U.S. Global Investors, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019, compared with fiscal year ended June 30, 2018. The supplied metadata identifies “2018 Q4,” but the filing is an annual report for fiscal 2019, not a quarterly filing.
Business Context
U.S. Global Investors is a registered investment adviser managing mutual funds, exchange-traded funds and Canadian assets through its 65%-owned subsidiary, Galileo Global Equity Advisors. Its three segments are U.S. investment management services, Canadian investment management services and corporate investments. Revenue is primarily derived from advisory, performance and administrative fees based on assets under management.
Total assets under management declined 16.5% to $540.1 million at June 30, 2019, from $647.0 million. Average AUM declined 22.6% to $564 million, primarily because of shareholder redemptions and market depreciation.
Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenues | $4.917 million | $6.261 million | Down 21.5% |
| Operating expenses | $7.881 million | $8.549 million | Down 7.8% |
| Operating loss | $2.964 million | $2.288 million | Loss increased |
| Net income attributable to U.S. Global | $(3.388) million | $0.647 million | Declined $4.035 million |
| EPS | $(0.22) | $0.04 | Declined |
| Net cash used in operating activities | $(1.192) million | $(0.034) million | Greater use of cash |
| Total assets | $23.736 million | $28.932 million | Down 18.0% |
| Shareholders’ equity | $22.179 million | $26.060 million | Down 14.9% |
Advisory fees declined 21.3% to $4.732 million. USGIF advisory fees fell 30.9% to $2.686 million, while ETF advisory fees fell 16.1% to $588,000. Galileo advisory fees declined to $537,000, but Galileo performance fees increased 98.5% to $921,000. Administrative services fees declined 25.4% to $185,000.
Compensation expense declined 20.0% to $3.418 million, primarily because of lower bonuses. General and administrative expense increased 4.5% to $4.041 million.
Investment results deteriorated materially: investment income changed from $1.504 million of income to a $1.564 million loss, while equity-method investment income declined from $1.624 million to $23,000. The company recorded a $977,000 tax benefit in 2019 compared with $197,000 of tax expense in 2018.
Liquidity, Capital and Debt
- Net working capital was approximately $11.6 million, with a current ratio of 9.2 to 1.
- Cash and cash equivalents were $2.949 million; restricted cash was $1.025 million.
- Unrestricted securities at fair value were approximately $14.3 million, and cash plus unrestricted securities totaled approximately $17.3 million.
- The company had no borrowings or long-term liabilities other than deferred taxes.
- A $1 million credit facility was available but unused and secured by restricted cash.
- Operating cash flow was negative $1.192 million. Investing activities used $1.726 million, and financing activities used $474,000, including $454,000 of dividends.
- The company authorized a monthly dividend of $0.0025 per share through September 2019; continuation remained subject to Board discretion.
Material Changes and Unusual Items
- Adoption of ASU 2016-01 moved changes in fair value of certain equity investments from other comprehensive income into earnings, increasing reported earnings volatility. The company reclassified approximately $2.089 million of net-of-tax unrealized gains from accumulated other comprehensive income to retained earnings at adoption.
- Corporate investments totaled $15.187 million at fair value, or approximately 64% of total assets. The HIVE Blockchain Technologies investment was valued at $3.6 million, down from $5.6 million.
- The company recorded approximately $1.8 million of net unrealized losses on equity securities still held at year-end, contributing significantly to the investment loss.
- Cryptocurrency-related exposure also included a $309,000 equity-method investment in Galileo Technology and Blockchain LP.
- Galileo’s Growth and Income Fund was liquidated in July 2019. The Canadian GOGO ETF was expected to liquidate around September 9, 2019; the U.S. GOAU ETF was not affected.
- Management expected USGIF advisory and administrative agreements to be renewed in September 2019 and ETF agreements to be renewed in September 2020.
- The company reported no material legal proceedings and no off-balance-sheet arrangements.
Outlook and Principal Risks
Management expects results to remain sensitive to financial-market conditions, investor redemptions, fund performance, product mix, fee waivers and performance fees. The company has particular exposure to volatile gold, natural-resources, emerging-market and cryptocurrency-related investments.
- Declining AUM or poor fund performance could reduce advisory revenue and profitability.
- Competition, fee pressure, distribution costs and regulatory requirements may compress margins.
- Investment income may remain volatile because of concentrated corporate investments and the accounting treatment adopted under ASU 2016-01.
- HIVE and other cryptocurrency-related investments may produce significant valuation swings.
- Advisory contracts are subject to annual renewal or termination on relatively short notice, creating client-retention risk.
- Regulatory investigations, litigation, cybersecurity incidents, foreign-exchange movements and the loss of key personnel could adversely affect results.
- Frank Holmes beneficially owned 99.80% of the voting class C stock, leaving publicly traded class A stock without voting control.
Facts Investors Should Verify
- Whether AUM stabilizes or continues to decline after June 30, 2019, particularly in USGIF, Galileo and ETF products.
- The current value and concentration of HIVE, GoldSpot, Thunderbird and other corporate investments.
- Whether advisory and administrative agreements were renewed and whether the Canadian GOGO ETF liquidation affected revenue.
- Whether operating cash flow returns to positive levels and whether dividends remain sustainable despite the fiscal 2019 net loss.
- The continuing impact of ASU 2016-01 on earnings volatility and retained earnings.
- Future fee waivers, performance fees and expense commitments, including the USGIF fee waiver arrangements.