U.S. Global Investors, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2016, with comparative fiscal years ended June 30, 2015 and June 30, 2014. The request metadata references 2015 Q4, but the supplied filing is an annual Form 10-K for FY2016, not a quarterly filing.
Business context
U.S. Global Investors is a registered investment adviser headquartered in San Antonio, Texas. Its principal activities are investment management and administrative services for mutual funds, offshore clients and the U.S. Global Jets ETF; investment management in Canada through its 65%-owned subsidiary Galileo; and corporate investing of company funds. The company had 23 full-time and 2 part-time employees at June 30, 2016.
Management fees are primarily based on assets under management, making revenue sensitive to market performance, investor redemptions, fund mix and performance-fee adjustments. The company ceased providing USGIF distribution and shareholder services on December 10, 2015; those activities are presented as discontinued operations.
Financial performance and key metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Operating revenue | $5.505 million | $7.333 million | Down 24.9% |
| Operating expenses | $9.681 million | $10.840 million | Down 10.7% |
| Operating loss | $(4.176) million | $(3.507) million | Loss widened |
| Investment income | $485,000 | $434,000 | Up 11.8% |
| Loss from continuing operations | $(3.685) million | $(3.895) million | Improved |
| Net loss attributable to U.S. Global | $(3.675) million | $(4.030) million | Improved 8.8% |
| Basic and diluted loss per share | $(0.24) | $(0.26) | Improved |
| Net cash provided by operating activities | $3.033 million | $(672,000) | Improved by $3.705 million |
| Average AUM | $744 million | $931 million | Down 20% |
| Period-end AUM | $883 million | $792 million | Up 11% |
Operating revenue declined mainly because advisory fees fell $1.497 million, or 22.4%, and administrative services fees fell $331,000, or 50.8%. USGIF advisory fees declined 19.6%, Galileo advisory fees declined 42.0%, and offshore advisory fees declined 30.0%; ETF advisory fees increased to $296,000 from $26,000 as the ETF completed its first full year of operations.
Expense reductions included lower compensation and benefits, general and administrative expenses and platform fees. These savings were partly offset by approximately $290,000 of costs related to the transition of USGIF services to third-party providers and higher ETF-related advertising.
The company reported total assets of $26.346 million, working capital of $16.874 million, and total shareholders’ equity of $25.046 million, including $24.528 million attributable to U.S. Global shareholders. Cash and cash equivalents were $3.993 million, restricted cash was $1.000 million, and investments at fair value totaled $13.585 million. The company had no long-term debt and had not drawn on its $1 million credit facility.
Material changes versus the prior comparable period
- Period-end total AUM increased 11% to $883 million, primarily from market appreciation in USGIF and offshore funds and growth of the ETF client. Average AUM declined 20% because of prior market depreciation and redemptions.
- USGIF AUM increased to $703.020 million from $590.826 million. Fixed-income AUM benefited from net shareholder purchases, while equity AUM benefited primarily from market appreciation in gold-related funds.
- Canadian AUM declined to $122.844 million from $150.718 million, with decreases in both Galileo funds and other Canadian advisory clients.
- Effective December 10, 2015, the company stopped acting as USGIF distributor and discontinued shareholder services. Related revenue and expenses were reclassified to discontinued operations; FY2016 discontinued-operations loss was $18,000 versus $81,000 in FY2015.
- Employment fell to 25 total employees from 42, consistent with the company’s cost-reduction efforts and reduced service responsibilities.
- Other-than-temporary investment impairments totaled $517,000 in FY2016, including $259,000 on available-for-sale securities and $258,000 on securities held at cost.
- The company purchased a $2.0 million note receivable in June 2016, maturing in June 2017, bearing 12% interest, and held another $212,000 note receivable maturing in 2017.
- Cash dividends decreased to $0.0025 per share per month from October 2015, compared with $0.005 per share per month previously. The FY2016 dividend was $0.0375 per share versus $0.06 in FY2015.
Cash flow, liquidity and capital allocation
- Operating cash flow was $3.033 million, helped substantially by a $5.509 million reduction in trading securities and working-capital changes.
- Investing cash flow was negative $646,000, including the $2.0 million note receivable investment and purchases of other investments, partly offset by securities-sale proceeds.
- Financing cash flow was negative $1.828 million, reflecting dividends, share repurchases and a $1.0 million increase in restricted cash.
- Contractual obligations totaled $769,000, consisting of $461,000 of operating leases and $308,000 of other contractual obligations, with $412,000 due within one year.
- The board authorized a monthly dividend of $0.0025 per share through December 2016, subject to review. Approximately $229,000 of dividends were expected to be paid from July through December 2016.
- The company repurchased 177,998 Class A shares for $313,000 during FY2016 and had approximately $2.68 million remaining under the 2016 repurchase authorization at June 30, 2016.
Outlook, commentary, risks and unusual items
Management stated that current cash reserves, investments and available financing should be sufficient for foreseeable operating needs. No formal revenue or earnings guidance was provided. Management expects investment income to remain volatile and notes that advisory revenue will fluctuate with financial markets, AUM, investor sentiment, fund performance and redemptions.
- Competition is intense across mutual funds, ETFs, investment advisers, banks, broker-dealers and other financial institutions. Fee pressure and alternative investment products may compress margins.
- Exposure to natural resources, gold, emerging markets, international markets and foreign currencies creates elevated market, political, liquidity and currency risks.
- Advisory and administrative agreements are generally subject to annual renewal or termination on short notice. USGIF agreements were renewed through September 2017; the ETF agreement runs through April 2017.
- The company has agreed to waive or reduce certain fund fees and bear fund expenses. Such waivers and expense reimbursements totaled $1.3 million in FY2016, and future amounts are uncertain.
- The company is dependent on key client relationships, particularly USGIF, and on key personnel, including portfolio managers and executives.
- Regulatory changes, examinations, litigation, cybersecurity incidents and failures to comply with securities regulations could adversely affect results and reputation. The filing reports no material legal proceedings.
- A $3.1 million valuation allowance fully reserved deferred tax assets at June 30, 2016, reflecting uncertainty regarding future realization. The company also reported U.S. federal net operating loss carryforwards of approximately $5.5 million.
- Frank Holmes beneficially owned 99.78% of the voting Class C shares. Publicly traded Class A shares are nonvoting, creating substantial control and governance concentration.
- The company’s independent auditor, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting, although the company is not required to obtain an auditor attestation of internal controls as a smaller reporting company.
Most important facts for investors to verify
- Whether the increase in period-end AUM is sustained and converts into higher average AUM and recurring advisory revenue.
- The effect of the December 2015 outsourcing and distribution transition on recurring revenue, expenses, margins and discontinued operations.
- The recoverability and credit quality of the $2.212 million of notes receivable and the company’s other concentrated investments.
- Whether continued losses, fee waivers and market volatility affect the $3.1 million deferred-tax valuation allowance and future cash generation.
- The sustainability of the $0.0025 monthly dividend and the company’s continued share repurchases despite recurring operating losses.
- Renewal of the USGIF and ETF advisory contracts in 2017 and retention of offshore and Canadian client relationships.
- The impact of gold, natural-resource, emerging-market and foreign-currency performance on AUM and fee revenue.
- The implications of concentrated voting control by Frank Holmes and the absence of voting rights for publicly traded Class A shareholders.