U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended March 31, 2014. The filing corresponds to fiscal 2014 third quarter, despite the request metadata identifying “2013 Q3.” Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
U.S. Global Investors provides investment management and related services and invests corporate funds for its own account. Operating revenue depends substantially on assets under management, market performance, shareholder redemptions and performance-fee adjustments.
Period-end assets under management were $959 million, down 35.6% from $1.488 billion at March 31, 2013 and down from $1.162 billion at June 30, 2013. Average assets under management for the nine months were $1.096 billion, compared with $1.634 billion in the prior-year period.
Key Financial Metrics
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Nine months ended March 31, 2014 | Nine months ended March 31, 2013 |
|---|---|---|---|---|
| Operating revenues | $2.742 million | $4.473 million | $8.534 million | $13.859 million |
| Operating income (loss) | ($415,267) | $214,666 | ($2.956 million) | $332,635 |
| Income (loss) from continuing operations | ($26,063) | $115,627 | ($992,505) | $386,398 |
| Net income (loss) | ($27,979) | $41,167 | ($1.231 million) | $255,952 |
| Net income (loss) per share | $0.00 loss | $0.00 | ($0.08) | $0.02 |
| Comprehensive income (loss) | $150,768 | $470,450 | ($1.138 million) | $589,769 |
Margins: Nine-month operating margin was approximately negative 34.6%, compared with positive 2.4% in the prior-year period. Quarterly operating margin was approximately negative 15.1%, compared with positive 4.8%.
Cash flow: Net cash used in operating activities was $16.713 million for the nine months, compared with $1.183 million provided in the prior-year period. The principal driver was a $14.056 million increase in trading securities. Investing activities provided $3.564 million, while financing activities used $804,000, including $696,000 of dividends and $230,000 of share repurchases. Ending cash and cash equivalents were $4.132 million.
Liquidity and capitalization: Current assets were $25.920 million and current liabilities were $1.579 million, producing working capital of approximately $24.3 million and a current ratio of 16.4 to 1. Total shareholders’ equity was $34.902 million. The Company had no long-term liabilities and an unused $1 million credit facility.
Investments: Investment holdings had a carrying value of approximately $25.3 million, or 69.3% of total assets. Trading securities were $18.646 million and available-for-sale securities were $6.241 million. Investment income was $1.482 million for the nine months, compared with $346,000 in the prior-year period, but management cautioned that investment gains and losses are volatile.
Material Changes Versus the Prior Comparable Period
- Nine-month operating revenue declined 38.4%, primarily because of lower assets under management, lower base advisory fees and increased performance-fee adjustments.
- Nine-month operating expenses declined 15.1%, reflecting lower employee compensation, platform fees and advertising costs, but the reduction did not offset the revenue decline.
- Mutual fund advisory fees declined 41.3% for the nine months; distribution fees and shareholder service fees also declined materially.
- The Company recorded investment income of $1.482 million for the nine months versus $346,000 in the prior year, driven mainly by realized gains on available-for-sale securities and higher dividend and interest income.
- The transfer agency business was exited in December 2013 and presented as discontinued operations. The nine-month after-tax loss from discontinued operations increased to $238,000 from $130,000.
- The Government Fund converted from a money market fund to a government ultra-short bond fund, and the U.S. Treasury Securities Cash Fund was liquidated. These changes contributed to lower assets under management and moved approximately $14.1 million from cash equivalents to trading securities.
- The Company repurchased 76,511 Class A shares for $230,347 during the nine months and continued a $2.75 million repurchase authorization for calendar 2014.
Outlook, Commentary, Risks and Unusual Items
Management stated that cash reserves, available financing and potential operating cash flow should be sufficient for foreseeable cash needs. Investment advisory and related contracts with the mutual funds were renewed through September 2014, except for the terminated transfer agency arrangement. Management expected remaining offshore client contracts to renew, although one offshore fund liquidated in November 2013.
The Company plans to purchase an additional 15% of Galileo Global Equity Advisors in the fourth fiscal quarter, increasing ownership from 50% to 65%. It will then reassess whether Galileo should continue under the equity method or be consolidated.
A monthly dividend of $0.005 per share was authorized through June 30, 2014 and remains subject to quarterly Board review. Contractual and voluntary fund fee waivers and expense reimbursements totaled $2.102 million for the nine months. Certain waived amounts may be recaptured, subject to fund yield requirements.
Key risks include declining or volatile assets under management, market and liquidity risk in the Company’s investment portfolio, fluctuations in investment income, competition, economic conditions, regulatory changes and potential unfavorable outcomes from claims or litigation. Management stated that no known contingency beyond recorded accruals was expected to have a material adverse effect. A hypothetical 25% market-price decline would reduce shareholders’ equity, net of tax, by approximately $3.077 million for trading securities and $1.030 million for available-for-sale securities.
The Company corrected nonmaterial investment classification issues by moving certain private and venture-capital securities to other investments and reclassifying certain fair-value measurements from Level 1 to Level 2. These changes did not affect net income or earnings per share. Management concluded that disclosure controls were effective as of March 31, 2014, with no material change in internal control over financial reporting.
Facts Investors Should Verify
- Whether assets under management stabilize or continue declining, particularly following fund liquidations, conversions and significant shareholder redemptions.
- The sustainability of advisory revenue given lower asset levels, fee waivers and performance-fee adjustments.
- The composition, liquidity, valuation and market concentration of the $25.3 million investment portfolio.
- The effect of continued operating losses and negative operating cash flow on cash balances, dividends and share repurchases.
- The terms and accounting treatment of the planned additional Galileo investment and any resulting consolidation.
- Whether the monthly dividend continues after June 30, 2014 and whether remaining fee waivers or recapture rights change.
- Potential costs associated with the discontinued transfer agency operations, including approximately $65,000 of unused leased-equipment expenses.