U S GLOBAL INVESTORS INC quarterly report, Q1 FY2019

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U.S. Global Investors, Inc. Form 10-Q Summary

Business context and reporting period

U.S. Global Investors, Inc. is an investment management company with operations in the United States and Canada. Its principal segments are U.S. investment management services, Canadian investment management services through Galileo Global Equity Advisors Inc. (65% owned), and corporate investments. This Form 10-Q covers the three months ended September 30, 2018, the first quarter of fiscal 2019, with comparisons to the three months ended September 30, 2017.

Financial performance and position

  • Operating revenue: $1.223 million, down 17.9% from $1.490 million. Advisory fees were $1.170 million versus $1.433 million; administrative services fees were $53,000 versus $57,000.
  • Operating expenses: $1.906 million, down 3.2% from $1.969 million. The reduction in compensation expense was partly offset by higher general and administrative costs.
  • Operating result: operating loss of $683,000 versus a $479,000 loss. The implied operating margin was approximately negative 55.8%, compared with negative 32.1% in the prior-year quarter.
  • Other income and loss: investment loss was $907,000 versus investment income of $209,000; equity-method loss was $7,000 versus income of $1.513 million.
  • Net result: consolidated net loss was $1.232 million versus net income of $1.236 million. Net loss attributable to U.S. Global Investors was $1.149 million, or $0.08 per diluted share, versus income of $1.270 million, or $0.08 per share.
  • Taxes: the company recorded a $356,000 tax benefit versus $10,000 of tax expense, primarily due to a reduction in a deferred tax liability associated with investment valuation declines.
  • Cash flow: operating activities used $289,000 versus providing $1.966 million. Investing activities provided $10,000 versus using $2.878 million. Financing activities used $114,000 in both periods, including $114,000 of dividends paid in each quarter.
  • Liquidity: September 30 cash and cash equivalents were $5.996 million, with an additional $1.000 million of restricted cash. Marketable securities at fair value totaled $14.315 million. Net working capital was approximately $15.5 million and the current ratio was 13.3 to 1.
  • Debt and credit: the company had no borrowings and no long-term liabilities other than deferred taxes. Its $1 million credit facility was undrawn, collateralized by restricted cash, and subject to covenants with which the company reported compliance.
  • Balance sheet: total assets were $26.858 million and total shareholders’ equity was $24.858 million, compared with $28.932 million and $26.060 million, respectively, at June 30, 2018.
  • Assets under management: period-end total assets under management, including U.S. funds and ETFs, were $559.2 million, down 21.8% from $715.2 million a year earlier and down from $600.3 million at June 30, 2018. Average assets under management were $579.3 million versus $711.0 million.

Material changes versus the prior comparable period

  • Revenue declined primarily because lower market values and shareholder redemptions reduced average assets under management. U.S. Global Investors Funds ended the quarter at $448.0 million versus $590.5 million a year earlier; Galileo assets under management were $41.3 million versus $56.3 million.
  • Market depreciation of U.S. fund assets was $29.2 million in the current quarter, compared with market appreciation of $26.5 million in the prior-year quarter. Net shareholder redemptions increased to $18.2 million from $15.1 million.
  • The company adopted ASU 2016-01 on July 1, 2018. Equity investment fair-value changes formerly reported in other comprehensive income are now generally recognized in earnings. The adoption reclassified approximately $3.1 million of unrealized gains and $1.0 million of related deferred tax expense into retained earnings and is expected to increase earnings volatility.
  • Current-quarter investment loss included $951,000 of unrealized losses on securities still held at quarter-end and a $29,000 impairment. The prior-year quarter included $686,000 of unrealized gains and $647,000 of realized losses.
  • The prior-year equity-method result included $1.513 million of income from the Galileo Partners Fund, which had been fully redeemed by June 30, 2018. The current quarter reflected a $7,000 loss from the Galileo Technology and Blockchain Fund.
  • Accumulated other comprehensive income declined from $1.858 million at June 30, 2018, to a $212,000 accumulated loss at September 30, 2018, largely reflecting the ASU 2016-01 reclassification.

Guidance, outlook, risks, contingencies, and unusual items

  • Management did not provide quantitative earnings or revenue guidance. It stated that current cash reserves, investments, and available financing should be sufficient for foreseeable operating needs.
  • The board authorized a monthly dividend of $0.0025 per share for October through December 2018, totaling approximately $114,000, subject to future board review and the company’s financial condition.
  • The share repurchase program permits up to $2.75 million of purchases during calendar 2018 and remains subject to market conditions. The company repurchased 1,000 shares for $2,000 during the quarter.
  • USGIF advisory and administrative contracts were renewed through September 2019. Certain ETF advisory contracts expire in April and June 2019; management anticipates renewal. Galileo agreements generally have termination provisions ranging from 30 days to 180 days.
  • Fee waivers and expense reimbursements for USGIF were $165,000, down from $232,000. Galileo waived or absorbed $116,000 of fund expenses, compared with $19,000 in the prior-year quarter.
  • The company held approximately $4.6 million of HIVE Blockchain Technologies shares at quarter-end, representing a significant concentration in a volatile cryptocurrency-mining-related investment. A 25% change in the value of securities at fair value would change their estimated value by approximately $3.6 million.
  • Other material risks include market and liquidity risk, fluctuations in assets under management, foreign currency exposure from Canada, regulatory and competitive pressures, and volatility in performance fees and corporate investments.
  • Management stated that there were no material changes to the risk factors in the fiscal 2018 Form 10-K. It also stated that pending or threatened claims and proceedings are not expected to have a material adverse effect, although unfavorable outcomes remain possible.
  • The company has U.S. federal net operating loss carryovers of approximately $5.3 million and maintains a valuation allowance of $1.9 million against certain deferred tax assets. Tax accounting under the Tax Cuts and Jobs Act, including GILTI, remained subject to evaluation.

Important facts for investors to verify

  • Whether assets under management stabilize or continue to decline, including the effect of market performance and shareholder redemptions.
  • The valuation and concentration risk of the HIVE investment and the Galileo blockchain-related equity-method investment.
  • The recurring operating loss and the company’s ability to fund dividends, share repurchases, fee waivers, and operating expenses from recurring advisory revenue.
  • The effect of ASU 2016-01 on future earnings volatility and comparability with prior periods.
  • Renewal of the ETF and other advisory contracts and any changes in fee waivers or expense reimbursement obligations.
  • Renewal of the undrawn $1 million credit facility before its May 31, 2019 expiration and continued compliance with its covenants.