2020.
Total assets were $42.2 million and shareholders’ equity was $35.1 million, compared with $18.8 million and $16.8 million, respectively, at June 30, 2020.
The company had no outstanding borrowings under its $1.0 million credit facility. The facility is secured by $1.0 million of restricted cash and expires May 31, 2021; management intends to renew it annually.
The approximately $442,000 PPP loan and accrued interest were forgiven, producing $444,000 of other operating revenue and a gain on debt extinguishment.

Material Changes Versus the Prior Comparable Period

Quarterly operating revenue increased 482.3%, while six-month operating revenue increased 397.3%, primarily because of higher ETF assets under management and related unitary management fees.
Quarterly operating expenses increased 232.3%, and six-month expenses increased 142.3%, reflecting higher employee compensation, investment-related bonuses, ETF expenses and business-development costs.
The company moved from losses to substantial profits because of operating income, the $15.0 million realized HIVE gain, unrealized investment gains and improved equity-method investment results.
Corporate investments at fair value totaled $12.5 million at December 31, 2020, versus $11.5 million at June 30, 2020. The portfolio had a cost basis of $10.6 million and unrealized gains of $1.9 million.
Discontinued operations had no impact on current-year results. The prior-year six-month comparison included a $253,000 loss from discontinued operations, including $165,000 attributable to U.S. Global.
The company repurchased 15,096 class A shares for $60,000 during the quarter and declared dividends of approximately $114,000 for the quarter.

Outlook, Risks and Unusual Items

Management stated that COVID-19-related remote-work arrangements had not adversely affected operations, financial reporting systems or internal controls.
COVID-19, market volatility and investor activity remain key risks because advisory revenue depends on assets under management and corporate investment values depend on market prices. The company cannot reasonably estimate the pandemic’s ultimate impact.
Investment income is inherently volatile and may vary with market movements, investment opportunities and transaction timing. A hypothetical 25% decrease in securities at fair value would reduce their reported value from $12.5 million to approximately $9.4 million.
The company has exposure to international markets, foreign currencies, natural resources, technology and cryptocurrency-related investments. Its $654,000 equity-method investment in Galileo New Economy Fund LP is concentrated in technology and cryptocurrency mining and may produce significant earnings volatility.
Fee waivers and expense reimbursements for USGIF totaled $401,000 for the six months ended December 31, 2020, and may continue at management’s discretion. These waivers reduced average fee rates.
Investment advisory and administrative contracts with USGIF and the ETFs expire or require renewal in September 2021. Management anticipates renewal.
In January 2021, after quarter-end, the company invested $15.0 million in HIVE convertible debentures bearing 8% interest and received HIVE warrants. Management reported approximately $6.6 million of cash and cash equivalents after this purchase.
In February 2021, the board increased the monthly dividend to $0.0050 per share for February and March 2021, subject to future board consideration.
Management reported no material changes to previously disclosed risk factors, and disclosure controls were concluded to be effective.

Important Facts for Investors to Verify

Separate recurring investment-management earnings from the unusually large HIVE realized gain and other unrealized investment gains.
Verify the sustainability of ETF asset inflows, particularly in the Jets ETF, and the effect of market performance or redemptions on future advisory fees.
Review the concentration, liquidity and volatility of the company’s corporate investment portfolio, including technology, cryptocurrency and international holdings.
Confirm renewal of the USGIF and ETF advisory contracts in September 2021 and monitor the level of fee waivers and expense reimbursements.
Reconcile post-quarter-end liquidity after the $15.0 million HIVE investment and assess the company’s ability to maintain dividends and share repurchases.
Review the potential impact of COVID-19, market declines, foreign-currency movements and the May 2021 expiration of the credit facility.