U.S. Global Investors, Inc. — Fiscal 2019 Second Quarter 10-Q
Reporting period: Three and six months ended December 31, 2019, compared with the corresponding periods ended December 31, 2018. The company provides investment management services to U.S. Global Investors Funds and ETFs and invests for its own account. Canadian investment management operations through Galileo are classified as discontinued operations.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2019 | Six months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Operating revenue | $887,000 | $793,000 | $1.691 million | $1.837 million |
| Operating loss | $(511,000) | $(856,000) | $(1.179) million | $(1.303) million |
| Investment loss | $(451,000) | $(3.430) million | $(3.481) million | $(4.331) million |
| Net loss attributable to U.S. Global | $(1.003) million | $(3.211) million | $(4.570) million | $(4.360) million |
| Loss per share | $(0.06) | $(0.21) | $(0.30) | $(0.29) |
Margins: The operating margin was approximately negative 57.6% for the quarter and negative 69.7% year to date. Net margin attributable to the company was approximately negative 113.1% for the quarter and negative 270.3% year to date. These margins were heavily affected by investment losses and the relatively small operating-revenue base.
- Cash flow: Net cash provided by operating activities was $544,000 for the six months, compared with $684,000 used in operating activities in the prior-year period. Investing activities provided $17,000; financing activities used $231,000, including $227,000 of dividends.
- Liquidity: December 31 cash and cash equivalents were $1.796 million, restricted cash was $1.025 million, and unrestricted securities at fair value were approximately $9.5 million. Net working capital was approximately $10.2 million, with an 8.0-to-1 current ratio.
- Investments: Securities at fair value totaled approximately $10.0 million, down from $15.2 million at June 30, 2019. The portfolio had a $13.1 million cost basis and $3.1 million of net unrealized losses.
- Debt: The company reported no borrowings or long-term liabilities other than lease obligations. A $1.0 million credit facility was available, fully collateralized by restricted cash, and unused at December 31, 2019.
- Equity: Total shareholders’ equity was $17.287 million, including $16.908 million attributable to U.S. Global Investors.
Material Changes Versus the Prior Comparable Period
- Quarterly operating revenue increased $94,000, or 11.9%, primarily from higher advisory fees and lower performance fees paid to USGIF funds.
- Six-month operating revenue decreased $146,000, or 7.9%, primarily because average assets under management were lower and USGIF performance fees paid were higher.
- Quarterly operating expenses decreased $251,000, or 15.2%, mainly from lower employee compensation, bonuses, fund expenses and general and administrative costs. Six-month expenses declined $270,000, or 8.6%.
- Quarterly investment loss improved by approximately $3.0 million, to $451,000, from $3.430 million. Six-month investment loss improved by approximately $850,000, to $3.481 million.
- Quarterly net loss attributable to U.S. Global improved by approximately $2.2 million, but the six-month loss increased by approximately $210,000 because discontinued operations shifted from income to loss.
- Assets under management for continuing operations were $543.6 million at December 31, 2019, up 7.9% from December 31, 2018 and up from $510.1 million at June 30, 2019. However, six-month average assets under management declined to $510.7 million from $550.8 million.
- Galileo’s assets under management declined to $16.9 million from $31.5 million at December 31, 2018 and $30.0 million at June 30, 2019. Galileo generated no performance fees in the current quarter or six-month period, compared with $870,000 in each comparable 2018 period.
Outlook, Risks, Contingencies and Unusual Items
- The company entered into a binding letter of intent for Galileo to repurchase its 65% interest for C$1.0 million. Closing was anticipated around March 2, 2020, subject to Canadian regulatory approval and other conditions. Galileo operations, including potential losses, were to remain consolidated until closing.
- Management stated that current cash, investments and available financing should be sufficient for foreseeable operating needs. Advisory and administrative contracts with USGIF and ETF clients expire in September 2020; management anticipates renewal.
- The company authorized a monthly dividend of $0.0025 per share through March 2020, subject to board review. The board also authorized up to $2.75 million of annual share repurchases through December 31, 2020; $3,000 of shares were repurchased during the quarter.
- Investment results remain volatile. Approximately 53.3% of total assets consisted of securities at fair value, and the portfolio included significant exposure to technology, blockchain, cryptocurrency-mining, natural-resource and international securities. The HIVE Blockchain investment was valued at approximately $731,000 at December 31, 2019, versus $3.6 million at June 30, 2019.
- A hypothetical 25% change in prices of securities at fair value would change their aggregate value from $10.022 million to approximately $12.528 million or $7.516 million. This sensitivity is not a forecast.
- USGIF fee waivers and expense reimbursements totaled $266,000 for the six months and $122,000 for the quarter. Future waivers are discretionary or contractually limited and may affect revenue and margins.
- The company adopted the new lease standard on July 1, 2019, increasing total assets and liabilities by less than $400,000 at adoption. The company disclosed no material change in risk factors from its fiscal 2019 Form 10-K.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2019, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm completion, proceeds and accounting treatment of the planned Galileo transaction and the extent of any continuing involvement.
- Monitor assets under management, net redemptions, fee waivers and performance-fee adjustments because these directly affect recurring revenue.
- Review the valuation and concentration of HIVE, blockchain, technology and other market-sensitive investments.
- Assess whether operating cash flow remains positive while the company continues dividends and share repurchases.
- Verify renewal of the $1.0 million credit facility and the USGIF and ETF advisory contracts in 2020.
- Evaluate the sustainability of the dividend and the impact of continued operating and investment losses on retained earnings and shareholders’ equity.