U.S. Global Investors, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2017. The request metadata references 2016 Q4, but the supplied filing is the fiscal 2017 annual report, with fiscal 2016 as the primary comparable period.
Business Context
U.S. Global Investors is a registered investment adviser operating through investment management services, a 65%-owned Canadian subsidiary, Galileo Global Equity Advisors, and corporate investments. Revenue is primarily generated from advisory and administrative fees tied to assets under management (AUM), supplemented by investment income.
The company managed mutual funds, two ETFs, offshore advisory accounts and Canadian funds. It employed 24 full-time and two part-time employees at June 30, 2017.
Financial Performance and Key Metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Operating revenue | $6.763 million | $5.505 million | +22.9% |
| Operating expenses | $7.636 million | $9.681 million | -21.1% |
| Operating income (loss) | $(873,000) | $(4.176) million | Improved |
| Investment income | $346,000 | $485,000 | -28.7% |
| Loss from continuing operations | $(544,000) | $(3.685) million | Improved |
| Net loss attributable to U.S. Global | $(513,000) | $(3.675) million | Improved |
| Basic loss per share | $(0.03) | $(0.24) | Improved |
| Net cash from operating activities | $690,000 | $3.033 million | Lower |
| Period-end AUM | $759.7 million | $883.1 million | -14.0% |
| Average AUM | $843 million | $744 million | +13.3% |
Approximate operating margin improved to negative 12.9% from negative 75.9%, while net margin improved to negative 7.6% from negative 66.8%. The company remained unprofitable despite the substantial improvement in results.
Advisory fees increased 25.0% to $6.479 million. USGIF advisory fees rose 34.5% to $4.887 million, ETF advisory fees rose 20.6% to $357,000, and offshore advisory fees rose 48.4% to $135,000. Galileo advisory fees declined 5.5% to $1.1 million. Administrative services fees fell 11.3% to $284,000 following the December 2015 outsourcing and fee restructuring.
Expense reductions were led by a $1.164 million decrease in employee compensation and benefits and a $741,000 decrease in general and administrative expenses. The company also recorded approximately $483,000 of other-than-temporary investment impairments during fiscal 2017.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $25.520 million and U.S. Global shareholders’ equity was $23.870 million at June 30, 2017.
- Cash and cash equivalents were $3.958 million; restricted cash was $1.0 million; and securities at fair value were $13.121 million.
- Working capital was approximately $16.3 million, with a current ratio of 15.0 to 1.
- The company had no long-term debt and had not drawn on its $1.0 million credit facility, which was collateralized by $1.0 million of restricted cash.
- Operating cash flow was positive at $690,000, while investing activities used $158,000 and financing activities used $564,000. Cash declined by $35,000 during the year.
- Contractual obligations totaled approximately $1.208 million, including $763,000 of operating lease obligations and $445,000 of other contractual commitments.
Material Changes Versus the Prior Comparable Period
- Revenue rebounded as higher average AUM, particularly in gold funds, increased advisory fees.
- Period-end AUM nevertheless declined by $123.4 million, primarily from market depreciation and shareholder redemptions in USGIF and Canadian accounts.
- USGIF AUM declined to $579.4 million from $703.0 million, while ETF AUM increased to $117.3 million from $43.4 million, principally due to growth in the U.S. Global Jets ETF and the launch of GOAU in June 2017.
- Galileo AUM fell to $47.8 million from $122.8 million, largely reflecting the loss or reduction of other Canadian advisory accounts.
- Operating expenses decreased substantially due to fewer employees, lower compensation, cost-cutting measures and the absence of prior-year USGIF transition costs.
- Distribution and shareholder-services operations remained discontinued after the December 2015 transition to third-party providers; fiscal 2017 had no discontinued-operations loss versus an $18,000 loss in fiscal 2016.
- Cash dividends were reduced to $0.0025 per share per month from October 2015 and totaled $0.03 per share in fiscal 2017. The company repurchased 69,636 Class A shares for $114,000.
Guidance, Outlook, Risks and Unusual Items
- Management expected the USGIF advisory and administrative agreements, which were up for renewal in September 2017, to be renewed. The agreements are terminable on short notice and require annual renewal.
- The two offshore clients had announced liquidations expected to be completed in September 2017; management expected fiscal 2018 fees from these clients to be minimal.
- Management believed cash reserves, investments and available financing were sufficient for foreseeable operating needs, but dividends and share repurchases remained discretionary.
- The company launched the GOAU ETF in June 2017 and expected ETFs to broaden its product structure and investment-management reach.
- Results are highly sensitive to AUM, investment performance, market prices, investor redemptions, product mix and performance-fee adjustments. Exposure is particularly concentrated in volatile gold, natural-resources and emerging-markets sectors.
- The company must waive or reduce certain fund fees and bear selected fund expenses. USGIF fee waivers and expense reimbursements totaled approximately $1.0 million in fiscal 2017.
- Corporate investments were significant relative to the balance sheet: securities at fair value represented approximately 51.4% of total assets. A hypothetical 25% price decline in trading and available-for-sale securities would reduce shareholders’ equity by approximately $3.28 million, before considering other effects.
- The company recorded a $3.3 million valuation allowance against deferred tax assets, reflecting uncertainty about their realization.
- Other risks include regulatory and compliance costs, litigation, cybersecurity and information-system disruptions, foreign exchange exposure, loss of key personnel, competition and the concentration of voting control in CEO Frank Holmes, who owned 99.79% of Class C voting shares.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management assessed disclosure controls and internal control over financial reporting as effective; the smaller-reporting-company status meant no auditor opinion on internal control was required.
Important Facts Investors Should Verify
- Whether the USGIF advisory and administrative agreements were renewed in September 2017 and on what terms.
- Post-filing AUM trends, particularly USGIF, Galileo and the ETF franchise, and whether redemptions continued after June 30, 2017.
- The completion and financial impact of the offshore-client liquidations.
- The sustainability of positive operating cash flow and the company’s path to operating profitability.
- The composition, liquidity and subsequent performance of the $13.1 million securities portfolio and other investments.
- Whether monthly dividends continued after September 2017, given recurring net losses and the Board’s discretion to reduce or suspend them.
- The potential effect of fee waivers, regulatory requirements, investment impairments and future accounting changes on reported earnings.