U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013, the company’s fiscal 2014 first quarter. The filing was dated November 7, 2013. U.S. Global Investors provides investment management services and invests corporate funds.
Financial Results and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Operating revenues | $3.052 million | $4.413 million | Down 30.8% |
| Operating loss | $(1.076) million | $(0.044) million | Higher loss |
| Investment income | $1.061 million | $0.201 million | Up 425.0% |
| Income from continuing operations | $(8,768) | $93,039 | Declined |
| Net income (loss) | $(37,413) | $48,800 | Declined $86,213 |
| Comprehensive income (loss) | $(236,227) | $150,600 | Declined |
| Net cash used in operating activities | $(441,130) | $(1,989) | Higher use of cash |
| Cash and cash equivalents | $18.823 million | $19.696 million at prior-year quarter-end | Current quarter increased $0.737 million from June 30, 2013 |
Operating margin was approximately negative 35.3%, compared with negative 1.0% in the prior-year quarter. Net margin was approximately negative 1.2%, compared with positive 1.1%. The operating loss was substantially offset by investment income, including a $875,346 realized gain on sales of available-for-sale securities.
At September 30, 2013, total assets were $38.337 million, shareholders’ equity was $36.391 million, and current liabilities were $1.946 million. Net working capital was approximately $23.7 million and the current ratio was 13.2 to 1. The company had no long-term liabilities and had not drawn on its $1 million credit facility.
Marketable investments totaled approximately $13.1 million, or 34.1% of total assets. Cash, cash equivalents, and marketable securities represented 83.2% of total assets. Investing activities generated $1.403 million of cash, principally from $1.903 million of proceeds from available-for-sale securities, partly offset by $0.500 million of purchases. Financing activities used $224,980, including $232,085 of dividends and $37,209 of share repurchases.
Material Changes Versus the Prior Comparable Period
- Assets under management at September 30, 2013 were $1.192 billion, down 32.5% from $1.766 billion a year earlier, although up from $1.162 billion at June 30, 2013. Average assets under management declined to $1.199 billion from $1.664 billion.
- Mutual fund advisory fees declined 30.2% to $2.037 million. Distribution, shareholder service, and administrative service fees also declined as a result of lower average assets under management.
- Operating expenses fell 7.4% to $4.128 million, primarily due to lower compensation and platform fees, but general and administrative costs increased because of strategic fund changes.
- Average investment management fees declined to 73 basis points from 79 basis points, partly reflecting fee waivers and support for fixed-income and money-market fund yields.
- Investment income increased sharply because of realized gains on available-for-sale securities. Investment gains and losses may be volatile and were concentrated in a small number of issuers.
- The company’s Board approved exiting the transfer agency business on August 23, 2013. Transfer agency results were classified as discontinued operations, which produced a $28,645 after-tax loss in the quarter versus a $44,239 loss in the prior-year quarter.
Guidance, Outlook, Risks, and Unusual Items
- The transfer agency business was expected to convert to a new provider in December 2013. Management stated that the exit would allow the company to focus on investment management.
- Administrative service fee rates were expected to increase in December 2013, subject to the terms disclosed in the filing.
- The Global Emerging Markets Fund was liquidated on October 31, 2013. Additional reorganizations, a money-market fund conversion, and liquidation of the U.S. Treasury Securities Cash Fund were anticipated by year-end, with some actions subject to shareholder approval.
- A monthly dividend of $0.005 per share was authorized through December 2013 and was subject to quarterly Board review. The expected October–December 2013 dividend amount was approximately $232,000.
- The company had approximately $734,000 of federal capital loss carryovers expiring in fiscal 2018 and approximately $82,000 of charitable contribution carryovers expiring in fiscal 2018–2019.
- The company disclosed exposure to equity price, market, credit, liquidity, regulatory, economic, and investment-management industry risks. A hypothetical 25% change in investment prices would have affected after-tax shareholders’ equity by approximately $803,000 for trading securities and $1.357 million for available-for-sale securities.
- The company had an unfunded commitment of $62,500 related to a venture capital investment. Management stated that known litigation and contingencies were not expected to have a material adverse effect, although unfavorable outcomes remain possible.
- Management believed cash reserves, available financing, and potential operating cash flow were sufficient for foreseeable needs. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether assets under management and advisory-fee revenue stabilize following the significant year-over-year decline.
- The sustainability and quality of investment income, particularly the effect of realized gains and market movements on reported earnings.
- The financial effect of exiting the transfer agency business and the timing and costs of the conversion.
- Whether planned fund liquidations, reorganizations, and fee changes improve operating performance or reduce revenue.
- The continuation of monthly dividends and the use of the remaining approximately $2.539 million share-repurchase authorization through calendar year-end 2013.
- The valuation, liquidity, and concentration risks associated with the company’s approximately $13.1 million investment portfolio, including offshore and Level 3 investments.