U.S. Global Investors, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018, compared with fiscal year 2017. The request metadata identifies “2017 Q4,” but the supplied filing is the fiscal 2018 Form 10-K, not a quarterly filing. The filing was signed September 6, 2018.
Business Context
U.S. Global Investors is a registered investment adviser operating through three segments: U.S. investment management services, Canadian investment management services through its 65%-owned Galileo subsidiary, and corporate investments. Revenue is primarily derived from advisory and administrative fees based on assets under management (AUM), supplemented by investment gains and equity-method investment income.
Total AUM declined to $647.0 million at June 30, 2018, from $759.7 million a year earlier, a 14.8% decrease. Average AUM declined 13.5% to approximately $729 million. The company attributed the decline mainly to redemptions, market depreciation in gold and precious-metals products, lower fixed-income assets, liquidation of offshore clients, and net redemptions in Galileo funds.
Financial Performance and Position
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Operating revenue | $6.261 million | $6.763 million | Down 7.4% |
| Operating expenses | $8.549 million | $7.636 million | Up 12.0% |
| Operating loss | $2.288 million | $873,000 | Loss increased |
| Other income | $3.174 million | $346,000 | Up 817.3% |
| Net income attributable to U.S. Global | $647,000 | $(513,000) | Turned profitable |
| Basic and diluted EPS | $0.04 | $(0.03) | Improved |
| Net cash from operating activities | $(34,000) | $690,000 | Declined |
Advisory fees decreased 7.2% to $6.013 million. USGIF advisory fees fell 20.5% to $3.885 million, while ETF advisory fees increased 96.4% to $701,000 and Galileo recorded $464,000 of performance fees versus none in the prior year. Administrative services fees declined 12.7% to $248,000.
Expenses increased primarily because employee compensation and benefits rose 13.7% to $4.270 million and general and administrative expenses rose 10.6% to $3.866 million. The company reported $1.504 million of investment income and $1.624 million of income from equity-method investments, compared with $346,000 of total other income in fiscal 2017.
At June 30, 2018, cash and cash equivalents were $6.364 million, restricted cash was $1.0 million, and securities at fair value totaled $15.265 million. Net working capital was approximately $15.3 million, the current ratio was 9.7 to 1, and shareholders’ equity totaled $26.060 million, including $25.542 million attributable to U.S. Global. The company had no borrowings and no long-term liabilities other than $1.099 million of deferred taxes. Its $1.0 million credit facility was undrawn.
Material Changes and Unusual Items
- Operating performance weakened: revenue declined while expenses increased, producing a $2.288 million operating loss.
- Reported profitability was supported by volatile non-operating items, including $1.624 million from equity-method investments concentrated in cryptocurrency-related funds and $1.504 million of investment income.
- The company held HIVE Blockchain Technologies shares valued at approximately $5.6 million at year-end, with a $3.1 million gross unrealized gain on available-for-sale securities. Cryptocurrency-related valuations may materially fluctuate.
- A corporate debt investment was redeemed early at par, generating an approximately $638,000 realized gain.
- Offshore advisory clients liquidated during fiscal 2018, reducing related advisory fees from $135,000 to $3,000.
- Cash flow from operations was slightly negative despite reported net income, principally reflecting the noncash equity-method income and changes in receivables and accrued expenses.
- The company paid approximately $455,000 of dividends and repurchased 48,947 class A shares for $141,000 during the fiscal year.
Outlook, Risks, and Contingencies
Management expects the USGIF advisory and administrative agreements, which were subject to renewal in September 2018, to be renewed. The company stated that available cash, investments, and financing should be sufficient for foreseeable operating needs. A monthly dividend of $0.0025 per share was authorized through September 2018, but future dividends remain subject to board discretion.
Key risks include declining AUM, investor redemptions, poor investment performance, intense competition, volatility in gold, natural-resource and emerging-market products, cryptocurrency exposure, foreign-currency risk, regulatory requirements, litigation, cybersecurity incidents, dependence on key personnel, and termination or nonrenewal of client agreements. Advisory contracts generally may be terminated on relatively short notice and are subject to annual renewal.
The company had no material legal proceedings reported. It disclosed approximately $847,000 of contractual obligations, consisting of $621,000 of operating lease obligations and $226,000 of other contractual obligations. It also had a $234,000 note receivable bearing 15% annual interest, with principal repayments scheduled to begin in February 2019.
Effective July 1, 2018, ASU 2016-01 moved changes in fair value of formerly available-for-sale equity investments into earnings; the company reclassified approximately $3.1 million from accumulated other comprehensive income to retained earnings and expects increased earnings volatility. The company had not finalized all tax accounting effects of the Tax Cuts and Jobs Act as of the filing date.
Investor Verification Checklist
- Verify whether the September 2018 renewals of the USGIF advisory and administrative agreements occurred on expected terms.
- Assess the sustainability of reported earnings excluding cryptocurrency-related equity-method income, investment gains, and other volatile items.
- Monitor AUM, redemptions, fund performance, fee waivers, and the continued growth of ETF products.
- Review the valuation and concentration risk of the HIVE investment and other cryptocurrency-related holdings.
- Reconcile negative operating cash flow with reported net income and assess recurring cash generation.
- Confirm the effect of ASU 2016-01 on fiscal 2019 earnings, retained earnings, and investment volatility.
- Consider dividend sustainability, the discretionary nature of future payments, and the remaining share-repurchase authorization.
- Evaluate governance and control risks arising from Frank Holmes’ ownership of 99.79% of voting class C shares and his relationships with HIVE and affiliated funds.