U.S. Global Investors, Inc. — Form 10-Q Summary
Business Context and Reporting Period
U.S. Global Investors, Inc. is an investment management company headquartered in San Antonio, Texas. It provides investment advisory, distribution, administrative and shareholder services, operates through its Canadian subsidiary Galileo Global Equity Advisors Inc., and invests for its own account.
This report covers the quarter ended September 30, 2015, the first quarter of fiscal 2016. The financial statements are unaudited and presented under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Operating revenues | $1.598 million | $3.297 million | Down 51.5% |
| Operating expenses | $2.986 million | $3.613 million | Down 17.4% |
| Operating loss | $1.388 million | $316,000 | Loss increased |
| Investment income | $534,000 | $220,000 | Up 142.7% |
| Net loss attributable to U.S. Global | $868,000 | $128,000 | Loss increased $740,000 |
| Basic and diluted loss per share | $0.06 | $0.01 | Loss increased |
| Cash flow from operating activities | $480,000 provided | $110,000 used | Improved $590,000 |
Revenue declined primarily because of lower assets under management, market depreciation, shareholder redemptions and lower performance-related fees. Expense reductions partially offset the revenue decline, particularly in platform fees, general and administrative costs, and employee compensation.
At September 30, 2015, cash and cash equivalents were $4.474 million, trading securities were $15.140 million, available-for-sale securities were $3.177 million, and other investments were $2.303 million. Total assets were $28.801 million, compared with $30.770 million at June 30, 2015.
Current liabilities were $1.473 million, producing net working capital of approximately $19.1 million and a current ratio of 14.0 to 1. The Company had no borrowings or long-term liabilities and had an unused $1 million credit facility available through May 31, 2016.
Shareholders’ equity totaled $27.328 million, including $26.795 million attributable to U.S. Global shareholders. The Company paid $230,000 in dividends and repurchased 73,021 Class A shares for $163,000 during the quarter.
Investments measured at fair value totaled approximately $18.3 million, or 63.6% of total assets. The portfolio had a cost basis of approximately $20.2 million. Investment income included $531,000 of realized gains on available-for-sale securities, partially offset by trading-security losses and a $60,000 other-than-temporary impairment.
Material Changes Versus the Prior Comparable Period
- Total assets under management at September 30, 2015 were $565.3 million, down 31.4% from $824.6 million one year earlier and down from $641.6 million at June 30, 2015.
- Average assets under management declined to $597.3 million from $918.1 million in the prior-year quarter.
- USGIF ending assets under management declined to $512.6 million from $806.1 million, driven by $54.3 million of market depreciation and $23.5 million of net shareholder redemptions.
- Galileo period-end assets under management fell to $113.9 million from $226.4 million, while average assets declined to $126.6 million from $244.9 million.
- Advisory fees decreased $1.281 million, or 53.0%, to $1.139 million. Distribution, shareholder services and administrative fees also declined substantially.
- Operating expenses decreased $627,000, including a $338,000 reduction in platform fees, a $197,000 reduction in general and administrative expenses, and a $112,000 reduction in employee compensation and benefits.
- The average annualized investment management fee rate declined to 65 basis points from 84 basis points, reflecting lower fee rates and fee waivers.
- Accumulated other comprehensive loss increased to $1.148 million from $483,000 at June 30, 2015, primarily because of unrealized losses on available-for-sale investments and foreign currency translation losses.
Outlook, Risks, Contingencies and Unusual Items
Management stated that results are highly dependent on market values, investor sentiment, fund asset levels, shareholder purchases and redemptions, and competition. Investment income is expected to remain volatile because it depends on market fluctuations and the timing of transactions.
The Company expects adequate liquidity from cash, marketable securities and available financing to meet foreseeable operating needs. Management may discontinue discretionary investment purchases, dividends or share repurchases if necessary.
A proposed restructuring of USGIF administrative and distribution functions was scheduled for shareholder consideration on December 9, 2015. If approved, Atlantic Fund Services would assume certain administrative, fund accounting and transfer agency responsibilities, and a third party would become distributor. The proposal could reduce administrative, distribution and shareholder service revenues, although certain expenses and fee waivers are also expected to decline.
For the quarter ended September 30, 2015, administrative fees were $111,000, distribution fees were $245,000 and shareholder services fees were $103,000. If the proposed revised administrative agreement had been in place, estimated quarterly administrative fees would have been approximately $50,000. The Company expected to record approximately $330,000 of its share of estimated transition costs in the quarter ending December 31, 2015.
The Company had fee waivers and expense reimbursements for USGIF of $378,000 during the quarter. Certain prior Government Fund waivers remained recoverable through December 31, 2015 and December 31, 2016, subject to applicable conditions.
Market risk is significant because of the concentration of assets in investments. A hypothetical 25% change in trading-security prices would have affected shareholders’ equity by approximately $3.785 million, while a comparable change in available-for-sale securities would have affected equity by approximately $794,000.
Management reported no material changes to previously disclosed risk factors, no material internal-control changes, and effective disclosure controls as of September 30, 2015. Ordinary-course claims and legal proceedings may arise, but management did not expect liabilities beyond recorded accruals to have a material adverse effect.
Most Important Facts for Investors to Verify
- Whether assets under management stabilize or continue declining, particularly in USGIF and Galileo.
- The effect of the proposed USGIF administrative and distribution transition on recurring revenue, platform expenses, fee waivers and the estimated $330,000 Company transition cost.
- The sustainability of dividends and share repurchases despite the quarterly operating loss.
- The composition, liquidity and valuation of the $18.3 million investment portfolio, including Level 3 corporate debt and the $835,000 unrealized loss on the offshore fund.
- Whether investment income continues to offset operating losses, given its stated volatility and dependence on market conditions.
- The Company’s ability to maintain liquidity and comply with covenants if operating losses persist.
- The status and recoverability of outstanding fee waivers and the potential impact of tax-loss carryforward limitations.