U S GLOBAL INVESTORS INC quarterly report, Q2 FY2016

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

Business Context and Reporting Period

U.S. Global Investors, Inc. is an investment management company with operations in the United States, Canada and offshore markets. Its principal activities are investment advisory services, Canadian investment management through its 65%-owned Galileo subsidiary, and investing corporate funds. This Form 10-Q covers the quarter and six months ended December 31, 2015, compared with the corresponding 2014 periods. The company is classified as a smaller reporting company.

Financial Results and Key Metrics

Metric	Three Months Ended Dec. 31, 2015	Three Months Ended Dec. 31, 2014	Six Months Ended Dec. 31, 2015	Six Months Ended Dec. 31, 2014
Operating revenues	$1.289 million	$1.858 million	$2.539 million	$4.485 million
Operating loss	$(1.916) million	$(0.837) million	$(3.311) million	$(1.166) million
Net loss attributable to U.S. Global Investors	$(2.212) million	$(0.842) million	$(3.080) million	$(0.970) million
Net loss per share	$(0.14)	$(0.05)	$(0.20)	$(0.06)
Net cash provided by operating activities	Not provided for the quarter	Not provided for the quarter	$0.539 million	$(0.212) million

Six-month operating revenue declined 43.4% year over year; quarterly revenue declined 30.6%.
Six-month operating margin was approximately negative 130.4%, compared with negative 26.0% in the prior-year period. Quarterly operating margin was approximately negative 148.6%, compared with negative 45.0%.
Six-month net margin was approximately negative 121.3%, compared with negative 21.6% in the prior-year period. Quarterly net margin was approximately negative 171.6%, compared with negative 45.3%.
Advisory fees were $2.336 million for the six months, down from $4.110 million, while administrative services fees were $203,000, down from $375,000.
Operating expenses increased to $5.850 million for the six months from $5.651 million. Quarterly expenses increased 18.9% to $3.205 million.
Investment income was $263,000 for the six months but was a loss of $271,000 in the quarter. Six-month investment results included $517,000 of other-than-temporary impairments on available-for-sale and cost-method investments.
At December 31, 2015, cash and cash equivalents were $3.563 million, total assets were $27.234 million, and shareholders’ equity was $25.568 million.
Marketable investments measured at fair value totaled approximately $17.2 million, or 63.2% of total assets. Held-to-maturity and other investments were $750,000 and $2.045 million, respectively.
The company had no borrowings or long-term liabilities. It had access to an unused $1 million credit facility through May 31, 2016 and was in compliance with its covenants.
Net working capital was approximately $17.2 million and the current ratio was 11.3 to 1. Management stated that available cash, investments and financing were sufficient for foreseeable operating needs.

Material Changes Versus the Prior Comparable Period

Assets under management, including USGIF, offshore clients and the ETF, were $589.4 million at December 31, 2015, down 12.1% from $670.9 million a year earlier. Average assets under management for the six months fell to $594.5 million from $827.5 million.
Galileo assets under management declined 35.8% year over year to $108.2 million. USGIF assets under management declined to $527.0 million from $659.7 million at December 31, 2014.
Effective December 10, 2015, the company ceased serving as distributor for USGIF and stopped receiving distribution and shareholder services fees. These activities were presented as discontinued operations.
The transition reduced future revenue and certain related expenses, but generated one-time transition costs of approximately $290,000 and workforce reduction costs in the quarter.
Discontinued operations produced a loss of $18,000 for the six months and $25,000 for the quarter, compared with losses of $42,000 and $54,000, respectively, in the prior-year periods.
Administrative service fee rates were reduced effective December 10, 2015, following the transfer of certain responsibilities to other service providers.
The company repurchased 133,228 Class A shares for $243,000 during the six months and authorized up to $2.75 million of repurchases during calendar 2016. It also paid $345,000 of dividends during the six months.
The company adopted discontinued-operations guidance effective July 1, 2015; management stated that adoption was not material. Several other accounting standards were under evaluation, including revenue recognition, consolidation, fair-value disclosures and deferred-tax classification.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management expects the USGIF transition to continue affecting operating revenue and expenses. It anticipates lower revenues and lower expenses as responsibilities are streamlined, with reimbursement for certain distribution expenses from the new distributor.
The company continues to streamline processes and reduce expenses in response to declining assets under management, market depreciation and net shareholder redemptions.
Fee waivers and expense reimbursements for USGIF totaled $751,000 for the six months, compared with $614,000 in the prior-year period. Approximately $498,000 of historical Government Fund waivers remained recoverable through December 31, 2016.
The board authorized a monthly dividend of $0.0025 per share through March 31, 2016. Future dividends remain discretionary and depend on earnings, capital requirements, financial condition and general business conditions.
Investment results are volatile and exposed to market, credit, liquidity, valuation and foreign-currency risks. A hypothetical 25% decline in trading securities would reduce their value by approximately $3.393 million; a 25% decline in available-for-sale securities would reduce value by approximately $912,000.
The company reported $912,000 of Level 3 corporate-debt investments and stated that reported fair values may differ materially from amounts realized upon sale.
Management noted normal-course legal and regulatory contingencies and stated that any liability beyond recorded accruals is not expected to have a material adverse effect, although unfavorable outcomes remain possible.
Management concluded that disclosure controls and procedures were effective as of December 31, 2015, and reported no material change in internal control over financial reporting.

Important Facts for Investors to Verify

Whether assets under management stabilize or continue declining, particularly at USGIF and Galileo.
The recurring revenue and expense impact of ending distribution and shareholder-services activities for USGIF.
The sustainability of dividends and share repurchases while the company is reporting substantial operating losses.
The valuation and liquidity of the company’s concentrated investment portfolio, including Level 3 assets and investments with unrealized or other-than-temporary losses.
The timing and terms of reimbursement for distribution expenses and the outcome of the broker-dealer withdrawal process.
The expiration or renewal of advisory contracts, including USGIF agreements through September 2016 and the ETF agreement through 2017.
Whether the company maintains compliance with the $1 million credit facility covenants and preserves sufficient liquidity despite continued losses.