U.S. Global Investors, Inc. — Fiscal 2014 Second Quarter 10-Q
Reporting period: Quarter and six months ended December 31, 2013, compared with the corresponding periods ended December 31, 2012. The company provides investment management services and invests corporate cash for its own account.
Key financial metrics
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Operating revenue | $2.740 million | $4.973 million | $5.792 million | $9.386 million |
| Operating income (loss) | $(1.465) million | $0.162 million | $(2.541) million | $0.118 million |
| Income (loss) from continuing operations | $(0.958) million | $0.178 million | $(0.966) million | $0.271 million |
| Net income (loss) | $(1.165) million | $0.166 million | $(1.203) million | $0.215 million |
| Basic net EPS | $(0.08) | $0.01 | $(0.08) | $0.01 |
Calculated margins: Operating margin was approximately negative 53.5% for the quarter and negative 43.9% for the six-month period. Net margin was approximately negative 42.5% and negative 20.8%, respectively.
- Investment income was $48,225 for the quarter and $1.109 million for six months, versus $160,987 and $361,638 in the prior-year periods. Six-month investment income benefited from realized gains on available-for-sale securities.
- Operating cash flow was $(15.305) million for the six months, compared with $0.121 million provided in the prior-year period. The principal use was a $14.051 million increase in trading securities.
- Cash and cash equivalents were $4.566 million at December 31, 2013, compared with $18.085 million at June 30, 2013. Marketable investments totaled approximately $25.984 million, or approximately 69.7% of total assets.
- Total assets were $37.266 million, shareholders’ equity was $35.081 million, and current liabilities were $2.185 million. Net working capital was approximately $23.5 million and the current ratio was 11.8 to 1.
- The company had no long-term liabilities. Its $1.0 million working-capital credit facility was unused, and management stated that covenant requirements were satisfied.
Material changes versus the prior comparable period
- Quarterly operating revenue declined 44.9%, primarily because mutual fund advisory fees fell 49.4% as a result of lower assets under management and larger performance-fee reductions. Six-month operating revenue declined 38.3%.
- Quarterly operating expenses declined 12.6%, and six-month expenses declined 10.1%, mainly from lower employee compensation and platform fees. General and administrative expense increased because of strategic fund restructurings.
- Assets under management at December 31, 2013 were $0.972 billion, down 39.6% from $1.610 billion a year earlier and down from $1.162 billion at June 30, 2013. Average assets under management for the six months were $1.153 billion versus $1.671 billion in the prior-year period.
- The company exited its transfer agency business. USSI transferred the function to a third party on December 9, 2013, and related results were classified as discontinued operations. The discontinued operation produced a six-month after-tax loss of $236,178 versus a $55,987 loss in the prior-year period.
- The U.S. Government Securities Savings Fund converted from a money market fund to an ultra-short bond fund, and the U.S. Treasury Securities Cash Fund was liquidated. These actions contributed to lower assets under management and reclassified approximately $14.119 million from cash equivalents to trading securities.
- The board renewed a $2.75 million share-repurchase authorization for calendar 2014. During the six months, the company repurchased 41,446 Class A shares for $109,737.
Outlook, commentary, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management expects current cash reserves, available financing and potential operating cash flow to cover foreseeable needs.
- Investment advisory revenue remains sensitive to market performance, investor sentiment, asset levels, redemptions, fund composition and performance-fee adjustments. The company also cautioned that investment income will fluctuate with market conditions and transaction timing.
- The investment portfolio was concentrated relative to the balance sheet: trading securities were $18.641 million and available-for-sale securities were $7.344 million. A hypothetical 25% market-price decline would reduce shareholders’ equity by approximately $4.287 million in aggregate, net of tax, based on the filing’s sensitivity analysis.
- The company waived or reimbursed $1.748 million of fund fees and expenses during the six months, including amounts potentially recoverable over future periods. Certain contractual expense limitations extend through April or December 2014.
- One offshore advisory fund liquidated in November 2013. The company also recorded a $14,767 equity-method loss from its 50% investment in Galileo for the six months.
- On January 17, 2014, Galileo gave the company the right to purchase an additional 15% interest. Management planned to proceed during the third fiscal quarter, which would increase ownership to 65%.
- The board authorized a monthly dividend of $0.005 per share through March 31, 2014, subject to review. The filing states that dividend payments remain discretionary.
- Management identified industry competition, domestic and foreign economic conditions, regulation, and market, credit and liquidity risks as material risks. No material changes to the risk factors in the fiscal 2013 Form 10-K were reported.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2013, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify the sustainability of assets under management, including redemption trends and the effect of fund liquidations and reorganizations.
- Assess whether fee waivers, expense reimbursements and performance-fee adjustments will continue to pressure advisory margins.
- Reconcile the substantial decline in cash with the conversion of cash equivalents into trading securities and evaluate the portfolio’s market and liquidity exposure.
- Monitor the planned Galileo investment increase to 65%, including funding, accounting treatment and the investee’s profitability.
- Review the financial and operating effects of the transfer agency exit, including remaining liabilities and transition costs.
- Confirm the continuation of the monthly dividend and the scope of the renewed $2.75 million share-repurchase program.