U.S. Global Investors, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended December 31, 2014, representing the company’s fiscal second quarter and first half of fiscal 2015. U.S. Global Investors provides investment management services in the United States and Canada and invests for its own account. Its Canadian subsidiary owns 65% of Galileo Global Equity Advisors, which was consolidated beginning June 1, 2014. The company exited its transfer agency business in December 2013.
Financial performance and position
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Operating revenue | $2.371 million | $5.668 million |
| Operating loss | $0.891 million | $1.208 million |
| Loss from continuing operations | $0.841 million | $0.931 million |
| Net loss attributable to U.S. Global | $0.842 million | $0.970 million |
| Basic and diluted loss per share | $0.05 | $0.06 |
| Net cash used in operating activities | Not separately provided | $0.212 million |
- Operating expenses were $3.262 million for the quarter and $6.876 million for the six-month period, producing operating margins of approximately negative 37.6% and negative 21.3%, respectively.
- Cash and cash equivalents were $4.252 million at December 31, 2014, compared with $5.910 million at June 30, 2014. Marketable trading and available-for-sale securities totaled approximately $21.6 million at fair value.
- Total assets were $34.511 million and shareholders’ equity was $32.894 million, including $32.301 million attributable to U.S. Global shareholders.
- Net working capital was approximately $22.3 million, and the current ratio was 14.8 to 1.
- The company had no long-term liabilities. A $1.0 million credit facility was available but unused, and the company reported compliance with its covenants.
- Total investments represented approximately 69.5% of total assets. Investment income was $53,000 for the quarter and $273,000 for the six months, compared with $48,000 and $1.109 million in the prior-year periods.
Material changes versus the prior comparable period
- Quarterly revenue declined 13.5% to $2.371 million; six-month revenue declined 2.1% to $5.668 million.
- Quarterly net loss attributable to U.S. Global improved 27.7%, from $1.165 million to $842,000. The six-month loss improved 19.4%, from $1.203 million to $970,000.
- Operating expenses declined 22.4% in the quarter and 17.5% for the six months, primarily due to lower compensation, general and administrative costs, fund reimbursements and restructuring costs. Platform fees increased due partly to Galileo consolidation.
- Quarterly mutual fund advisory fees declined 7.2%, while six-month advisory fees increased 5.1% due to Galileo revenue being included in the current year.
- Distribution fees and shareholder service fees declined 29.7% and 31.6%, respectively, in the quarter because of lower average assets under management.
- Assets under management were $670.9 million at December 31, 2014, down 31.0% from $972.1 million a year earlier and down from $965.9 million at June 30, 2014. Average assets under management for the six months were $827.5 million versus $1.2 billion in the prior-year period.
- Available-for-sale securities generated a significant decline in accumulated other comprehensive income, which moved from $906,000 at June 30, 2014 to a total accumulated other comprehensive loss of $291,000 at December 31, 2014.
- The prior-year periods included losses from discontinued transfer agency operations of $207,000 for the quarter and $236,000 for the six months; no such losses were recorded in 2014.
Guidance, outlook, risks, contingencies and unusual items
- Management stated that cash reserves, investments and available financing should meet foreseeable operating and capital needs. No formal earnings or revenue guidance was provided.
- Investment advisory contracts with U.S. Global Investors Funds were renewed through September 2015. Offshore and Galileo advisory agreements may be terminated or expire subject to their contractual provisions.
- The company authorized a monthly dividend of $0.005 per share through March 31, 2015, subject to quarterly board review. Expected January-to-March 2015 dividends were approximately $231,000.
- The company repurchased 67,005 Class A shares for $206,000 during the six months and renewed its $2.75 million repurchase authorization for calendar 2015.
- Fund fee waivers and expense reimbursements totaled $614,000 for the six months, down from $1.748 million in the prior-year period. Certain waived amounts remain recoverable through December 2015 and December 2016.
- Key risks include declines in assets under management, market and credit risk from the investment portfolio, liquidity risk, competition, economic conditions, regulation and volatility in investment income. A hypothetical 25% change in investment prices would have affected shareholders’ equity, net of tax, by approximately $2.808 million for trading securities and $750,000 for available-for-sale securities.
- Management reported no material changes to previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting.
- Management believes pending litigation and other contingencies will not have a material adverse effect, although unfavorable outcomes remain possible.
Important facts for investors to verify
- Whether assets under management and net shareholder flows stabilize, particularly in the U.S. equity funds and Galileo’s Canadian business.
- The sustainability of recurring advisory revenue given fee waivers, performance-fee adjustments and the decline in average assets.
- The composition, valuation and liquidity of the investment portfolio, including approximately $1.2 million of unrealized losses on available-for-sale securities and Level 3 corporate debt.
- Whether operating-cost reductions are sustainable and sufficient to return the core investment management business to profitability.
- The board’s decision regarding continuation of the monthly dividend after March 31, 2015, and the pace of share repurchases.
- Renewal and termination provisions for U.S. Global, offshore and Galileo advisory contracts.