U S GLOBAL INVESTORS INC quarterly report, Q3 FY2016

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

Reporting period: Quarter and nine months ended March 31, 2016. The filing period differs from the request metadata describing “2015 Q3.” The company is a smaller reporting company headquartered in San Antonio, Texas and operates investment management, Canadian investment management, and corporate investment businesses.

Financial performance and position

Metric	Three months ended March 31, 2016	Three months ended March 31, 2015	Nine months ended March 31, 2016	Nine months ended March 31, 2015
Operating revenue	$1.330 million	$1.389 million	$3.869 million	$5.875 million
Operating loss	$(0.540) million	$(1.171) million	$(3.851) million	$(2.337) million
Net loss attributable to U.S. Global	$(0.350) million	$(1.007) million	$(3.430) million	$(1.978) million
Loss per share	$(0.02)	$(0.07)	$(0.22)	$(0.13)
Net cash provided by operating activities	Not separately provided	Not separately provided	$0.009 million	$(0.638) million

Third-quarter operating revenue declined 4.2%, while operating expenses declined 27.0% to $1.870 million. The implied operating margin improved to approximately negative 40.6% from negative 84.3%.
Nine-month operating revenue declined 34.1%, while operating expenses declined only 6.0%. The implied operating margin was approximately negative 99.5%, compared with negative 39.8% in the prior-year period.
Third-quarter net loss attributable to the company improved by $657,000, primarily from lower compensation, general and administrative, and platform expenses.
Nine-month net loss worsened by $1.452 million, reflecting lower assets under management, reduced advisory and administrative fees, and transition-related costs.
Investment income was $148,000 in the quarter and $411,000 for nine months, compared with $249,000 and $522,000, respectively. Nine-month investment income included approximately $259,000 of impairments on available-for-sale securities and $258,000 of impairments on securities held at cost.
March 31, 2016 assets were $26.679 million, including $3.057 million of cash, $13.102 million of trading securities, $0.750 million of held-to-maturity securities, and $4.013 million of available-for-sale securities.
The company had $1.124 million of current liabilities, $16.863 million of working capital, and a reported current ratio of 16.0 to 1. It had no borrowings or long-term liabilities and an unused $1 million credit facility available through May 31, 2016.
Cash declined by $450,000 during the first nine months, ending at $3.057 million. Financing cash uses included $460,000 of dividends and $269,000 of share repurchases.

Material changes versus the prior comparable period

Total assets under management at March 31, 2016 were $660.3 million, up 4.5% from March 31, 2015, but average assets under management for the nine-month period fell to $595.9 million from $773.5 million.
USGIF assets under management declined to $590.5 million from $620.5 million at the prior-year quarter-end. Galileo assets under management declined 26.5% year over year to $112.6 million.
Advisory fees declined 32.5% for the nine-month period, primarily because of lower average assets under management. Third-quarter advisory fees increased 2.5%, helped by ETF fees and more favorable performance-fee adjustments.
Administrative services fees declined 63.8% in the quarter and 50.8% for nine months following lower assets and reduced responsibilities under revised USGIF arrangements.
Effective December 10, 2015, the company ceased serving as USGIF distributor. Distribution and shareholder-services revenues and related expenses were reclassified to discontinued operations. These operations generated no revenue in the current quarter and a nine-month loss of $18,000.
The company recorded approximately $290,000 of one-time transition expenses in the quarter ended December 31, 2015. Workforce reductions and outsourcing reduced current-quarter operating costs.
Accumulated other comprehensive loss improved to $45,000 at March 31, 2016 from $483,000 at June 30, 2015, primarily due to unrealized gains on available-for-sale securities.

Outlook, risks, contingencies, and unusual items

Management stated that current cash, investments, and available financing should be sufficient for foreseeable operating needs, despite the nine-month net loss.
The business remains sensitive to market values, investor sentiment, shareholder purchases and redemptions, competition, investment performance, and the level and composition of assets under management.
Approximately 64.2% of total assets consisted of investments measured or carried at fair value or cost. A hypothetical 25% market-price decline would reduce estimated equity by approximately $4.279 million before considering other effects.
Investment results may be volatile. The company had $17.1 million of investments measured at fair value, including $212,000 classified as Level 3, requiring significant unobservable inputs.
The company maintains fee waivers and expense reimbursements for certain funds. Fees waived or expenses borne for USGIF were $311,000 in the quarter and $1.1 million for nine months. Approximately $498,000 of historical Government Fund waivers remained recoverable through December 31, 2016.
A monthly dividend of $0.0025 per share was authorized through September 30, 2016, subject to board review. The company expected approximately $230,000 of dividends from April through September 2016.
The company disclosed ordinary-course litigation and other contingencies but stated that amounts beyond recorded accruals are not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Management concluded that disclosure controls and procedures were effective as of March 31, 2016, with no material change in internal control over financial reporting.

Important facts for investors to verify

Whether the lower average assets under management and reduced fee rates continue to pressure advisory revenue.
The sustainability of the post-distribution-transition cost savings and whether recurring revenue loss exceeds expense reductions.
The composition, liquidity, valuation, and impairment risk of the company’s investment portfolio, particularly the offshore fund and Level 3 securities.
The company’s ability to remain cash-flow neutral or positive while continuing dividends, share repurchases, and investment activities.
Renewal of USGIF advisory and administrative agreements through September 2016, the ETF agreement through 2017, and the company’s offshore and Canadian advisory contracts.
The continued availability or renewal of the $1 million credit facility after May 31, 2016, and compliance with its financial covenants.