U S GLOBAL INVESTORS INC quarterly report, Q2 FY2019

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

Business context and reporting period

U.S. Global Investors is an investment management company operating through U.S. fund and ETF advisory services, Canadian investment management through its 65%-owned Galileo subsidiary, and corporate investment activities. This Form 10-Q covers the fiscal quarter and six months ended December 31, 2018, filed February 12, 2019.

Financial performance and position

Metric	Three months ended Dec. 31, 2018	Three months ended Dec. 31, 2017	Six months ended Dec. 31, 2018	Six months ended Dec. 31, 2017
Operating revenue	$1.799 million	$1.993 million	$3.022 million	$3.483 million
Operating loss	$(322) thousand	$(149) thousand	$(1.005) million	$(628) thousand
Net income attributable to U.S. Global	$(3.211) million	$749 thousand	$(4.360) million	$2.019 million
EPS	$(0.21)	$0.05	$(0.29)	$0.13
Net cash from operating activities	Not separately provided	Not separately provided	$(11) thousand	$1.823 million

Quarterly operating margin was approximately negative 17.9%; six-month operating margin was approximately negative 33.3%.
Investment income was a loss of $3.395 million in the quarter and $4.302 million for six months, compared with investment income of $243 thousand and $452 thousand, respectively, in the prior-year periods.
Equity-method investment results were losses of $48 thousand for the quarter and $55 thousand for six months, versus income of $1.218 million and $2.731 million in the comparable prior-year periods.
At December 31, 2018, total assets were $23.221 million, including $6.055 million of cash and cash equivalents, $1.000 million of restricted cash, and $12.390 million of securities at fair value.
Current liabilities were $1.631 million, producing reported net working capital of approximately $15.0 million and a current ratio of 10.2 to 1.
The company had no borrowings and no long-term liabilities other than deferred taxes. Its $1.0 million credit facility was undrawn and collateralized by restricted cash.
Shareholders’ equity totaled $21.530 million, including $20.920 million attributable to U.S. Global shareholders.

Material changes versus the prior comparable period

Quarterly revenue declined 9.7%, and six-month revenue declined 13.2%, primarily because of lower assets under management and lower base advisory fees.
Quarterly net loss attributable to U.S. Global shifted from $749 thousand of income to a $3.211 million loss; the six-month result shifted from $2.019 million of income to a $4.360 million loss.
Assets under management, including U.S. funds and ETFs, were $504.0 million at December 31, 2018, down 26.0% from $681.2 million a year earlier. Galileo assets under management were $31.5 million, down 51.4% year over year.
Corporate investment results were adversely affected by approximately $3.4 million of quarterly and $4.4 million of six-month unrealized losses, including significant declines in cryptocurrency-related investments.
Galileo performance fees increased to $870 thousand in both the quarter and six-month period, compared with $464 thousand in each prior-year comparable period, partially offsetting lower base fees.
Operating expenses declined 1.0% in the quarter and 2.0% for six months. Lower compensation costs were partly offset by higher general and administrative expenses, including fund and consulting costs.
Effective July 1, 2018, ASU 2016-01 required changes in 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, increasing earnings volatility.

Outlook, risks, contingencies, and unusual items

Management stated that current cash, investments, and financing availability should be sufficient for foreseeable operating needs. Cash and unrestricted marketable securities totaled approximately $17.6 million.
The company expects to renew its $1.0 million credit facility, which expires May 31, 2019, and was compliant with its covenants at December 31, 2018.
USGIF advisory and administrative contracts were renewed through September 2019. The U.S. Global Jets ETF contract expires in April 2019, and the U.S. Global GO GOLD and Precious Metal Miners ETF contract expires in June 2019; management anticipates renewal.
A monthly dividend of $0.0025 per share was authorized through March 2019, subject to board review. The company paid $227 thousand of dividends during the six months ended December 31, 2018.
The company repurchased 11,000 class A shares for $13 thousand during the quarter and had approximately $2.726 million remaining under its repurchase authorization.
Fee waivers and expenses borne for USGIF totaled $212 thousand in the quarter and $377 thousand for six months, compared with $102 thousand and $334 thousand in the prior-year periods. Future waivers are discretionary or contractually limited and may reduce revenue.
The company’s HIVE Blockchain Technologies investment was valued at approximately $1.9 million at December 31, 2018, compared with $5.6 million at June 30, 2018. HIVE and related cryptocurrency investments are highly volatile and concentrated risks.
Management identified market, credit, liquidity, foreign-currency, regulatory, competitive, and investment-management risks. No material changes to the risk factors in the prior Form 10-K were reported.
The company reported no material litigation contingency expected to adversely affect its consolidated financial statements, although ordinary-course claims and proceedings remain possible.

Important facts for investors to verify

Whether assets under management stabilize or continue to decline, particularly within USGIF and Galileo.
The market value and concentration of HIVE, cryptocurrency-related holdings, and other corporate investments.
The effect of ASU 2016-01 on future earnings volatility and the comparability of earnings with prior periods.
Renewal of the credit facility and ETF advisory contracts, and continuation of the monthly dividend after March 2019.
The sustainability of Galileo performance fees and the extent of future USGIF fee waivers.
Realized cash flow versus reported earnings, given the substantial unrealized investment losses and the six-month operating cash outflow.