U.S. Global Investors, Inc. Form 10-Q Summary
Reporting period: Quarterly report for the three and nine months ended March 31, 2013, filed May 8, 2013. The request identifies “2012 Q3,” but the filing covers fiscal 2013 third-quarter results. U.S. Global is an investment-management company with investment-management services and corporate-investment segments.
Financial performance and condition
| Metric | Three months ended March 31, 2013 | Prior comparable period | Nine months ended March 31, 2013 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $4.8 million | $5.5 million | $15.2 million | $19.2 million |
| Net income | $41,167 | $487,138 | $255,952 | $1.65 million |
| Basic and diluted EPS | $0.00 | $0.03 | $0.02 | $0.11 |
| Cash flow from operations | Not separately provided | Not separately provided | $1.18 million | $1.18 million |
- Three-month pre-tax margin was approximately 1.8% and net margin approximately 0.9%, compared with approximately 14.4% and 8.8%, respectively, in the prior-year quarter.
- Nine-month pre-tax margin was approximately 3.2% and net margin approximately 1.7%, compared with approximately 13.6% and 8.6%, respectively, in the prior-year period.
- At March 31, 2013, cash and cash equivalents were $19.1 million, total assets were $40.4 million, current assets were $26.8 million, and current liabilities were $2.7 million.
- Net working capital was approximately $24.1 million and the current ratio was 9.9 to 1. Shareholders’ equity was $37.7 million.
- Trading and available-for-sale investments totaled approximately $14.2 million at fair value, or 35.1% of total assets. The portfolio had approximately $748,226 of aggregate unrealized gains before tax, while trading securities had an unrealized loss of approximately $464,024.
- The company had no long-term liabilities. A $1 million working-capital credit facility was available but unused.
- Cash decreased by $1.47 million during the nine months, primarily reflecting $2.40 million of dividends paid and $308,201 of net investing cash outflows. Ending cash was $19.1 million.
Material changes versus the prior comparable period
- Quarterly revenue declined 13.8%, while nine-month revenue declined 20.7%.
- Quarterly net income declined 91.5%; nine-month net income declined 84.5%.
- Quarterly investment income shifted from $464,863 of income to a $16,081 loss, primarily because of unrealized losses on trading securities.
- Nine-month investment income increased to $345,557 from $56,256, but this improvement did not offset lower recurring investment-management revenue.
- Nine-month mutual fund advisory fees declined 18.3%, distribution fees declined 31.2%, transfer-agent fees declined 27.2%, and administrative-services fees declined 29.9%.
- Expenses declined 1.2% in the quarter and 11.0% for the nine months. Lower platform fees and employee compensation partly offset higher general and administrative costs and, in the quarter, substantially higher advertising expense.
- Assets under management were $1.488 billion at March 31, 2013, down 21.4% from $1.894 billion a year earlier and down from $1.624 billion at June 30, 2012. Average assets under management for the nine months were $1.634 billion versus $2.168 billion in the prior-year period.
- The company attributed asset declines primarily to redemptions and market weakness in natural-resources, gold, emerging-market, and other specialty equity funds. The S&P 500 rose approximately 17% during the nine months while gold indices declined approximately 15%, contributing to investor rotation away from specialty funds.
Outlook, commentary, risks, and unusual items
- Management stated that existing cash, available financing, and expected operating cash flow should be sufficient for foreseeable needs and potential growth opportunities.
- The monthly dividend was reduced from $0.02 to $0.005 per share beginning in January 2013. The $0.005 dividend was authorized through June 2013 and remained subject to quarterly board review.
- The board authorized up to $2.75 million of 2013 share repurchases. Through March 31, 2013, the company repurchased 22,203 Class A shares for $84,983, leaving approximately $2.665 million authorized.
- In March 2013, the company purchased a 50% interest in Toronto-based Galileo Global Equity Advisors Inc. for $600,000. The investment will be accounted for under the equity method; Galileo retains operational control. The filing states that accounting for the transaction remained under evaluation and could change.
- The company continued voluntarily waiving or reimbursing fund fees and expenses. Such waivers totaled $2.50 million for the nine months and could increase if interest rates remain low, negatively affecting revenue and earnings. Potential recovery of certain waivers depends on a rising-rate environment.
- Investment income is volatile and concentrated in a small number of issuers. A hypothetical 25% change in investment prices would affect shareholders’ equity, net of tax, by approximately $824,004 for trading securities and $1.52 million for available-for-sale securities.
- The company reported no material changes to previously disclosed risk factors. Key risks include market volatility, fund redemptions, competition, regulation, credit and liquidity risks, investment losses, and fluctuations in offshore-client performance fees.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2013, with no material change in internal control over financial reporting.
Investor verification points
- Verify the sustainability of assets under management, particularly exposure to natural-resources, gold, and emerging-market funds, and the impact of continued redemptions on advisory, distribution, and transfer-agent fees.
- Review the extent and recoverability of voluntary fee waivers and the sensitivity of earnings to interest rates.
- Assess the fair value, liquidity, concentration, and Level 2 and Level 3 valuation assumptions for the $14.2 million investment portfolio.
- Monitor the accounting, performance, governance relationships, and potential additional ownership rights associated with the Galileo investment.
- Confirm continuation and funding of the reduced monthly dividend after June 2013 and the pace of share repurchases under the remaining authorization.
- Review the company’s annual report for detailed risk factors, pending claims, and contingencies; the quarterly filing states that no material risk-factor changes occurred and that no material adverse litigation liability was expected beyond recorded accruals.