U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2015; filed May 14, 2015. The filing is for fiscal 2015 third quarter, despite the request metadata referencing 2014 Q3. U.S. Global provides investment management services in the United States and Canada and invests for its own account. The company owns 65% of Galileo Global Equity Advisors.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 | ||
|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |
| Operating revenue | $1.831 million | $2.742 million | $7.500 million | $8.534 million |
| Operating loss | $(1.218) million | $(0.415) million | $(2.426) million | $(2.956) million |
| Net loss attributable to U.S. Global | $(1.007) million | $(0.028) million | $(1.978) million | $(1.231) million |
| Net loss per share | $(0.07) | Approximately $0.00 | $(0.13) | $(0.08) |
| Investment income | $0.249 million | $0.373 million | $0.522 million | $1.482 million |
Operating margins were approximately (66.5%) in the quarter and (32.3%) for the nine-month period, compared with approximately (15.1%) and (34.6%), respectively, in the prior comparable periods. The quarterly deterioration primarily reflected the 33.2% revenue decline, while operating expenses decreased only 3.4%.
- At March 31, 2015, cash and cash equivalents were $3.671 million, trading securities were $16.443 million, and available-for-sale securities were $4.303 million.
- Total investments, including $2.413 million of other investments, were approximately $23.2 million, or 70.1% of total assets.
- Total assets were $33.018 million and total shareholders’ equity was $31.425 million; U.S. Global shareholders’ equity was $30.866 million.
- Current liabilities were $1.593 million, producing reported net working capital of approximately $21.1 million and a current ratio of 14.3 to 1.
- The company had no long-term liabilities. A $1.0 million working-capital credit facility was available, unused, and subject to quarterly covenants; management reported compliance.
- Cash flow used in operations was $0.638 million for the nine months, compared with $16.713 million used in the prior year. Investing activities used $0.453 million, financing activities used $0.895 million, and cash declined $2.239 million to $3.671 million.
- Monthly dividends of $0.005 per share were authorized through June 30, 2015, subject to board review. The company repurchased 86,250 Class A shares for $0.266 million during the nine months.
Material changes versus the prior comparable period
- Assets under management at March 31, 2015 were $632.0 million, down 34.1% from $959.0 million a year earlier and down from $965.9 million at June 30, 2014. Average assets under management for the nine months were $773.5 million versus $1.1 billion.
- U.S. fund assets declined because of market depreciation and shareholder redemptions. Nine-month fund assets decreased from $945.9 million to $620.5 million; the decline included $253.6 million of market depreciation and $60.1 million of net redemptions and distributions.
- Quarterly revenue declined $0.911 million, or 33.2%. Mutual fund advisory fees fell $0.578 million, distribution fees fell $0.175 million, and shareholder service fees fell $0.086 million.
- Nine-month revenue declined $1.034 million, or 12.1%, while expenses declined $1.564 million, or 13.6%. Lower compensation and general and administrative costs were partly offset by higher platform fees.
- Galileo was consolidated in the current year after the company acquired its additional 15% interest in June 2014. Galileo contributed $0.413 million of revenue in the quarter and $1.59 million for the nine months, but also added operating expenses.
- Investment income declined $0.960 million, or 64.8%, for the nine months. Current-period results included $0.548 million of unrealized losses on trading securities and a $0.105 million other-than-temporary impairment on available-for-sale corporate debt securities.
- The transfer agency business was fully exited in December 2013. Accordingly, the prior-year nine-month loss from discontinued operations of $0.238 million did not recur.
- Accumulated other comprehensive income declined from $0.906 million at June 30, 2014 to an accumulated loss of $0.462 million, primarily due to investment-related losses and foreign currency translation losses.
Outlook, commentary, risks, and unusual items
- Management stated that cash reserves, investments, and available financing should be sufficient for foreseeable operating needs and investment opportunities. No formal earnings or revenue guidance was provided.
- Advisory and related contracts with U.S. Global Investors Funds were renewed through September 2015. Offshore and Galileo agreements have periodic termination or notice provisions.
- Management expects investment income to remain volatile because of market fluctuations, investment opportunities, and transaction timing.
- The company waived or absorbed $1.005 million of fund fees and expenses during the nine months, compared with $2.102 million in the prior year. Some prior waivers remain potentially recapturable, including $0.510 million through December 2015 and $0.498 million through December 2016.
- Principal risks include declines in assets under management, market and liquidity risk, investment valuation risk, competition, economic conditions, regulation, shareholder redemptions, and potential losses on concentrated investments. A hypothetical 25% decline in trading securities would reduce shareholders’ equity by an estimated $2.713 million after tax; the comparable estimated impact for available-for-sale securities was $0.710 million.
- The company reported $0.105 million of other-than-temporary impairment charges on corporate debt securities after issuers defaulted on scheduled payments.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.
- Pending accounting standards on revenue recognition, going-concern disclosures, and consolidation were under evaluation; the filing does not provide a quantified expected impact.
Investor verification points
- Verify the sustainability of the company’s $632.0 million assets under management and the effect of continued market depreciation or redemptions on advisory revenue.
- Assess whether recurring fee revenue and expense reductions can offset the company’s continuing operating losses.
- Review the composition, liquidity, valuation levels, and impairment exposure of the approximately $23.2 million investment portfolio.
- Confirm the status and renewal terms of U.S. fund, offshore, and Galileo advisory contracts, including fee waivers and recapture rights.
- Monitor cash usage, dividend continuation, share repurchases, and availability of the unused $1.0 million credit facility.
- Evaluate the impact of Galileo’s consolidation on revenue, expenses, non-controlling interest, and future Canadian assets under management.