U.S. Global Investors, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended September 30, 2014, representing the first quarter of fiscal 2015. The company provides investment management services in the United States and Canada and invests for its own account. Its Canadian subsidiary owns a 65% controlling interest in Galileo Global Equity Advisors, which was consolidated beginning June 1, 2014. The company exited its transfer agency business in December 2013.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2014 | Prior Comparable Period |
|---|---|---|
| Operating revenue | $3.297 million | $3.052 million |
| Operating loss | $(316,000) | $(1.076) million |
| Operating margin | $(9.6%) | $(35.3%) |
| Investment income | $220,000 | $1.060 million |
| Loss from continuing operations | $(89,000) | $(9,000) |
| Net loss attributable to U.S. Global Investors | $(128,000) | $(37,000) |
| Net loss per share | $(0.01) | $0.00 |
| Net cash used in operating activities | $(110,000) | $(441,000) |
| Cash and cash equivalents at period end | $4.734 million | $18.822 million |
Ending assets were $36.506 million, including $17.586 million of trading securities, $5.552 million of available-for-sale securities and $2.413 million of other investments. Total investments represented approximately 70% of total assets. Current liabilities were $1.679 million, producing working capital of approximately $23.4 million and a current ratio of 14.9 to 1.
The company had no long-term liabilities and an unused $1 million working-capital credit facility. Total shareholders’ equity was $34.827 million, including $617,000 attributable to the non-controlling interest in Galileo.
Material Changes Versus the Prior Comparable Period
- Operating revenue increased $245,000, or 8.0%, primarily because Galileo revenue was consolidated. Mutual fund advisory fees increased 15.8% to $2.420 million.
- Operating expenses decreased $515,000, or 12.5%, to $3.613 million, mainly due to lower employee compensation and general and administrative expenses. Platform fees increased because of Galileo consolidation.
- Operating loss improved by $760,000, although the company remained unprofitable.
- Investment income fell $840,000, or 79.2%, to $220,000. Realized gains on available-for-sale securities declined to $295,000 from $875,000, while trading securities produced a $231,000 unrealized loss.
- Net loss attributable to the company increased to $128,000 from $37,000 because the improvement in operating results was more than offset by lower investment income and the absence of the prior-year discontinued-operations loss benefit.
- Assets under management declined to $824.6 million at September 30, 2014, from $1.2 billion a year earlier and $965.9 million at June 30, 2014. The decline reflected market depreciation, net shareholder redemptions and the liquidation or conversion of money-market funds.
- Average mutual-fund net assets declined to $897.5 million from $1.173 billion. The average annualized management fee increased to 84 basis points from 73 basis points, partly reflecting Galileo consolidation.
- Cash declined by $1.176 million during the quarter, primarily from $740,000 of investing cash outflows, $259,000 of financing cash outflows and $110,000 of operating cash outflows.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash reserves, available financing and projected operating cash flow should be sufficient for foreseeable cash needs and operating capital.
- Investment advisory and related contracts with the U.S. funds were renewed through September 2015. Galileo and offshore advisory agreements have termination and renewal provisions described in the filing.
- The company waived or absorbed $277,000 of fund fees and expenses during the quarter, compared with $855,000 in the prior-year period. Certain prior fee waivers remain potentially recoverable through 2016, subject to fund-yield conditions.
- A monthly dividend of $0.005 per share was authorized through December 31, 2014, subject to quarterly board review. Expected dividends for October through December were approximately $232,000.
- The company repurchased 16,793 Class A shares for $59,000 under its 2014 authorization, leaving approximately $2.512 million available.
- Investment income is volatile and depends on market conditions, transaction timing and investment opportunities. A hypothetical 25% market-price decline would reduce after-tax shareholders’ equity by approximately $3.818 million across trading and available-for-sale securities, based on the filing’s sensitivity disclosures.
- Principal risks include investment-management competition, changes in economic conditions, regulation, market and credit risk, liquidity risk, redemptions and fluctuations in assets under management.
- Management reported no material changes to previously disclosed risk factors, effective disclosure controls, or material changes in internal control over financial reporting.
- Beginning November 1, 2014, the administrative fee per fund was scheduled to decrease from $10,000 to $7,000 annually.
Important Facts for Investors to Verify
- Confirm the sustainability of revenue and profitability after consolidating Galileo and after accounting for lower U.S. assets under management.
- Monitor assets under management, market performance, shareholder redemptions and fee-waiver levels, which directly affect advisory revenue.
- Assess the concentration and market sensitivity of the company’s investment portfolio, which represented approximately 70% of assets.
- Review the reduction in cash from $18.822 million at September 30, 2013, to $4.734 million at September 30, 2014, and the company’s continuing operating cash requirements.
- Verify the recoverability and expiration dates of fee waivers, the continuation of the monthly dividend, and the terms of the unused credit facility.
- Review the company’s annual-report risk factors and contingencies because the quarterly filing states that unfavorable outcomes remain possible, although management does not expect liabilities beyond recorded accruals to be material.