U S Global Investors Inc 10-K/A for FY2022
U S Global Investors Inc (GROW)
About this 10-K/A
U S Global Investors Inc filed this 10-K/A on May 19, 2023, covering the fiscal year ended June 30, 2022 (FY2022).
Headline figures
Fiscal year ended June 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $24.71M
- up 14.1% from $21.65M a year earlier
- Net income
- $3.82M
- down 88.1% from net income of $31.96M a year earlier
- Diluted EPS
- $0.25
- down 88.2% from $2.12 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Amendment No. 2
For the Fiscal Year Ended
or
for the transition period from _____ to _____
Commission File Number
U.S. GLOBAL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| | |
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Class A common stock, $0.025 par value per share | | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes ☐
Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
The aggregate market value of the 11,689,467 shares of nonvoting class A common stock held by nonaffiliates of the registrant was $
On August 19, 2022, there were 13,866,999 shares of Registrant’s class A nonvoting common stock issued and
Documents incorporated by reference: None
EXPLANATORY NOTE
Restatement of Consolidated Financial Statements
We have restated our consolidated financial statements as of June 30, 2022, and for the year then ended in order to correct certain fair value measurements related to our investment in HIVE Blockchain Technologies, Ltd. (“HIVE”) common share purchase warrants and our investment in HIVE unsecured convertible debentures. For a discussion of the valuation, the adjusted fair value measurement, and the impact of the restatement adjustment on the consolidated financial statements as of June 30, 2022, and for the year then ended, see Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8 — Financial Statements and Supplementary Data.
Internal Control Over Financial Reporting
Management reassessed its evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2022, and concluded that a deficiency in the design and operating effectiveness of the internal controls represented a material weakness in the internal control over financial reporting and, therefore, the Company did not maintain effective internal control over financial reporting as of June 30, 2022. For a description of the material weakness identified by management and management’s plan to remediate the material weakness, see Part II, Item 9A — Controls and Procedures.
Amended Reports
This Amended Annual Report on Form 10-K/A-2 does not reflect events occurring after the original filing date of September 1, 2022, and does not modify or update disclosures in the original filing that may have been affected by subsequent events, except for the effects of the restatement described in Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8 — Financial Statements and Supplementary Data. Other disclosures not affected by the restatement are unchanged and reflect the disclosures made at the time of original filing.
This Amended Annual Report on Form 10-K/A-2 reflects amendments to the following items:
● Part I, Item 1A — Risk Factors
● Part II, Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations
● Part II, Item 7A — Quantitative and Qualitative Disclosures about Market Risk
● Part II, Item 8 — Financial Statements and Supplementary Data
● Part II, Item 9A — Controls and Procedures
● Part IV, Item 15 — Exhibits
The Company's Chief Executive Officer and Chief Financial Officer are providing currently dated certifications in connection with this Amended Annual Report on Form 10-K/A-2. See Exhibits 31.1 and 32.1.
Part I of Annual Report on Form 10-K
Item 1. Business
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, U.S. Global Investors, Inc. and its subsidiaries (collectively, “U.S. Global” or the “Company”) may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, future expectations of the Company, and other matters that do not relate strictly to historical facts and are based on certain assumptions by management. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of Company management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in Part I, Item 1A, Risk Factors, and elsewhere in this report and other documents filed or furnished by U.S. Global from time to time with the U.S. Securities and Exchange Commission (“SEC”). U.S. Global cautions readers to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date on which such statements are made. Except to the extent required by applicable law, U.S. Global undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
U.S. Global, a Texas corporation organized in 1968, is a registered investment adviser under the Investment Advisers Act of 1940, as amended (“Advisers Act”). The Company, with principal operations located in San Antonio, Texas, manages two business segments:
| 1. |
Investment Management Services, through which the Company offers, to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”) and exchange traded fund (“ETF”) clients, a range of investment management products and services to meet the needs of individual and institutional investors; and |
| 2. |
Corporate Investments, through which the Company invests for its own account in an effort to add growth and value to its cash position. The Company holds a significant amount of its total assets in investments. |
As part of its investment management business, the Company provides: (1) investment advisory services and (2) administrative services to the mutual funds advised by the Company. The fees from these services, as well as investment income, are the primary sources of the Company’s revenue.
Business Segments
Business segments are discussed below.
Investment Management Services
Investment Advisory Services. The Company furnishes an investment program for each of the clients it manages and determines, subject to overall supervision by the applicable board of trustees of the clients, the clients’ investments pursuant to an advisory agreement. Consistent with the investment restrictions, objectives and policies of the particular client, the portfolio team for each client determines what investments should be purchased, sold, and held, and makes changes in the portfolio deemed necessary or appropriate. In the advisory agreement, the Company is charged with seeking the best overall terms in executing portfolio transactions and selecting brokers or dealers.
As required by the Investment Company Act of 1940, as amended (“Investment Company Act”), the advisory agreement with USGIF is subject to annual renewal and is terminable upon 60-day notice. In September 2021, the Board of Trustees of USGIF approved for an annual period the continuance of the advisory agreement.
In addition to providing advisory services to USGIF, the Company provides advisory services to three U.S.-based ETFs: U.S. Global Jets ETF, U.S. Global GO GOLD and Precious Metal Miners ETF, and the U.S. Global Sea to Sky Cargo ETF. The advisory agreement for the U.S. Global Jets ETF and the U.S. Global GO GOLD and Precious Metal Miners ETF has been renewed through September 2023. The advisory agreement for the U.S. Global Sea to Sky Cargo ETF will continue in force for the initial period of two years from January 2022, and thereafter, the advisory agreement will be subject to renewal on an annual basis. The Company also serves as investment advisor to one European-based ETF, the U.S. Global Jets UCITS ETF. The advisory services agreement for the U.S. Global Jets UCITS ETF is not subject to renewal on an annual basis and is terminable upon 6-months' notice.
Net assets under management on June 30, 2022, and June 30, 2021, are detailed in the following table.
| Assets Under Management (“AUM”) |
||||||
| Fund |
Ticker |
June 30, 2022 |
June 30, 2021 |
|||
| (dollars in thousands) |
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| ETF Clients |
||||||
| Airline and Cargo |
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| U.S. Global Jets ETF |
JETS |
$ | 2,453,268 | $ | 3,616,805 | |
| U.S. Global Jets UCITS ETF |
JETS |
12,934 | 947 | |||
| U.S. Global Sea to Sky ETF |
SEA |
7,568 | - | |||
| Total Airline and Cargo |
2,473,770 | 3,617,752 | ||||
| Gold and Natural Resources |
||||||
| U.S. Global GO GOLD and Precious Metal Miners ETF |
GOAU |
76,609 | 102,635 | |||
| Total Gold and Natural Resources |
76,609 | 102,635 | ||||
| Total ETF Clients |
2,550,379 | 3,720,387 | ||||
| U.S. Global Investors Funds |
||||||
| Gold and Natural Resources |
||||||
| Global Resources |
PSPFX |
57,385 | 70,758 | |||
| World Precious Minerals |
UNWPX |
59,075 | 112,861 | |||
| Gold and Precious Metals |
USERX |
111,953 | 158,378 | |||
| Total Gold and Natural Resources |
228,413 | 341,997 | ||||
| Emerging Markets |
||||||
| Emerging Europe |
EUROX |
10,821 | 24,779 | |||
| China Region |
USCOX |
7,624 | 12,546 | |||
| Total Emerging Markets |
18,445 | 37,325 | ||||
| International Equity |
||||||
| Global Luxury Goods (formerly known as Holmes Macro Trends) |
USLUX |
39,508 | 54,058 | |||
| Total International Equity |
39,508 | 54,058 | ||||
| Bond |
||||||
| U.S. Government Securities Ultra-Short Bond |
UGSDX |
35,490 | 39,079 | |||
| Near-Term Tax Free |
NEARX |
35,671 | 36,763 | |||
| Total Bond |
71,161 | 75,842 | ||||
| Total U.S. Global Investors Funds |
357,527 | 509,222 | ||||
| Total AUM |
$ | 2,907,906 | $ | 4,229,609 | ||
Administrative Services. The Company also manages, supervises and conducts certain other affairs of USGIF, subject to the control of the Funds’ Board of Trustees pursuant to an administrative services agreement. The administrative services agreement with USGIF is subject to renewal on an annual basis and is terminable upon 60-day notice. In September 2021, the Board of Trustees of USGIF approved for an annual period the continuance of the agreement.
Corporate Investments
Investment Activities. In addition to providing management and advisory services, the Company is actively engaged in investing for its own account. See segment information in the Notes to the Consolidated Financial Statements at Note 16, Financial Information by Business Segment, of this Annual Report on Form 10-K.
Additional Segment Information
See additional financial information about business segments in Part II, Item 8, Financial Statements and Supplementary Data at Note 16, Financial Information by Business Segment, of this Annual Report on Form 10-K.
Human Capital
As of June 30, 2022, U.S. Global and its wholly-owned subsidiaries employed 20 full-time employees and 2 part-time employees. The Company considers its relationship with its employees to be good. Our compensation program is designed to attract, retain and reward qualified individuals who possess the skills and motivation necessary to support our business objectives and assist in the achievement of goals. Key to our compensation program are performance-based cash and fund share bonuses and incentives for achieving professional certifications. In addition to base salary and bonus compensation, we also offer employees benefits such as life, disability, and health (medical, dental and vision) insurance, paid time off, a 401(k) plan that includes a match, discretionary profit-sharing, and assistance with savings programs. Long-term incentive awards include stock options.
Competition
The mutual fund industry is highly competitive. According to the Investment Company Institute, at the end of 2021 there were approximately 8,900 domestically registered open-end investment companies and approximately 2,700 exchange-traded funds of varying sizes and investment policies, whose shares are being offered to the public in the U.S. In addition to competition from other mutual fund managers and investment advisers, the Company and the mutual fund industry are in competition with various investment alternatives offered by insurance companies, banks, securities broker-dealers, and other financial institutions. Many of these institutions are able to engage in more liberal advertising than mutual funds and ETFs and may offer accounts at competitive interest rates, which may be insured by federally chartered corporations such as the Federal Deposit Insurance Corporation.
A number of mutual fund groups are significantly larger than the funds managed by U.S. Global, offer a greater variety of investment objectives and have greater resources to promote the sale of investments therein. However, the Company believes it has the resources, products, and personnel to compete with these other mutual funds. In particular, the Company is known for its expertise in the gold mining and exploration, natural resources, emerging markets, and airlines. Competition for sales of fund shares is influenced by various factors, including investment objectives and performance, advertising and sales promotional efforts, distribution channels, and the types and quality of services offered to fund shareholders.
Success in the investment advisory business is substantially dependent on each fund’s investment performance, the quality of services provided to shareholders, and the Company’s efforts to market the Funds and ETFs effectively. Operating revenues from management and administrative services fees are based on the assets of the funds under management. Costs of distribution and compliance continue to put pressure on profit margins for the mutual fund industry.
Despite the Company’s expertise in gold mining and exploration, natural resources, emerging markets, and airlines, the Company faces the same obstacle many advisers face, namely uncovering undervalued investment opportunities as the markets face further uncertainty and increased volatility. In addition, the growing number of alternative investments, especially in specialized areas, has created pressure on the profit margins and increased competition for available investment opportunities.
Supervision and Regulation
The Company and the clients the Company manages and administers operate under certain laws, including federal and state securities laws, governing their organization, registration, operation, legal, financial, and tax status. Among the potential penalties for violation of the laws and regulations applicable to the Company are fines, imprisonment, injunctions, revocation of registration, and certain additional administrative sanctions. Any determination that the Company or its management has violated applicable laws and regulations could have a material adverse effect on the business of the Company. Moreover, there is no assurance that changes to existing laws, regulations, or rulings promulgated by governmental entities having jurisdiction over the Company and its clients will not have a material adverse effect on the Company’s business. The Company has no control over regulatory rulemaking or the consequences it may have on the mutual fund and investment advisory industry.
Regulatory pronouncements and oversight have significantly increased the burden of compliance infrastructure with respect to the mutual fund industry and the capital markets. This momentum of regulations has contributed significantly to the costs of managing and administering mutual funds.
U.S. Global is registered as an investment adviser with the SEC. As a registered investment adviser, it is subject to the requirements of the Advisers Act, and the SEC’s regulations thereunder, as well as to examination by the SEC’s staff. The Advisers Act imposes substantive regulation on virtually all aspects of the Company’s business and relationships with the Company’s clients. Applicable rules relate to, among other things, fiduciary duties to clients, transactions with clients, effective compliance programs, conflicts of interest, advertising, recordkeeping, reporting, and disclosure requirements. The Funds and the ETFs for which the Company acts as the investment adviser are registered with the SEC under the Investment Company Act. The Investment Company Act imposes additional obligations, including detailed operational requirements for both funds and their advisers. Moreover, an investment adviser’s contract with a registered fund may be terminated by the fund on not more than 60 days’ notice and is subject to annual renewal by the fund’s board after an initial two-year term. Both the Advisers Act and the Investment Company Act regulate the “assignment” of advisory contracts by the investment adviser. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from fines and censures to termination of an investment adviser’s registration. The failure of the Company, or the Funds and ETFs which the Company advises, to comply with the requirements of the SEC could have a material adverse effect on the Company. The Company is also subject to federal and state laws affecting corporate governance, including the Sarbanes-Oxley Act of 2002 (“S-Ox Act”), as well as rules adopted by the SEC.
U.S. Global is required to keep and maintain certain reports and records, which must be made available to the SEC upon request.
U.S. Global manages clients’ portfolios on a discretionary basis, with the authority to enter into security transactions, select broker-dealers to execute trades, and negotiate brokerage commissions. The Company may receive soft dollar credits from certain broker-dealers that are used to pay for research and related services or products, which therefore has the effect of reducing certain operating expenses. These soft dollar arrangements are intended to be within the safe harbor provisions of the Securities Exchange Act of 1934. If the ability to use soft dollar arrangements were reduced or eliminated as a result of statutory amendments, new regulations or change in business practices, the Company’s operating expenses would increase.
Relationships with Clients
The business of the Company is to a significant degree dependent on its association and contractual relationships with USGIF and exchange traded fund clients. In the event the advisory or administrative agreements with USGIF or the advisory agreements with exchange traded fund clients are canceled or not renewed pursuant to the terms thereof, the Company would be substantially adversely affected. U.S. Global considers its relationships with its clients to be good, and management has no reason to believe that the management and service contracts will not be renewed in the future; however, there is no assurance that USGIF and/or the exchange traded fund clients will choose to continue their relationships with the Company.
Available Information
The Company’s Internet website address is www.usfunds.com. Information contained on the Company’s website is not part of this annual report on Form 10-K. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with (or furnished to) the SEC are available through a link on the Company’s Internet website, free of charge, as soon as reasonably practicable after such material is filed or furnished. (The link to the Company’s SEC filings can be found at www.usfunds.com by clicking “Investor Relations.”) The Company routinely posts important information on its website.
The Company also posts its Corporate Governance Guidelines, Code of Business Conduct, Code of Ethics for Principal Executive and Senior Financial Officer and the charters of the audit and compensation committees of its Board of Directors on the Company’s website in the “Policies and Procedures” section of "About Us." The Company’s SEC filings and governance documents are available in print to any stockholder that makes a written request to: Investor Relations, U.S. Global Investors, Inc., 7900 Callaghan Road, San Antonio, Texas 78229.
The Company files reports electronically with the SEC via the SEC’s Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”), which may be accessed through the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov.
Investors and others should note that we announce material financial information to our investors using the website, SEC filings, press releases, public conference calls and webcasts. We also use social media to communicate with our customers and the public about our company. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on social media channels listed below. This list may be updated from time to time.
https://www.facebook.com/USFunds
https://twitter.com/USFunds
https://twitter.com/USGlobalETFs
https://www.linkedin.com/company/u-s-global-investors
https://www.instagram.com/usglobal
https://pinterest.com/usfunds
https://www.youtube.com/c/usglobalinvestorssanantonio
https://www.youtube.com/channel/UCDkX1zvbWPyWc99esHOhwRQ
Information contained on our website or on social media channels is not deemed part of this report.
The Company faces a variety of significant and diverse risks, many of which are inherent in the business. Described below are certain risks that could materially affect the Company. Other risks and uncertainties that the Company does not presently consider to be material, or of which the Company is not presently aware, may become important factors that affect it in the future. The occurrence of any of the risks discussed below could materially and adversely affect the business, prospects, financial condition, results of operations, or cash flow.
Risk Factors Related to Our Industry
The investment management business is intensely competitive.
Competition in the investment management business is based on a variety of factors, including:
| ● |
Investment performance; |
| ● |
Investor perception of an investment team’s drive, focus, and alignment of interest with them; |
| ● |
Quality of service provided to, and duration of relationships with, clients and shareholders; |
| ● |
Business reputation; and |
| ● |
Level of fees charged for services. |
The Company competes with a large number of investment management firms, commercial banks, broker-dealers, insurance companies, and other financial institutions. Competitive risk is heightened by the fact that some competitors may invest according to different investment styles or in alternative asset classes which the markets may perceive as more attractive than the Company’s investment approach. If the Company is unable to compete effectively, revenues and earnings may be reduced, and the business could be materially affected.
Failure to comply with government regulations could result in fines, which could cause the Company’s earnings and stock price to decline.
The Company is subject to a variety of foreign and domestic federal securities laws and agencies, including, but not limited to, the Advisers Act, the Investment Company Act, the S-Ox Act, the Gramm-Leach-Bliley Act of 1999, the Bank Secrecy Act of 1970, as amended, the USA PATRIOT Act of 2001, the SEC, FINRA, and NASDAQ. Moreover, financial reporting requirements and the processes, controls, and procedures that have been put in place to address them, are comprehensive and complex. While management has focused attention and resources on compliance policies and procedures, non-compliance with applicable laws or regulations could result in fines, sanctions or censures which could affect the Company’s reputation, and thus its revenues and earnings.
Our business is subject to substantial risk from litigation, regulatory investigations and potential securities laws liability.
Many aspects of U.S. Global’s business involve substantial risks of litigation, regulatory investigations and/or arbitration. The Company is exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC and other regulatory bodies. U.S. Global, its subsidiaries, and/or officers could be named as parties in legal actions, regulatory investigations and proceedings. An adverse resolution of any lawsuit, legal or regulatory proceeding or claim against the Company could result in substantial costs or reputational harm to the Company and have a material adverse effect on the Company’s business, financial condition or results of operations, which, in turn, may negatively affect the market price of the Company’s common stock and U.S. Global’s ability to pay dividends. In addition to these financial costs and risks, the defense of litigation or arbitration may divert resources and management’s attention from operations.
Increased regulatory and legislative actions and reforms could increase costs and negatively impact the Company’s profitability and future financial results.
The Company is subject to financial services laws, regulations, corporate governance requirements, administrative actions and policies. During the past two decades, federal securities laws have been substantially augmented and made significantly more complex by the S-Ox Act, the USA PATRIOT Act of 2001, and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). With new laws and changes in interpretations and enforcement of existing requirements, the associated time the Company must dedicate to, and related costs the Company must incur in, meeting the regulatory complexities of the business have increased. In order to comply with these requirements, the Company has had to expend additional time and resources. Future changes in financial institution regulation may increase the costs of compliance and the complexity of operations.
Further, adverse results of regulatory investigations of mutual fund, investment advisory, and financial services firms could tarnish the reputation of the financial services industry generally, and mutual funds and investment advisers more specifically, causing investors to avoid further fund investments or redeem their balances. Redemptions would decrease the Company’s assets under management, which would reduce its advisory revenues and net income.
Investment Company Act - Certain changes in control of the Company would automatically terminate our investment management agreements with our client, unless the funds' boards of directors and shareholders vote to continue the agreements.
Under the Investment Company Act, an investment management agreement with a fund must provide for its automatic termination in the event of its assignment. The funds' board and shareholders must vote to continue the agreement following its assignment, the cost of which ordinarily would be borne by the Company. Under the Advisers Act, a client's investment management agreement may not be assigned by the investment advisor without the client's consent. An advisor's ownership is considered to be assigned to another party when a controlling block of the advisor's ownership is transferred. In our case, an assignment would occur with a transfer or issuance of a controlling block of Class C shares. The Company cannot be certain that our clients will consent to assignments of our investment management agreements or approve new agreements with us if an assignment occurs. This restriction may discourage potential purchasers from acquiring a controlling interest in the Company.
Risks Related to Our Common Stock
One person beneficially owns substantially all of our voting stock and controls the outcome of all matters requiring a vote of stockholders, which may influence the value of our publicly traded non-voting stock.
Frank Holmes, CEO, is the beneficial owner of over 99 percent of our class C voting convertible common stock, and is subject to the Investment Company Act as described above, and controls the outcome of all issues requiring a vote of stockholders. All of our publicly traded stock is nonvoting stock. Consequently, except to the extent provided by law, stockholders other than Frank Holmes have no vote with respect to the election of directors or any other matter requiring a vote of stockholders. Frank Holmes is able to determine the outcome of matters submitted to a vote of our shareholders for approval and will be able to cause or prevent a change in control of the Company. This lack of voting rights may adversely affect the market value of the publicly traded class A nonvoting common stock.
The market price and trading volume of the Company’s class A common stock may be volatile, which could result in rapid and substantial losses for the Company’s stockholders.
The market price of the Company’s class A common stock may be volatile, and the trading volume may fluctuate, causing significant price variations to occur. If the market price of the Company’s class A common stock declines significantly, stockholders may be unable to sell their shares at or above their purchase price. The Company cannot assure that the market price of its class A common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of the Company’s class A common stock, or result in fluctuations in price or trading volume, include:
| ● |
Decreases in assets under management; |
| ● |
Variations in quarterly and annual operating results; |
| ● |
Volatility in realized and unrealized gains or losses on corporate investments; |
| ● |
Publication of research reports about the Company or the investment management industry; |
| ● |
Departures of key personnel; |
| ● |
Adverse market reactions to any indebtedness the Company may incur, acquisitions or disposals the Company may make, or securities the Company may issue in the future; |
| ● |
Changes in market valuations of similar companies; |
| ● |
Changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting the business, or enforcement of these laws and regulations, or announcements relating to these matters; |
| ● |
Adverse publicity about the asset management industry, generally, or individual scandals, specifically; and |
| ● |
General market and economic conditions. |
In addition, the Company has invested in convertible securities and warrants in the cryptocurrency mining industry through its corporate investments. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. This volatility may materially impact the Company’s financial statements and thus affect the Company’s common stock market price. In addition, the price of the Company’s common stock may fluctuate to the extent that shareholders invest in the Company’s common stock as a proxy for cryptocurrency. The investing public may be influenced by future anticipated appreciation or depreciation in value of cryptocurrencies or blockchain generally, factors over which the Company has little or no influence or control. The Company’s stock price may also be subject to volatility due to supply and demand factors associated with few or limited public company options for investment in the segment, which may change over time.
Macroeconomic declines, including inflation; negative political developments, including volatile market conditions due to investor concerns regarding inflation and potential hostilities between Russia and Ukraine; adverse market conditions; and catastrophic events may cause a decline in the Company’s revenue, an increase in the Company’s costs, negatively affect the Company’s operating results, adversely affect the Company’s cash flow, and could result in a decline in the Company’s stock price.
The market price of the Company’s class A common stock could decline due to the large number of shares of the Company’s class C common stock eligible for future sale upon conversion to class A shares.
The market price of the Company’s class A common stock could decline as a result of sales of a large number of shares of class A common stock eligible for future sale upon the conversion of class C shares, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for the Company to raise additional capital by selling equity securities in the future, at a time and price the Company deems appropriate.
The Company intends to pay regular dividends to its stockholders, but the ability to do so is subject to the discretion of the Board of Directors.
The Company intends to pay cash dividends on a monthly basis, but the Board of Directors, at its discretion, may decrease the level or frequency of dividends or discontinue payment of dividends entirely based on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions.
Acquisitions involve inherent risks that could compromise the success of the combined business and dilute the holdings of current stockholders.
As part of our business strategy, we may pursue corporate development transactions, including the acquisition of asset management firms. These transactions involve assessing the value, strengths, weaknesses, liabilities and potential profitability of the transactions, and if our assessment is incorrect, the success of the combined business could be jeopardized. In addition, such transactions are subject to acquisition costs and expenses, are likely to divert the attention of management’s time, and can dilute the stockholders of the combined company if the acquisition is made for stock of the combined company.
Risks Related to Our Operations
Natural disasters, global pandemics and other unpredictable events could adversely affect our operations.
Natural disasters, outbreaks of epidemics, terrorist attacks, extreme weather events or other unpredictable events could adversely affect our revenues, expenses, and net income by:
| ● |
decreasing investment valuations in, and returns on, the investment portfolios that we manage and our corporate portfolio, thus causing reductions and volatility in revenue, |
| ● |
causing disruptions in national or global economies that decrease investor confidence and make investment products generally less attractive, |
| ● |
incapacitating or reducing the availability of key personnel necessary to conduct our business activities, |
| ● |
interrupting the Company’s business operations or those of critical service providers, |
| ● |
triggering technology delays or failures, and |
| ● |
requiring substantial capital expenditures and operating expenses to remediate damage, replace our facilities, and restore our operations. |
The Company’s business operations are concentrated in San Antonio, Texas. The Company has developed various backup systems and contingency plans but cannot be assured that those preparations will be adequate in all circumstances that could arise, or that material interruptions and disruptions will not occur. The Company also relies to varying degrees on outside vendors for service delivery in addition to technology and disaster contingency support, and there is a risk that these vendors will not be able to perform in an adequate and timely manner. If the Company loses the availability of employees, or if it is unable to respond adequately to such an event in a timely manner, revenues, expenses, and net income could be negatively impacted.
Specifically, the effects of the outbreak of the novel coronavirus (COVID-19) had an adverse effect on the global economy, the United States economy and the global financial markets. Should this reoccur and continue for an extended period, it may disrupt the Company’s operations and the Company’s clients’ operations, which could have an adverse effect on the Company’s business, financial condition and results of operations. A recurrence of an outbreak of any kind of epidemic, communicable disease or virus or major public health issue could cause a slowdown in the levels of economic activity generally, which would adversely affect the Company’s business, financial condition and operations.
The loss of key personnel could negatively affect the Company’s financial performance.
The success of the Company depends on key personnel, including the portfolio managers, analysts, and executive officers. Competition for qualified, motivated, and skilled personnel in the asset management industry remains significant. Moreover, in order to retain certain key personnel, the Company may be required to increase compensation to such individuals, resulting in additional expense. The loss of key personnel or the Company’s failure to attract replacement personnel could negatively affect its financial performance.
The Company could be subject to losses if it fails to properly safeguard sensitive and confidential information.
As part of the Company’s normal operations, it maintains and transmits certain confidential information about the Company and its clients as well as proprietary information relating to its business operations. These systems could be victimized by unauthorized users or corrupted by computer viruses or other malicious software code, or authorized persons could inadvertently or intentionally release confidential or proprietary information. Such a breach could subject the Company to liability for a failure to safeguard client data, result in the termination of relationships with our existing customers, require significant capital and operating expenditures to investigate and remediate the breach and subject the Company to regulatory action.
We rely upon certain critical information systems for the operation of our business, and the failure of any critical information system, including a cyber-security breach, may result in harm to our business.
We are heavily dependent on technology infrastructure and rely upon certain critical information systems for the effective operation of our business. These information systems include data network and telecommunications, internet access and our websites, and various computer hardware equipment and software applications. These information systems are subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cyber-attacks and other events to the extent that these information systems are under our control. We have implemented measures, such as virus protection software, intrusion detection systems and emergency recovery processes to address the outlined risks. However, security measures for information systems cannot be guaranteed to be failsafe. Any compromise of our data security or our inability to use or access these information systems at critical points in time could unfavorably impact the timely and efficient operation of our business and subject us to additional costs and liabilities, which could adversely affect our results of operations. Finally, federal legislation relating to cyber-security threats could impose additional requirements on our operations.
Higher insurance premiums and related insurance coverage risks could increase costs and reduce profitability.
While U.S. Global carries insurance in amounts and under terms that it believes are appropriate, the Company cannot assure that its insurance will cover most liabilities and losses to which it may be exposed, or that our insurance policies will continue to be available at acceptable terms and fees. U.S. Global is subject to regulatory and governmental inquiries and civil litigation. An adverse outcome of any such proceeding could involve substantial financial penalties. From time to time, various claims against us arise in the ordinary course of business, including employment-related claims. There has been increased incidence of litigation and regulatory investigations in the financial services industry in recent years, including customer claims and class action suits alleging substantial monetary damages. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As U.S. Global’s insurance policies come up for renewal, the Company may need to assume higher deductibles or co-insurance liabilities, or pay higher premiums, which would increase the Company’s expenses and reduce net income.
We have identified a material weakness in our internal control over financial reporting. This material weakness could continue to adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.
As further described in Item 9A of this Form 10-K/A-2, management has concluded that, because of a material weakness in internal control over financial reporting, our internal control over financial reporting and our disclosure controls and procedures were not effective as of June 30, 2022. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis. If we fail to remediate this material weakness in our internal controls, or after having remediated such material weakness, thereafter fail to maintain the adequacy of our internal control over financial reporting or our disclosure controls and procedures, we could be subjected to regulatory scrutiny, civil or criminal penalties or shareholder litigation, the defense of any of which could cause the diversion of management’s attention and resources, we could incur significant legal and other expenses, and we could be required to pay damages to settle such actions if any such actions were not resolved in our favor. Moreover, we may be the subject of negative publicity focusing on this material weakness and we may be subject to negative reactions from shareholders and others with whom we do business.
Risks Related to Assets Under Management
Poor investment performance could lead to a decline in revenues.
Success in the investment management industry is largely dependent on investment performance relative to market conditions and the performance of competing products. Good relative performance generally attracts additional assets under management, resulting in additional revenues. Conversely, poor performance generally results in decreased sales and increased redemptions with a corresponding decrease in revenues. Therefore, poor investment performance relative to the portfolio benchmarks and to competitors could impair the Company’s revenues and growth. The equity funds within USGIF have a performance fee whereby the base advisory fee is adjusted upwards or downwards by 0.25 percent if there is a performance difference of 5 percent or more between a Fund’s performance and that of its designated benchmark index over the prior rolling 12 months.
The Company’s clients can terminate their agreements with the Company on short notice, which may lead to unexpected declines in revenue and profitability.
The Company’s investment advisory agreements are generally terminable on short notice and subject to annual renewal. If the Company’s investment advisory agreements are terminated, which may occur in a short time frame, the Company may experience a decline in revenues and profitability.
The Company derives a substantial portion of revenue from one fund under management.
A substantial amount of assets under management is concentrated in the U.S. Global Jets ETF (86 percent and 82 percent of average net assets for fiscal years 2022 and 2021, respectively). Consequently, the Company’s revenues followed a similar pattern of concentration (82 percent and 76 percent of total operating revenues for fiscal years 2022 and 2021, respectively). As a result, our operating results are particularly dependent upon the performance of one fund and our ability to maintain and grow assets under management in that fund. If this fund were to experience a significant decrease in market value or redemptions, our assets under management would be reduced, adversely affecting our revenues.
Difficult market conditions can adversely affect the Company by reducing the market value of the assets we manage or causing shareholders to make significant redemptions.
Changes in economic or market conditions may adversely affect the profitability, performance of and demand for the Company’s investment products and services. Under the Company’s advisory fee arrangements, the fees received are primarily based on the market value of assets under management. Accordingly, a decline in the price of securities held in funds under management would be expected to cause revenues and net income to decline, which would result in lower advisory fees, or cause increased shareholder redemptions in favor of investments they perceive as offering greater opportunity or lower risk, which redemptions would also result in lower advisory fees. The ability of the Company to compete and grow is dependent on the relative attractiveness of the types of investment products the Company offers and its investment performance and strategies under prevailing market conditions.
Market-specific risks may negatively impact the Company’s earnings.
The Company manages certain funds in the emerging market and natural resources sectors, which are highly cyclical. The investments in the funds are subject to significant loss due to political, economic and diplomatic developments, currency fluctuations, social instability, and changes in governmental policies, including trading policies, regulatory requirements, tariffs and other barriers. Foreign trading markets, particularly in some emerging market countries, are often smaller, less liquid, less regulated and significantly more volatile than the U.S. and other established markets.
Government relationship risks may negatively impact the Company’s earnings.
The Company manages a fund with significant investments in China-based issuers. While companies in China may be subject to limitations on their business relationships under Chinese law, these laws may not be consistent with certain political and security concerns of the U.S. As a result, Chinese companies may have material direct or indirect business relationships with governments that are considered state sponsors of terrorism by the U.S. government, or governments that otherwise have policies in conflict with the U.S. government (an “Adverse Government”). If a fund under management invests in companies that have or develop a material business relationship with an Adverse Government, the fund will be subject to the risk that these companies’ reputation and price in the market will be adversely or negatively impacted.
Risks Related to Our Corporate Investments
Investment income and assets may be negatively impacted by fluctuations in the Company’s corporate investments.
The Company currently has a substantial portion of its assets in corporate investments. These investments are subject to investment market risk, and investment income could be adversely affected by the realization of losses upon disposition of investments or the recognition of significant unrealized losses or impairments. Due to the Company’s investments in debt securities carried at fair value, interest rate fluctuations represent a market risk factor affecting the Company’s consolidated financial position. Debt securities may fluctuate in value due to changes in interest rates. Typically, investments subject to interest rate risk will decrease in value when interest rates rise and increase in value when interest rates decline. Fluctuations in investment income are expected to continue in the future.
The Company has exposure to the cryptocurrency markets through its investments.
The Company has invested in convertible securities and warrants in the cryptocurrency mining industry through its corporate investments. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There is potential for significant volatility in the valuation of the Company’s cryptocurrency-related investments.
Adverse changes in foreign currencies could negatively impact financial results.
We have cash and certain corporate investments held in foreign currencies. Adverse changes in foreign currency exchange rates would also lower the value of those assets. Certain assets under management also have exposure to foreign currency fluctuations in various markets, which could impact their valuation and thus the revenue we receive.
Item 1B. Unresolved Staff Comments
Not applicable for smaller reporting companies.
The Company presently owns and occupies an office building as its headquarters in San Antonio, Texas. The office building is approximately 46,000 square feet on approximately 2.5 acres of land.
There are no material legal proceedings in which the Company is involved.
Item 4. Mine Safety Disclosures
Not applicable.
Part II of Annual Report on Form 10-K
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
U.S. Global Investors, Inc. (“U.S. Global” or the “Company”) has three classes of common equity: class A, class B, and class C common stock, par value $0.025 per share.
The Company’s class A common stock is traded over-the-counter and is quoted daily under NASDAQ’s Capital Markets. Trades are reported under the symbol “GROW.”
There is no established public trading market for the Company’s class B and class C common stock.
The Company’s class A and class B common stock have no voting privileges.
Holders
On August 19, 2022, there were approximately 181 holders of record of class A common stock, no holders of record of class B common stock, and 20 holders of record of class C common stock.
Securities authorized for issuance under equity compensation plans
Information relating to equity compensation plans under which our stock is authorized for issuance is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”
Purchases of equity securities by the issuer
The Company has a share repurchase program, approved by the Board of Directors, authorizing the Company to annually purchase up to $5.0 million of its outstanding common shares, as market and business conditions warrant, on the open market in compliance with Rule 10b-18 of the Securities Exchange Act of 1934 through December 31, 2022. The repurchase program has been in place since December 2012, and the Board of Directors has annually renewed the repurchase program each calendar year.
For the quarter ended June 30, 2022, the Company purchased a total of 45,696 class A shares using cash of $219,000. The Company may repurchase class A stock from employees; however, none were repurchased from employees during the quarter ended June 30, 2022. The Company did not repurchase any classes B or C common stock during the quarter ended June 30, 2022.
| (dollars in thousands, except price data) |
|||||||||||||||||||||
| Approximate Dollar |
|||||||||||||||||||||
| Total Number of |
Value of Shares that |
||||||||||||||||||||
| Shares Purchased as |
May Yet Be |
||||||||||||||||||||
| Total Number of |
Total Amount |
Average Price |
Part of Publicly |
Purchased Under |
|||||||||||||||||
| Period |
Shares Purchased 1 |
Purchased |
Paid Per Share 2 |
Announced Plan 3 |
the Plan |
||||||||||||||||
| 04-01-22 to 04-30-22 | 15,544 | $ | 80 | $ | 5.14 | 15,544 | $ | 4,823 | |||||||||||||
| 05-01-22 to 05-31-22 | 16,897 | 80 | $ | 4.74 | 16,897 | $ | 4,743 | ||||||||||||||
| 06-01-22 to 06-30-22 | 13,255 | 59 | $ | 4.43 | 13,255 | $ | 4,684 | ||||||||||||||
| Total |
45,696 | $ | 219 | $ | 4.78 | 45,696 | |||||||||||||||
| 1. |
The Board of Directors of the Company approved on December 7, 2012, and renewed annually, a repurchase of up to $2.75 million in each of calendar years 2013 through 2022 of its outstanding class A common stock from time to time on the open market in accordance with all applicable rules and regulations. On February 25, 2022, the Company announced that the Board of Directors of the company approved an increase to the limit of its annual share buyback program from $2.75 million to $5.0 million. |
| 2. |
The average price paid per share of stock repurchased under the stock repurchase program includes the commissions paid to brokers. |
| 3. |
The total amount of shares that may be repurchased in 2022 under the program is $5.0 million. |
Dividends
The Board of Directors has authorized a monthly dividend of $0.0075 per share from July 2022 through September 2022. The total amount of cash dividends to be paid to class A and class C shareholders from July 2022 to September 2022 will be approximately $337,000, which is included as dividends payable in the Consolidated Balance Sheets at June 30, 2022. Payment of cash dividends is within the discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion reviews and analyzes the consolidated results of operations of U.S. Global Investors, Inc. and its subsidiaries (collectively, “U.S. Global” or the “Company”) for the past two fiscal years and other factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
Recent Trends in Financial Markets
The Company’s operating revenues are highly correlated to the level of assets under management (“AUM”) and fees associated with various investment products. While AUM is directly impacted by changes in the financial markets, it is also impacted by cash inflows or outflows due to shareholder activity. Performance fees on certain equity fund products may also impact revenues, either positively or negatively. Various products may have different fees, so changes in our product mix may also affect revenues. For example, international equity products will generally have a higher fee than fixed income products, so changes in assets in those products will have a larger impact on revenues.
While products are offered for a wide variety of markets, the Company has traditionally focused on gold mining and exploration, natural resources, and emerging markets. More recently the airline industry has become more significant to our revenue. All these markets are volatile and subject to capital cycles.
The world economy has largely moved on from the current circulating COVID-19 variant except for China, where they have large city-wide lockdowns to try to halt the spread of virus, which have kept world supply chains tight to uncertain. With Russia invading Ukraine, this compounded the supply chain issues with most of the world, barring prominent China and India holdouts, having stopped trading for Russian commodities. However, Europe is still heavily dependent on Russian natural gas which is being used as leverage against Europe for helping Ukraine defend itself. The confluence of these factors has led to the highest inflation in the U.S. in forty years. Energy markets were tight with oil and natural gas futures up 58.6 percent and 81.7 percent, respectively, over the past fiscal year. Thus, energy and utilities stocks were the best performing sectors in the S&P 500 over the trailing twelve months ending June 30, 2022. However, 6 of the 11 sectors which make up the S&P 500 posted double digit losses, with the S&P 500 down 10.6 percent on a total return basis. While not a bear market on a year-over-year measure, the S&P 500 was down nearly 20.0 percent over the last six months ended June 30, 2022.
With inflation becoming a significant problem, the Federal Reserve began embarking on a path of interest rate hikes that accelerated as the fiscal year ended. Fear that the U.S. was already in a recession due to high energy prices and escalating borrowing costs were confirmed after the end of the fiscal year with two consecutive negative GDP quarters. Performance has been affected with airlines down 31.3 percent and luxury goods off 23.7 percent for the fiscal year. Although airline travel has improved significantly with COVID-19 related travel restrictions being lifted, the industry’s earnings are impacted by the significant spike in jet fuel prices.
With interest rates climbing in the U.S. and the turmoil in Europe, investors largely flocked to the U.S. dollar, pushing it up 10.3 percent for the year ended June 30, 2022. However, gold also held up, marking a 2.1 percent gain for the same period while silver, platinum, and palladium fell in price by 22.4 percent, 16.6 percent, and 30.3 percent, respectively. Industrial metal prices also fell with copper off 13.1 percent for the year ended June 30, 2022.
The Company’s emerging markets products also declined in value with war in Ukraine and China’s decision to have large city-wide lockdowns to contain virus transmission. Eastern European markets fell 46.3 percent during the year ended June 30, 2022, with the collapse of the Russian stock market and its collateral damage on its neighbors. Trade tensions still exist between the U.S. and China despite the change in presidential power, and President Biden has been slow to relax many of the trade barriers erected against China. Chinese markets are off 29.5 percent for the fiscal year.
Mutual funds in general continued to see outflows compared to other investment alternatives, including ETFs. The Company has three ETF products listed on the New York Stock Exchange: the U.S. Global Jets ETF (ticker JETS), which concentrates on the U.S. and international airline industry, the U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU), which invests in companies engaged in the production of precious metals either through active (mining or production) or passive (owning royalties or production streams) means, and U.S. Global Sea to Sky Cargo ETF (ticker SEA), which concentrates on the global sea shipping and air freight industries. The Company has one European-based ETF product listed on various exchanges in Europe, the U.S. Global Jets UCITS ETF (ticker JETS), which concentrates on the U.S. and international airline industry.
Assets in the Jets ETF were $2.5 billion and $3.6 billion at June 30, 2022, and 2021, respectively. The Jets ETF invests in airline-related stocks, including global airline carriers, airport operators and aircraft manufacturers.
The spread of the global COVID-19 outbreak and actions taken in response have affected the global and domestic economies and financial markets. Market declines affect the Company’s assets under management, and thus its revenues and also the valuation of the Company’s corporate investments. The Company cannot determine the long-term impact of COVID-19 on the Company’s business. Should this macro-economic risk reemerge and continue for an extended period, there could be an adverse material financial impact to the Company’s business and investments, including a material reduction in its results of operations.
COVID-19-related circumstances (e.g., remote work arrangements) have not adversely affected the Company’s ability to maintain operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures.
To manage expenses, the Company maintains a flexible structure for one of its largest costs, compensation expense, by setting relatively low base salaries with bonuses that are tied to fund and Company performance. Thus, the Company’s expense model somewhat expands and contracts with asset swings and performance.
Business Segments
The Company, with principal operations located in San Antonio, Texas, manages two business segments:
| 1. |
Investment management services, through which the Company offers, to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”) and ETF clients, a range of investment management products and services to meet the needs of individual and institutional investors; and |
| 2. |
Corporate investments, through which the Company invests for its own account in an effort to add growth and value to its cash position. The Company holds a significant amount of its total assets in investments. |
| Assets Under Management (“AUM”) |
||||||||
| (dollars in thousands) |
June 30, 2022 |
June 30, 2021 |
||||||
| Investment Management Services |
||||||||
| ETF Clients |
$ | 2,550,379 | $ | 3,720,387 | ||||
| USGIF |
357,527 | 509,222 | ||||||
| Total AUM |
$ | 2,907,906 | $ | 4,229,609 | ||||
On June 30, 2022, total AUM as of period end was $2.9 billion compared to $4.2 billion on June 30, 2021, a decrease of $1.3 billion, or 31.2 percent. The decrease was primarily due to market depreciation in the ETFs, primarily the U.S. Global Jets ETF (“Jets ETF”), in the month of June 2022.
During fiscal year 2022, average AUM was $3.9 billion compared to $3.4 billion in fiscal year 2021, an increase of 17.7 percent. The increase was primarily due to inflows into the Jets ETF during fiscal 2021, resulting in an increase in average assets throughout the year, while average assets in fiscal 2022 were relatively steady until June 2022. The Jets ETF invests in airline-related stocks, including global airline carriers, airport operators and aircraft manufacturers.
The following is a brief discussion of the Company’s two business segments.
Investment Management Services
The Company generates operating revenues from managing and servicing the Funds. The Company recorded advisory and administrative services fees from USGIF totaling approximately $3.8 million and $4.5 million in fiscal 2022 and fiscal 2021, respectively. These revenues are largely dependent on the total value and composition of assets under its management. Fluctuations in the markets and investor sentiment directly impact the Funds’ asset levels, thereby affecting income and results of operations. Detailed information regarding the Funds managed by the Company within USGIF can be found on the Company’s website, www.usfunds.com, including the prospectus and performance information for each fund. The mutual fund shareholders in USGIF are not required to give advance notice prior to redemption of shares in the Funds, and the USGIF funds do not currently charge a redemption fee.
Investment base advisory fees from USGIF are calculated as a percentage of average net assets, ranging from 0.375 percent to 1.25 percent, and are paid monthly. The base advisory fee on the equity funds within USGIF is adjusted upward or downward based on performance. For the years ended June 30, 2022, and 2021, the Company adjusted its base advisory fees upward by $20,000 and $482,000, respectively. USGIF advisory fees in total, including performance adjustments, decreased by approximately $755,000, or 17.5 percent, in fiscal year 2022 compared to fiscal year 2021, primarily as a result of a decrease in average assets under management driven by market depreciation in the equity funds and a decrease in received performance fees.
Mutual fund investment advisory fees are also affected by changes in assets under management, which include:
| ● |
market appreciation or depreciation; |
| ● |
the addition of new fund shareholder accounts; |
| ● |
fund shareholder contributions of additional assets to existing accounts; |
| ● |
withdrawals of assets from and termination of fund shareholder accounts; |
| ● |
exchanges of assets between accounts or products with different fee structures; and |
| ● |
the amount of fees voluntarily reimbursed. |
The following tables summarize the changes in assets under management for USGIF for fiscal years 2022 and 2021.
| Year Ended June 30, 2022 |
||||||||||||
| (dollars in thousands) |
Equity |
Fixed Income |
Total |
|||||||||
| Beginning Balance |
$ | 433,380 | $ | 75,842 | $ | 509,222 | ||||||
| Market depreciation |
(110,465 | ) | (2,201 | ) | (112,666 | ) | ||||||
| Dividends and distributions |
(61,309 | ) | (285 | ) | (61,594 | ) | ||||||
| Net shareholder purchases (redemptions) |
24,761 | (2,195 | ) | 22,566 | ||||||||
| Ending Balance |
$ | 286,367 | $ | 71,161 | $ | 357,528 | ||||||
| Average investment management fee |
0.93 | % | 0.00 | % | 0.78 | % | ||||||
| Average net assets |
$ | 380,519 | $ | 71,818 | $ | 452,337 | ||||||
| Year Ended June 30, 2021 |
||||||||||||
| (dollars in thousands) |
Equity |
Fixed Income |
Total |
|||||||||
| Beginning Balance |
$ | 343,214 | $ | 82,683 | $ | 425,897 | ||||||
| Market appreciation |
101,575 | 229 | 101,804 | |||||||||
| Dividends and distributions |
(16,243 | ) | (401 | ) | (16,644 | ) | ||||||
| Net shareholder purchases (redemptions) |
4,834 | (6,669 | ) | (1,835 | ) | |||||||
| Ending Balance |
$ | 433,380 | $ | 75,842 | $ | 509,222 | ||||||
| Average investment management fee |
0.93 | % | 0.00 | % | 0.77 | % | ||||||
| Average net assets |
$ | 412,905 | $ | 82,289 | $ | 495,194 | ||||||
The average annualized investment management fee rate (total advisory fees, excluding performance fees, as a percentage of average assets under management) was 78 basis points in fiscal year 2022 and 77 basis points in fiscal year 2021. The average investment management fee for equity funds in both fiscal years 2022 and 2021 was 93 basis points. The average investment management fee for the fixed income funds was nil for both fiscal years 2022 and 2021, respectively. The low fee rate for the fixed income funds is due to voluntary fee waivers on these funds as discussed in Note 5, Investment Management and Other Fees, in the Consolidated Financial Statements of this Annual Report on Form 10-K.
The Company serves as investment advisor to three U.S.-based exchange-traded funds (ETFs): U.S. Global Jets ETF (ticker JETS), U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU), and U.S. Global Sea to Sky Cargo ETF (ticker SEA). The Company receives a unitary management fee of 0.60 percent of average net assets and has agreed to bear all expenses of the ETFs, except the U.S. Global Sea to Sky Cargo ETF. The Company has agreed to contractually limit the expenses of the U.S. Global Sea to Sky Cargo ETF through April 2023. The Company also serves as investment advisor to one European-based ETF, the U.S. Global Jets UCITS ETF. The Company receives a unitary management fee of 0.65 percent of average net assets and has agreed to bear all expenses of the ETF. The Company recorded advisory fees from the ETF clients totaling $21.0 million and $17.1 million in fiscal year 2022 and fiscal year 2021, respectively. Average assets in the ETFs increased in fiscal year 2022, primarily in the Jets ETF. Information on the U.S.-based ETFs can be found at www.usglobaletfs.com, including the prospectus, performance and holdings. The ETFs’ authorized participants are not required to give advance notice prior to redemption of shares in the ETFs, and the ETFs do not charge a redemption fee. The U.S. Global Jets UCITS ETF is not available to U.S. investors.
Corporate Investments
Management believes it can more effectively manage the Company’s cash position by maintaining certain types of investments utilized in cash management and continues to believe that such activities are in the best interest of the Company.
The following summarizes the cost, unrealized gain or loss, and fair value of investments carried at fair value as of June 30, 2022, and June 30, 2021.
| Securities at Fair Value |
Cost |
Unrealized Gain in Other Comprehensive Income |
Unrealized Gain (Loss) in Investment Income (Loss) |
Fair Value |
||||||||||||
| (dollars in thousands) |
||||||||||||||||
| Equity securities at fair value 1 |
$ | 19,967 | $ | - | $ | (5,667 | ) | $ | 14,300 | |||||||
| Available-for-sale debt securities at fair value 2 |
8,576 | 4,588 | (2,539 | ) | 10,625 | |||||||||||
| Total at June 30, 2022, As Restated |
$ | 28,543 | $ | 4,588 | $ | (8,206 | ) | $ | 24,925 | |||||||
| Equity securities at fair value 1 |
$ | 14,363 | $ | - | $ | 3,895 | $ | 18,258 | ||||||||
| Available-for-sale debt securities at fair value 2 |
8,741 | 8,308 | - | 17,049 | ||||||||||||
| Total at June 30, 2021 |
$ | 23,104 | $ | 8,308 | $ | 3,895 | $ | 35,307 | ||||||||
| 1. |
Changes in unrealized and realized gains and losses are included in earnings in the statement of operations. |
| 2. |
Realized gains and losses are included in earnings in the statement of operations. Changes in unrealized gains and losses are included in the statement of comprehensive income (loss), except for declines in fair value determined to be other than temporary, and amounts attributable to embedded derivatives, which are included in earnings in the statement of operations. An embedded derivative and its related host contract represent one legal contract and are combined within the investments in available-for-sale debt securities on the consolidated balance sheets. |
The investments shown above include investments at fair value of $12.8 million and $7.3 million, as of June 30, 2022, and 2021, respectively, invested in USGIF funds the Company advised.
Investment income (loss) from the Company’s investments includes:
| ● |
realized gains and losses on sales of securities; |
| ● |
realized gains and losses on principal payment proceeds; |
| ● |
unrealized gains and losses on fair valued securities; |
| ● |
realized foreign currency gains and losses; |
| ● |
realized gains and losses on sale of subsidiary; |
| ● |
impairments and observable price changes on equity investments without readily determinable fair values; and |
| ● |
dividend and interest income. |
Investment income can be volatile and may vary depending on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions. A significant portion of the unrealized gains and losses is concentrated in a small number of issuers. For fiscal year 2022, the Company had a total investment loss of $6.2 million, compared to $28.3 million investment income in fiscal year 2021. Due to market volatility, the Company expects that gains or losses will continue to fluctuate in the future.
A significant portion of the securities recorded at fair value in the above table is in investments in HIVE Blockchain Technologies Ltd. (“HIVE”), which were warrants and convertible debentures valued at $11.1 million at June 30, 2022, and $25.1 million at June 30, 2021. The investments in HIVE are discussed in more detail in Note 4, Investments, to the Consolidated Financial Statements of this Annual Report on Form 10-K. HIVE is a company that is headquartered in Canada with cryptocurrency mining facilities in Iceland, Sweden, and Canada. Frank Holmes, CEO, is the executive chairman of HIVE. Effective August 31, 2018, Mr. Holmes was named Interim CEO of HIVE.
Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile, and may be influenced by a wide variety of factors, including speculative activity. Cryptocurrency mining companies face a variety of risks, including, but not limited to, environmental concerns, regulatory factors, and heightened risks of cybersecurity attacks for which there may be no source of recovery. There has been significant volatility in the market price of HIVE, which has materially impacted the investment’s value included on the balance sheet, unrealized gain (loss) recognized in investment income (loss), and unrealized gain (loss) recognized in other comprehensive income (loss).
In addition to the investments above, as of June 30, 2022, and 2021, the Company owned other investments of approximately $4.0 million and $3.5 million, respectively, classified as securities without readily determinable fair values.
Consolidated Results of Operations
The following is a discussion of the consolidated results of operations of the Company and a detailed discussion of the Company’s revenues and expenses.
Year Ended June 30, 2022, Compared with Year Ended June 30, 2021
The Company posted net income, as shown in the Consolidated Statements of Operations, of $3.8 million ($ 0.25 per share) for the year ended June 30, 2022, compared with net income of $32.0 million ($ 2.12 per share) for the year ended June 30, 2021, a decrease of approximately $28.1 million. The change is primarily due to lower realized gains and unrealized investment losses in the current year compared to higher realized gains and unrealized investment gains in the prior year, as discussed further below.
Operating Revenues
| Year ended June 30, |
||||||||||||||||
| $ |
% |
|||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
Change |
Change |
||||||||||||
| ETF advisory fees: |
||||||||||||||||
| Airline and cargo ETFs |
$ | 20,378 | $ | 16,473 | $ | 3,905 | 23.7 | % | ||||||||
| Gold and natural resources ETF |
584 | 654 | (70 | ) | (10.7 | )% | ||||||||||
| Total ETF advisory fees |
20,962 | 17,127 | 3,835 | 22.4 | % | |||||||||||
| Investment advisory fees - USGIF: |
||||||||||||||||
| Gold and natural resources funds |
$ | 2,851 | $ | 3,606 | $ | (755 | ) | (20.9 | )% | |||||||
| Emerging markets funds |
213 | 302 | (89 | ) | (29.5 | )% | ||||||||||
| International equity funds |
499 | 407 | 92 | 22.6 | % | |||||||||||
| Bond funds |
- | 3 | (3 | ) | (100.0 | )% | ||||||||||
| Total investment advisory fees - USGIF |
3,563 | 4,318 | (755 | ) | (17.5 | )% | ||||||||||
| Total advisory fees |
24,525 | 21,445 | 3,080 | 14.4 | % | |||||||||||
| USGIF administrative services fees |
189 | 209 | (20 | ) | (9.6 | )% | ||||||||||
| Total Operating Revenues |
$ | 24,714 | $ | 21,654 | $ | 3,060 | 14.1 | % | ||||||||
Total consolidated operating revenues for the year ended June 30, 2022, increased $3.1 million, or 14.1 percent, compared with the year ended June 30, 2021. This increase was primarily attributable to the following:
| ● |
Advisory fees increased by $3.1 million, or 14.4 percent, primarily as the result of higher ETF assets under management. Advisory fees are comprised of two components: a base management fee and a performance fee. |
| ○ |
Base management fees increased approximately $3.5 million. ETF unitary management fees increased due to an increase in ETF average assets under management, primarily in the Jets ETF, and the addition of the Jets ETF UCITS product in Europe and the Sea to Sky Cargo ETF. Base fees for USGIF increased primarily as a result of higher average assets under management, primarily due to market appreciation. |
| ○ | Performance fee adjustments for USGIF received in the current year were $20,000 compared to $482,000 in the prior year, a decrease of $462,000. The USGIF performance fee, which applies to the equity funds only, is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months. |
| ● |
Administrative services fees decreased by $20,000, or 9.6 percent, primarily as a result of higher net assets under management upon which these fees are based in the current period. These fees are paid by USGIF based on average daily net assets for administrative services provided by the Company to the Funds. |
Advisory Fees. Advisory fees, the largest component of the Company’s operating revenues, are derived from two sources: exchange-traded fund advisory fees and USGIF advisory fees. In fiscal year 2022, these sources accounted for 84.8 percent and 14.4 percent, respectively, of the Company’s operating revenues.
Investment base advisory fees from USGIF are calculated as a percentage of average net assets, ranging from 0.375 percent to 1.25 percent, and are paid monthly. The base advisory fee on the equity funds within USGIF is adjusted upward or downward based on performance. For the years ended June 30, 2022, and 2021, the Company adjusted its base advisory fees upward by $20,000 and $482,000, respectively. USGIF advisory fees in total, including performance adjustments, decreased by approximately $755,000, or 17.5 percent, in fiscal year 2022 compared to fiscal year 2021, primarily as a result of a decrease in average assets under management driven by market depreciation in the equity funds and a decrease in performance fees received.
Mutual fund investment advisory fees are also affected by changes in assets under management, which include:
| ● |
market appreciation or depreciation; |
| ● |
the addition of new fund shareholder accounts; |
| ● |
fund shareholder contributions of additional assets to existing accounts; |
| ● |
withdrawals of assets from and termination of fund shareholder accounts; |
| ● |
exchanges of assets between accounts or products with different fee structures; and |
| ● |
the amount of fees voluntarily reimbursed. |
The Company serves as investment advisor to three U.S.-based exchange-traded funds (ETFs): U.S. Global Jets ETF (ticker JETS), U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU), and U.S. Global Sea to Sky Cargo ETF (ticker SEA). The Company receives a unitary management fee of 0.60 percent of average net assets of the ETFs, and has agreed to bear all expenses of the ETFs, except the U.S. Global Sea to Sky Cargo ETF. The Company has agreed to contractually limit the expenses of the U.S. Global Sea to Sky Cargo ETF through April 2023. The Company also serves as investment advisor to one European-based ETF, the U.S. Global Jets UCITS ETF. The Company receives a unitary management fee of 0.65 percent of average net assets and has agreed to bear all expenses of the ETF. The Company recorded advisory fees from the ETF clients of $21.0 million and $17.1 million in fiscal years 2022 and 2021, respectively, due to an increase in assets as discussed above.
Operating Expenses
| Year ended June 30, |
||||||||||||||||
| $ |
% |
|||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
Change |
Change |
||||||||||||
| Employee compensation and benefits |
$ | 6,059 | $ | 7,369 | $ | (1,310 | ) | (17.8 | )% | |||||||
| General and administrative |
6,911 | 5,704 | 1,207 | 21.2 | % | |||||||||||
| Advertising |
405 | 220 | 185 | 84.1 | % | |||||||||||
| Depreciation and amortization |
226 | 196 | 30 | 15.3 | % | |||||||||||
| Total |
$ | 13,601 | $ | 13,489 | $ | 112 | 0.8 | % | ||||||||
Total operating expenses increased $112,000, or 0.8 percent, compared with the previous fiscal year. This increase was primarily attributable to increases in general and administrative expenses, offset by lower employee compensation, as described below.
Employee Compensation and Benefits. Employee compensation and benefits decreased $1.3 million, or 17.8 percent, in fiscal year 2022, primarily as a result of lower bonuses related to lower realized investment gains than in the previous fiscal year.
General and Administrative. General and administrative expenses increased $1.2 million, or 21.2 percent, in fiscal year 2022, primarily due to increased fund expenses and higher consulting and professional fees.
Other Income (Loss)
| Year ended June 30, |
$ | % | ||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
Change |
Change |
||||||||||||
| As Restated |
||||||||||||||||
| Investment income (loss) |
$ | (6,174 | ) | $ | 28,338 | $ | (34,512 | ) | (121.8 | )% | ||||||
| Income (loss) from equity method investments |
(206 | ) | 347 | (553 | ) | (159.4 | )% | |||||||||
| Gain on forgiveness of PPP loan |
- | 444 | (444 | ) | (100.0 | )% | ||||||||||
| Other income |
235 | 144 | 91 | 63.2 | % | |||||||||||
| Total Other Income (Loss) |
$ | (6,145 | ) | $ | 29,273 | $ | (35,418 | ) | (121.0 | )% | ||||||
Total consolidated other loss for the year ended June 30, 2022, was $6.1 million, compared to $29.3 million in income for the year ended June 30, 2021, a change of $ 35.4 million, or 121.0 percent. The change was primarily due to the following components and factors:
| ● |
Investment loss was $6.2 million for the year ended June 30, 2022, compared to investment income of $28.3 million for the year ended June 30, 2021, a change of approximately $34.5 million. Investment income (loss) is dependent on market fluctuations and does not remain at a consistent level. |
| ○ | The current year ended June 30, 2022, had unrealized losses on equity securities of $9.4 million, unrealized losses on embedded derivatives of $2.5 million, and realized gains on sales of securities of $1.8 million, whereas the prior year ended June 30, 2021, had unrealized gains of $9.9 million on equity securities, no unrealized losses on embedded derivatives, and realized gains on sales of equity securities of $16.6 million. The $16.6 realized gains on equity securities in the prior year ended June 30, 2021, was primarily from the sale of the Company’s investment in common stock of HIVE, resulting in $15.0 million of the realized gains included in investment income. | |
| ○ | The year ended June 30, 2022, had dividend and interest income of $1.9 million, compared to $464,000 in the prior year ended June 30, 2021, an increase of $1.5 million, or 320.0 percent, primarily due to the Company’s investment in convertible debentures in HIVE during the prior year. |
| ○ | Also, due to the Company’s investment in convertible debentures in HIVE during the prior year, there were realized gains on debt securities of $2.2 million for the year ended June 30, 2022, compared to $1.2 million in the prior year ended June 30, 2021, an increase of $1.0 million, or 85.7 percent. |
| ○ | A significant portion of corporate investments is held in securities of a company in the business of mining cryptocurrency. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. See further discussion of this security and other investments in Note 4, Investments, to the Consolidated Financial Statements of this Amended Annual Report on Form 10-K/A-2. |
| ● |
There was $206,000 in losses from equity method investments for the year ended June 30, 2022, compared to $347,000 in income for the year ended June 30, 2021, a decrease of $553,000. The Company’s equity method investment was dissolved during the year ended June 30, 2022. |
| ● |
The Company recorded a gain of $444,000 for the year ended June 30, 2021, due to extinguishment of debt related to forgiveness of the Paycheck Protection Program (“PPP”) loan and accrued interest. See further information on the PPP loan in Note 10, Borrowings, to the Consolidated Financial Statements of this Amended Annual Report on Form 10-K/A-2. |
| ● |
There was $235,000 in other income for the year ended June 30, 2022, compared to $144,000 in other income for the year ended June 30, 2021, an increase of $91,000. The increase was primarily due to consulting fees earned in the amount of $120,000 from HIVE Blockchain Technologies Ltd. (“HIVE”) during the current year, compared to $40,000 during the prior year. Frank Holmes serves on the board as executive chairman of HIVE and held shares and options at June 30, 2022. Effective August 31, 2018, Mr. Holmes was named Interim CEO and Interim Executive Chairman of HIVE. Effective December 22, 2020, Mr. Holmes became the Executive Chairman of HIVE. |
Provision for Income Taxes
A tax expense of $1.1 million was recorded for the year ended June 30, 2022, compared to a tax expense of $5.5 million for the year ended June 30, 2021. The tax expense in the current year was primarily the result of operating income, offset by a decrease in valuation of certain investments, which resulted in a deferred tax asset. The tax expense in the prior period was primarily the result of operating income, realized gain on sale of securities, and unrealized gains on securities.
The Company and its non-Canadian subsidiaries file a consolidated U.S. federal income tax return. U.S. Global Investors (Canada) Limited (“USCAN”) files a separate tax return in Canada. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes resulting from the use of the liability method of accounting for income taxes.
Liquidity and Capital Resources
At June 30, 2022, the Company had net working capital (current assets minus current liabilities) of approximately $33.9 million and a current ratio (current assets divided by current liabilities) of 9.2 to 1. With approximately $22.3 million in cash and cash equivalents and $13.8 million in securities carried at fair value, excluding convertible securities, which together comprise approximately 61.9 percent of total assets, the Company has adequate liquidity to meet its current obligations. Total shareholders’ equity was approximately $54.2 million.
The increase in cash, and accordingly, net working capital, was primarily due to net cash provided by operating activities of $10.5 million, proceeds on sales of equity investments of $2.9 million, and proceeds from principal paydowns of $3.0 million, somewhat offset by $6.7 million of corporate investment purchases. Consolidated shareholders’ equity at June 30, 2022, was $54.2 million, a decrease of $160,000, or 0.3 percent since June 30, 2021. The decrease was primarily due to a decrease in other comprehensive income (loss) of $3.0 million, dividends declared of $1.4 million, somewhat offset by net income of $3.8 million for the year ended June 30, 2022.
The Company also has access to a $1 million credit facility, which can be utilized for working capital purposes. The credit agreement requires the Company to maintain certain covenants; the Company has been in compliance with these covenants during the current fiscal year. The credit agreement will expire on May 31, 2023, and the Company intends to renew annually. The credit facility is collateralized by approximately $1 million, included in restricted cash on the balance sheet, held in deposit in a money market account at the financial institution that provided the credit facility. As of June 30, 2022, this credit facility remained unutilized by the Company.
Investment advisory contracts pursuant to the Investment Company Act of 1940 and related affiliated contracts in the U.S., by law, may not exceed one year in length and, therefore, must be renewed at least annually after an initial two-year term. The investment advisory and related contracts between the Company and USGIF have been renewed through September 2022. The advisory agreement for the U.S. Global Jets ETF and the U.S. Global GO GOLD and Precious Metal Miners ETF has been renewed through September 2023. The advisory agreement for the U.S. Global Sea to Sky Cargo ETF will continue in force for the initial period of two years from January 2022, and thereafter, the advisory agreement will be subject to renewal on an annual basis.
The primary cash requirements are for operating activities. The Company also uses cash to purchase investments, pay dividends and repurchase Company stock. The cash outlays for investments and dividend payments are discretionary. The stock repurchase plan is approved through December 31, 2022, but may be suspended or discontinued as deemed necessary. Cash and securities recorded at fair value, excluding convertible securities, of approximately $36.1 million are available to fund current activities.
Contractual obligations primarily consist of agreements for services used in daily operations and for marketing and distribution. Other contractual obligations consist of agreements to waive or reduce fees and/or pay expenses on certain funds. Future obligations under these agreements are dependent upon future levels of fund assets.
The Board of Directors has authorized a monthly dividend of $0.0075 per share from July 2022 through September 2022. The total amount of cash dividends to be paid to class A and class C shareholders from July 2022 to September 2022 will be approximately $337,000, which is included as dividends payable in the Consolidated Balance Sheets at June 30, 2022. Payment of cash dividends is within the discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions.
Management believes current cash reserves, investments, and financing available will be sufficient to meet foreseeable cash needs for operating activities.
The spread of the global COVID-19 had an adverse effect on global and domestic economies and financial markets, which may reoccur and continue for an undetermined period. Market declines affect the Company’s assets under management, and thus its revenues and also the valuation of the Company’s corporate investments. This may adversely affect the Company’s balance sheet and results of operations.
Critical Accounting Estimates
The discussion and analysis of financial condition and results of operations are based on the Company’s financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. Management reviews these estimates on an ongoing basis. Estimates are based on experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While significant accounting policies are described in more detail in Note 3 to the consolidated financial statements, the Company believes the accounting policies that require management to make assumptions and estimates involving significant judgment are those relating to valuation of investments, income taxes, and valuation of stock-based compensation.
Fair Value of Financial Instruments. The financial instruments of the Company are reported on the Consolidated Balance Sheets at market or fair values or at carrying amounts that approximate fair values. The Company believes that the estimates related to fair values of financial instruments are critical accounting estimates because the assumptions used could significantly impact the unrealized gains or losses recorded in the Company’s Consolidated Financial Statements.
Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. Forfeitures are recognized as they occur.
The Company believes that the estimates related to stock-based compensation expense are critical accounting estimates because the assumptions used could significantly impact the timing and amount of stock-based compensation expense recorded in the Company’s Consolidated Financial Statements.
Income Taxes. The Company’s annual effective income tax rate is based on the mix of income and losses in its U.S. and non-U.S. entities which are part of the Company’s Consolidated Financial Statements, statutory tax rates, and tax-planning opportunities available to the Company in the various jurisdictions in which it operates. Significant judgment is required in evaluating the Company’s tax positions.
Tax law requires certain items to be included in the tax return at different times from when these items are reflected in the Company’s Consolidated Statements of Operations. As a result, the effective tax rate reflected in the Consolidated Financial Statements is different from the tax rate reported on the Company’s consolidated tax return. Some of these differences are permanent, such as expenses that are not deductible in the tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment dates.
The Company assesses uncertain tax positions in accordance with ASC 740, Income Taxes. Judgment is used to identify, recognize, and measure the amounts to be recorded in the financial statements related to tax positions taken or expected to be taken in a tax return. A liability is recognized to represent the potential future obligation to the taxing authority for the benefit taken in the tax return. These liabilities are adjusted, including any impact of the related interest and penalties, in light of changing facts and circumstances such as the progress of a tax audit. A number of years may elapse before a particular matter for which a reserve has been established is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction.
The Company assesses whether a valuation allowance should be established against its deferred income tax assets based on consideration of available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecast of future profitability, the duration of statutory carry back and carry forward periods, the Company’s experience with tax attributes expiring unused, and tax planning alternatives.
Assessing the future tax consequences of events that have been recognized in the Company’s Consolidated Financial Statements or tax returns requires judgment. The Company believes that income taxes include critical accounting estimates because variations in the actual outcome of these future tax consequences could materially impact the Company’s financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
The following information, together with information included in other parts of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, describes the key aspects of certain financial instruments that have market risk to the Company.
COVID-19 had an adverse effect on global and domestic financial markets, which may reoccur and continue for an undetermined period. This may adversely affect assets under management and thus the Company’s revenues and operating results. Market declines also affect the valuation of the Company’s corporate investments, which also adversely affects the Company’s balance sheet and results of operations.
Macroeconomic declines, including inflation; negative political developments, including volatile market conditions due to investor concerns regarding inflation and potential hostilities between Russia and Ukraine; adverse market conditions; and catastrophic events may cause a decline in the Company’s revenue, an increase in the Company’s costs, negatively affect the Company’s operating results, adversely affect the Company’s cash flow, and could result in a decline in the Company’s stock price.
Investment Management and Administrative Services Fees
Revenues are generally based upon a percentage of assets under management in accordance with contractual agreements. Accordingly, fluctuations in the financial markets have a direct effect on the Company’s operating results. A significant portion of assets under management in equity funds have exposure to international markets and/or natural resource sectors, which may experience volatility. In addition, fluctuations in interest rates may affect the value of assets under management in fixed income funds.
Performance Fees
USGIF advisory fees are comprised of two components: a base management fee and a performance fee. The performance fee is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months.
As a result, the Company’s revenues are subject to volatility beyond market-based fluctuations discussed in the investment management and administrative fees section above. For the years ended June 30, 2022, and 2021, the Company realized an increase in its USGIF base advisory fee of $20,000 and $482,000, respectively, due to these performance adjustments.
Corporate Investments
The Company’s Consolidated Balance Sheets include substantial amounts of assets whose fair values are subject to market risk. The market risks are primarily associated with equity prices and foreign currency exchange rates. The fair values of corporate investments with exposure to the cryptocurrency industry are subject to considerable volatility.
The Company’s investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to certain investment advisory clients. Written procedures are in place to manage compliance with the code of ethics and other policies affecting the Company’s investment practices.
Equity Price Risk
Due to the Company’s investments in securities carried at fair value, equity price fluctuations represent a market risk factor affecting the Company’s consolidated financial position. The carrying values of investments subject to equity price risks are based on quoted market prices or, if not actively traded, management’s estimate of fair value as of the balance sheet date. Market prices fluctuate, and the amount realized in the subsequent sale of an investment may differ significantly from the reported fair value.
The following table summarizes the Company’s equity price risks in securities carried at fair value as of June 30, 2022, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.
| Fair Value at |
Hypothetical |
Estimated Fair Value |
Estimated Increase |
||||||||||
| June 30, 2022 | Percentage |
After Hypothetical | (Decrease) in | ||||||||||
| (dollars in thousands) |
(As Restated) |
Change |
Price Change |
Net Income (Loss) (1) |
|||||||||
| Equity securities at fair value |
$ | 14,300 | 25% increase |
$ | 17,875 | $ | 2,824 | ||||||
| 25% decrease |
$ | 10,725 | $ | (2,824 | ) | ||||||||
| Embedded derivatives at fair value 2 |
$ | 3 | 25% increase |
$ | 4 | $ | 1 | ||||||
| 25% decrease |
$ | 2 | $ | (1 | ) | ||||||||
| 1. |
Changes in unrealized and realized gains and losses on embedded derivatives and equity securities at fair value are included in earnings in the Consolidated Statements of Operations. The estimated increase (decrease) is after income taxes at the statutory rate in effect as of the balance sheet date. |
| 2. |
An embedded derivative and its related host contract represent one legal contract and are combined within the investments in available-for-sale debt securities on the Consolidated Balance Sheets. |
The selected hypothetical changes do not reflect what could be considered best- or worst-case scenarios. Results could be significantly different due to both the nature of markets and the concentration of the Company’s investment portfolio.
COVID-19 had an effect on volatility in global and domestic financial markets, which may reoccur and continue for an undetermined period. This may not only adversely affect the Company’s assets under management but also the valuation of the Company’s corporate investments.
A significant portion of the equity securities recorded at fair value in the above table subject to equity price risk are investments in common share purchase warrants of HIVE Blockchain Technologies Ltd. (“HIVE”), which were valued at $515,000 at June 30, 2022. Also, the embedded derivatives shown in the above table, which were valued at $3,000 at June 30, 2022, are related to HIVE convertible debentures. HIVE is discussed in more detail in Note 4, Investments, to the Consolidated Financial Statements of this Amended Annual Report on Form 10-K/A-2. HIVE is a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland, Sweden and Canada. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There is potential for significant volatility in the market price of HIVE, which could materially impact the investment’s value included on the balance sheet and unrealized gain (loss) recognized in investment income.
Interest Rate Risk
Due to the Company’s investments in debt securities carried at fair value, interest rate fluctuations represent a market risk factor affecting the Company’s consolidated financial position. Debt securities may fluctuate in value due to changes in interest rates. Typically, investments subject to interest rate risk will decrease in value when interest rates rise and increase in value when interest rates decline. Fluctuations in interest rates could materially impact the Company’s investments in debt securities carried at fair value included on the balance sheet and gains (losses) recognized in investment income.
Foreign Currency Risk
A portion of cash and certain corporate investments are held in foreign currencies. Adverse changes in foreign currency exchange rates would lower the value of those cash accounts and corporate investments. Certain assets under management also have exposure to foreign currency fluctuations in various markets, which could impact their valuation and thus the revenue received by the Company.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
U.S. Global Investors, Inc.
San Antonio, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying Consolidated Balance Sheets of U.S. Global Investors, Inc. and subsidiaries (the “Company”) as of June 30, 2022, and 2021, the related Consolidated Statements of Operations, Comprehensive Income, Shareholders’ Equity, and Cash Flows for each of the two years in the period ended June 30, 2022, and the related notes (collectively referred to as the “Consolidated Financial Statements”). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company and subsidiaries at June 30, 2022, and 2021, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
Restatement to Correct 2022 Misstatement
As discussed in Note 1 to the consolidated financial statements, the 2022 financial statements have been restated to correct a misstatement.
Basis for Opinion
These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s Consolidated Financial Statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the Consolidated Financial Statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor from 2004 to 2022.
Dallas, Texas
September 1, 2022, except for the impact of the restatement discussed in Note 1 as to which the date is May 19, 2023
CONSOLIDATED BALANCE SHEETS
| June 30, 2022 | June 30, 2021 | |||||||
| (dollars in thousands) | As Restated | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Investments in securities at fair value | ||||||||
| Accounts and other receivables | ||||||||
| Tax receivable | ||||||||
| Prepaid expenses | ||||||||
| Total Current Assets | ||||||||
| Net Property and Equipment | ||||||||
| Other Assets | ||||||||
| Deferred tax asset | ||||||||
| Investments in equity securities at fair value, non-current | ||||||||
| Investments in available-for-sale debt securities at fair value | ||||||||
| Investments in held-to-maturity debt securities | ||||||||
| Other investments | ||||||||
| Equity method investments | ||||||||
| Operating lease, right of use assets | ||||||||
| Financing lease, right of use assets | ||||||||
| Other assets, non-current | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation and related costs | ||||||||
| Dividends payable | ||||||||
| Operating lease liability, short-term | ||||||||
| Financing lease liability, short-term | ||||||||
| Other accrued expenses | ||||||||
| Taxes payable | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Deferred tax liability | ||||||||
| Financing lease liability, long-term | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 18) | ||||||||
| Shareholders’ Equity | ||||||||
| Common stock (class A) - $ par value; nonvoting; shares authorized; and shares issued at June 30, 2022, and June 30, 2021, respectively; and shares outstanding at June 30, 2022, and June 30, 2021, respectively | ||||||||
| Common stock (class B) - $ par value; nonvoting; shares authorized; shares issued | ||||||||
| Convertible common stock (class C) - $ par value; voting; shares authorized; and shares issued and outstanding at June 30, 2022, and June 30, 2021, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Treasury stock, class A shares at cost; shares and shares at June 30, 2022, and June 30, 2021, respectively | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income, net of tax | ||||||||
| Retained earnings | ||||||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended June 30, |
||||||||
| 2022 | 2021 | |||||||
| (dollars in thousands, except per share data) |
||||||||
| As Restated | ||||||||
| Operating Revenues |
||||||||
| Advisory fees |
$ | $ | ||||||
| Administrative services fees |
||||||||
| Operating Expenses |
||||||||
| Employee compensation and benefits |
||||||||
| General and administrative |
||||||||
| Advertising |
||||||||
| Depreciation and amortization |
||||||||
| Operating Income |
||||||||
| Other Income (Loss) |
||||||||
| Investment income (loss) |
( |
) | ||||||
| Income (loss) from equity method investments |
( |
) | ||||||
| Gain on forgiveness of PPP loan |
||||||||
| Other income |
||||||||
| ( |
) | |||||||
| Income Before Income Taxes |
||||||||
| Provision for Income Taxes |
||||||||
| Tax expense |
||||||||
| Net Income |
||||||||
| Earnings Per Share |
||||||||
| Basic Net Income per Share |
$ | $ | ||||||
| Diluted Net Income per Share |
$ | $ | ||||||
| Basic weighted average number of common shares outstanding |
||||||||
| Diluted weighted average number of common shares outstanding |
||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended June 30, |
||||||||
| (dollars in thousands) |
2022 |
2021 |
||||||
| As Restated | ||||||||
| Net Income |
$ | $ | ||||||
| Other Comprehensive Income (Loss), Net of Tax: |
||||||||
| Unrealized gains (losses) on available-for-sale securities arising during period |
( |
) | ||||||
| Less: reclassification adjustment for gains included in net income (Note 4) |
( |
) | ( |
) | ||||
| Net change from available-for-sale securities, net of tax |
( |
) | ||||||
| Foreign currency translation adjustment |
( |
) | ||||||
| Less: reclassification adjustment for foreign currency gains included in net income |
( |
) | ||||||
| Net change from foreign currency translations |
( |
) | ||||||
| Other Comprehensive Income (Loss) |
( |
) | ||||||
| Comprehensive Income |
$ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Accumulated |
||||||||||||||||||||||||||||||||||||||||
| Common |
Common |
Other |
||||||||||||||||||||||||||||||||||||||
| Stock |
Common |
Stock |
Common |
Additional |
Treasury |
Comprehensive |
||||||||||||||||||||||||||||||||||
| (class A) |
Stock |
(class C) |
Stock |
Paid-in |
Stock |
Treasury |
Income |
Retained |
||||||||||||||||||||||||||||||||
| (dollars in thousands) |
Shares |
(class A) |
Shares |
(class C) |
Capital |
Shares |
Stock |
(Loss) |
Earnings |
Total |
||||||||||||||||||||||||||||||
| Balance at June 30, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||
| Purchases of shares of Common Stock (class A) |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under ESPP of shares of Common Stock (class A) |
( |
) | ||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net of tax |
- | - | - | |||||||||||||||||||||||||||||||||||||
| Dividends declared |
- | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Stock bonuses |
( |
) | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax |
- | - | - | |||||||||||||||||||||||||||||||||||||
| Net income |
- | - | - | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Purchases of shares of Common Stock (class A) |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under ESPP of shares of Common Stock (class A) |
( |
) | ||||||||||||||||||||||||||||||||||||||
| Conversion of shares of class C common stock for class A common stock |
- | ( |
) | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Share-based compensation, net of tax |
- | - | - | |||||||||||||||||||||||||||||||||||||
| Dividends declared |
- | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax, as restated |
- | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Net income, as restated |
- | - | - | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 (As Restated) |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended June 30, |
||||||||
| 2022 | 2021 | |||||||
| (dollars in thousands) |
||||||||
| As Restated | ||||||||
| Cash Flows from Operating Activities: |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
| Depreciation, amortization and accretion |
( |
) | ||||||
| Net recognized loss on disposal of fixed assets |
||||||||
| Net realized gains on securities |
( |
) | ( |
) | ||||
| Unrealized losses (gains) on securities |
( |
) | ||||||
| Investment basis adjustment |
||||||||
| Net loss (income) from equity method investment |
( |
) | ||||||
| Foreign currency transaction gain |
( |
) | ||||||
| Provision for deferred taxes |
( |
) | ||||||
| Stock bonuses |
||||||||
| Stock-based compensation expense |
||||||||
| PPP loan forgiveness |
( |
) | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts and other receivables |
( |
) | ||||||
| Prepaid expenses and other assets |
( |
) | ( |
) | ||||
| Accounts payable and accrued expenses |
( |
) | ||||||
| Total adjustments |
( |
) | ||||||
| Net cash provided by operating activities |
||||||||
| Cash Flows from Investing Activities: |
||||||||
| Purchase of property and equipment |
( |
) | ( |
) | ||||
| Purchase of equity securities at fair value, current |
( |
) | ||||||
| Purchase of equity securities at fair value, non-current |
( |
) | ( |
) | ||||
| Purchase of other investments |
( |
) | ( |
) | ||||
| Purchase of held-to-maturity debt securities |
( |
) | ||||||
| Purchase of available-for-sale debt securities at fair value |
( |
) | ||||||
| Proceeds from sale of equity method investment |
||||||||
| Proceeds on sale of equity securities at fair value, non-current |
||||||||
| Proceeds from principal paydowns of available-for-sale debt securities at fair value |
||||||||
| Return of capital on other investments |
||||||||
| Net cash provided by (used in) investing activities |
( |
) | ||||||
| Cash Flows from Financing Activities: |
||||||||
| Issuance of common stock |
||||||||
| Repurchases of common stock |
( |
) | ( |
) | ||||
| Dividends paid |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Net increase in cash, cash equivalents, and restricted cash |
||||||||
| Beginning cash, cash equivalents, and restricted cash |
||||||||
| Ending cash, cash equivalents, and restricted cash |
$ | $ | ||||||
| Supplemental Disclosures of Non-Cash Investing and Financing Activities |
||||||||
| Dividends declared but not paid |
$ | $ | ||||||
| Fair value of assets acquired |
$ | $ | ||||||
| Unsettled sales of non-current investments |
$ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information |
||||||||
| Cash paid for income taxes |
$ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
NOTE 1. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 2022, and for the year then ended, have been restated to reflect corrections of misstatements related to our corporate investments in HIVE Blockchain Technologies, Ltd. ("HIVE"). In addition to the changes listed below, various footnotes reflect the effects of this restatement, including but not limited to, Note 4, Investments, Note 13, Income Taxes, Note 14, Earnings Per Share, Note 15, Accumulated Other Comprehensive Income (Loss), and Note 16, Financial Information by Business Segment.
An error was detected in the fair value calculations performed by a third party for the investment in HIVE common share purchase warrants and the investment in HIVE unsecured convertible debentures. Specifically, related to the common share purchase warrants, the valuation model was not appropriately adjusted after a share consolidation by the issuer in May 2022. As a result, the fair value of the common share purchase warrants was corrected at June 30, 2022. The effect was as follows:
| Year Ended | ||||
| and as of | ||||
| (dollars in thousands, except per share data) | June 30, 2022 | |||
| (Overstatement)/Understatement | ||||
| Deferred tax asset | $ | |||
| Investments in equity securities at fair value, non-current | $ | ( | ) | |
| Total Shareholders’ Equity | $ | ( | ) | |
| Investment Loss | $ | |||
| Tax Expense | $ | ( | ) | |
| Net Income | $ | ( | ) | |
| Earnings Per Share | $ | ( | ) | |
The error related to the HIVE unsecured convertible debentures was related to an additional principal payment being included within the binomial lattice valuation model. As a result, the fair value of the HIVE unsecured convertible debentures was corrected at June 30, 2022. The effect was as follows:
| Year Ended | ||||
| and as of | ||||
| (dollars in thousands) | June 30, 2022 | |||
| (Overstatement)/Understatement | ||||
| Deferred tax asset | $ | |||
| Investments in available-for-sale debt securities at fair value | $ | ( | ) | |
| Total Shareholders’ Equity | $ | ( | ) | |
| Other Comprehensive Loss | $ | |||
The following tables set forth the impact of the restatement on the Company's annual consolidated financial statements as of and for the year ended June 30, 2022.
CONSOLIDATED BALANCE SHEET
| June 30, 2022 | ||||||||||||
| As | ||||||||||||
| Previously | Restatement | As | ||||||||||
| (dollars in thousands) | Reported | Adjustments | Restated | |||||||||
| Assets | ||||||||||||
| Current Assets | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| Restricted cash | ||||||||||||
| Investments in securities at fair value | ||||||||||||
| Accounts and other receivables | ||||||||||||
| Tax receivable | ||||||||||||
| Prepaid expenses | ||||||||||||
| Total Current Assets | ||||||||||||
| Net Property and Equipment | ||||||||||||
| Other Assets | ||||||||||||
| Deferred tax asset | ||||||||||||
| Investments in equity securities at fair value, non-current | ( | ) | ||||||||||
| Investments in available-for-sale debt securities at fair value | ( | ) | ||||||||||
| Investments in held-to-maturity debt securities | ||||||||||||
| Other investments | ||||||||||||
| Equity method investments | ||||||||||||
| Operating lease, right of use assets | ||||||||||||
| Financing lease, right of use assets | ||||||||||||
| Other assets, non-current | ||||||||||||
| Total Other Assets | ( | ) | ||||||||||
| Total Assets | $ | $ | ( | ) | $ | |||||||
| Liabilities and Shareholders’ Equity | ||||||||||||
| Current Liabilities | ||||||||||||
| Accounts payable | $ | $ | $ | |||||||||
| Accrued compensation and related costs | ||||||||||||
| Dividends payable | ||||||||||||
| Operating lease liability, short-term | ||||||||||||
| Financing lease liability, short-term | ||||||||||||
| Other accrued expenses | ||||||||||||
| Taxes payable | ||||||||||||
| Total Current Liabilities | ||||||||||||
| Long-Term Liabilities | ||||||||||||
| Deferred tax liability | ||||||||||||
| Financing lease liability, long-term | ||||||||||||
| Total Long-Term Liabilities | ||||||||||||
| Total Liabilities | ||||||||||||
| Commitments and Contingencies (Note 18) | ||||||||||||
| Shareholders’ Equity | ||||||||||||
| Common stock (class A) - $ par value; nonvoting; shares authorized; and shares issued at June 30, 2022, and June 30, 2021, respectively; and shares outstanding at June 30, 2022, and June 30, 2021, respectively | ||||||||||||
| Common stock (class B) - $ par value; nonvoting; shares authorized; shares issued | ||||||||||||
| Convertible common stock (class C) - $ par value; voting; shares authorized; and shares issued and outstanding at June 30, 2022, and June 30, 2021, respectively | ||||||||||||
| Additional paid-in-capital | ||||||||||||
| Treasury stock, class A shares at cost; shares and shares at June 30, 2022, and June 30, 2021, respectively | ( | ) | ( | ) | ||||||||
| Accumulated other comprehensive income, net of tax | ( | ) | ||||||||||
| Retained earnings | ( | ) | ||||||||||
| Total Shareholders’ Equity | ( | ) | ||||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ( | ) | $ | |||||||
CONSOLIDATED STATEMENT OF OPERATIONS
| Year Ended June 30, 2022 | ||||||||||||
| As | ||||||||||||
| Previously | Restatement | As | ||||||||||
| (dollars in thousands, except per share data) | Reported | Adjustments | Restated | |||||||||
| Operating Revenues | ||||||||||||
| Advisory fees | $ | $ | $ | |||||||||
| Administrative services fees | ||||||||||||
| Operating Expenses | ||||||||||||
| Employee compensation and benefits | ||||||||||||
| General and administrative | ||||||||||||
| Advertising | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Operating Income | ||||||||||||
| Other Income (Loss) | ||||||||||||
| Investment income (loss) | ( | ) | ( | ) | ( | ) | ||||||
| Income (loss) from equity method investments | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||
| ) | ( | ) | ) | |||||||||
| Income Before Income Taxes | ( | ) | ||||||||||
| Provision for Income Taxes | ||||||||||||
| Tax expense | ( | ) | ||||||||||
| Net Income | ( | ) | ||||||||||
| Earnings Per Share | ||||||||||||
| Basic Net Income per Share | $ | $ | ( | ) | $ | |||||||
| Diluted Net Income per Share | $ | $ | ( | ) | $ | |||||||
| Basic weighted average number of common shares outstanding | ||||||||||||
| Diluted weighted average number of common shares outstanding | ||||||||||||
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
| Year Ended June 30, 2022 | ||||||||||||
| As | ||||||||||||
| Previously | Restatement | As | ||||||||||
| (dollars in thousands) | Reported | Adjustments | Restated | |||||||||
| Net Income | $ | $ | ( | ) | $ | |||||||
| Other Comprehensive Income (Loss), Net of Tax: | ||||||||||||
| Unrealized gains (losses) on available-for-sale securities arising during period | ( | ) | ( | ) | ( | ) | ||||||
| Less: reclassification adjustment for gains included in net income (Note 4) | ( | ) | ( | ) | ||||||||
| Net change from available-for-sale securities, net of tax | ( | ) | ( | ) | ( | ) | ||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||
| Less: reclassification adjustment for foreign currency gains included in net income | ( | ) | ( | ) | ||||||||
| Net change from foreign currency translations | ( | ) | ( | ) | ||||||||
| Other Comprehensive Income (Loss) | ( | ) | ( | ) | ( | ) | ||||||
| Comprehensive Income | $ | $ | ( | ) | $ | |||||||
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Common | Common | Other | ||||||||||||||||||||||||||||||||||||||
| Stock | Common | Stock | Common | Additional | Treasury | Comprehensive | ||||||||||||||||||||||||||||||||||
| (class A) | Stock | (class C) | Stock | Paid-in | Stock | Treasury | Income | Retained | ||||||||||||||||||||||||||||||||
| Shares | (class A) | Shares | (class C) | Capital | Shares | Stock | (Loss) | Earnings | Total | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| As Previously Reported: | ||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Purchases of shares of Common Stock (class A) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under ESPP of shares of Common Stock (class A) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Conversion of shares of class C common stock for class A common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net of tax | - | - | - | |||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Restatement Adjustments: | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| As Restated: | ||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Purchases of shares of Common Stock (class A) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under ESPP of shares of Common Stock (class A) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Conversion of shares of class C common stock for class A common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net of tax | - | - | - | |||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENT OF CASH FLOWS
| Year Ended June 30, 2022 | ||||||||||||
| (dollars in thousands) | As | |||||||||||
| Previously | Restatement | As | ||||||||||
| Reported | Adjustments | Restated | ||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net income | $ | $ | ( | ) | $ | |||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation, amortization and accretion | ( | ) | ( | ) | ||||||||
| Net recognized loss on disposal of fixed assets | ||||||||||||
| Net realized gains on securities | ( | ) | ( | ) | ||||||||
| Unrealized losses (gains) on securities | ||||||||||||
| Investment basis adjustment | ||||||||||||
| Net loss (income) from equity method investment | ||||||||||||
| Foreign currency transaction gain | ( | ) | ( | ) | ||||||||
| Provision for deferred taxes | ( | ) | ( | ) | ( | ) | ||||||
| Stock bonuses | ||||||||||||
| Stock-based compensation expense | ||||||||||||
| PPP loan forgiveness | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts and other receivables | ||||||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||||||
| Total adjustments | ||||||||||||
| Net cash provided by operating activities | ||||||||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||||||
| Purchase of equity securities at fair value, current | ( | ) | ( | ) | ||||||||
| Purchase of equity securities at fair value, non-current | ( | ) | ( | ) | ||||||||
| Purchase of other investments | ( | ) | ( | ) | ||||||||
| Purchase of held-to-maturity debt securities | ||||||||||||
| Purchase of available-for-sale debt securities at fair value | ||||||||||||
| Proceeds from sale of equity method investment | ||||||||||||
| Proceeds on sale of equity securities at fair value, non-current | ||||||||||||
| Proceeds from principal paydowns of available-for-sale debt securities at fair value | ||||||||||||
| Return of capital on other investments | ||||||||||||
| Net cash provided by (used in) investing activities | ( | ) | ( | ) | ||||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Issuance of common stock | ||||||||||||
| Repurchases of common stock | ( | ) | ( | ) | ||||||||
| Dividends paid | ( | ) | ( | ) | ||||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||||||
| Net increase in cash, cash equivalents, and restricted cash | ||||||||||||
| Beginning cash, cash equivalents, and restricted cash | ||||||||||||
| Ending cash, cash equivalents, and restricted cash | $ | $ | $ | |||||||||
| Supplemental Disclosures of Non-Cash Investing and Financing Activities | ||||||||||||
| Dividends declared but not paid | $ | $ | $ | |||||||||
| Fair value of assets acquired | $ | $ | $ | |||||||||
| Unsettled sales of non-current investments | $ | $ | $ | |||||||||
| Supplemental Disclosures of Cash Flow Information | ||||||||||||
| Cash paid for income taxes | $ | $ | $ | |||||||||
NOTE 2. ORGANIZATION
U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) serves as investment adviser to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”), a Delaware statutory trust that is a no-load, open-end investment company offering shares in numerous mutual funds to the investing public. The Company also provides administrative services to USGIF. For these services, the Company receives fees from USGIF. The Company also provides advisory services to SEC registered exchange traded funds (“ETFs”).
The Company has the following subsidiaries utilized primarily for corporate investment purposes: U.S. Global Investors (Bermuda) Limited (“USBERM”), incorporated in Bermuda, and U.S. Global Investors (Canada) Limited (“USCAN”). The Company created U.S. Global Indices, LLC, a Texas limited liability company, of which the Company is the sole member, to provide indexing services to exchange-traded funds managed by the Company.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: USBERM, USCAN and U.S. Global Indices, LLC.
There are two primary consolidation models in U.S. GAAP, the variable interest entity (“VIE”) and voting interest entity models. The Company’s evaluation for consolidation includes whether entities in which it has an interest or from which it receives fees are VIEs and whether the Company is the primary beneficiary of any VIEs identified in its analysis. A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the group of holders of the equity investment at risk lacks certain characteristics of a controlling financial interest. The primary beneficiary is the entity that has the obligation to absorb a majority of the expected losses or the right to receive the majority of the residual returns and consolidates the VIE on the basis of having a controlling financial interest.
The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain funds it advises, specifically, certain funds in USGIF. The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. In the ordinary course of business, the Company may choose to waive certain fees or assume operating expenses of the funds it advises for competitive, regulatory or contractual reasons (see Note 5 for information regarding fee waivers). The Company has not provided financial support to any of these entities outside the ordinary course of business. The Company’s risk of loss with respect to these VIEs is limited to the carrying value of its investments in, and fees receivable from, the entities. The Company is not deemed to be the primary beneficiary because it does not have the obligation to absorb a majority of the expected losses or the right to receive the majority of the residual returns. The Company does not consolidate these VIEs because it is not the primary beneficiary. The Company’s total exposure to unconsolidated VIEs, consisting of the carrying value of investment securities and receivables for fees, was $
The carrying amount of assets and liabilities recognized in the Consolidated Balance Sheets related to the Company's interests in these non-consolidated VIEs were as follows:
| Carrying Value and Maximum Exposure to Loss | ||||||||
| (dollars in thousands) | June 30, 2022 | June 30, 2021 | ||||||
| Investments in securities at fair value | $ | $ | ||||||
| Investments in equity securities at fair value, non-current | ||||||||
| Other receivables | ||||||||
| Total VIE assets, maximum exposure to loss | ||||||||
| Other accrued expenses | ||||||||
| Total carrying amount | $ | $ | ||||||
Since the Company is not the primary beneficiary of the above funds it advises, the Company evaluated if it should consolidate under the voting interest entity model. Under the voting interest model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50 percent of the outstanding voting shares over an entity. The Company does not have control of any of the above funds it advises; therefore, the Company does not consolidate any of these funds.
During the years ended June 30, 2022, and 2021, the Company held a variable interest in a fund organized as a limited partnership, but this entity did not qualify as a VIE. Since it was not a VIE, the Company evaluated if it should consolidate it under the voting interest entity model. Under the voting interest model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50 percent of the outstanding voting shares over an entity. The Company did not have control of the entity and, therefore, did not consolidate it. However, the Company was considered to have the ability to exercise significant influence. Thus, the investment was accounted for under the equity method of accounting. During the year ended June 30, 2022, this entity was dissolved. See further information about this investment in Note 4.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes.
Cash and Cash Equivalents. Cash and cash equivalents include highly liquid investments with original maturities of three months or less.
Restricted Cash. Restricted cash represents cash invested in a money market account as collateral for credit facilities that is not available for general corporate use.
Investments. The Company records security transactions on trade date. Realized gains (losses) from security transactions are calculated on the first-in/first-out cost basis, unless otherwise identifiable, and are recorded in earnings on the date of sale.
Investments in Equity Securities. Equity securities are generally carried at fair value on the Consolidated Balance Sheets with changes in the fair value recorded through earnings within investment income (loss).
Investments in Debt Securities. The Company classifies debt investments as available-for-sale or held-to-maturity based on the Company’s intent to sell the security or, its intent and ability to hold the debt security to maturity. Available-for-sale debt securities are carried at fair value, and changes in unrealized gains and losses are reported net of tax in accumulated other comprehensive income (loss), except for declines in fair value determined to be other than temporary, which are reported in earnings. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to investment income (loss). Held-to-maturity debt securities are purchased with the intent and ability to hold until maturity and are carried at amortized cost.
Embedded derivatives. The Company does not use derivatives for trading, speculation, or hedging exposures. Certain financial instruments the Company invests in contain both a derivative and a non-derivative component. In such cases, the derivative component is termed an embedded derivative, with the non-derivative component representing the host contract. If the economic characteristics and risks of embedded derivative are not closely related to those of the host contract, and the changes in the fair value of the host contact itself is not recorded through earnings within investment income (loss), the embedded derivative is bifurcated and carried at fair value, with changes in the fair value recorded through earnings within investment income (loss) on the Consolidated Statements of Operations. The host contract will continue to be accounted for in accordance with the appropriate accounting standard. The embedded derivative and the related host contract represent one legal contract and are combined on the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows, and tables within Note 4, Investments, unless otherwise indicated.
Other Investments. Other investments consist of equity investments in entities over which the Company is unable to exercise significant influence and which do not have readily determinable fair values. The Company has elected to value these investments using the measurement alternative, under which such securities are measured at cost, less impairment, if any. If the Company identifies observable price changes for identical or similar securities of the same issuer, the equity security is measured at fair value as of the date the observable transaction occurred, with such changes recorded in investment income (loss).
Equity Method Investments. Investments classified as equity method consist of investments in companies in which the Company is able to exercise significant influence but not control. Under the equity method of accounting, the investment is initially recorded at cost, then the Company’s proportional share of investee’s underlying net income or loss is recorded as a component of “other income” with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce the Company’s carrying value of the investment. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable.
Fair Value of Financial Instruments. The financial instruments of the Company are reported on the Consolidated Balance Sheets at market or fair values or at carrying amounts that approximate fair values.
Receivables. Receivables other than notes receivable consist primarily of advisory and other fees owed to the Company by clients. The Company also may invest in notes receivable. Notes receivable are recorded in accordance with the terms of the agreement, and accrued interest is recorded when earned. Unearned fees are shown as a deduction from the related notes receivable and are amortized to interest income using the effective interest method. The Company reviews the need for an allowance for credit losses for notes and other receivables based on various factors including payment history, historical bad debt experience, existing economic conditions, aging and specific accounts identified as high risk. Uncollectible receivables, if any, are charged against the allowance when all reasonable efforts to collect the amounts due have been exhausted. The Company had
Property and Equipment. Fixed assets are recorded at cost. Depreciation for fixed assets is recorded using the straight-line method over the estimated useful life of each asset as follows: furniture and equipment are depreciated over
Leases. The Company leases equipment under various leasing arrangements. Leases may be classified as either financing leases or operating leases, as appropriate. The Company determines if a contract is a lease or contains a lease at inception. The Company accounts for lease and nonlease components as a single component for its leases. The Company elected the short-term lease exception for leases with an initial term of 12 months or less. Consequently, such leases are not recorded on the Consolidated Balance Sheets. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain they will be exercised or not, respectively.
Fixed lease payments are included in right of use (“ROU”) assets and lease liabilities within other assets and liabilities, respectively, on the Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date using the Company’s incremental borrowing rate as the discount rate. Fixed lease payments made over the lease term are recorded as lease expense on a straight-line basis. Variable lease payments based on usage, changes in an index or market rate are expensed as incurred.
For new leases, the discount rates are based on the entire noncancelable lease term.
The Company is the lessor of certain areas of its owned office building under operating leases. The Company determines if a contract is a lease or contains a lease at inception. The Company elected not to separate lease and related non-lease components and account for the combined component as an operating lease.
Impairment of Long-Lived Assets. The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in business circumstances indicate the net book values of the assets may not be recoverable. Impairment is indicated when the assets’ net book value is less than fair value of the asset. If this occurs, an impairment loss is recognized for the difference between the fair value and net book value. Factors that indicate potential impairment include: a significant decrease in the market value of the asset or a significant change in the asset’s physical condition or use.
Treasury Stock. Treasury stock purchases are accounted for under the cost method. The subsequent issuances of these shares are accounted for based on their weighted-average cost basis.
Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. Forfeitures are recognized as they occur.
Income Taxes. The Company and its non-Canadian subsidiaries file a consolidated federal income tax return. USCAN files a separate tax return in Canada. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes, resulting from the use of the liability method of accounting for income taxes. The liability method requires that deferred tax assets be reduced by a valuation allowance in cases where it is more likely than not that the deferred tax assets will not be realized.
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2022, the Company did have any accrued interest or penalties related to uncertain tax positions. The tax years from through 2021 remain open to examination by the U.S. Federal tax jurisdictions to which the Company is subject. The tax years from through 2021 remain open to examination by the non-U.S. Federal tax jurisdictions to which the Company is subject.
The Company has elected to treat the global intangible low-taxed income (GILTI) tax as a period expense. The Company also elected to use the tax law ordering approach when assessing the realization of net operating losses related to GILTI.
Revenue Recognition. The Company’s operating revenue is earned from investment advisory and administrative services provided to clients. Each distinct service promised in the agreements is considered a performance obligation and is the basis for determining when revenue is recognized. The fees are allocated to each distinct performance obligation and revenue is recognized when, or as, promises are satisfied. The consideration for services is generally variable and included in net revenues when it is improbable that a significant reversal could occur in the future. The timing of when clients are billed and related payment received varies in accordance with agreed-upon contractual terms. For current agreements, billing occurs after the Company has recognized revenue which results in accounts receivable and revenue.
Investment Advisory Fees. The investment advisory agreements have a single performance obligation, since the promised services are not separately identifiable from other promises in the agreements and, therefore, are not distinct. Investment advisory fees are comprised of two components, a base fee and a performance fee, if applicable. Base investment advisory fees are recognized as the services are performed over time and are based upon agreed-upon percentages of average assets under management (“AAUM”), depending on contractual terms. These fees are received in cash after the end of each monthly period within 30 days. Investment advisory fees are affected by changes in assets under management, including market appreciation or depreciation, foreign exchange translation, and net inflows or outflows. Investment advisory fees are reported net of fee waivers.
Performance Fees. USGI receives investment advisory performance fees from certain funds. Performance fees for the equity funds within USGIF are a fulcrum fee that is a
Administrative Services Fees. The administrative services agreement has a single performance obligation, since the promised services are not separately identifiable from other promises in the agreement and, therefore, are not distinct. Administrative services fees are recognized as the services are performed over time and are based upon agreed-upon percentages of AAUM. These fees are received in cash after the end of each monthly period within 30 days. Administrative services fees are affected by changes in assets under management, including market appreciation or depreciation, foreign exchange translation, and net inflows or outflows. Administrative services fees are reported net of fee waivers.
Fee Waivers. For certain clients, the Company has agreed to contractually limit the expenses or voluntarily waived or reduced its fees and/or agreed to pay expenses for funds. These fee waivers are deemed to be a reduction of the transaction price and are reported as a reduction of investment advisory fees and/or administrative services fees. These fees are paid in cash after the end of each monthly period within 30 days.
Dividends and Interest. Dividends are recorded on the ex-dividend date, and interest income is recorded on an accrual basis. Any discount between the cost and the principal amount of debt investments is amortized to interest income using the effective interest method. Both dividends and interest income are included in investment income.
Advertising Costs. The Company expenses advertising costs as they are incurred. The Company is reimbursed for certain advertising expenses related to USGIF from the distributor for USGIF.
Foreign Exchange. The balance sheets of certain foreign subsidiaries of the Company and certain foreign-denominated investment products are translated at the current exchange rate as of the end of the accounting period and the related income or loss is translated at the average exchange rate in effect during the period. Net exchange gains and losses resulting from balance sheet translations of foreign subsidiaries are excluded from income and are recorded in “accumulated other comprehensive income (loss)” on the Consolidated Balance Sheets. Net exchange gains and losses resulting from income or loss translations are included in income and are recorded in “investment income (loss)” on the Consolidated Statements of Operations. Investment transactions denominated in foreign currencies are converted to U.S. dollars using the exchange rate on the date of the transaction and any related gain or loss is included in “investment income (loss)” on the Consolidated Statements of Operations.
Use of Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
COVID-19 adversely affected the global financial markets, and in the future it or other epidemics, pandemics or outbreaks may adversely affect the Company’s results of operations, cash flows and financial position. The Company cannot reasonably estimate the future impact, given the uncertainty over the duration and severity of the economic impact.
Earnings Per Share. The Company computes and presents earnings per share in accordance with ASC 260, Earnings Per Share. Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of EPS that could occur if options to issue common stock were exercised. The Company has two classes of common stock with outstanding shares. Both classes share equally in dividend and liquidation preferences.
Accumulated Other Comprehensive Income (Loss). Accumulated other comprehensive income (loss), net of tax, is reported in the Consolidated Balance Sheets and the Consolidated Statements of Shareholders’ Equity and includes any unrealized gains and losses on debt securities classified as available-for-sale and foreign currency translation adjustments.
Recent Accounting Pronouncements and Developments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, and has subsequently issued several amendments (collectively, “ASU 2016-13”). ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. ASU 2016-13 will be effective for smaller reporting companies, including U.S. Global, for fiscal years beginning after December 15, 2022. Earlier application is permitted only for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted. The standard became effective for the Company on July 1, 2021. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements or disclosures.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). The FASB issued ASU 2022-03 (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 will be effective for fiscal years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
NOTE 4. INVESTMENTS
As of June 30, 2022, the Company held investments carried at fair value on a recurring basis of $
The cost basis of investments is adjusted for amortization of premium or accretion of discount on debt securities held or the recharacterization of distributions from investments in partnerships, if applicable.
Concentrations of Credit Risk
A significant portion of the Company’s investments carried at fair value on a recurring basis is investments in USGIF, which were $
Fair Value Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques described below maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value.
The inputs used for measuring financial instruments at fair value are summarized in the three broad levels listed below:
Level 1 – Inputs represent unadjusted quoted prices for identical assets exchanged in active markets.
Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets exchanged in active or inactive markets; quoted prices for identical assets exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets, such as interest rates and yield curves; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Inputs include unobservable inputs used in the measurement of assets. The Company is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets and it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with the investing in those securities. Because of the inherent uncertainties of valuation, the values reflected may materially differ from the values received upon actual sale of those investments.
The Company has established a Proprietary Valuation Committee (the “Committee”) to administer and oversee the Company’s valuation policies and procedures, which are approved by the Board of Directors, and to perform a periodic review of valuations provided by independent pricing services.
For actively traded securities, the Company values investments using the closing price of the securities on the exchange or market on which the securities principally trade. If the security is not traded on the last business day of the quarter, it is generally valued at the mean between the last bid and ask quotation. The fair value of a security that has a restriction greater than one year is based on the quoted price for an otherwise identical unrestricted instrument that trades in a public market, adjusted for the estimated effect of the restriction. Mutual funds, which include open- and closed-end funds and exchange-traded funds, are valued at net asset value or closing price, as applicable.
For common share purchase warrants not traded on an exchange, the estimated fair value is determined using the Black-Scholes option-pricing model. This sophisticated model utilizes a number of assumptions in arriving at its results, including the estimated life, the risk-free interest rate, and historical volatility of the underlying common stock. The Company may change the assumption of the risk-free interest rate and utilize the yield curve for instruments with similar characteristics, such as credit ratings and jurisdiction, or change the expected volatility. The effects of changing any of the assumptions or factors employed by the Black-Scholes model may result in a significantly different valuation.
Certain convertible debt securities not traded on an exchange are valued by an independent pricing service using a binomial lattice model based on factors such as yield, quality, maturity, coupon rate, type of issuance, individual trading characteristics of the underlying common shares and other market data. The model utilizes a number of assumptions in arriving at its results. The effects of changing any of the assumptions or factors utilized in the binomial lattice model, including expected volatility, credit adjusted discount rates, and discounts for lack of marketability, may result in a significantly different valuation for the securities.
For other securities included in the fair value hierarchy with unobservable inputs, the Committee considers a number of factors in determining a security’s fair value, including the security’s trading volume, market values of similar class issuances, investment personnel’s judgment regarding the market experience of the issuer, financial status of the issuer, the issuer’s management, and back testing, as appropriate. The fair values may differ from what may have been used had a broader market for these securities existed. The Committee reviews inputs and assumptions and reports material items to the Board of Directors. Securities which do not have readily determinable fair values are also periodically reviewed by the Committee.
The following summarizes the major categories of investments with fair values adjusted on a recurring basis as of June 30, 2022, and June 30, 2021, and other investments with fair values adjusted on a nonrecurring basis, with fair values shown according to the fair value hierarchy.
| June 30, 2022 (As Restated) | |||||||||||||||
| Significant | Significant | ||||||||||||||
| Other | Unobservable | ||||||||||||||
| Quoted Prices | Inputs | Inputs | |||||||||||||
| (dollars in thousands) | (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||
| Investments carried at fair value on a recurring basis: | |||||||||||||||
| Investments in equity securities: | |||||||||||||||
| Equities - International | $ | $ | $ | $ | |||||||||||
| Mutual funds - Fixed income | |||||||||||||||
| Mutual funds - Global equity | |||||||||||||||
| Total investments in equity securities: | $ | $ | $ | $ | |||||||||||
| Investments in debt securities: | |||||||||||||||
| Available-for-sale - Convertible debentures | |||||||||||||||
| Total investments carried at fair value on a recurring basis: | $ | $ | $ | $ | |||||||||||
| Investments carried at fair value on a nonrecurring basis: | |||||||||||||||
| Other investments1 | $ | $ | $ | $ | |||||||||||
| June 30, 2021 | |||||||||||||||
| Significant | Significant | ||||||||||||||
| Other | Unobservable | ||||||||||||||
| Quoted Prices | Inputs | Inputs | |||||||||||||
| (dollars in thousands) | (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||
| Investments carried at fair value on a recurring basis: | |||||||||||||||
| Investments in equity securities: | |||||||||||||||
| Equities - International | $ | $ | $ | $ | |||||||||||
| Mutual funds - Fixed income | |||||||||||||||
| Mutual funds - Global equity | |||||||||||||||
| Total investments in equity securities: | $ | $ | $ | $ | |||||||||||
| Investments in debt securities: | |||||||||||||||
| Available-for-sale - Convertible debentures | |||||||||||||||
| Total investments carried at fair value on a recurring basis: | $ | $ | $ | $ | |||||||||||
| Investments carried at fair value on a nonrecurring basis: | |||||||||||||||
| Other investments1 | $ | $ | $ | $ | |||||||||||
1. Other investments include equity securities without readily determinable fair values that were adjusted as a result of the measurement alternative on dates other than June 30, 2022, or June 30, 2021, respectively. These securities are classified as level 3 due to the infrequency of the observable price changes and/or restrictions on the shares.
The securities classified as Level 3 and carried at fair value on a recurring basis in the preceding tables are investments in HIVE Blockchain Technologies Ltd. (“HIVE”), which were warrants and convertible debentures valued at $
The following table is a reconciliation of investments recorded at fair value for which unobservable inputs (Level 3) were used in determining fair value during the year ended June 30, 2022:
| Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis | ||||||||
| June 30, 2022 (As Restated) | ||||||||
| Investments in | Investments in | |||||||
| (dollars in thousands) | equity securities | debt securities | ||||||
| Beginning Balance | $ | $ | ||||||
| Principal repayments | ( | ) | ||||||
| Amortization of day one premium | ( | ) | ||||||
| Accretion of bifurcation discount | ||||||||
| Total unrealized gains or losses included in: | ||||||||
| Investment Income (Loss) | ( | ) | ( | ) | ||||
| Other Comprehensive Income (Loss) | ( | ) | ||||||
| Ending Balance | $ | $ | ||||||
During the fiscal year ended June 30, 2021, the Company purchased convertible securities of HIVE, a company that is headquartered in Canada with cryptocurrency mining facilities in Iceland, Sweden, and Canada, for $
The Company recorded the warrants at the estimated fair value of $
The Company currently considers the related fair value measurements to contain Level 3 inputs. The following is quantitative information as of June 30, 2022, with respect to the securities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3):
| June 30, 2022 (As Restated) | |||||||||||
| (dollars in thousands) | Fair Value | Principal Valuation Techniques | Unobservable Inputs | ||||||||
| Investments in equity securities: | |||||||||||
| Common share purchase warrants | $ | Option pricing model | |||||||||
| Volatility | % | ||||||||||
| Investments in debt securities: | |||||||||||
| Available-for-sale - Convertible debentures | $ | Binomial lattice model | |||||||||
| Volatility | % | ||||||||||
| Credit Adjusted Discount Rate | % | ||||||||||
During the fiscal year ended June 30, 2021, the Company sold its investment of
During the fiscal year ended June 30, 2022, the Company sold its investment in Thunderbird Entertainment Group Inc. (“Thunderbird”), a company headquartered and traded in Canada, which was valued at approximately $
During the year ended June 30, 2021, the Company sold its investment in GoldSpot Discoveries Corp. (“GoldSpot”), a technology company headquartered and traded in Canada which leverages machine learning in natural resource exploration, and recorded realized gains on sales of fair valued securities of $
Equity Investments at Fair Value
Investments in equity securities with readily determinable fair values are carried at fair value, and changes in unrealized gains or losses are reported in current period earnings.
The following details the components of the Company’s equity investments carried at fair value as of June 30, 2022, and 2021.
| June 30, 2022 (As Restated) | |||||||||||
| (dollars in thousands) | Cost | Unrealized Gains (Losses) | Fair Value | ||||||||
| Equity securities at fair value | |||||||||||
| Equities - International | $ | $ | ( | ) | $ | ||||||
| Equities - Domestic | ( | ) | |||||||||
| Mutual funds - Fixed income | ( | ) | |||||||||
| Mutual funds - Global equity | ( | ) | |||||||||
| Total equity securities at fair value | $ | $ | ( | ) | $ | ||||||
| June 30, 2021 | |||||||||||
| (dollars in thousands) | Cost | Unrealized Gains (Losses) | Fair Value | ||||||||
| Equity securities at fair value | |||||||||||
| Equities - International | $ | $ | $ | ||||||||
| Equities - Domestic | ( | ) | |||||||||
| Mutual funds - Fixed income | |||||||||||
| Mutual funds - Global equity | |||||||||||
| Total equity securities at fair value | $ | $ | $ | ||||||||
Debt Investments
Investments in debt securities are classified on the acquisition dates and at each balance sheet date. Securities classified as held-to-maturity are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. Debt securities classified as trading are acquired with the intent to sell in the near term and are carried at fair value with changes reported in earnings. All other debt securities are classified as available-for-sale and are carried at fair value.
Investment gains and losses on available-for-sale debt securities are recorded when the securities are sold, as determined on a specific identification basis, and recognized in current period earnings. Changes in unrealized gains are reported net of tax in accumulated other comprehensive income (loss). For debt securities in an unrealized loss position, a loss in earnings is recognized for the excess of amortized cost over fair value if the Company intends to sell before the price recovers. Otherwise, the Company evaluates as of the balance sheet date whether the unrealized losses are attributable to credit losses or other factors. The severity of the decline in value, creditworthiness of the issuer and other relevant factors are considered. The portion of unrealized loss the Company believes is related to a credit loss is recognized in earnings, and the portion of unrealized loss the Company believes is not related to a credit loss is recognized in other comprehensive income.
The following details the components of the Company’s available-for-sale debt investments at June 30, 2022, and June 30, 2021.
| June 30, 2022 (As Restated) | ||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrealized Gains in Other Comprehensive Income | Gross Unrealized Losses in Investment Income (Loss) | Fair Value | ||||||||||
| Available-for-sale - Convertible debentures 1 | $ | $ | $ | ( | ) | $ | ||||||||
| June 30, 2021 | ||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrealized Gains in Other Comprehensive Income | Gross Unrealized Losses in Investment Income (Loss) | Fair Value | ||||||||||
| Available-for-sale - Convertible debentures 1 | $ | $ | $ | $ | ||||||||||
1. Changes in unrealized gains and losses are included in the statement of comprehensive income (loss), except for embedded derivatives. Changes in unrealized and realized gains and losses for embedded derivatives are included in earnings in the statement of operations.
The following details the components of the Company’s held-to-maturity debt investments at June 30, 2022, and June 30, 2021.
| June 30, 2022 | ||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrecognized Holding Gains | Gross Unrecognized Holding Losses | Fair Value | ||||||||||
| Held-to-maturity - Debentures1 | $ | $ | $ | ( | ) | $ | ||||||||
| June 30, 2021 | ||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrecognized Holding Gains | Gross Unrecognized Holding Losses | Fair Value | ||||||||||
| Held-to-maturity - Debentures1 | $ | $ | $ | $ | ||||||||||
1. Held-to-maturity debt instruments are carried at amortized cost, and the fair value is classified as Level 2 according to the fair value hierarchy
At June 30, 2022, and June 30, 2021, the Company held $
The following summarizes the net carrying amount and estimated fair value of debt securities at June 30, 2022, by contractual maturity dates. Actual maturities may differ from final contractual maturities due to principal repayment installments or prepayment rights held by issuers.
| June 30, 2022 (As Restated) | |||||||
| Available-for-sale | Held-to-maturity | ||||||
| debt securities | debt securities | ||||||
| Convertible | Due after one year | ||||||
| (dollars in thousands) | debentures 1 | through five years | |||||
| Net Carrying Amount | $ | $ | |||||
| Fair Value | $ | $ | |||||
1. Principal payments of $
Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are reported at fair value, and changes in fair value are recorded through earnings within investment income (loss). The host contract continues to be accounted for in accordance with the appropriate accounting standard. The embedded derivative and the related host contract represent one legal contract and are combined on the Consolidated Balance Sheets and the tables reflected above. The Company held one financial instrument containing an embedded derivative, which represents an investment in HIVE, at June 30, 2022, and June 30, 2021.
The following table summarizes the fair values of embedded derivatives on the Consolidated Balance Sheet, categorized by risk exposure, at June 30, 2022, and June 30, 2021
| June 30, 2022 | June 30, 2021 | |||||
| Other Assets | Other Assets | |||||
| (dollars in thousands) | Investments in available-for-sale debt securities | Investments in available-for-sale debt securities | ||||
| Embedded Derivatives: | ||||||
| Equity price risk exposure | $ | $ | ||||
The embedded derivatives presented in the table above were bifurcated from the related host contract on June 30, 2021; as such, there was no effect on the Consolidated Statement of Operations for the year ended June 30, 2021. The following table presents the effect of embedded derivatives on the Consolidated Statements of Operations, categorized by risk exposure, for the for the year ended June 30, 2022.
| Year Ended June 30, | ||||||
| 2022 | 2021 | |||||
| Other Income (Loss) | Other Income (Loss) | |||||
| (dollars in thousands) | Investment Income (Loss) | Investment Income (Loss) | ||||
| Embedded Derivatives: | ||||||
| Equity price risk exposure | $ | ( | ) | $ | ||
Other Investments
Other investments consist of equity investments in entities over which the Company is unable to exercise significant influence and which do not have readily determinable fair values. For these securities, the Company generally elects to value using the measurement alternative, under which such securities are measured at cost, less impairment, if any. If the Company identifies observable price changes for identical or similar securities of the same issuer, the equity security is measured at fair value as of the date the observable transaction occurred, with such changes recorded in investment income (loss).
The following table presents the carrying value of equity securities without readily determinable fair values held as of June 30, 2022, and 2021, that are measured under the measurement alternative, and the related adjustments recorded during the periods presented for those securities with observable price changes or impairments. These securities are included in the nonrecurring fair value hierarchy tables when applicable price changes are observable, or when impairments occur.
| Year Ended June 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Other Investments | ||||||||
| Carrying value | $ | $ | ||||||
| Upward carrying value changes | $ | $ | ||||||
| Downward carrying value changes/impairments | $ | ( | ) | $ | ( | ) | ||
The period-end carrying values reflect cumulative purchases and sales in addition to upward and downward carrying value changes. The cumulative amount of upward adjustments to all equity securities without readily determinable fair values total $
The Company has an investment in The Sonar Company (“Sonar”), a company headquartered in the United States, at a cost of $
Investments Classified as Equity Method
The Company had an equity method investment in Galileo New Economy Fund LP (previously known as Galileo Technology and Blockchain LP), a Canadian limited partnership, during fiscal year 2021, and through its dissolution date, which occurred during the third quarter of fiscal 2022. The Company owned approximately
Investment Income (Loss)
The following summarizes investment income (loss) reflected in earnings for the periods presented.
| Year Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (dollars in thousands) | ||||||||
| As Restated | ||||||||
| Investment Income (Loss) | ||||||||
| Realized gains on equity securities | $ | $ | ||||||
| Realized gains on debt securities | ||||||||
| Unrealized gains (losses) on equity securities | ( | ) | ||||||
| Unrealized losses on embedded derivatives | ( | ) | ||||||
| Dividend and interest income | ||||||||
| Realized foreign currency gains (losses) | ( | ) | ||||||
| Total Investment Income (Loss) | $ | ( | ) | $ | ||||
For the years ended June 30, 2022, and 2021, realized gains on principal payment proceeds in the amount of $
The following table presents unrealized gains and losses recognized during the years ended June 30, 2022, and 2021, on equity investments still held at each respective date.
| Year Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (dollars in thousands) | ||||||||
| As Restated | ||||||||
| Net gains (losses) recognized during the period on equity securities | $ | ( | ) | $ | ||||
| Less: Net gains (losses) recognized during the period on equity securities sold during the period | ( | ) | ( | ) | ||||
| Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date1 | $ | ( | ) | $ | ||||
1. Included $
Investment income (loss) can be volatile and varies depending on market fluctuations. The Company expects that gains and losses will continue to fluctuate in the future.
NOTE 5. INVESTMENT MANAGEMENT AND OTHER FEES
The following table presents operating revenues disaggregated by performance obligation:
| Year Ended June 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| ETF advisory fees | $ | $ | ||||||
| USGIF advisory fees | ||||||||
| USGIF performance fees earned | ||||||||
| Total Advisory Fees | ||||||||
| USGIF administrative services fees | ||||||||
| Total Operating Revenue | $ | $ | ||||||
The Company serves as investment adviser to USGIF and receives a fee based on a specified percentage of net assets under management. The advisory agreement for the equity funds within USGIF provides for a base advisory fee that is adjusted upwards or downwards by
The Company has agreed to contractually limit the expenses of the Near-Term Tax Free Fund and the Global Luxury Goods Fund through April 2023. The Company has voluntarily waived or reduced its fees and/or agreed to pay expenses on the remaining USGIF funds. These caps will continue on a voluntary basis at the Company’s discretion. The aggregate fees waived and expenses borne by the Company for USGIF were $
The Company receives administrative service fees from USGIF based on an annual rate of
The Company serves as investment advisor to three U.S.-based exchange-traded funds (ETFs): U.S. Global Jets ETF (ticker JETS), U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU), and U.S. Global Sea to Sky Cargo ETF (ticker SEA). The Company receives a unitary management fee of
As of June 30, 2022, the Company had $
NOTE 6. RESTRICTED AND UNRESTRICTED CASH
The Company maintains its cash deposits with established commercial banks. At times, balances may exceed federally insured limits. We have not experienced any losses in such accounts and do not believe that we are exposed to any significant credit risk associated with our cash deposits. Restricted cash represents cash invested in a money market account as collateral for credit facilities that is not available for general corporate use.
A reconciliation of cash, cash equivalents, and restricted cash reported from the Consolidated Balance Sheets to the Statements of Cash Flows is shown below:
| June 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | ||||||
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
| June 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Building and land | $ | $ | ||||||
| Furniture, equipment, and other | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net property and equipment | $ | $ | ||||||
Depreciation expense totaled $
NOTE 8. LEASES
The Company has lease agreements for office equipment that expire in fiscal year 2026. Lease expense totaled $
The components of lease expense included in general and administrative expense on the Consolidated Statements of Operations for the years ended June 30, 2022, and June 30, 2021, and qualitative information concerning the Company’s leases were as follows:
| Year Ended | Year Ended | |||||||
| June 30, | June 30, | |||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
| Cash paid for amounts included in measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Right-of-use assets obtained in exchanged for: | ||||||||
| Net finance lease liabilities | $ | $ | ||||||
| Finance leases: | ||||||||
| Weighted-average remaining lease term (in years) | - | |||||||
| Weighted-average discount rate | % | |||||||
| Operating leases: | ||||||||
| Weighted-average remaining lease term (in years) | - | |||||||
| Weighted-average discount rate | % | |||||||
Maturities of lease liabilities as of June 30, 2022, are as follows:
| (dollars in thousands) | ||||
| Fiscal Year | Finance Leases | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total | $ | |||
The Company is the lessor of certain areas of its owned office building under operating leases expiring in various years through fiscal year 2025. At the commencement of an operation lease, no income is recognized; subsequently, lease payments received are recognized on a straight-line basis. Lease income included in other income on the Consolidated Statements of Operations was $
A summary analysis of annual undiscounted cash flows to be received on leases as of June 30, 2022, is as follows:
| (dollars in thousands) | ||||
| Fiscal Year | Operating Leases | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| Total lease payments | $ | |||
The Company may terminate the building leases with one hundred eighty days written notice if it sells the property. If the Company terminates the lease, the Company will pay the tenant a termination fee of the lesser of six months of the base monthly rent or the base monthly rent times the number of months remaining in the initial term.
NOTE 9. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
| June 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Professional fees | $ | $ | ||||||
| Vendors payable | ||||||||
| ETF operating and distribution expenses | ||||||||
| Other taxes payable | ||||||||
| Other accrued expenses | $ | $ | ||||||
NOTE 10. BORROWINGS
The Company has access to a $
Effective April 12, 2020, the Company was approved for a loan of approximately $
NOTE 11. BENEFIT PLANS
The Company offers a savings and investment plan qualified under Section 401(k) of the Internal Revenue Code covering substantially all employees. In connection with this 401(k) plan, participants can voluntarily contribute a portion of their compensation, up to certain limitations, to this plan, and the Company will match
The 401(k) plan allows for a discretionary profit sharing contribution by the Company, as authorized by the Board of Directors. The Company made a profit sharing contribution of $
The Company offers employees, including its executive officers, an opportunity to participate in savings programs using mutual funds managed by the Company. Employees may contribute to an IRA, and the Company matches these contributions on a limited basis. A similar savings plan utilizing Uniform Gifts to Minors Act (“UGMA”) accounts is offered to employees to save for their minor relatives. The Company match, reflected in base salary expense, aggregated in all programs to $
The Company has an Employee Stock Purchase Plan whereby eligible employees can purchase treasury shares at market price. During fiscal years 2022 and 2021, employees purchased
NOTE 12. SHAREHOLDERS’ EQUITY
The Company has three classes of common equity: class A, class B, and class C common stock. The Company’s class A common stock is traded over-the-counter and is quoted daily under NASDAQ’s Capital Markets under the symbol “GROW.” There is no established public trading market for the Company’s class B and class C common stock. There are
The Company’s class A and class B common stock have no voting privileges.
Dividends
Dividends totaling $
As of June 30, 2022, the Board has authorized a monthly dividend of $
Share Repurchase Plan
The Company has a share repurchase program, approved by the Board of Directors, authorizing the Company to annually purchase up to $
During fiscal years 2022 and 2021, the Company repurchased
Other Activity
During fiscal year 2021, the Company granted
The Company granted
All stock grants vest immediately after issuance. Issuances of treasury stock for grants, bonuses, and the share repurchase plan are accounted for using the weighted-average cost basis of the shares issued.
Shareholders of class C shares are allowed to convert to class A. During fiscal year 2022,
Stock Option Plans
In November 1989, the Board of Directors adopted the 1989 Non-Qualified Stock Option Plan (“1989 Plan”), amended in December 1991, which provides for the granting of options to purchase
The assumptions utilized to estimate the fair value of options granted under the 1989 Plan during the year ended June 30, 2021, are presented in the following table:
| Risk-free interest rate | % | |||
| Expected volatility | % | |||
| Expected life (in years) | ||||
| Expected dividend yield | % |
The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. Expected volatility is based on historical volatility of the Company’s common stock. The Company did not have historical post-vesting activity under the 1989 Plan and utilized the simplified method to calculate expected term for stock options granted during the year ended June 30, 2021. The simplified method calculates the expected term as mid-point between the weighted-average time to vest and the contractual maturity. The expected dividend yield is based on the date of grant.
The estimated fair value of options granted is amortized to expense over the options’ vesting period. During the year ended June 30, 2022, $
Stock option transactions under the 1989 Plan for the last two fiscal years are summarized below.
| Weighted Average | Weighted Average Remaining | Aggregate Intrinsic | ||||||||||||||
| Exercise | Contractual | Value | ||||||||||||||
| (dollars in thousands, except price data) | Options | Price | Life in Years | (net of tax) | ||||||||||||
| Outstanding June 30, 2020 | n/a | |||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | n/a | |||||||||||||||
| Forfeited | n/a | |||||||||||||||
| Outstanding June 30, 2021 | $ | |||||||||||||||
| Granted | n/a | |||||||||||||||
| Exercised | n/a | |||||||||||||||
| Forfeited | n/a | |||||||||||||||
| Outstanding June 30, 2022 | $ | $ | ||||||||||||||
In April 1997, the Board of Directors adopted the 1997 Non-Qualified Stock Option Plan (“1997 Plan”), which provides for the granting of stock appreciation rights (SARs) and/or options to purchase
The estimated fair value of options granted is amortized to expense over the options’ vesting period. The fair value of these options is estimated at the date of the grant using a Black-Scholes option pricing model.
Stock option transactions under the 1997 Plan for the past two fiscal years are summarized below:
| Weighted Average | Weighted Average Remaining | Aggregate Intrinsic | ||||||||||||||
| Exercise | Contractual | Value | ||||||||||||||
| (dollars in thousands, except price data) | Options | Price | Life in Years | (net of tax) | ||||||||||||
| Outstanding June 30, 2020 | $ | |||||||||||||||
| Granted | - | n/a | ||||||||||||||
| Exercised | - | n/a | ||||||||||||||
| Forfeited | - | n/a | ||||||||||||||
| Outstanding June 30, 2021 | $ | |||||||||||||||
| Granted | - | n/a | ||||||||||||||
| Exercised | - | n/a | ||||||||||||||
| Forfeited | - | n/a | ||||||||||||||
| Outstanding June 30, 2022 | $ | $ | ||||||||||||||
NOTE 13. INCOME TAXES
The Company and its non-Canadian subsidiaries file a consolidated U.S. federal income tax return. USCAN files a separate tax return in Canada. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes resulting from the use of the liability method of accounting for income taxes.
Carryovers
For U.S. federal income tax purposes at June 30, 2022, the Company has
For Canadian income tax purposes, USCAN has
Additional Disclosures
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. There was
The Company's components of income (loss) before tax by jurisdiction are as follows:
| Year ended June 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| As Restated | ||||||||
| United States | $ | $ | ||||||
| Canada | ( | ) | ||||||
| Total | $ | $ | ||||||
The reconciliation of income tax computed at U.S. federal statutory rates to income tax expense is as follows:
| Year ended June 30, | ||||||||||||||||
| % of | % of | |||||||||||||||
| (dollars in thousands) | 2022 | Pretax | 2021 | Pretax | ||||||||||||
| As Restated | As Restated | |||||||||||||||
| Tax expense at statutory rate | $ | % | $ | % | ||||||||||||
| Tax expense (benefit) from change in foreign unrealized gain/loss | ( | ) | ( | )% | % | |||||||||||
| Non-taxable investment income (loss) | % | ( | ) | ( | )% | |||||||||||
| Change in valuation allowance | % | ( | ) | ( | )% | |||||||||||
| Income from controlled foreign corporation | % | % | ||||||||||||||
| Rate difference on foreign deferred income (loss) | ( | ) | ( | )% | % | |||||||||||
| Rate difference on foreign income (loss) | ( | ) | ( | )% | % | |||||||||||
| Foreign tax credit | ( | ) | ( | )% | ( | ) | ( | )% | ||||||||
| Other | % | ( | ) | ( | )% | |||||||||||
| Total tax expense | $ | % | $ | % | ||||||||||||
Components of total tax expense (benefit) are as follows:
| Year ended June 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| As Restated | ||||||||
| Current tax expense - U.S. Federal | $ | $ | ||||||
| Current tax expense - Non-U.S. | ||||||||
| Deferred tax expense (benefit) - U.S. Federal | ( | ) | ||||||
| Deferred tax expense (benefit) - Non-U.S. | ( | ) | ||||||
| Total tax expense | $ | $ | ||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company’s deferred assets and liabilities are as follows:
| June 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| As Restated | ||||||||
| Deferred Income Tax Assets: | ||||||||
| Accumulated depreciation | $ | $ | ||||||
| Investments in securities at fair value | ||||||||
| Accrued expenses | ||||||||
| Product start-up costs | ||||||||
| Stock-based compensation expense | ||||||||
| Other | ||||||||
| Total Deferred Tax Assets | ||||||||
| Deferred Income Tax Liabilities: | ||||||||
| Investments in securities at fair value | $ | $ | ( | ) | ||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Other investments | ( | ) | ( | ) | ||||
| Equity method investments | ( | ) | ||||||
| Foreign tax on undistributed earnings | ( | ) | ( | ) | ||||
| Total Deferred Tax Liabilities | ( | ) | ( | ) | ||||
| Net Deferred Tax Asset (Liability) | $ | $ | ( | ) | ||||
NOTE 14. EARNINGS PER SHARE
The following table sets forth the computation for basic and diluted earnings per share (EPS):
| Year Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (dollars in thousands, except per share data) | ||||||||
| As Restated | ||||||||
| Net Income | $ | $ | ||||||
| Weighted average number of outstanding shares | ||||||||
| Basic | ||||||||
| Effect of dilutive securities: | ||||||||
| Stock options | ||||||||
| Diluted | ||||||||
| Earnings Per Share | ||||||||
| Basic Net Income per Share | $ | $ | ||||||
| Diluted Net Income per Share | $ | $ | ||||||
The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the years ended June 30, 2022, and 2021,
During fiscal years 2022 and 2021, the Company repurchased class A shares on the open market. Repurchased shares are classified as treasury shares and are deducted from outstanding shares in the earnings per share calculation.
NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents changes in accumulated other comprehensive income (loss) by component:
| (dollars in thousands) | Unrealized gains (losses) on available-for-sale investments | Foreign currency translation adjustment 1 | Total | |||||||||
| Balance at June 30, 2020 | $ | $ | ( | ) | $ | ( | ) | |||||
| Other comprehensive income before reclassifications | ||||||||||||
| Tax effect | ( | ) | ( | ) | ||||||||
| Amount reclassified from AOCI | ( | ) | ( | ) | ||||||||
| Tax effect | ||||||||||||
| Net other comprehensive income for 2021 | ||||||||||||
| Balance at June 30, 2021 | ||||||||||||
| Other comprehensive loss before reclassifications | ( | ) | ( | ) | ( | ) | ||||||
| Tax effect | ||||||||||||
| Amount reclassified from AOCI | ( | ) | ( | ) | ( | ) | ||||||
| Tax effect | ||||||||||||
| Net other comprehensive loss for 2022 | ( | ) | ( | ) | ( | ) | ||||||
| Balance at June 30, 2022 (As Restated) | $ | $ | $ | |||||||||
| 1. | Amounts include no tax expense or benefit. |
NOTE 16. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company manages the following business segments:
| 1. | Investment management services, by which the Company offers, to USGIF and ETF clients, a range of investment management products and services to meet the needs of individual and institutional investors; and |
| 2. | Corporate investments, through which the Company invests for its own account in an effort to add growth and value to its cash position |
These segments are managed separately. The Company’s segment information is prepared on the same basis that management uses to review the financial information for operational and investment decision-making purposes. The Company's chief operating and investment decision maker, the Chief Executive Officer, evaluates the performance of the Company’s Corporate Investments segment separately from the Investment Management Services segment based on investment income (loss), and the Corporate Investments segment does not include any allocated company expenses. All segment accounting policies are the same as those described in the summary of significant accounting policies.
The following schedule details total revenues and income by business segment:
| Investment | ||||||||||||
| Management | Corporate | |||||||||||
| (dollars in thousands) | Services | Investments | Consolidated | |||||||||
| Year ended June 30, 2022, As Restated | ||||||||||||
| Net operating revenues | $ | $ | $ | |||||||||
| Investment loss | $ | $ | ( | ) | $ | ( | ) | |||||
| Loss from equity method investments | $ | $ | ( | ) | $ | ( | ) | |||||
| Other income | $ | $ | $ | |||||||||
| Income (loss) before income taxes | $ | $ | ( | ) | $ | |||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Gross identifiable assets at June 30, 2022 | $ | $ | $ | |||||||||
| Deferred tax asset | $ | |||||||||||
| Consolidated total assets at June 30, 2022 | $ | |||||||||||
| Year ended June 30, 2021 | ||||||||||||
| Net operating revenues | $ | $ | $ | |||||||||
| Investment income | $ | $ | $ | |||||||||
| Income from equity method investments | $ | $ | $ | |||||||||
| Gain on forgiveness of PPP loan | $ | $ | $ | |||||||||
| Other income | $ | $ | $ | |||||||||
| Income before income taxes | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Gross identifiable assets at June 30, 2021 | $ | $ | $ | |||||||||
Net operating revenues from investment management services include revenues from USGIF of $
NOTE 17. RELATED PARTY TRANSACTIONS
On June 30, 2022, and 2021, the Company had $
The Company earned advisory and administrative services fees, as applicable, from the various funds for which it acts as investment adviser, as disclosed in Note 5. Receivables include amounts due from the funds for those fees and out-of-pocket expenses, net of amounts payable to the funds for expense reimbursements. As of June 30, 2022, and 2021, the Company had $
The Company has had various investments in HIVE that were valued at approximately $
As discussed in Note 4, the Company held an investment in Thunderbird that was valued at approximately $
As discussed in Note 4, the Company has an investment in Sonar that had a carrying value of approximately $
NOTE 18. CONTINGENCIES AND COMMITMENTS
The Company continuously reviews all investor, employee, and vendor complaints and pending or threatened litigation. The likelihood that a loss contingency exists is evaluated through consultation with legal counsel, and a loss contingency is recorded if probable and reasonably estimable.
During the normal course of business, the Company may be subject to claims, legal proceedings, and other contingencies. These matters are subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably. The Company establishes accruals for matters for which the outcome is probable and can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial statements of the Company. The Company recorded
The Board of Directors has authorized a monthly dividend of $
The outbreak of the COVID-19 pandemic and the resulting actions to control or slow the spread have affected global and domestic economies and financial markets, and in the future it or other epidemics, pandemics or outbreaks may adversely affect the Company's results of operations, cash flows and financial position. The Company cannot reasonably estimate the future impact of these events, given the uncertainty over the duration and severity of the economic impact.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in or disagreements with accountants on accounting and financial disclosure during the two most recent fiscal years.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is: (1) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms; and (2) accumulated and communicated to management, including the principal executive and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. At the time that the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022, was originally filed on September 1, 2022, an evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2022 (the “Evaluation Date.”) Based on that evaluation, the CEO and CFO concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective as of June 30, 2022.
In connection with the preparation of this Amended Annual Report on Form 10-K/A-2, a reevaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2022, was conducted under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based on that reevaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2022, due to the existence of the material weakness in internal control over financial reporting described below (which we view as an integral part of our disclosure controls and procedures). Based on the completion of the fair value remeasurements, we believe that the consolidated financial statements included in this Amended Annual Report on Form 10-K/A-2 fairly present, in all material respects, our financial position, results of operations and cash flows as of the date, and for the period, presented, in conformity with U.S. GAAP.
Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of its internal control over financial reporting as of June 30, 2022. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on the Company’s assessment on the Evaluation Date, management believed that the Company’s management has maintained effective internal control over financial reporting as of June 30, 2022. However, due to the material weakness in internal control over financial reporting subsequently identified and described below, management has reevaluated the effectiveness of the Company’s internal control over financial reporting as of June 30, 2022, and has concluded that the Company’s internal control over financial reporting was not effective as of that date because of the material weakness.
Management identified a deficiency in the design and operating effectiveness of the Company’s internal controls as of June 30, 2022, that represents a material weakness in our internal control over financial reporting. The deficiency is the result of the inadequate design of controls to measure the fair value of the Company’s investments and overreliance on the work of a third-party specialist resulting in undetected errors in the valuation of certain investments.
Management is in the process of designing a remediation plan intended to address this material weakness, which will include taking steps to enhance its evaluation of the qualifications of third-party specialists, more accurately define the scope of work to be performed by such specialists, and improve the review process for work products prepared by specialists. Management, under the supervision of the Audit Committee, will develop a comprehensive remediation plan, including a detailed plan and timetable for implementation, and will report regularly to the Audit Committee regarding the status of the implementation activities.
Changes in Internal Control over Financial Reporting. Other than as described above and below, there have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the fourth quarter ended June 30, 2022, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Management identified a deficiency in the design and operating effectiveness of the Company’s internal controls as of September 30, 2021, that represented a material weakness in our internal control over financial reporting. The deficiency was the result of an existing control failing to operate effectively. Management disclosed in the Form 10-Q (“quarterly reports”) during the fiscal year ended June 30, 2022, that the Company’s control involving the review of tax-related journal entries were not adequately performed. Management evaluated its existing controls, noting the multiple attributes within the tax provision review control. Management determined that all existing attributes were performed. Management determined the control involving the review of tax-related journal entries did not include an attribute to ensure inclusion of the deferred assets/liabilities in the quarterly estimated tax rate ("ETR") journal entry adjustment. Management designed and implemented a remediation plan to address the material weakness, which included 1) adding an attribute to the tax provision review control to ensure the changes in deferred tax asset/liabilities accounts are included in the ETR journal entry adjustment, and 2) management’s completion of additional professional education for tax accounting essentials. The additional control attribute and professional education led to a more precise review of the tax provision. Thus, management has concluded that the material weakness was remediated as of June 30, 2022.
Inherent Limitation of the Effectiveness of Internal Control. A control system, no matter how well conceived, implemented and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Limitations inherent in any control system include the following:
| ● |
Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes. |
| ● |
Controls can be circumvented by individuals, acting alone or in collusion with others, or by management override. |
| ● |
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. |
| ● |
Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. |
| ● |
The design of a control system must reflect the fact that resources are constrained, and the benefits of controls must be considered relative to their costs. |
Because of such inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company or any division of a company have been detected.
In light of Frank Holmes’ ownership of 99.81 percent of the class C voting shares, the Company is eligible to rely on the exemption from certain of the NASDAQ corporate governance listing requirements relating to the independence of the Board of Directors and certain committees that is afforded to controlled companies. Under NASDAQ rules, a controlled company is a company of which more than 50 percent of the voting power for the election of directors is held by an individual, a group or another company.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Part III of Annual Report on Form 10-K
Item 10. Directors, Executive Officers and Corporate Governance
The directors and executive officers of U.S. Global Investors, Inc. (“U.S. Global” or the “Company”) are as follows:
| Name |
Age |
Position |
| Frank E. Holmes |
67 |
Director of the Company and Chief Executive Officer of the Company since October 1989, and Chief Investment Officer since June 1999. Since October 1989, Mr. Holmes has served and continues to serve in various positions with the Company and its subsidiaries. Mr. Holmes served as Chairman of the Board of HIVE Blockchain Technologies Ltd. since August 2017, Interim Executive Chairman from August 2018 to December 2020, Executive Chairman since December 2020, and Interim CEO since August 2018. He also served on the board of Thunderbird Entertainment Group Inc. (formerly Thunderbird Entertainment, Inc.) from June 2014 to March 2021. Mr. Holmes served as Chairman of the Board of GoldSpot Discoveries Corp. from February 2019 to May 2020 and as a director from February 2019 to June 2020. Mr. Holmes served as Director of Meridian Global Gold & Resources Fund Ltd. from December 2003 to November 2017; and Director of Meridian Global Energy & Resources Fund Ltd. from April 2006 to November 2017. |
| Jerold H. Rubinstein |
84 |
Chairman of the Board of Directors since February 2006 and Director of the Company since October 1989. Mr. Rubinstein has served as Director and Chairman of Salton Sea Industries from June 2016 to June 2020. Mr. Rubinstein served as Director and Chairman of the Audit Committee of CKE Restaurants from June 2006 to July 2010 and April 2011 to December 2017. He also served as Director and Chairman of the Audit Committee of Greenwood Hall, Inc. from November 2016 to June 2017. |
| Roy D. Terracina |
76 |
Director of the Company since December 1994 and Vice Chairman of the Board of Directors since May 1997. Mr. Terracina is the owner of Sunshine Ventures, Inc., a company formed to hold investments, since January 1994 and has served as Chief Executive Officer and Board Chair of the Sonar Company since July 2021. |
| Thomas F. Lydon, Jr. |
62 |
Director of the Company since June 1997. Mr. Lydon has served as Chairman of the Board and President of Global Trends Investments since April 1996; Vice Chairman of VettaFi since July 2021; co-CEO of ETF Flows LLC since February 2019; Board Member of Alerian Company, Independent Trustee of Guggenheim Investments since February 2012; and Independent Director of Harvest Volatility Edge Trust from December 2017 to December 2018. |
| Lisa C. Callicotte |
49 |
Chief Financial Officer of the Company since July 12, 2013. Controller of the Company from July 2009 until July 2013. Since July 2009, Ms. Callicotte has served and continues to serve in various positions with the Company and its subsidiaries. |
None of the directors or executive officers of the Company has a family relationship with any of the other directors or executive officers.
The members of the Board of Directors are elected for one-year terms or until their successors are elected and qualified. The Board of Directors appoints the executive officers of the Company.
Director Independence. The Company’s Board of Directors is currently composed of four members. The Board of Directors has determined that three of the four members meet the definition of an independent director set forth in NASDAQ Rule 5605(a)(2), with the exception being Frank Holmes, who is the Chief Executive Officer and Chief Investment Officer of the Company. In assessing the independence of directors, the Board of Directors considered the business relationships between the Company and its directors or their affiliated businesses, including businesses owned and operated by family members, other than ordinary investment relationships. Furthermore, the Board of Directors has determined that none of the members of the two standing committees of the Board of Directors in existence during the 2022 fiscal year has any material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company) and that each such member is “independent” within the meaning of the independence standards applicable to each such committee.
The Board of Directors held seven meetings over the past fiscal year. Each incumbent director attended at least 75 percent of the board meetings during the last fiscal year. Directors are encouraged to attend the annual meeting of shareholders. Two of the directors attended the 2021 fiscal year annual meeting. The standing committees of the Board of Directors currently consist of the Audit Committee and the Compensation Committee. The membership and responsibilities of those committees are described below:
| Independent Directors |
Audit Committee |
Compensation Committee |
| Roy D. Terracina |
Chairman |
Member |
| Thomas F. Lydon, Jr. |
Member |
Chairman |
| Jerold H. Rubinstein |
Member |
Member |
Audit Committee. The Company has a separately designated Audit Committee, established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee assists the Board of Directors in monitoring the integrity of the financial statements of the Company; the independent auditor’s qualifications and independence; the performance of the Company’s independent auditors; complaints relating to the Company’s accounting, internal accounting controls and audit matters; and the Company’s accounting and financial reporting processes and audits of the Company’s financial statements. The Board of Directors has determined that Director Roy Terracina qualifies as an “audit committee financial expert” as defined in Item 401(e) of Regulation S-K under the Exchange Act. Mr. Terracina’s pertinent experience, qualifications, attributes, and skills include: a bachelor’s degree and a master’s degree in finance, financial experience as a treasurer of a publicly traded company, managerial experience attained as the owner of a company responsible as a major supplier of baked and packaged goods primarily through the Department of Defense, the knowledge and experience he has attained from service on other boards and the knowledge and experience he has attained from his service on U.S. Global’s Board of Directors. The Audit Committee met nine times during the past fiscal year. Each incumbent committee member attended at least 75 percent of the committee meetings during the last fiscal year.
Report of the Audit Committee. Management is responsible for U.S. Global’s internal controls and financial reporting process. BDO USA, LLP, U.S. Global’s independent registered public accounting firm for the fiscal year ended June 30, 2022, is responsible for performing an independent audit of U.S. Global’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”) and to issue its report thereon. The Audit Committee monitors and oversees these processes. The Audit Committee approves the selection and appointment of U.S. Global’s independent registered public accounting firm and recommends the ratification of such selection and appointment to U.S. Global’s Board of Directors.
The Audit Committee has reviewed and discussed U.S. Global’s audited financial statements with management and BDO USA, LLP. The committee has discussed with BDO USA, LLP the matters required to be discussed by the PCAOB auditing standards which relates to the conduct of our audit, including our auditors’ judgment about the quality of the accounting principles applied in our fiscal year 2022 audited consolidated financial statements. The Audit Committee has received the written disclosures and the letter from BDO USA, LLP required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the committee concerning independence and has discussed with BDO USA, LLP that firm’s independence.
Based on the foregoing review and discussions and such other matters the Audit Committee considered relevant and appropriate, the committee recommended to the Board of Directors that the audited financial statements of U.S. Global be included in its Annual Report on Form 10-K for the year ended June 30, 2022.
Compensation Committee. The Compensation Committee assists the Board of Directors in carrying out its responsibilities with respect to employee qualified benefit plans and employee programs, executive compensation programs, stock option plans and director compensation programs. The Compensation Committee has broad responsibility for assuring that the Company’s executive officers, including the Company’s Chief Executive Officer, are effectively compensated in terms of salaries, supplemental compensation and benefits that are internally equitable and externally competitive. Additional responsibilities include the review and approval of corporate goals and objectives relevant to the Chief Executive Officer. The Compensation Committee reviews all components of compensation, including salaries, cash incentive plans, long-term incentive plans and various employee benefit matters. The Compensation Committee met two times during the past fiscal year. Each incumbent committee member attended at least 75 percent of the committee meetings during the last fiscal year.
Nomination of Directors. Although the Company does not have a standing nominating committee, the Company’s Corporate Governance Guidelines effectively provide guidance on selection and nomination process whenever a vacancy occurs on the Board of Directors. Due to the longevity of service of the current Board of Directors, those Directors have not participated in consideration of director nominees.
The Company believes generally that its Board of Directors as a whole should encompass a range of talent and expertise enabling it to provide sound guidance with respect to the Company’s operations and interests. Whenever a vacancy occurs on the Board of Directors, the board members are responsible for identifying one or more candidates to fill that vacancy, investigating each candidate and evaluating their suitability for service on the board. The following attributes or qualifications will be considered by the Board of Directors in evaluating a person’s candidacy:
| ● |
Management and leadership experience; |
| ● |
Skilled and diverse background; and |
| ● |
Integrity and professionalism. |
The board members are authorized to use any methods it deems appropriate for identifying candidates for board membership. In addition, candidates recommended by the Company’s stockholders are considered in the same manner as other candidates.
The Company’s policy is to have at least a majority of directors qualify as “independent” under the NASDAQ Listing Rules and the Company’s Corporate Governance Guidelines, which are available at the Company’s website at www.usfunds.com.
Director Interaction with Stockholders. The Company’s Corporate Governance Guidelines provide the process by which stockholders and other interested parties may contact the non-management members of the Board. These guidelines are contained on the Company’s website under “About Us,” followed by “Investor Relations.”
Code of Ethics for Principal Executive and Senior Financial Officers
The Company has adopted a Code of Ethics for Principal Executive and Senior Financial Officers that applies to the Company’s principal executive officer and principal financial officer. This code charges these individuals with responsibilities regarding honest and ethical conduct, the preparation and quality of the disclosures in documents and reports the Company files with the SEC, and compliance with applicable laws, rules, and regulations.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Overview
The following section provides a discussion and analysis of the basis for the compensation awarded to the CEO and the CFO, (“Named Executive Officers” or “NEOs”), as well as our directors in fiscal year 2022. We provide investment advisory and other services to our clients. Our long-term success depends on our ability to provide superior investment returns and outstanding client service. As such, one of our greatest assets is the collective skill, experience and efforts of our employees. To achieve success, we must be able to attract, retain and motivate professionals within all levels of our Company who are committed to our core values.
We place great significance on our values of performance, teamwork, initiative, responsiveness, focused work ethic, and intellectual curiosity. We believe that adherence to these core values will contribute to the long-term success of the Company and our shareholders.
We compete for talent with a large number of investment management and financial services companies, many of which have significantly larger market capitalization than we do. Our relatively small size within the industry, geographic location, and lean executive management team provides unique challenges.
Setting Executive Compensation
The Compensation Committee of our Board of Directors is responsible for reviewing and approving corporate goals and objectives relevant to the CEO, Frank Holmes; evaluating the CEO’s performance in light of those goals and objectives; and determining and approving the CEO’s compensation level based on this evaluation. In addition, the committee is responsible for reviewing and approving compensation recommended by Mr. Holmes for our other executive officers. The Board of Directors appointed Messrs. Lydon, Terracina, and Rubinstein as members of the Compensation Committee. Mr. Lydon serves as the chairman of the Compensation Committee. The Compensation Committee has a charter that is available for review on our website at www.usfunds.com by clicking “About Us,” followed by “Policies and Procedures.”
The individuals listed below are the CEO and CFO, who are the only NEOs for fiscal year 2022.
| Name |
Title |
| Frank E. Holmes |
Chief Executive Officer and Chief Investment Officer |
| Lisa C. Callicotte |
Chief Financial Officer |
In establishing total annual compensation for Mr. Holmes, the Compensation Committee considers a number of factors. For assistance in determining the appropriate factors to consider, the Compensation Committee consulted in 2005 with Moss Adams LLP, an executive compensation consulting firm. Importantly, the Compensation Committee considers the various functions Mr. Holmes assumes, including the dual role of CEO and Chief Investment Officer (“CIO”). In addition, the Compensation Committee considers various measures of company performance, including profitability and total shareholder return. The Compensation Committee also reviews Mr. Holmes’ performance in managing our corporate investments, in overseeing the management of our client portfolios and the results of our operational earnings.
In addition to his base salary, Mr. Holmes receives a bonus based on operational earnings, which are substantially derived from assets under management, based on a percentage of operational earnings, and capped at a predetermined dollar amount, as computed for financial reporting purposes in accordance with GAAP (before consideration of this fee).
Mr. Holmes also receives a bonus when our investment team meets their performance goals. The bonus is based on calculated fund performance bonuses of the investment team and is in recognition of Mr. Holmes’ creation and oversight of the investment processes and strategy.
The committee has delegated to Mr. Holmes the responsibility for reviewing the performance of, and recommending the compensation levels for, our other NEOs. The committee does not use rigid formulas with respect to the compensation of NEOs. Mr. Holmes makes a recommendation based on the achievement of qualitative goals that apply to all employees, quantitative goals that apply to an executive officer’s specific job responsibilities and other accomplishments, such as expansion in functional responsibility. In forming his recommendations, Mr. Holmes also considers the responsibilities and workload of the executive officer; the explicit and tacit knowledge required to perform these responsibilities, including any professional designations; the profitability of the company; and the cost of living in San Antonio, Texas.
Objectives
Our executive compensation programs are designed to:
| ● |
attract and retain key executives, |
| ● |
align executive performance with our long-term interests and those of our shareholders, and |
| ● |
link executive pay with performance. |
Elements of Executive Compensation
The committee reviews and approves all components of executive officer compensation. The principal elements of executive compensation, other than Mr. Holmes, are:
| ● |
base salary, |
| ● |
performance-based cash and stock bonuses, |
| ● |
long-term incentive awards, and |
| ● |
other compensation and benefits. |
Base Salary
Base salaries for NEOs are reviewed annually by the Compensation Committee. Generally, the salaries of NEOs are occasionally adjusted to recognize expansion of an individual’s role, outstanding and sustained performance, or to bring the officer’s pay into alignment with the market. We did not use any benchmarking studies in fiscal year 2022 to obtain market information. In addition, the Compensation Committee did not consider the equity ownership of the Company by Mr. Holmes when setting his compensation. Nor did the committee aim for a specific relationship between Mr. Holmes and the other executive officers. Base salaries paid to NEOs during the fiscal year are shown in the Summary Compensation Table.
Performance-Based Cash Bonuses
Executive officers, except Mr. Holmes, participate in a team performance pay program based on each employee’s annual salary to recognize monthly completion of departmental goals. Additionally, key executive officers are compensated based on individual performance pay arrangements. Discretionary cash bonuses are awarded from time to time for such things as completion of critical projects or outstanding performance.
Mr. Holmes considered a matrix of factors in reviewing the performance of, and compensation for, the CFO, Ms. Lisa Callicotte. Mr. Holmes considered such things as responsibilities, productivity, results of the Company’s actual versus targeted goals, hours of work, profitability of the Company, timely and accurate financial regulatory filings, unqualified audit results and the cost of living in San Antonio. Occasionally, Ms. Callicotte receives discretionary bonuses for the completion of projects.
Long-Term Incentive Awards
Long-term incentive awards include stock options and restricted shares. We have utilized option grants to induce qualified individuals to join us, thereby providing the individual with an opportunity to benefit if we have significant growth. Similarly, options have been utilized to reward existing employees, including NEOs, for long and faithful service and to encourage them to stay with us. The Company has no written policy for allocating between cash and equity, or current and long-term compensation for the CEO and other NEOs. The Compensation Committee administers the stock option plans.
Stock Option Plans
In November 1989, the Board of Directors adopted the 1989 Non-Qualified Stock Option Plan (“1989 Plan”) which provides for the granting of options to purchase shares of our class A common stock to directors, officers, and employees. On December 6, 1991, shareholders approved and amended the 1989 Plan to provide provisions to cause the plan and future grants under the plan to qualify under 1934 Act Rule 16b-3. The 1989 Plan is administered by the Compensation Committee consisting of three independent members of the Board of Directors. The maximum number of shares of class A common stock initially approved for issuance under the 1989 Plan is 1,600,000 shares. During the fiscal year ended June 30, 2022, no stock options were granted under this plan. As of June 30, 2022, under this amended plan, 1,964,400 options had been granted, 883,000 options had been exercised, 850,400 options had expired, 231,000 remained outstanding, which were issued during the fiscal year ended June 30, 2021, and 486,000 options are available for grant.
In April 1997, the Board of Directors adopted the 1997 Non-Qualified Stock Option Plan (“1997 Plan”), which shareholders approved on April 25, 1997. It provides for the granting of stock appreciation rights (“SARs”) and/or options to purchase shares of our class A common stock to directors, officers and employees. The 1997 Plan expressly requires that all grants under the plan qualify under 1934 Act Rule 16b-3. The 1997 Plan is administered by the Compensation Committee consisting of three outside members of the Board of Directors. The maximum number of shares of class A common stock initially approved for issuance under the 1997 Plan is 400,000 shares. During the fiscal year ended June 30, 2022, no stock options were granted under this plan. As of June 30, 2022, 583,300 options had been granted; 257,000 shares had been exercised; 324,300 options had expired; 2,000 options remained outstanding; and 141,000 options are available for grant.
2010 Stock Incentive Plan
In October 2010, at the Annual Meeting of Shareholders, the class C shareholders voted to adopt the 2010 Stock Incentive Plan. The Plan was amended in May 2020. The 2010 Stock Incentive Plan is intended to promote the interests of the Company by providing eligible persons in the Company’s service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company to align such persons’ interests with those of the Company’s shareholders and as an incentive for them to remain in such service. During fiscal year 2021, 1,600 shares were awarded as stock bonuses to NEOs. This plan expired in October 2020.
Assessment of Risk
By design, the Company’s compensation program for all employees, including executive officers, does not incentivize excessive risk-taking. The Company’s base salary component of compensation does not encourage risk-taking because it is a fixed amount. Generally, incentive awards have the following risk-limiting characteristics:
| ● |
Awards are made based on a review of a variety of indicators of performance, thus diversifying the risk associated with any single indicator of performance; |
| ● |
All participants, including executive officers, in the Employee Stock Purchase Plan are subject to stock ownership and holding guidelines. |
Other Compensation and Benefits
Health, Welfare and Retirement Benefits
Health, welfare, and retirement benefits are designed to provide a safety net of protection for employees in the event of illness, disability, or death, and to provide employees an opportunity to accumulate retirement savings.
We offer a range of health and welfare benefits to substantially all employees, including the NEOs. These benefits include medical, dental, vision, prescription drug, short-term disability, long-term disability, group life and accidental death insurance, and tuition reimbursement.
401(k) Plan
We offer a 401(k) plan covering substantially all employees, including NEOs. Participants may contribute a portion of their base salary and cash incentive compensation, up to a limit imposed by the Internal Revenue Code, which is $20,500 in calendar year 2022. An additional “catch-up” pretax contribution of up to $6,500 is allowed for employees over 50. We automatically match 100 percent of the first 3 percent of participating employees’ contributions and 50 percent of the next 2 percent of participating employees’ contributions. We contribute to participants’ accounts at the same time that the employee’s pay deferral is made. Employees are immediately vested in both their 401(k) salary deferral contribution and the matched contributions. Participants in our 401(k) plan may contribute to Roth and/or traditional 401(k) accounts.
Profit Sharing
The 401(k) plan allows for us to make a discretionary profit sharing contribution, as authorized by the Board of Directors. Factors that are considered by the Board of Directors include earnings, cash flows, capital requirements and the general financial condition of the Company. No specific performance thresholds or goals are required by the board to authorize a profit sharing contribution. The Company made a profit sharing contribution of $200,000 and $80,000 in fiscal years 2022, and 2021, respectively.
Savings Plans
We also have a program pursuant to which we offer employees an opportunity to participate in savings programs using mutual funds managed by us. Employee contributions to an Individual Retirement Account are matched to a maximum of $100 per month for certain management-level employees, including NEOs, and a maximum of $30 for all other employees. A similar savings plan utilizing Uniform Gifts to Minors Act (“UGMA”) accounts is offered to all employees to save for minor relatives and is matched at a maximum of $15 per month per child.
Employee Stock Purchase Plan
We also have a program whereby eligible employees can purchase treasury shares, at market price. During fiscal years 2022 and 2021, employees purchased 10,191 and 2,330 shares of treasury stock from us, respectively. The purchase price used is the closing stock price on the last business day of each month. All participants, including executive officers, in the Employee Stock Purchase Plan are subject to stock ownership and holding guidelines. We do not restrict the ability of our employees or directors to hedge their position in our shares. In addition, neither the board nor NEOs are required to own or purchase a certain number of shares.
The Summary Compensation Table includes the matched contributions to the plans described above for each NEO.
Perquisites and Other Benefits
We provide certain perquisites that the committee believes are reasonable and consistent with our overall compensation program to a limited number of officers. The perquisites consist of such things as memberships for business entertainment purposes and policies for long-term disability and life insurance. The Summary Compensation Table shows the value of perquisites provided to NEOs in fiscal year 2022 in the “All Other Compensation” column.
Employment Agreements, Termination and Change-in Control Arrangements
We do not have any employment agreements, termination agreements, or change-in control agreements with any of our executive officers.
Compliance with Section 162(m)
As amended by the Tax Cuts and Jobs Act enacted in December 2017, Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation greater than $1 million paid during any fiscal year to our CEO, CFO and our three other most highly compensated executive officers.
Compensation of Named Executive Officers
The following table sets forth for the fiscal year ended June 30, 2022, the compensation reportable for the NEOs, as determined by SEC rules. Columns were omitted if they were not applicable.
| Summary Compensation Table |
||||||||||||||||||||||||||||||
| Name and Principal Position |
Year |
Salary |
Bonus |
Stock Awards |
Option Awards |
Non-Equity Incentive Plan Compensation |
All Other Compensation |
Total |
||||||||||||||||||||||
| ($) |
($) |
($) 1 |
($) 2 |
($) 3 |
($) 4,5 |
($) |
||||||||||||||||||||||||
| (dollars in thousands) |
||||||||||||||||||||||||||||||
| Frank E. Holmes |
||||||||||||||||||||||||||||||
| Chief Executive Officer |
2021 |
422 | 98 | 2 | 168 | 3,110 | 196 | 3,996 | ||||||||||||||||||||||
| Chief Investment Officer |
2022 |
424 | 97 | - | - | 1,329 | 173 | 2,023 | ||||||||||||||||||||||
| Lisa C. Callicotte |
||||||||||||||||||||||||||||||
| Chief Financial Officer |
2021 |
155 | 69 | 2 | 168 | - | 55 | 449 | ||||||||||||||||||||||
| 2022 |
163 | 63 | - | - | - | 52 | 278 | |||||||||||||||||||||||
| 1. |
Amounts shown represent expense recognized in the consolidated financial statements for shares awarded as stock bonuses. |
| 2. |
Amounts shown represent options awarded. See discussion of assumptions made for options valuation in Note 11, Shareholders' Equity. |
| 3. |
Amounts consist of cash incentive compensation awards earned for services. The amounts were paid pursuant to the senior executive bonus programs. |
| 4. |
For fiscal year 2022, represents amounts paid by us on behalf of or to Mr. Holmes as follows: (i) $62 in insurance, (ii) $34 in matched contributions, (iii) $26 in paid time off payout, (iv) $24 in profit sharing, (v) $7 in memberships, and (vi) $20 in miscellaneous items. |
| 5. |
For fiscal year 2022, represents amounts paid by us on behalf of or to Ms. Callicotte as follows: (i) $22 in profit sharing, (ii) $19 in matched contributions, (iii) $10 in paid time off payout, and (iv) $1 in miscellaneous items. |
Outstanding equity awards as of June 30, 2022, for the named executive officers are detailed in the table below. Columns were omitted if they were not applicable.
| Outstanding Equity Awards at Fiscal Year-End |
|||||||||||||
| Option Awards |
|||||||||||||
| Name |
Number of Securities Underlying Unexercised Options - Exercisable |
Number of Securities Underlying Unexercised Options - Unexercisable |
Option Exercise Price ($) |
Option Expiration Date |
|||||||||
| Frank E. Holmes |
50,000 | - | $ | 6.05 | 6/21/2031 |
||||||||
| Lisa C. Callicotte |
2,000 | - | $ | 2.74 | 3/21/2028 |
||||||||
| Lisa C. Callicotte |
50,000 | - | $ | 6.05 | 6/21/2031 |
||||||||
The Pension Benefits, Nonqualified Deferred Compensation, and Option Exercises and Stock Vested Tables were omitted because they were not applicable.
Compensation of Directors
The compensation of directors is subject to a minimum of $6,000 in any quarter. Directors are reimbursed for reasonable travel expenses incurred in attending the meetings held by the Board of Directors. Mr. Rubinstein serves as the Chairman of the Board. We may grant non-employee directors options under our 1989 and 1997 Stock Option Plans. Director compensation for the fiscal year ended June 30, 2022, is detailed in the table below. Columns that were not applicable were omitted.
| Director Compensation |
||||||||
| Fees Earned or |
||||||||
| Name |
Paid in Cash 1 |
Total |
||||||
| (dollars in thousands) |
||||||||
| Jerold H. Rubinstein |
$ | 170 | $ | 170 | ||||
| Roy D. Terracina |
$ | 84 | $ | 84 | ||||
| Thomas F. Lydon, Jr. |
$ | 81 | $ | 81 | ||||
| 1. |
The difference in fees earned was primarily due to Mr. Rubinstein receiving an additional amount per month for added responsibilities as chairman. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners
Class C Common Stock (Voting Stock)
On August 19, 2022, there were 2,068,549 shares of the Company’s class C common stock outstanding. The following table sets forth, as of such date, information regarding the beneficial ownership of the Company’s class C common stock by each person known by the Company to own 5 percent or more of the outstanding shares of class C common stock.
| Name and Address of Beneficial Owner |
Class C Common Shares Beneficially Owned | Percent of Class (%) |
||||||
| Frank Holmes |
2,064,560 | 99.81 | % | |||||
| 7900 Callaghan Road |
||||||||
| San Antonio, TX 78229 |
||||||||
Class A Common Stock (Nonvoting Stock)
On August 19, 2022, there were 12,884,169 shares of the Company’s class A common stock outstanding. There were no persons known by the Company to own 5 percent or more of the outstanding shares of class A common stock.
Security Ownership of Management
The following table sets forth, as of August 19, 2022, information regarding the beneficial ownership of the Company’s class A and class C common stock by each director and named executive officer and by all directors and executive officers as a group. Except as otherwise indicated in the notes below, each person owns directly the number of shares indicated in the table and has sole voting power and investment power with respect to all such shares.
| Class C |
Class A |
|||||||||||||||
| Beneficial Owner |
Common Stock |
Common Stock |
||||||||||||||
| Number of Shares |
% | Number of Shares |
% | |||||||||||||
| Frank E. Holmes, CEO, Director |
2,064,560 | 99.81 | % | 509,024 | 3.95 | % | ||||||||||
| Lisa C. Callicotte, CFO |
- | - | 22,381 | 0.17 | % | |||||||||||
| Jerold H. Rubinstein, Director |
- | - | 2,800 | 0.02 | % | |||||||||||
| Roy D. Terracina, Director |
- | - | 63,800 | 0.50 | % | |||||||||||
| Thomas F. Lydon, Jr., Director |
- | - | 17,500 | 0.14 | % | |||||||||||
| All directors and executive officers as a group (five persons) |
2,064,560 | 99.81 | % | 615,505 | 4.78 | % | ||||||||||
Equity Compensation Plan Information
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
||||||||||
| Plan Category |
(a) |
(b) |
(c ) |
|||||||||
| Equity compensation plans approved by security holders |
N/A | N/A | N/A | |||||||||
| Equity compensation plans not approved by security holders |
||||||||||||
| 1989 Stock Option Plan 1 |
231,000 | $ | 6.05 | 486,000 | ||||||||
| 1997 Non-Qualified Stock Option Plan 2 |
2,000 | $ | 2.74 | 141,000 | ||||||||
| Employee Stock Purchase Plan 3 |
N/A | N/A | 102,778 | |||||||||
| 2010 Stock Incentive Plan 4 |
N/A | N/A | - | |||||||||
| Total |
233,000 | 729,778 | ||||||||||
| 1. |
Stock options under this plan may be granted to directors, officers, and employees of the Company from authorized but unissued shares or treasury shares. |
| 2. |
Stock options under this plan may be granted to directors, executives, and key salaried employees of the Company from authorized but unissued shares or treasury shares. The term of the option periods must be less than ten years. |
| 3. |
The Company has adopted a stock purchase plan to provide eligible employees of the Company an opportunity to purchase common stock of the Company. There are authorized shares of treasury stock reserved for issuance under the plan for which a registration statement has not been filed. |
| 4. |
The Company adopted a stock incentive plan to provide eligible persons in the Company’s service an opportunity to acquire common stock of the Company. There were authorized shares of treasury stock reserved for issuance under the plan for which a registration statement has not been filed. This plan expired in October 2020. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
See Note 17, Related Party Transactions, to the Consolidated Financial Statements of this Annual Report on Form 10-K, which incorporates the information of the relationships and related transaction for this Item 13. Refer to Item 10 for information regarding director independence.
Item 14. Principal Accounting Fees and Services
The following table represents fees for professional audit services for the audit of the Company’s annual financial statements for the fiscal years ended June 30, 2022, and 2021, respectively, rendered by BDO USA, LLP.
| Fiscal year ended June 30, |
||||||||
| (dollars in thousands) |
2022 |
2021 |
||||||
| Audit fees 1 |
$ | 348 | $ | 317 | ||||
| Audit-related fees 2 |
- | - | ||||||
| Tax fees 3 |
62 | 74 | ||||||
| Total fees |
$ | 410 | $ | 391 | ||||
| 1. |
Audit fees consist of fees for professional services rendered by the principal accountant for the audit of the Company’s annual financial statements and review of the financial statements included in the Company’s Form 10-Q and for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. |
| 2. |
Audit-related fees consist primarily of fees for assurance and related services by the accountant that are reasonably related to the performance of the audit or review of the Company’s financial statements. |
| 3. |
Tax fees include the preparation of federal tax returns as well as tax planning and consultation on new tax legislation, regulations, rulings, and developments. |
Audit Committee Pre-Approval Policies
The Audit Committee has established pre-approval policies pursuant to which all audit and auditor-provided non-audit engagement fees and terms must be approved. Pre-approval is generally provided and is detailed as to the particular service or category of services. The Audit Committee is also responsible for considering, to the extent applicable, whether the independent auditors’ provision of other non-audit services to the Company is compatible with maintaining the independence of the independent auditors.
All services provided by BDO USA, LLP in the fiscal years ended June 30, 2022, and 2021 were pre-approved by the Audit Committee.
Part IV of Annual Report on Form 10-K
Item 15. Exhibits, Financial Statement Schedules
| (a) |
The following documents are filed as part of this report: |
| 1. |
Financial Statements |
See Item 8 of Part II of this report.
| 2. |
Financial Statement Schedules |
None.
| 3. |
Exhibits |
| 3.1 |
|
| 3.2 |
|
| 4.1 |
|
| 10.1 |
|
| 10.2 |
|
| 10.3 |
|
| 10.4 |
|
| 10.5 |
|
| 10.6 |
|
| 10.7 |
|
| 10.8 |
| 10.9 |
|
| 10.10 |
|
| (C) Amended Schedule A to Advisory Agreement with ETF Series Solutions, incorporated by reference to Post-Effective Amendment 755 and Amendment 756 filed October 28, 2021 (EDGAR Accession No. 0000894189-21-007557) | |
| 14.01 |
|
| 14.02 |
|
| 21 |
|
| 23.1 |
|
| 31.1 |
|
| 32.1 |
Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act of 2002), included herein. |
| 101.INS |
Inline XBRL Instance Document. |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB |
Inline XBRL Taxonomy Extension Labels Linkbase Document. |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| U.S. Global Investors, Inc. |
|
| By: /s/ Frank E. Holmes |
|
| Frank E. Holmes |
|
| Date: May 19, 2023 |
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature |
Capacity in which signed |
Date |
| /s/ Frank E. Holmes |
||
| Frank E. Holmes |
Chief Executive Officer Chief Investment Officer Director |
May 19, 2023 |
| /s/ Thomas F. Lydon, Jr. |
||
| Thomas F. Lydon, Jr. |
Director |
May 19, 2023 |
| /s/ Jerold H. Rubinstein |
||
| Jerold H. Rubinstein |
Chairman, Board of Directors |
May 19, 2023 |
| /s/ Roy D. Terracina |
||
| Roy D. Terracina |
Director |
May 19, 2023 |
| /s/ Lisa C. Callicotte |
||
| Lisa C. Callicotte |
Chief Financial Officer |
May 19, 2023 |
Exhibit 21 — Subsidiaries of the Company, Jurisdiction of Incorporation, and Percentage of Ownership
|
1. |
U.S. Global Investors (Bermuda) Ltd. - incorporated in Bermuda and wholly owned by the Company |
|
2. |
U.S. Global Investors (Canada) Ltd. – incorporated in Canada and wholly owned by the Company |
|
3. |
U.S. Global Indices, LLC – incorporated in Texas and wholly owned by the Company |
Exhibit 23.1 — Consent of BDO USA, LLP
Consent of Independent Registered Public Accounting Firm
U.S. Global Investors, Inc.
San Antonio, Texas
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-158182, 333-158926, 333-25699 and 033-33012) of U.S. Global Investors, Inc., of our report dated September 1, 2022, except for the impact of the restatement discussed in Note 1 as to which the date is May 19, 2023, which appears in this Form 10-K/A-2.
/s/ BDO USA, LLP
BDO USA, LLP
Dallas, Texas
Exhibit 31.1 — Rule 13a – 14(a) Certifications
(under Section 302 of the Sarbanes-Oxley Act of 2002)
I, Frank E. Holmes, the principal executive officer of U.S. Global Investors, Inc., certify that:
|
1. |
I have reviewed this annual report on Form 10-K/A-2 of U.S. Global Investors, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: May 19, 2023 /s/ Frank E. Holmes |
Rule 13a – 14(a) Certifications
(under Section 302 of the Sarbanes-Oxley Act of 2002)
I, Lisa C. Callicotte, the principal financial officer of U.S. Global Investors, Inc., certify that:
|
1. |
I have reviewed this annual report on Form 10-K/A-2 of U.S. Global Investors, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: May 19, 2023 /s/ Lisa C. Callicotte |
Exhibit 32.1 — Section 1350 Certifications
(under Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Annual Report of U.S. Global Investors, Inc. (the Company) on Form 10-K/A-2 for the year ending June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Frank E. Holmes, Chief Executive Officer of the Company, hereby certify to my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
Date: May 19, 2023 /s/ Frank E. Holmes |
A signed original of the written statement required by Section 906 has been provided to U.S. Global Investors, Inc. and will be retained by U.S. Global Investors, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Section 1350 Certifications
(under Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Annual Report of U.S. Global Investors, Inc. (the Company) on Form 10-K/A-2 for the year ending June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Lisa C. Callicotte, Chief Financial Officer of the Company, hereby certify to my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
Date: May 19, 2023 /s/ Lisa C. Callicotte |
A signed original of the written statement required by Section 906 has been provided to U.S. Global Investors, Inc. and will be retained by U.S. Global Investors, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.