U S GLOBAL INVESTORS INC quarterly report, Q3 FY2022

U.S. Global Investors, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended March 31, 2022. The filing is dated May 9, 2022. The request metadata references “2021 Q3,” but the filing clearly covers fiscal 2022 third quarter.

Business Context

U.S. Global Investors provides investment management services to exchange-traded funds and U.S. Global Investors Funds, and invests corporate cash for its own account. Advisory revenue is substantially dependent on assets under management (AUM), investment performance, market conditions and investor flows.

Total AUM was approximately $4.1 billion at March 31, 2022, down $537.0 million, or 11.7%, from March 31, 2021, and down $161.8 million, or 3.8%, from June 30, 2021.
Average AUM for the nine months ended March 31, 2022 was $4.0 billion, compared with $3.0 billion in the prior-year period.
The company operates in investment management services and corporate investments.

Financial Performance and Metrics

Metric	Nine Months Ended March 31, 2022	Nine Months Ended March 31, 2021	Three Months Ended March 31, 2022	Three Months Ended March 31, 2021
Operating revenue	$19.3 million	$14.3 million	$6.2 million	$6.4 million
Operating income	$8.3 million	$4.3 million	$2.5 million	$3.3 million
Income before taxes	$6.3 million	$35.4 million	$(1.1) million	$11.7 million
Net income (loss)	$5.1 million	$27.2 million	$(846,000)	$8.6 million
Diluted EPS	$0.34	$1.81	$(0.06)	$0.57
Net cash provided by operating activities	$9.1 million	$1.9 million	Not separately provided	Not separately provided

Operating margin was approximately 43.2% for the nine-month period, compared with 30.1% in the prior-year period. Quarterly operating margin was approximately 40.8%, compared with 51.8% in the prior-year quarter. Net earnings were significantly affected by volatile corporate investment results.

Liquidity, Capital Resources and Balance Sheet

Cash and cash equivalents were $26.8 million at March 31, 2022, compared with $14.4 million at June 30, 2021.
Total cash, cash equivalents and restricted cash were $27.8 million, compared with $15.4 million at June 30, 2021.
Net working capital was approximately $31.8 million, and the current ratio was 7.6 to 1.
Total assets were $62.5 million and shareholders’ equity was $57.2 million at March 31, 2022.
The company had total liabilities of $5.3 million, including $507,000 of deferred tax liabilities. No funded debt was outstanding.
The company had access to a $1.0 million credit facility, secured by restricted cash, which was unused at March 31, 2022. The facility was scheduled to expire May 31, 2022, and management intended to renew it annually.
Nine-month cash flow included $4.3 million of net cash from investing activities and $1.1 million of cash used in financing activities, including $901,000 of dividends and $233,000 of share repurchases.

Material Changes Versus the Prior Comparable Period

Nine-month operating revenue increased 34.6%, primarily from higher ETF advisory fees, particularly fees associated with the JETS ETF and newer ETF products.
Quarterly operating revenue decreased 2.8%, primarily because of lower USGIF average AUM and unfavorable performance-fee adjustments.
Nine-month operating expenses increased 9.3%; general and administrative expenses rose $1.4 million, partly offset by a $669,000 decline in employee compensation.
Corporate investment results shifted from $30.1 million of investment income in the prior-year nine-month period to a $2.0 million loss in the current period. The current period included unrealized losses on equity securities and embedded derivatives.
Quarterly investment results shifted from $8.4 million of income to a $3.5 million loss.
Accumulated other comprehensive income declined to $4.8 million from $6.6 million at June 30, 2021, largely due to losses on available-for-sale investments.
The company repurchased 43,591 Class A shares for $233,000 during the nine-month period and increased its annual repurchase authorization from $2.75 million to $5.0 million.
The monthly dividend was $0.0075 per share from October 2021 through March 2022. The board authorized continuation through June 2022, subject to future review.

Investments and Unusual Items

Investments carried at recurring fair value totaled $25.2 million at March 31, 2022, or approximately 40.3% of total assets, compared with $35.3 million at June 30, 2021.
A significant portion of the investment portfolio consisted of Level 3 HIVE Blockchain Technologies securities, including warrants valued at $4.8 million and convertible debentures valued at $12.7 million.
HIVE-related securities were subject to significant cryptocurrency and equity-price volatility. The company recognized $2.1 million of losses on embedded derivatives during the nine-month period.
The company’s equity-method investment in Galileo New Economy Fund LP was dissolved during the quarter. The company received $85,000 in cash and securities valued at approximately $228,000.
The company received $90,000 of consulting fees from HIVE during the nine-month period. Frank Holmes serves as HIVE’s executive chairman and held HIVE shares and options.
The company’s former PPP loan of approximately $442,000 was fully forgiven in fiscal 2021; no balance remained.

Guidance, Outlook and Risks

Management did not provide quantitative earnings or revenue guidance.
Management believes existing cash, investments and available financing are sufficient for foreseeable operating needs.
Investment management revenue remains sensitive to market declines, changes in AUM, redemptions, performance fees, interest rates, foreign currency movements and regulatory or competitive pressures.
COVID-19, inflation, geopolitical developments including Russia-Ukraine hostilities, market volatility and adverse economic conditions could reduce AUM, advisory revenue, investment values, cash flow and profitability.
Cryptocurrency-related investments and Level 3 valuations create material valuation and liquidity risk. A 25% change in equity prices was estimated to affect after-tax net income by approximately $2.5 million for equity securities and embedded derivatives combined.
Disclosure controls and procedures were ineffective as of March 31, 2022 because of a material weakness involving review of tax-related journal entries. Management was implementing a remediation plan.
A prior material weakness involving valuation controls for complex investments was considered remediated as of December 31, 2021.
USGIF and U.S.-based ETF advisory contracts had been renewed through September 2022.

Most Important Facts to Verify

Whether the tax-related internal-control material weakness was remediated and whether additional corrections or restatements were required.
Current AUM, ETF flows and the effect of market performance on advisory revenue after March 31, 2022.
Updated fair values, valuation assumptions and concentration risk for HIVE securities and other Level 3 investments.
Whether the $1.0 million credit facility was renewed after its May 31, 2022 expiration date.
Whether the $0.0075 monthly dividend continued beyond June 2022 and whether share repurchases continued under the expanded authorization.
Any subsequent changes in COVID-19, inflation, interest-rate, foreign-exchange or geopolitical conditions affecting markets and corporate investments.