U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019, the first quarter of fiscal 2020. Comparative period is the three months ended September 30, 2018. The filing was signed November 7, 2019.
Business context
U.S. Global Investors provides investment management and administrative services through U.S. Global Investors Funds, two ETFs, and its 65%-owned Canadian subsidiary, Galileo Global Equity Advisors. The company also invests corporate funds in marketable securities, including technology, cryptocurrency-mining, natural-resource, and other investments. Revenue is substantially influenced by assets under management, market performance, redemptions, and performance-fee adjustments.
Financial performance and condition
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Operating revenue | $0.904 million | $1.223 million | Down 26.1% |
| Operating expenses | $1.719 million | $1.906 million | Down 9.8% |
| Operating loss | $0.815 million | $0.683 million | Loss increased $0.132 million |
| Investment loss | $3.020 million | $0.907 million | Loss increased $2.113 million |
| Net loss attributable to U.S. Global | $3.567 million | $1.149 million | Loss increased $2.418 million |
| Diluted loss per share | $0.24 | $0.08 | Loss increased $0.16 |
| Net cash used in operating activities | $0.208 million | $0.289 million | Use decreased $0.081 million |
Margins: Operating margin was approximately negative 90.2% versus negative 55.8% in the prior-year quarter. Net loss attributable to the company represented approximately negative 394.6% of revenue versus negative 94.0% previously, primarily because of investment losses.
- Assets under management were $498.0 million at September 30, 2019, down 10.9% from $559.2 million a year earlier and down from $510.1 million at June 30, 2019. Average assets under management were $513.8 million, compared with $579.3 million.
- USGIF assets under management declined to $415.0 million from $448.0 million at September 30, 2018, primarily from net shareholder redemptions of $16.1 million, partially offset by $5.8 million of market appreciation.
- Galileo assets under management declined 48.2% year over year to $21.4 million; average assets under management declined to $27.0 million from $44.3 million.
- Advisory fees declined $0.310 million, reflecting lower average assets, ETF fee reductions, and $0.197 million of USGIF performance fees paid out versus $0.086 million in the prior-year period.
- The $3.020 million investment loss included approximately $3.062 million of unrealized losses on fair-valued securities. Management stated that most of the loss related to technology and cryptocurrency-mining equity securities.
- Cash and cash equivalents were $2.618 million, and restricted cash was $1.025 million. Unrestricted securities at fair value were approximately $10.9 million. Net working capital was approximately $10.7 million, with a current ratio of 8.9 to 1.
- Total assets were $20.037 million, compared with $23.736 million at June 30, 2019. Total shareholders’ equity was $18.432 million, including $18.017 million attributable to U.S. Global shareholders.
- The company had no borrowings and no long-term liabilities other than lease liabilities. Lease liabilities totaled $0.349 million after adoption of the new lease standard.
Material changes versus the prior comparable period
- Revenue declined $0.319 million as lower assets under management reduced base advisory, ETF, and administrative-service fees.
- Operating expenses declined $0.187 million, mainly from lower general and administrative expenses and employee compensation.
- Investment losses increased $2.113 million, driven by unrealized losses compared with $0.951 million of unrealized losses and a $0.029 million impairment in the prior-year quarter.
- Net loss attributable to U.S. Global increased from $1.149 million to $3.567 million.
- Operating cash usage improved to $0.208 million from $0.289 million. Financing cash usage was $0.115 million, primarily dividends of $0.113 million.
- The company adopted the new lease accounting standard on July 1, 2019, recording right-of-use assets and lease liabilities and increasing total assets and liabilities by less than $0.4 million at adoption.
- The company’s corporate securities at fair value declined to $11.625 million from $15.187 million at June 30, 2019, while the securities’ cost basis was $14.140 million.
Outlook, risks, contingencies, and unusual items
- Management expects investment income and losses to remain volatile because of market fluctuations, investment timing, foreign currency movements, and exposure to technology and cryptocurrency-related securities.
- The HIVE Blockchain Technologies investment was valued at approximately $1.8 million at September 30, 2019, down from $3.6 million at June 30, 2019. Management identified cryptocurrency markets and related stocks as high-risk and potentially significantly volatile.
- A hypothetical 25% change in the fair value of securities at fair value would change their estimated value from $11.625 million to approximately $14.531 million or $8.719 million.
- USGIF advisory and administrative contracts were renewed through September 2020, and ETF advisory contracts expire in September 2020. Management anticipates renewal, but renewal is not assured.
- The company has a $1.0 million working-capital credit facility, collateralized by restricted cash, expiring May 31, 2020. It was unused, and the company was in compliance with its covenants.
- A monthly dividend of $0.0025 per share was authorized through December 2019. Continuation is subject to Board approval and the company’s financial condition and business outlook.
- The company may repurchase up to $2.75 million of class A shares through December 31, 2019. It repurchased 1,400 shares for $3,000 during the quarter.
- Management believes existing cash, unrestricted investments, and available financing will satisfy foreseeable operating needs. However, revenue remains sensitive to market conditions, redemptions, fee waivers, and performance fees.
- Management reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective as of September 30, 2019.
Important facts for investors to verify
- Whether assets under management stabilize or continue declining, particularly at USGIF and Galileo.
- The market value and concentration of corporate investments, especially HIVE and other technology or cryptocurrency-related holdings.
- Whether recurring advisory revenue can cover operating expenses without relying on investment gains.
- The continuation of the monthly dividend after December 2019 and any future share repurchases.
- Renewal of the $1.0 million credit facility and investment advisory contracts expiring in 2020.
- The effect of future market volatility, foreign currency changes, fee waivers, performance-fee adjustments, and the expected adoption of the credit-loss accounting standard.
- The filing’s statement that legal matters are not expected to have a material adverse effect, while acknowledging that some claims or proceedings could be resolved unfavorably.