U S GLOBAL INVESTORS INC quarterly report, Q3 FY2017

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

Reporting period: Fiscal third quarter and nine months ended March 31, 2017; filed May 11, 2017. The filing is for the period ending March 31, 2017, although the request metadata labels it “2016 Q3.” U.S. Global Investors is an investment management company with U.S., Canadian and corporate-investment segments.

Financial performance

Metric	Three months ended March 31	Nine months ended March 31
Operating revenues	$1.669 million, up 25.5%	$5.292 million, up 36.8%
Operating income (loss)	$(191,000)	$(394,000)
Operating margin	(11.4%)	(7.4%)
Net income (loss) attributable to U.S. Global Investors	$(33,000), or $0.00 per share	$238,000, or $0.02 per share
Net margin attributable to U.S. Global Investors	(2.0%)	4.5%
Investment income	$161,000	$663,000
Net cash provided by operating activities	Not separately reported	$496,000

Advisory fees increased 25.4% to $1.604 million in the quarter and 40.1% to $5.064 million for the nine-month period.
Administrative services fees were $65,000 in the quarter and $228,000 year to date.
Operating expenses were essentially flat year over year in the quarter at $1.860 million, but declined 26.3% to $5.686 million for the nine-month period.
Nine-month results benefited from higher advisory revenue, lower compensation and general and administrative costs, and reduced investment impairments compared with the prior year.
Quarterly operating losses were more than offset by investment income only in part; the company reported a small quarterly net loss.

Liquidity, capital structure and investments

Cash and cash equivalents were $3.434 million at March 31, 2017, compared with $3.993 million at June 30, 2016. Restricted cash was $1.000 million.
Current assets were $17.270 million and current liabilities were $1.046 million, producing approximately $16.2 million of working capital and a 16.5-to-1 current ratio.
The company had no borrowings or long-term liabilities. A $1.0 million credit facility was available but unused, collateralized by $1.0 million of restricted cash; it was scheduled to expire May 31, 2017, with management intending to renew it annually.
Total shareholders’ equity was $24.990 million, including $24.468 million attributable to U.S. Global Investors shareholders.
Fair-value investments totaled approximately $13.2 million, or 50.9% of total assets, and other cost-method investments totaled $2.6 million. The company also held $2.234 million of notes receivable.
Cash flow was reduced by $582,000 of investing outflows, $435,000 of financing outflows, $342,000 of dividends paid and $97,000 of share repurchases. Ending cash declined $559,000 from June 30, 2016.

Assets under management and operating trends

Total assets under management, including USGIF, offshore clients and the ETF client, were $697.3 million at March 31, 2017, up 5.6% from March 31, 2016, but down from $760.2 million at June 30, 2016.
USGIF assets under management were $614.0 million at March 31, 2017, versus $590.5 million a year earlier. Nine-month net shareholder activity was $57.9 million of net redemptions, compared with $0.6 million of net purchases in the prior-year period.
Galileo assets under management declined 12.0% year over year to $99.1 million, although nine-month average assets increased to $122.4 million from $115.5 million.
The average annualized USGIF investment management fee increased to 74 basis points for the nine months from 65 basis points in the prior-year period. Fee waivers and expense reimbursements remained significant at $764,000 for the nine months.
The company ceased USGIF distribution and shareholder-services activities in December 2015. Those activities are classified as discontinued operations; no discontinued-operations loss was reported in the current period versus an $18,000 loss in the prior-year nine-month period.

Material changes versus the prior comparable periods

Nine-month net income attributable to the company improved by approximately $3.668 million, from a $3.430 million loss to $238,000 of income.
Revenue growth reflected higher average assets under management, primarily in USGIF gold and natural-resource funds, and improved performance-fee adjustments.
Compensation expense declined $1.135 million year to date, primarily because of reduced staffing and prior-year severance costs. General and administrative expense declined $776,000, partly because prior-year USGIF transition costs did not recur.
Investment income rose $252,000 year to date to $663,000. Prior-year results included substantially larger investment impairments, while current-year investment income remained subject to market volatility.
Available-for-sale securities generated $160,000 of accumulated other comprehensive income during the nine months, while foreign-currency translation reduced comprehensive income by $27,000.

Guidance, outlook, risks and unusual items

No quantitative earnings or revenue guidance was provided. Management stated that current cash, investments and available financing should fund foreseeable operating needs.
USGIF advisory and administrative agreements were renewed through September 2017, and management anticipated renewal. The ETF advisory agreement was renewed through April 2018; management also expected offshore client agreements to renew.
The company authorized a monthly dividend of $0.0025 per share through June 2017. Continuation is subject to Board approval and financial conditions. The 2017 share-repurchase authorization permits up to $2.75 million of repurchases; $97,000 was used during the first nine months.
Advisory revenue depends on assets under management and is exposed to market performance, investor redemptions, fund composition and fee waivers. Performance fees are variable and may increase or reduce advisory revenue.
Corporate investments expose the company to equity, fixed-income, natural-resource, foreign-currency, liquidity and valuation risks. A hypothetical 25% price decline would reduce the value of trading securities by approximately $2.430 million and available-for-sale securities by approximately $881,000, before considering other effects.
Unconsolidated variable-interest-entity exposure, consisting of investments and fee receivables, was $11.4 million at March 31, 2017.
The company reported no material changes to previously disclosed risk factors. Management concluded that disclosure controls were effective and that no material internal-control changes occurred during the quarter.
The company had federal net operating loss carryforwards of approximately $5.1 million, fully reserved by a $3.0 million deferred-tax valuation allowance. Certain ownership changes could limit their utilization.

Important facts for investors to verify

Whether assets under management recover from the $697.3 million period-end level and whether continued redemptions pressure advisory-fee revenue.
The sustainability of profitability excluding volatile investment income and nonrecurring cost reductions.
The extent and duration of fund fee waivers and expense reimbursements, including the contractual cap for the Near-Term Tax Free Fund through April 2018.
Renewal of the $1.0 million credit facility after its May 31, 2017 expiration and compliance with its covenants.
Continuation of the monthly dividend after June 2017 and future share repurchase activity.
Credit quality and repayment of the $2.0 million note maturing in June 2017 and the $234,000 note amended to mature in 2021.
Market and valuation exposure from investments representing approximately half of total assets, including the offshore energy and natural-resources fund.