Business Context and Reporting Period
U.S. Global Investors, Inc. is an investment management company with two segments: investment management services and corporate investments. This Form 10-Q covers the quarter ended September 30, 2012, the first quarter of fiscal 2013, with comparisons to the quarter ended September 30, 2011. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $4.98 million | $7.79 million | Down 36.1% |
| Income before taxes | $89,536 | $1.16 million | Down 92.3% |
| Net income | $48,800 | $749,518 | Down 93.5% |
| Basic and diluted EPS | $0.00 | $0.05 | Declined |
| Comprehensive income | $150,600 | $309,444 | Down 51.3% |
| Operating cash flow | $(1,989) | $1.80 million | Declined |
Revenue consisted primarily of mutual fund advisory fees of $2.92 million, distribution fees of $771,562, transfer agent fees of $734,556, administrative services fees of $254,224, and investment income of $200,651. Pretax and net margins were approximately 1.8% and 1.0%, respectively, compared with approximately 14.9% and 9.6% in the prior-year quarter.
Operating expenses declined 26.3% to $4.89 million. Employee compensation and benefits were $2.39 million, general and administrative expense was $1.54 million, and platform fees were $715,406.
At September 30, 2012, cash and cash equivalents were $19.70 million, trading securities were $5.39 million, and available-for-sale securities were $9.01 million. Total assets were $41.11 million and shareholders’ equity was $38.04 million. Current liabilities were $3.07 million, producing approximately $25.0 million of working capital and a 9.1-to-1 current ratio. The company had no long-term liabilities and had not drawn on its $1 million credit facility.
The company paid $928,438 of dividends during the quarter. Net cash used in financing activities was $882,240, and cash declined by $916,675 to $19.70 million.
Material Changes Versus the Prior Comparable Period
- Assets under management at September 30, 2012 were $1.766 billion, down 13.8% from $2.050 billion a year earlier, although up from $1.624 billion at June 30, 2012.
- Average assets under management fell to $1.664 billion from $2.453 billion, reducing advisory, distribution, transfer agent, and administrative fee revenue.
- Mutual fund advisory fees fell 46.6%, including a $1.93 million decline in management fees and a $612,047 unfavorable swing in performance fees.
- Investment income improved to a gain of $200,651 from a loss of $551,875, primarily because of unrealized gains on trading securities versus unrealized losses in the prior-year period.
- Expense reductions partly offset the revenue decline: platform fees decreased 44.2%, employee compensation decreased 17.1%, advertising decreased 71.2%, and general and administrative expense decreased 15.5%.
- The average annualized investment management fee rate declined to 79 basis points from 85 basis points, partly reflecting voluntary fee waivers and reimbursements.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that current cash reserves, available financing, and potential operating cash flow should be sufficient for foreseeable cash needs and growth opportunities; no formal earnings guidance was provided.
- A monthly dividend of $0.02 per share was authorized through December 2012 and remains subject to board review and the company’s earnings, financial condition, capital needs, and business conditions.
- The company waived or reimbursed $850,042 of fund fees and expenses during the quarter, including $300,635 under minimum-yield arrangements for certain money market funds. Management stated that future waivers could increase significantly and negatively affect revenue and net income.
- Recoverable fee waivers and reimbursements totaled amounts scheduled through 2015; recovery depends on fund yields and applicable contractual conditions.
- Investments totaled approximately $14.4 million, or 35.0% of total assets. The portfolio includes trading securities and less-liquid available-for-sale investments, including offshore funds and a venture capital investment. An unfunded commitment of $62,500 related to the venture capital investment remained outstanding.
- Investment income is volatile and depends on market movements, transaction timing, and investment opportunities. A hypothetical 25% market-price decline would reduce shareholders’ equity, net of tax, by approximately $2.38 million across trading and available-for-sale securities.
- Key risks include investment-market volatility, competition, economic conditions, regulation, market and credit risk, liquidity risk, redemptions, and fluctuations in assets under management. Management reported no material changes to the risk factors in the prior Form 10-K.
- The company disclosed ordinary-course claims and litigation contingencies, but management believes any liability exceeding recorded accruals would not materially affect the consolidated financial statements.
- Investment advisory and related contracts with U.S. Global Investors Funds were renewed effective October 1, 2012. Management anticipated renewal of offshore-client contracts.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2012, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether assets under management and average fee rates stabilize or continue to decline.
- The sustainability and potential recovery of voluntary fee waivers and minimum-yield reimbursements.
- The effect of market performance and redemptions on advisory revenue and investment income.
- The liquidity, valuation, and redemption restrictions associated with the offshore and venture capital investments.
- The board’s continuation of the $0.02 monthly dividend after December 2012.
- Whether operating cash flow returns to positive levels after the quarter’s nominal operating cash outflow.
- Compliance with the $1 million credit facility’s financial covenants and continued non-use of the facility.