Business Context and Reporting Period
U.S. Global Investors, Inc. filed this Form 10-Q for the quarter ended March 31, 2018, covering the three and nine months ended that date. The request metadata identifies “2017 Q3,” but the filing period is fiscal 2018 third quarter. The company provides investment management services in the United States and Canada and invests for its own account. It owns 65% of Galileo Global Equity Advisors Inc.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Operating revenue | $1.417 million, down 15.1% | $4.900 million, down 7.4% |
| Operating loss | $0.590 million | $1.218 million |
| Net income attributable to U.S. Global | $(1.060) million; $(0.07) per share | $0.959 million; $0.06 per share |
| Operating margin | Approximately (41.6)% | Approximately (24.9)% |
| Net margin attributable to U.S. Global | Approximately (74.8)% | Approximately 19.6% |
| Net cash provided by operating activities | Not separately provided | $1.920 million |
| Cash and cash equivalents | $4.057 million at March 31, 2018 | |
| Restricted cash | $1.000 million | |
| Marketable securities at fair value | $20.098 million | |
| Total assets | $33.934 million | |
| Total liabilities | $3.058 million, including $1.564 million of deferred taxes | |
| Shareholders’ equity | $30.876 million, including noncontrolling interest |
Net working capital was approximately $13.8 million and the current ratio was 10.3 to 1. The company had no borrowings as of March 31, 2018. A $1.0 million credit facility was available, fully collateralized by restricted cash, and remained unused. Cash, cash equivalents and marketable securities represented approximately 71.2% of total assets.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined $252,000, primarily because advisory fees fell $253,000 as assets under management decreased and USGIF performance adjustments reduced fees.
- Third-quarter operating expenses increased $147,000, or 7.9%, driven by higher compensation, ETF-related costs, travel and advertising.
- Third-quarter net loss attributable to U.S. Global increased to $1.060 million from $33,000, mainly because of a $927,000 loss from equity-method investments and lower operating revenue.
- For the nine-month period, net income attributable to U.S. Global increased to $959,000 from $238,000. The improvement was driven primarily by $1.804 million of income from equity-method investments, partly offset by lower revenue and higher expenses.
- Assets under management declined to $639.1 million at March 31, 2018, from $697.3 million a year earlier and $711.9 million at June 30, 2017. Average assets under management for the nine months declined to $687.9 million from $757.1 million.
- Galileo assets under management declined 46.9% year over year to $52.6 million, although they increased from $47.8 million at June 30, 2017.
- Investments at fair value increased to $20.1 million from $13.1 million at June 30, 2017, largely because of appreciation in the company’s HIVE Blockchain Technologies investment.
- Accumulated other comprehensive income increased to $6.189 million from $264,000 at June 30, 2017, primarily from unrealized gains on available-for-sale securities.
Cash Flow, Investments and Capital Allocation
- Nine-month operating cash flow was $1.920 million, compared with $496,000 in the prior-year period.
- Investing activities used $1.351 million, including $826,000 for an equity-method investment and $2.420 million for available-for-sale securities, partly offset by $1.462 million of proceeds from an equity-method investment.
- Financing activities used $475,000, including $341,000 of dividends and $139,000 of share repurchases.
- The board authorized monthly dividends of $0.0025 per share through June 2018, subject to future board consideration. The company repurchased 47,947 Class A shares for $139,000 during the nine months.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that current cash reserves, investments and available financing should be sufficient for foreseeable operating needs. No formal earnings or revenue guidance was provided.
- The investment portfolio is concentrated in volatile assets. HIVE was valued at approximately $9.8 million at March 31, 2018, compared with a $2.4 million cost basis. The company also had indirect HIVE exposure through Galileo funds.
- Cryptocurrency and blockchain-related investments are identified as a significant risk. A 25% change in the value of available-for-sale securities would have changed shareholders’ equity, net of tax, by approximately $2.722 million based on the filing’s sensitivity analysis.
- Equity-method investment results were highly volatile: the Galileo funds contributed $1.804 million of income for the nine months but produced a $927,000 loss in the third quarter.
- The company adopted the lower U.S. corporate tax rate resulting from the Tax Cuts and Jobs Act and recorded provisional tax amounts. The accounting for the Act was incomplete at March 31, 2018, and final impacts may differ.
- The $2.0 million note receivable was paid in full after quarter-end, with accrued interest and no gain or loss. A $1.7 million corporate debt investment was expected to be redeemed at par in May 2018.
- The company agreed to limit certain fund expenses and waived or absorbed $482,000 of USGIF fees and expenses during the nine-month period. Future waivers are discretionary or contractually limited in certain cases.
- Management stated that legal or other contingencies were not expected to have a material adverse effect, although unfavorable resolutions remain possible.
- Disclosure controls and procedures were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether the decline in assets under management and advisory revenue continues, particularly for USGIF and Galileo.
- The market value and concentration of HIVE and other cryptocurrency-related holdings, including direct and equity-method exposure.
- The sustainability of quarterly dividends and the company’s share repurchase activity.
- The final accounting effects of the Tax Cuts and Jobs Act and the adoption of new financial reporting standards, especially fair-value treatment for equity investments.
- Renewal of the $1.0 million credit facility after its May 31, 2018 expiration and compliance with related covenants.
- The timing and proceeds from the post-quarter-end note repayment and corporate debt redemption.