U.S. Global Investors, Inc. Form 10-Q Summary
Business context and reporting period
This filing is a quarterly report for the nine and three months ended March 31, 2020, filed May 14, 2020. Although the request metadata identifies “2019 Q3,” the source filing clearly reports fiscal 2020 third-quarter results. U.S. Global Investors provides investment management and administrative services for mutual funds and ETFs and invests corporate cash and capital for its own account.
Continuing operations comprise investment management services and corporate investments. The company sold its 65% interest in Galileo Global Equity Advisors Inc. effective March 2, 2020; Galileo results are presented as discontinued operations.
Key financial metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Operating revenues | $914,000, versus $857,000 | $2.605 million, versus $2.694 million |
| Operating loss | $(979,000), versus $(672,000) | $(2.158) million, versus $(1.976) million |
| Loss from continuing operations | $(1.557) million, versus income of $892,000 | $(5.962) million, versus $(3.678) million |
| Net income attributable to U.S. Global | $(1.612) million, or $(0.11) per share, versus $779,000, or $0.05 | $(6.182) million, or $(0.41) per share, versus $(3.581) million, or $(0.24) |
| Net cash provided by operating activities | Not separately provided for the quarter | $351,000, versus cash used of $807,000 |
Quarterly operating revenue increased 6.7%, primarily from higher ETF advisory fees and lower performance fees paid to USGIF funds. Nine-month operating revenue declined 3.3% because of lower average assets under management and higher performance fees paid.
Operating expenses increased 23.8% in the quarter to $1.893 million and 2.0% for the nine months to $4.763 million. Quarterly general and administrative expense increased 44.9%, primarily because of business-development costs associated with growth in ETF assets.
Investment loss was $441,000 in the quarter and $3.922 million for the nine months, compared with investment income of $2.1 million and investment loss of $2.231 million, respectively, in the comparable periods. The nine-month investment loss included approximately $4.0 million of unrealized losses. Equity-method investment losses were $91,000 in the quarter and $146,000 year to date.
Balance sheet, liquidity, debt and cash flow
- March 31, 2020 total assets were $16.719 million, compared with $23.744 million at June 30, 2019.
- Cash and cash equivalents were $2.086 million; restricted cash was $1.025 million. Total cash, cash equivalents and restricted cash were $3.111 million.
- Securities at fair value were $9.480 million, down from $15.187 million at June 30, 2019. Their cost basis was $12.928 million, resulting in $3.448 million of unrealized losses.
- Total liabilities were $1.408 million, and shareholders’ equity attributable to U.S. Global was $15.311 million. The company had no drawn borrowings at March 31, 2020, apart from lease liabilities.
- Management reported approximately $8.8 million of net working capital and a 7.5-to-1 current ratio. Cash and unrestricted marketable securities totaled approximately $11.4 million.
- The $1 million working-capital credit facility was undrawn and collateralized by restricted cash. It was scheduled to expire May 31, 2020, with management intending to renew it annually.
- Nine-month investing cash flow was positive $681,000, including $746,000 of proceeds from the Galileo sale. Financing cash flow was negative $412,000, including $340,000 of dividends and $74,000 of share repurchases.
Material changes versus prior comparable periods
- Quarterly results shifted from $779,000 of attributable net income to a $1.612 million loss, driven principally by the reversal from investment gains to investment losses and higher operating expenses.
- Nine-month attributable loss increased to $6.182 million from $3.581 million.
- Assets under management, including USGIF and ETFs, were $665.1 million at March 31, 2020, up 32.0% from $503.8 million at March 31, 2019 and 30.4% from $510.1 million at June 30, 2019. The increase was primarily attributable to inflows into the U.S. Global Jets ETF.
- USGIF ending assets under management declined to $318.3 million from $418.9 million a year earlier, reflecting market depreciation and net shareholder redemptions. Nine-month average USGIF assets declined to $417.8 million from $438.4 million.
- Galileo was sold for approximately $746,000, producing a realized gain of approximately $151,000. A $228,000 foreign-currency loss was reclassified from accumulated other comprehensive income upon the sale.
- The company adopted the new lease standard on July 1, 2019, increasing assets and liabilities by less than $400,000 at adoption. March 31, 2020 right-of-use assets were $105,000 and lease liabilities totaled $105,000.
- The company repurchased 69,420 Class A shares for $68,000 during the quarter and 72,820 shares for $74,000 during the nine months.
Guidance, outlook, risks and unusual items
- Management provided no formal earnings or revenue guidance. It expects the USGIF and ETF advisory contracts, both expiring in September 2020, to be renewed.
- COVID-19 caused substantial market volatility and may reduce assets under management, fee revenue and the value of corporate investments. Management stated that the duration and severity of the impact cannot be reasonably estimated.
- The company’s corporate portfolio has significant exposure to volatile investments, including HIVE Blockchain Technologies, whose value was approximately $1.3 million at March 31, 2020, compared with $3.6 million at June 30, 2019. A 25% change in securities prices would change the fair value of securities at fair value by approximately $2.4 million.
- The company holds approximately $150,000 in an equity-method investment concentrated in technology and cryptocurrency-related assets, which generated a $146,000 loss for the nine months.
- Fee waivers and expense reimbursements for USGIF totaled $407,000 for the nine months and $141,000 for the quarter. A contractual expense limitation for the Near-Term Tax Free Fund extends through April 2021; other waivers are voluntary and may continue to fluctuate.
- The company received approval on April 12, 2020 for a $442,000 Paycheck Protection Program loan at 1% interest, maturing April 12, 2022. Forgiveness depends on satisfying applicable payroll, staffing and eligible-expense requirements.
- Management identified pandemic, market, credit, liquidity, foreign-currency, regulatory, operational and investment-concentration risks. The company stated that disclosure controls and internal control over financial reporting were effective as of March 31, 2020.
- The board authorized monthly dividends of $0.0025 per share through June 2020. Continuation after June 2020 remains subject to board approval and financial conditions.
Important facts for investors to verify
- Whether COVID-19-related market declines materially reduced assets under management, advisory revenue and corporate investment values after March 31, 2020.
- The current status and forgiveness qualification of the $442,000 PPP loan.
- Renewal of the $1 million credit facility and the USGIF and ETF advisory contracts.
- The sustainability of dividends, share repurchases and fee waivers given the company’s continuing operating losses.
- Subsequent valuation changes in HIVE, other cryptocurrency- and technology-related investments, and the remaining corporate investment portfolio.
- Whether ETF asset growth, particularly in the Jets ETF, persists or reverses as market conditions and investor flows change.