U.S. Global Investors, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011, representing the first quarter of fiscal 2012. The filing was dated November 3, 2011. The company provides investment management, fund administration, distribution and transfer-agent services and also invests corporate funds.
Financial Performance and Position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Total revenue | $7.792 million | $8.921 million | Down 12.7% |
| Operating expenses | $6.630 million | $6.962 million | Down 4.8% |
| Income before taxes | $1.162 million | $1.959 million | Down 40.7% |
| Net income | $749,518 | $1.266 million | Down 40.8% |
| Diluted EPS | $0.05 | $0.08 | Down $0.03 |
| Net margin | 9.6% | 14.2% | Down approximately 4.6 points |
| Operating cash flow | $1.799 million | $1.280 million | Up 40.6% |
- Investment management revenue was $8.358 million, while corporate investment revenue was negative $566,321.
- Investment income changed from $479,851 of income to a $551,875 loss, primarily because of unrealized losses on trading securities.
- Cash and cash equivalents were $28.124 million at September 30, 2011, compared with $27.208 million at June 30, 2011.
- Total assets were $45.113 million and shareholders’ equity was $40.645 million. Net working capital was approximately $32.5 million and the current ratio was 8.3 to 1.
- The company had no long-term liabilities and had not drawn on its $1 million working-capital credit facility.
- Investments totaled approximately $9.1 million at market value, or 20.2% of total assets. Trading securities had an unrealized loss of approximately $850,917; available-for-sale securities had an unrealized gain of approximately $912,709.
- Cash flow included $925,366 of dividends paid. No property and equipment was purchased during the quarter.
Material Changes Versus the Prior Comparable Period
- Assets under management at period end declined 22% to $2.050 billion from $2.625 billion at September 30, 2010, driven by market depreciation in equity funds, particularly natural-resources funds, and net shareholder redemptions.
- Average assets under management were broadly stable at $2.453 billion versus $2.450 billion in the prior-year quarter, limiting the decline in recurring advisory revenue.
- Mutual fund advisory fees increased to $5.461 million from $5.371 million, but transfer-agent fees declined to $1.092 million from $1.203 million and other advisory fees declined to $94,697 from $166,834.
- General and administrative expenses declined 15.5%, primarily because the prior-year period included costs associated with implementing new investment management and trading software.
- Other comprehensive income shifted to a $440,074 loss from a $459,682 gain, reflecting lower unrealized gains on available-for-sale securities.
- Fee waivers and expense reimbursements remained significant at $803,229, compared with $800,545 in the prior-year quarter. The company stated that future waivers could increase and negatively affect revenue and net income.
Outlook, Risks and Unusual Items
- The company provided no quantitative earnings or revenue guidance. Management stated that current cash reserves, available financing and expected operating cash flow should meet foreseeable cash needs and support potential growth opportunities.
- A monthly dividend of $0.02 per share was authorized through December 2011 and is subject to quarterly board review. Future dividends depend on earnings, capital requirements, financial condition and general business conditions.
- Management highlighted risks from investment-management industry competition, economic conditions, regulation, market volatility, credit risk and liquidity risk. No material change was reported to the risk factors in the fiscal 2011 Form 10-K.
- Investment income is volatile and depends on market movements, transaction timing and investment opportunities. A 25% change in security prices was estimated to affect shareholders’ equity, net of tax, by approximately $843,103 for trading securities and $659,413 for available-for-sale securities.
- The company voluntarily caps or waives fees for all thirteen funds. Recoverable waived fees totaled approximately $3.99 million through December 31, 2014, subject to fund-yield conditions and the company’s ability to recapture them.
- The company had an unfunded $125,000 commitment related to a venture-capital investment. It also held investments subject to redemption notice requirements and potential redemption discounts.
- Routine claims, litigation and other contingencies may arise in the ordinary course of business. Management believed amounts exceeding recorded accruals would not materially affect the consolidated financial statements.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2011, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the decline in period-end assets under management and equity-fund redemptions continued after September 30, 2011.
- The composition, liquidity and subsequent performance of the approximately $9.1 million investment portfolio, including trading and Level 3 holdings.
- The sustainability of recurring advisory and transfer-agent revenue given market-sensitive assets under management.
- The future level and recoverability of fund fee waivers and expense reimbursements.
- Whether the $0.02 monthly dividend was continued after December 2011 and remained supported by earnings and cash flow.
- Any changes in offshore-client contracts, performance fees, litigation, regulatory matters or credit-facility covenant compliance.