U S GLOBAL INVESTORS INC quarterly report, Q1 FY2018

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

Business Context and Reporting Period

Form 10-Q for the three months ended September 30, 2017, the company’s fiscal 2018 first quarter. U.S. Global Investors provides investment management services in the United States and Canada and invests for its own account. The filing is unaudited and should be read with the fiscal 2017 Form 10-K.

Key Financial Metrics

Metric	Q1 FY2018	Q1 FY2017
Operating revenues	$1.490 million	$1.981 million
Operating income (loss)	$(479,000)	$31,000
Income before taxes	$1.246 million	$284,000
Net income attributable to U.S. Global	$1.270 million	$263,000
Basic and diluted EPS	$0.08	$0.02
Net cash provided by operating activities	$1.966 million	$191,000

• Operating margin was approximately negative 32.1%; net income attributable to the company was approximately 85.2% of operating revenue, reflecting substantial investment-related and equity-method income rather than operating performance.
• Other income was $1.725 million, including $1.513 million of income from the Galileo Partners Fund equity-method investment.
• Cash and cash equivalents were $2.973 million; restricted cash was $1.000 million. Total current assets were $14.253 million versus current liabilities of $1.133 million, producing working capital of approximately $13.1 million and a current ratio of 12.6 to 1.
• Fair-value securities totaled $22.455 million, or approximately 62.7% of total assets. Other investments were $2.119 million, equity-method investments were $2.013 million, and notes receivable totaled approximately $2.198 million.
• The company had no borrowings or long-term liabilities. Its $1 million credit facility was undrawn, collateralized by restricted cash, and subject to covenants with which the company reported compliance.
• Comprehensive income attributable to the company was $10.439 million, including $9.133 million of net unrealized gains on available-for-sale securities.

Material Changes Versus the Prior Comparable Period

• Operating revenue declined $491,000, or 24.8%, primarily because advisory fees fell $458,000 as average assets under management declined. Administrative service fees decreased $33,000.
• Operating expenses increased $19,000, or 1.0%. General and administrative expense and advertising increased, partly offset by lower employee compensation and benefits.
• Operating results shifted from $31,000 of income to a $479,000 loss.
• Net income attributable to U.S. Global increased approximately $1.0 million, primarily because the company recognized $1.513 million of equity-method income from a newly acquired interest in the Galileo Partners Fund.
• Assets under management declined to $715.2 million from $820.1 million at September 30, 2016, while average assets under management declined to $711.0 million from $821.6 million. The quarter included net shareholder redemptions compared with net purchases in the prior-year quarter.
• Fair-value securities increased from approximately $13.1 million at June 30, 2017, to $22.5 million, primarily due to the acquisition and appreciation of an available-for-sale investment in HIVE Blockchain Technologies Ltd.
• Cash decreased $985,000 during the quarter, reflecting $2.878 million of investing outflows partly offset by $1.966 million of operating cash flow.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

• Management did not provide formal earnings guidance. It expects current cash, investments, and available financing to fund foreseeable operating needs.
• The company expects renewal of its USGIF advisory and administrative contracts through September 2018 and the U.S. Global Jets ETF advisory contract, which expires in April 2018. The GOGO ETF’s initial advisory term extends through June 2019.
• Offshore advisory clients are liquidating, with completion expected in the second quarter of fiscal 2018; related future fees are expected to be minimal. An affiliated offshore fund is also liquidating.
• The company waived or reduced $232,000 of USGIF fees and expenses during the quarter and has a contractual expense limitation for the Near-Term Tax Free Fund through April 2018. Future waivers are uncertain.
• HIVE represented approximately $11.4 million of the company’s available-for-sale securities and was subject to resale restrictions through February 2018. The company also had an approximately $2.0 million equity-method investment in a fund concentrated in HIVE. HIVE price volatility could materially affect comprehensive income, assets, and reported earnings.
• Investment income, performance-based fees, assets under management, and equity-method income are volatile and depend on market conditions, investor flows, security valuations, and transaction timing. A hypothetical 25% change in security prices would have changed shareholders’ equity by approximately $5.614 million in aggregate, before considering other effects.
• Management reported no material changes to previously disclosed risk factors, effective disclosure controls, or material weaknesses in internal control.
• The company adopted ASU 2016-09 without material impact. It expects the future adoption of ASU 2016-01 to materially affect financial statement presentation because available-for-sale equity investment gains and losses will generally move from other comprehensive income to earnings.

Important Facts for Investors to Verify

1. Assess the sustainability of reported earnings excluding the $1.513 million equity-method gain and the effect of HIVE-related valuations.
2. Review HIVE’s market price, resale restrictions, concentration, and the company’s direct and indirect ownership exposure.
3. Monitor assets under management, redemption trends, fee waivers, ETF growth, and the renewal of advisory contracts.
4. Confirm liquidity, the continued availability and renewal of the $1 million credit facility, and the status of restricted cash.
5. Verify the continuation of the $0.0025-per-share monthly dividend after December 2017 and future stock repurchase activity.