U.S. Global Investors, Inc. — Form 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarter and six months ended December 31, 2022, representing fiscal 2023 second-quarter results. U.S. Global Investors provides investment management services for ETFs and U.S. Global Investors Funds and invests corporate funds for its own account. The filing was signed June 9, 2023.
Total assets under management were approximately $2.4 billion at December 31, 2022, down 36.4% from $3.8 billion a year earlier and down 17.0% from June 30, 2022.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2022 | Three Months Ended Dec. 31, 2021 | Six Months Ended Dec. 31, 2022 | Six Months Ended Dec. 31, 2021 |
|---|---|---|---|---|
| Operating revenues | $3.728 million | $6.574 million | $8.140 million | $13.095 million |
| Operating income | $908 thousand | $2.939 million | $2.493 million | $5.806 million |
| Operating margin | 24.4% | 44.7% | 30.6% | 44.3% |
| Investment income (loss) | $116 thousand | $1.579 million | $(1.344) million | $1.545 million |
| Net income | $869 thousand | $3.590 million | $976 thousand | $5.980 million |
| Net margin | 23.3% | 54.6% | 12.0% | 45.7% |
| Diluted EPS | $0.06 | $0.24 | $0.07 | $0.40 |
| Cash flow from operations | Not separately provided | Not separately provided | $1.128 million | $5.493 million |
At December 31, 2022, cash and cash equivalents were $23.416 million, restricted cash was $1.000 million, and total assets were $54.951 million. Current assets were $38.740 million versus current liabilities of $2.514 million, producing approximately $36.2 million of net working capital and a 15.4-to-1 current ratio.
Total debt was limited to financing lease liabilities of $80 thousand. The company had access to a $1.0 million working-capital credit facility, secured by restricted cash, but it was undrawn. Shareholders’ equity was $52.380 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter operating revenue declined 43.3%; six-month revenue declined 37.8%, primarily because lower ETF assets reduced base advisory fees.
- Advisory fees declined 43.4% in the quarter and 37.9% year to date. USGIF performance fees changed from income of $141 thousand to a payment of $135 thousand in the quarter, and from income of $329 thousand to a payment of $281 thousand year to date.
- Operating expenses decreased 22.4% in the quarter and 22.5% year to date, principally from lower employee compensation, bonuses, and prior-year stock-option amortization.
- Investment results deteriorated from income of $1.579 million to $116 thousand in the quarter and from income of $1.545 million to a loss of $1.344 million year to date. The changes reflected equity-security losses, including a six-month $1.841 million downward adjustment or impairment related to other investments, and the absence of prior-year equity-security sale gains.
- Other comprehensive loss was $1.248 million in the quarter and $1.734 million year to date, reducing accumulated other comprehensive income to $1.890 million from $3.624 million at June 30, 2022.
- Cash increased $1.102 million from June 30, 2022, while shareholders’ equity decreased $1.784 million, or 3.3%.
- The company repurchased 87,407 Class A shares for $249 thousand during the quarter and 127,372 shares for $382 thousand year to date.
Cash Flow, Investments, Liquidity, and Unusual Items
- Six-month cash generation included $1.128 million from operations and $1.014 million from investing activities, partly offset by $1.040 million used in financing activities. Investing inflows included $1.5 million of principal repayments on available-for-sale debt securities.
- Investments carried at fair value on a recurring basis totaled $21.4 million at December 31, 2022, down from $24.9 million at June 30, 2022. The company also held $2.6 million of other investments and $1.0 million of held-to-maturity debt securities.
- HIVE Blockchain-related warrants and convertible debentures were valued at approximately $8.2 million and represented a significant concentration of Level 3 valuation risk. The remaining principal on the debentures was $9.1 million, with a January 2026 maturity.
- Management states that current cash, investments, and financing capacity should be sufficient for foreseeable operating needs. Dividends and share repurchases are discretionary.
- The monthly dividend was $0.0075 per share through March 2023 and was subsequently authorized through June 2023. The filing states that continuation remains subject to Board approval and business conditions.
Outlook, Risks, Contingencies, and Controls
The filing does not provide quantitative revenue or earnings guidance. Management expects investment income and losses to remain volatile and dependent on market movements, investment opportunities, and transaction timing. Advisory revenue remains sensitive to assets under management, fund performance, redemptions, and market conditions.
- Principal risks include declining or volatile financial markets, inflation and interest rates, geopolitical developments, cryptocurrency-market disruptions, foreign-currency exposure, regulation, competition, and COVID-19 or other pandemic effects.
- The company has indirect cryptocurrency exposure through securities of issuers connected to the cryptocurrency industry and does not intend to invest directly in cryptocurrencies.
- Contractual expense limits for certain funds were extended through April 2024. Fee waivers and expense reimbursements for USGIF totaled $523 thousand for the six months ended December 31, 2022, compared with $319 thousand in the prior-year period.
- Management disclosed that disclosure controls and procedures were not effective as of December 31, 2022 because a material weakness in internal control over financial reporting remained outstanding. The weakness relates to evaluation of third-party valuation specialists, definition of their work scope, and review of their work products. A remediation plan was being developed.
- Management believes existing litigation and contingencies will not have a material adverse effect, although unfavorable outcomes remain possible. The filing does not identify a specific material litigation liability.
- The $1.0 million credit agreement expired May 31, 2023; the company stated it intended to renew it.
Important Facts for Investors to Verify
- Whether assets under management and ETF flows stabilized after the 36.4% year-over-year decline.
- The valuation, liquidity, and credit performance of the HIVE-related Level 3 securities and other concentrated investments.
- Progress and effectiveness of remediation for the disclosed material weakness in internal controls.
- Renewal and terms of the $1.0 million credit facility after its May 31, 2023 expiration.
- The sustainability of dividends and share repurchases given lower operating revenue and earnings.
- The effect of contractual fee waivers and expense caps, including the extension through April 2024.