U S GLOBAL INVESTORS INC quarterly report, Q2 FY2018

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

Reporting period: Fiscal quarter and six months ended December 31, 2017; filed February 14, 2018. The company provides investment management services in the United States and Canada and invests for its own account. The filing is for a smaller reporting company and presents unaudited interim financial statements.

Financial Performance and Position

Metric	Three months ended Dec. 31, 2017	Three months ended Dec. 31, 2016	Six months ended Dec. 31, 2017	Six months ended Dec. 31, 2016
Operating revenues	$2.0 million	$1.6 million	$3.5 million	$3.6 million
Operating loss	$(0.1) million	$(0.2) million	$(0.6) million	$(0.2) million
Income before taxes	$1.3 million	$15 thousand	$2.6 million	$0.3 million
Net income attributable to U.S. Global	$0.7 million	$8 thousand	$2.0 million	$0.3 million
Diluted EPS	$0.05	$0.00	$0.13	$0.02
Net cash from operating activities	Not separately provided	Not separately provided	$1.8 million	$0.7 million

Margins: Operating margins were approximately negative 7.5% for the quarter and negative 18.0% for the six-month period. Net margins attributable to U.S. Global were approximately 37.6% and 58.0%, respectively, based on reported operating revenues; these margins were materially influenced by investment and equity-method income rather than core operating revenue.

Six-month operating revenue declined 3.9%, while quarterly revenue increased 21.4% year over year.
Six-month operating expenses increased 7.4% to $4.1 million, driven primarily by higher compensation, bonuses, ETF costs and Canadian fund start-up expenses.
Other income increased to $3.2 million for the six months, including $2.7 million of equity-method income from the Galileo Partners Fund, compared with no equity-method income in the prior-year period.
Cash and cash equivalents were $3.0 million at December 31, 2017, compared with $4.0 million at June 30, 2017. Restricted cash was $1.0 million.
Current assets were $15.0 million and current liabilities were $1.6 million, producing approximately $13.4 million of working capital and a 9.6-to-1 current ratio.
The company had no borrowings; the only long-term liability was a $3.9 million deferred tax liability. A $1.0 million credit facility was available, collateralized by restricted cash, and remained unused.
Total assets increased to $45.1 million from $25.5 million at June 30, 2017. Shareholders’ equity increased to $39.6 million from $24.4 million, substantially reflecting unrealized investment gains.

Material Changes Versus the Prior Comparable Period

Quarterly net income attributable to U.S. Global increased to $749 thousand from $8 thousand; six-month income increased to $2.0 million from $271 thousand.
Quarterly advisory fees increased 22.9%, primarily because Galileo recognized $464 thousand of performance fees. Galileo recorded no comparable performance fees in the prior-year quarter.
USGIF advisory fee adjustments reduced revenue by $192 thousand in the quarter and $308 thousand for six months, compared with a $9 thousand reduction and a $30 thousand increase, respectively, in the prior-year periods.
Assets under management, including USGIF and ETFs, were $681.2 million at December 31, 2017, down from $683.1 million a year earlier and $711.9 million at June 30, 2017. Average assets under management for the six months fell to $702.4 million from $773.9 million.
Galileo assets under management were $64.8 million, down 49.5% from $128.4 million a year earlier, but up from $47.8 million at June 30, 2017.
The company invested approximately $2.4 million in HIVE Blockchain Technologies shares. The investment was valued at approximately $19.1 million at December 31, 2017, generating a substantial unrealized gain recorded in other comprehensive income.
Available-for-sale securities increased to $22.4 million from $3.4 million at June 30, 2017. Accumulated other comprehensive income increased to $13.7 million from $264 thousand.
The company repurchased 36,748 Class A shares for $117 thousand during the quarter and 45,947 shares for $131 thousand during the six months. The 2018 repurchase authorization permits up to $2.75 million of purchases.

Guidance, Outlook, Risks and Unusual Items

No formal earnings or revenue guidance was provided. Management expects advisory contracts with USGIF and the U.S. Global Jets ETF to be renewed, but future fees remain dependent on assets under management, market performance, redemptions and fee waivers.
The company launched the GOGO ETF on the Toronto Stock Exchange through Galileo in September 2017. The offshore advisory clients completed liquidation during the second quarter, eliminating future fees from those clients.
The Galileo Partners Fund was concentrated in HIVE and generated $2.7 million of equity-method income for the six months, primarily from realized and unrealized investment gains. This income is inherently volatile and may reverse with changes in HIVE’s value.
HIVE shares were restricted from resale until mid-March 2018 and were subject to Canadian insider regulations. Cryptocurrency markets and related securities were identified as early-stage, high-risk and highly volatile.
On January 31, 2018, the company redeemed part of its Galileo Partners Fund investment for approximately $1.5 million, reducing its ownership from approximately 30% to 24%. The investment will continue to be accounted for under the equity method.
The Tax Cuts and Jobs Act resulted in a provisional $17 thousand transition-tax expense and a revised blended statutory tax rate of approximately 28% for fiscal 2018. The tax accounting was not finalized and may change.
The company pays a monthly dividend of $0.0025 per share through March 2018, subject to future board approval. Management states that dividends, investments and share repurchases are discretionary.
Key risks include market and liquidity risk, volatility in assets under management and performance fees, foreign currency exposure, client redemptions, regulatory and competitive pressures, valuation uncertainty, and concentration in HIVE and cryptocurrency-related investments.

Investor Verification Checklist

Verify the valuation, resale restrictions and subsequent performance of the HIVE investment and the Galileo Partners Fund.
Assess how much reported earnings depends on unrealized investment gains and equity-method income versus recurring advisory fees.
Monitor assets under management, USGIF redemptions, Galileo’s significantly reduced assets under management and the sustainability of performance fees.
Confirm the final tax effects of the Tax Cuts and Jobs Act and any resulting changes to deferred taxes or net operating loss utilization.
Review renewal of the credit facility and advisory contracts, including the U.S. Global Jets ETF contract expiring in April 2018.
Evaluate the company’s ability and intention to continue dividends and share repurchases given operating losses and investment-market volatility.