U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2019. The request metadata identifies “2018 Q3,” but the filing is for fiscal 2019 third quarter. The company provides investment management services in the United States and Canada and invests corporate funds.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Operating revenue | $971 thousand, down 31.5% | $3.993 million, down 18.5% |
| Operating income (loss) | $(884) thousand | $(1.889) million |
| Operating margin | (91.0%), versus (41.6%) prior year | (47.3%), versus (24.9%) prior year |
| Net income (loss) attributable to U.S. Global | $779 thousand, versus $(1.060) million | $(3.581) million, versus $959 thousand |
| Basic and diluted EPS | $0.05, versus $(0.07) | $(0.24), versus $0.06 |
| Net cash from operating activities | Not separately provided for the quarter | $(714) thousand, versus $1.920 million |
Quarterly profitability was driven by $2.094 million of investment income, including approximately $2.0 million of unrealized gains. The nine-month loss reflected $(2.208) million of investment loss, including approximately $2.4 million of unrealized losses, and a $(52) thousand equity-method investment loss.
- Assets under management, including USGIF and ETFs, were $503.8 million at March 31, 2019, down 21.2% from $639.1 million a year earlier and down from $600.3 million at June 30, 2018.
- Galileo assets under management were $31.5 million, down 40.1% from $52.6 million a year earlier.
- Total assets were $23.910 million, compared with $28.932 million at June 30, 2018. Shareholders’ equity was $22.167 million, compared with $26.060 million.
- Cash and cash equivalents were $3.659 million, with $1.000 million restricted as collateral for the credit facility. Unrestricted securities at fair value were approximately $13.6 million.
- Net working capital was approximately $12.7 million and the current ratio was 11.6 to 1.
- The company had no borrowings; its only long-term liability was a $553 thousand deferred tax liability. A $1 million credit facility was available but undrawn and remained subject to covenants.
- Cash, cash equivalents and restricted cash declined by $2.705 million during the first nine months, ending at $4.659 million. Investing activities used $1.602 million, financing activities used $362 thousand, including $341 thousand of dividends, and operating activities used $714 thousand.
Material changes versus the prior comparable periods
- Operating revenue declined primarily because lower average assets under management reduced base advisory and administrative fees. Nine-month advisory fees fell $861 thousand.
- Operating expenses decreased 7.6% in the quarter and 3.9% year to date, mainly from lower compensation, but general and administrative expenses increased.
- Quarterly results improved because investment income rose to $2.094 million from $275 thousand and equity-method results improved from a $(927) thousand loss to $3 thousand of income.
- Year-to-date results deteriorated because investment results changed from $727 thousand of income to a $(2.208) million loss and equity-method results changed from $1.804 million of income to a $(52) thousand loss.
- Effective July 1, 2018, ASU 2016-01 required changes in the fair value of certain equity investments to be recognized in earnings rather than other comprehensive income. The company reclassified $3.1 million of unrealized gains and $1.0 million of related deferred tax expense into retained earnings. Management expects greater earnings volatility.
- Galileo recorded $870 thousand of performance-fee revenue in the nine-month period, compared with $464 thousand in the prior year. Such fees are dependent on market performance and may be volatile.
- The monthly dividend was $0.0025 per share through March 2019 and was authorized through June 2019. The board may discontinue or modify future dividends.
- The company repurchased 20,075 Class A shares for $24 thousand during the first nine months and 8,075 shares for $9 thousand during the quarter.
Guidance, outlook, risks 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.
- USGIF advisory and administrative contracts were renewed through September 2019, and ETF advisory contracts expire in October 2019. Management anticipates renewal.
- Fee waivers and expense reimbursements for USGIF totaled $541 thousand in the first nine months and $164 thousand in the quarter. The company has a contractual expense cap for one fund through April 2020 and other waivers remain discretionary.
- Approximately 64.7% of total assets consisted of securities at fair value. The company held approximately $4.0 million of HIVE Blockchain Technologies shares, whose value is exposed to cryptocurrency-market volatility. The company also held a $228 thousand equity-method investment concentrated in cryptocurrency-related assets.
- The company’s securities at fair value were $15.466 million. A hypothetical 25% market-price decline would reduce their estimated value to $11.599 million, before considering other effects.
- Other investment concentrations included Thunderbird Entertainment and GoldSpot Discoveries, portions of which were subject to escrow or resale restrictions.
- Revenue depends on assets under management, market values, investor redemptions, foreign exchange rates and performance fees. The filing highlights investment-management competition, regulation, market, credit and liquidity risks.
- Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls and procedures were effective as of March 31, 2019.
- Pending or threatened claims may arise in the ordinary course of business, but management believes amounts in excess of recorded accruals will not materially affect the consolidated financial statements.
Investor verification checklist
- Verify the effect of ASU 2016-01 on comparability, retained earnings and the substantial shift of unrealized investment gains and losses into earnings.
- Track assets under management, net redemptions, market performance and the renewal of USGIF, ETF and Galileo advisory contracts.
- Assess the concentration and valuation risk of HIVE and other cryptocurrency- and natural-resource-related investments.
- Confirm the sustainability of the monthly dividend and the company’s continued ability to fund dividends, repurchases and operating cash needs despite negative year-to-date operating cash flow.
- Review the $2.3 million valuation allowance against tax carryovers, $6.7 million of U.S. federal net operating-loss carryovers and the resulting variability of tax expense or benefit.
- Monitor compliance with the $1 million credit-facility covenants and the facility’s May 31, 2020 expiration date.