U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2016, the second quarter of fiscal 2017. Financial statements are unaudited and presented under U.S. GAAP.
Business Context
The company provides investment management services to U.S. Global Investors Funds, offshore clients, an ETF client, and Canadian clients through its 65%-owned Galileo subsidiary. It also invests corporate funds. Revenue is primarily based on assets under management and is therefore sensitive to market performance, investor flows, and fee waivers.
Total assets under management were $683.1 million at December 31, 2016, up 15.9% from $589.4 million a year earlier, but down from $760.2 million at June 30, 2016. Average assets under management for the six months were $773.9 million, compared with $594.5 million in the prior-year period.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Operating revenues | $1.642 million | $1.289 million | $3.623 million | $2.539 million |
| Operating loss | $(234,000) | $(1.916) million | $(203,000) | $(3.311) million |
| Investment income | $249,000 | $(271,000) | $502,000 | $263,000 |
| Net income attributable to U.S. Global | $8,000 | $(2.212) million | $271,000 | $(3.080) million |
| EPS attributable to U.S. Global | $0.00 | $(0.14) | $0.02 | $(0.20) |
| Net cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $718,000 | $539,000 |
Operating margins remained negative: approximately negative 14.3% for the quarter and negative 5.6% for the six-month period, based on operating loss divided by operating revenues. Profitability benefited substantially from investment income and lower operating expenses.
At December 31, 2016, cash and cash equivalents were $3.801 million, restricted cash was $1.0 million, marketable securities were approximately $13.3 million, and total assets were $26.502 million. Current assets were $17.506 million versus current liabilities of $1.170 million, producing approximately $16.3 million of working capital and a 15.0-to-1 current ratio.
The company had no borrowings or long-term liabilities. Its $1.0 million credit facility was undrawn, secured by the $1.0 million restricted cash balance, and scheduled to expire May 31, 2017; management intended to renew it annually.
Material Changes Versus the Prior Comparable Period
- Quarterly operating revenue increased 27.4%, while six-month revenue increased 42.7%, primarily from higher advisory fees and higher average assets under management.
- Quarterly operating expenses declined 41.5% and six-month expenses declined 34.6%, driven by fewer employees, lower general and administrative costs, strategic cost reductions, and the absence of prior-year transition and severance costs.
- The company generated modest profitability versus substantial losses in the prior-year periods. Six-month net income attributable to the company improved by approximately $3.351 million.
- Investment income improved to $249,000 from a $271,000 loss for the quarter and to $502,000 from $263,000 for the six-month period. The improvement reflected higher dividend and interest income and significantly lower impairment losses.
- USGIF assets under management ended the six-month period at $602.1 million, compared with $527.0 million a year earlier. However, the period included net shareholder redemptions of $44.8 million and market depreciation of $47.5 million.
- Administrative service fee revenue declined because the company’s fee rate was reduced after certain services were outsourced in December 2015.
- The company ceased distributing USGIF products in December 2015. Related distribution and shareholder-service activities are presented as discontinued operations; no discontinued-operations loss was recorded in 2016 versus an $18,000 six-month loss in 2015.
Cash Flow, Capital Allocation, and Other Items
- Six-month operating cash flow was $718,000. Investing activities used $555,000, primarily for purchases of available-for-sale securities and other investments.
- Financing activities used $305,000, including $228,000 of dividends and $80,000 of share repurchases.
- The board authorized monthly dividends of $0.0025 per share through March 2017, subject to future board review.
- The company repurchased 47,552 Class A shares for $80,000 during the six months and renewed its repurchase authorization for up to $2.75 million during calendar 2017.
- Investments measured at fair value were approximately 50.3% of total assets. A hypothetical 25% market-price decline would reduce the estimated value of trading and available-for-sale securities by approximately $3.334 million in aggregate, with the accounting effect depending on classification.
Guidance, Outlook, Risks, and Contingencies
- No quantitative earnings or revenue guidance was provided. Management stated that current cash, investments, and available financing should be sufficient for foreseeable operating needs.
- Management expects investment income to remain volatile because it depends on market fluctuations, investment opportunities, transaction timing, and impairments.
- Advisory revenue is exposed to changes in market values and investor flows, particularly in equity, international, gold, natural-resource, and fixed-income funds. Performance-fee adjustments can also increase or decrease revenue.
- The company waived or reduced fund fees and paid certain fund expenses totaling $546,000 during the six months. The Near-Term Tax Free Fund expense limitation was contractually effective through April 2017; other waivers were voluntary and may continue at management’s discretion.
- The company’s exposure to unconsolidated variable-interest entities was $11.3 million at December 31, 2016, limited to the carrying value of investments and fee receivables.
- A $2.0 million note receivable matures in June 2017 and bears interest at 12%; the issuer has a one-year extension option subject to a 2.5% fee. A second $234,000 note bears interest at 15% and was amended to extend maturity to 2021.
- Management reported no material changes to previously disclosed risk factors. Principal risks include investment-management competition, economic and market conditions, regulation, credit and liquidity risk, foreign exchange exposure, and investment valuation uncertainty.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2016, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the increase in advisory revenue and profitability can persist as assets under management declined from June 30, 2016 and fund redemptions continued.
- The sustainability and economic impact of fee waivers, expense reimbursements, and the reduced administrative-service fee structure.
- The performance and liquidity of the company’s $13.3 million fair-value investment portfolio, including the offshore fund and concentrated exposure to market-sensitive securities.
- Repayment or extension of the $2.0 million note receivable and collectability of the $234,000 note.
- Renewal of the $1.0 million credit facility and continuation of the monthly dividend after March 2017.
- The effect of discontinued USGIF distribution activities on the company’s long-term revenue and cost base.