U.S. Global Investors, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended September 30, 2016, representing the company’s fiscal first quarter. U.S. Global Investors provides investment management services in the United States and Canada and invests for its own account. The company owns a 65% controlling interest in Galileo Global Equity Advisors Inc.
Total assets under management were $820.1 million at September 30, 2016, up 45.1% from $565.3 million a year earlier and up from $760.2 million at June 30, 2016. USGIF assets under management increased primarily from market appreciation in gold and natural resources funds and net shareholder purchases.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Operating revenues | $2.0 million | $1.3 million |
| Operating income (loss) | $31,000 | $(1.4) million |
| Investment income | $253,000 | $534,000 |
| Income (loss) attributable to U.S. Global | $263,000 | $(868,000) |
| Basic and diluted EPS | $0.02 | $(0.06) |
| Net cash provided by operating activities | $191,000 | $480,000 |
Operating revenue increased 58.5% to $2.0 million. Advisory fees rose 66.0% to $1.9 million, while administrative services fees declined 18.9% to $90,000. Approximate operating margin was 1.6% versus negative 111.6% in the prior-year quarter; approximate net margin attributable to the company was 13.3% versus negative 69.4%, with the current-period net result benefiting from investment income.
At September 30, 2016, cash and cash equivalents were $3.3 million, restricted cash was $1.0 million, and fair-value trading and available-for-sale securities totaled $14.4 million. Net working capital was approximately $16.3 million and the current ratio was 14.1 to 1. The company had no borrowings or long-term liabilities and had an unused $1.0 million credit facility secured by $1.0 million of deposited cash. Total shareholders’ equity was $25.8 million, including $25.3 million attributable to U.S. Global.
Cash declined by $690,000 during the quarter. Operating activities provided $191,000, investing activities used $759,000, primarily for the purchase of other investments, and financing activities used $142,000 for dividends and share repurchases.
Material changes versus the prior comparable period
- Net income attributable to U.S. Global improved by approximately $1.1 million, from an $868,000 loss to $263,000 of income.
- Operating expenses decreased 26.3% to $2.0 million, driven by lower employee compensation, general and administrative costs, and advertising expenses.
- Average USGIF assets under management increased to $761.0 million from $541.1 million, while the average investment management fee rose to 76 basis points from 65 basis points.
- Investment income decreased to $253,000 from $534,000 because the prior-year quarter included $531,000 of realized gains on available-for-sale securities. The current quarter included $99,000 of unrealized gains on trading securities and $16,000 of other-than-temporary investment declines.
- Effective December 10, 2015, the company ceased serving as USGIF distributor. Related distribution and shareholder-services activities are presented as discontinued operations; those activities generated $7,000 of income in the prior-year quarter and none in the current quarter.
- Administrative service fees declined following a reduction in fee rates and outsourced responsibilities. Fund fee waivers and expense reimbursements were $234,000, compared with $378,000 in the prior-year quarter.
- Other comprehensive income attributable to U.S. Global was $946,000, primarily reflecting unrealized gains on available-for-sale securities, compared with a $1.5 million comprehensive loss in the prior-year quarter.
Guidance, outlook, risks, contingencies, and unusual items
The filing provides no formal earnings or revenue guidance. Management stated that cash reserves, investments, and financing availability should be sufficient for foreseeable operating needs. The monthly dividend of $0.0025 per share was authorized through March 2017, subject to future board consideration. The company repurchased 14,947 Class A shares for $30,000 during the quarter, with approximately $2.65 million remaining under the 2016 authorization.
Revenue depends substantially on assets under management, market performance, investor sentiment, and performance-fee adjustments. Management identified risks from investment-management competition, economic conditions, regulation, market, credit, liquidity, foreign-currency, and investment-valuation risks. Approximately 53% of total assets consisted of investments at fair value, creating material sensitivity to market movements. A hypothetical 25% change in market prices would change the estimated fair value of trading securities by approximately $2.6 million and available-for-sale securities by approximately $1.0 million.
The company had $12.0 million of exposure to unconsolidated variable-interest entities, consisting of investment securities and fee receivables. It also held $2.2 million of notes receivable, including a $2.0 million note maturing in June 2017. The company reported no material accrued litigation contingencies and believes any liability beyond recorded accruals would not materially affect the financial statements.
The company expects to renew its $1.0 million credit facility, which expires May 31, 2017. USGIF advisory and administrative agreements run through September 2017; the ETF advisory agreement expires in April 2017, and management anticipates renewal. Fund expense caps, fee waivers, contract renewals, and the recoverability of $498,000 of prior Government Fund waivers through December 31, 2016, remain relevant items.
The company adopted new consolidation and fair-value disclosure guidance during the period and early adopted deferred-tax balance-sheet classification guidance. Management stated that these adoptions did not materially change the consolidated financial statements. The filing states that there were no material changes to previously disclosed risk factors and that disclosure controls were effective.
Important facts for investors to verify
- Whether the sharp increase in assets under management, particularly in gold and natural resources funds, is sustained or reverses with market conditions.
- The recurring earnings impact of discontinued distribution activities, reduced administrative fees, fund fee waivers, and expense reimbursements.
- The composition, liquidity, valuation, and market sensitivity of the $14.4 million investment portfolio and $2.7 million of cost-method investments.
- Credit quality and repayment timing for the $2.2 million of notes receivable, including the $2.0 million note maturing in June 2017.
- Renewal of the credit facility and advisory contracts, continuation of the monthly dividend, and use of the remaining share-repurchase authorization.
- Potential volatility from performance fees, foreign currency exposure, investment impairments, and changes in assets under management.