U S Global Investors Inc 10-Q for FY2022 Q3
U S Global Investors Inc (GROW)
About this 10-Q
U S Global Investors Inc filed this 10-Q on May 9, 2022, covering the quarter ended March 31, 2022 (FY2022 Q3).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6.18M
- down 2.8% from $6.36M a year earlier
- Net loss
- $846K
- compared with net income of $8.61M a year earlier
- Diluted EPS
- -$0.06
- compared with $0.57 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
Commission File Number
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| (Exact name of registrant as specified in its charter) |
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| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
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| (Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
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 whether the registrant (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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation 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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 |
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| 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
On April 29, 2022, there were 13,866,999 shares of Registrant’s class A nonvoting common stock issued and
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME (LOSS) (UNAUDITED) |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
20 |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
25 |
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26 |
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PART II. OTHER INFORMATION |
27 |
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27 |
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
27 |
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28 |
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29 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
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Assets |
March 31, 2022 |
June 30, 2021 |
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(dollars in thousands) |
(unaudited) |
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Current Assets |
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Cash and cash equivalents |
$ | $ | ||||||
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Restricted cash |
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Investments in securities at fair value |
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Accounts and other receivables |
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Tax receivable |
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Prepaid expenses |
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Total Current Assets |
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Net Property and Equipment |
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Other Assets |
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Investments in equity securities at fair value, non-current |
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Investments in available-for-sale debt securities at fair value |
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Investments in held-to-maturity debt securities |
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Other investments |
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Equity method investments |
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Right of use assets |
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Other assets, non-current |
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Total Other Assets |
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Total Assets |
$ | $ | ||||||
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Liabilities and Shareholders’ Equity |
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Current Liabilities |
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Accounts payable |
$ | $ | ||||||
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Accrued compensation and related costs |
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Dividends payable |
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Lease liability, short-term |
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Other accrued expenses |
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Taxes payable |
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Total Current Liabilities |
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Long-Term Liabilities |
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Deferred tax liability |
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Total Long-Term Liabilities |
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Total Liabilities |
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Commitments and Contingencies (Note 12) |
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Shareholders’ Equity |
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| Common stock (class A) - $ |
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| Common stock (class B) - $ |
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| Convertible common stock (class C) - $ |
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Additional paid-in-capital |
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| Treasury stock, class A shares at cost; |
( |
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Accumulated comprehensive income, net of tax |
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Retained earnings |
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Total Shareholders’ Equity |
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Total Liabilities and Shareholders’ Equity |
$ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Nine Months Ended March 31, |
Three Months Ended March 31, |
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(dollars in thousands, except per share data) |
2022 |
2021 |
2022 |
2021 |
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Operating Revenues |
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Advisory fees |
$ | $ | $ | $ | ||||||||||||
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Administrative services fees |
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Operating Expenses |
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Employee compensation and benefits |
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General and administrative |
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Advertising |
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Depreciation and amortization |
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Operating Income |
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Other Income (Loss) |
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Investment income (loss) |
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Income (loss) from equity method investments |
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Gain on forgiveness of PPP loan |
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Other income |
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Income (Loss) Before Income Taxes |
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Provision for Income Taxes |
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Tax expense (benefit) |
( |
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Net Income (Loss) |
$ | $ | $ | ( |
) | $ | ||||||||||
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Basic Net Income (Loss) per share |
$ | $ | $ | ( |
) | $ | ||||||||||
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Diluted Net Income (Loss) per share |
$ | $ | $ | ( |
) | $ | ||||||||||
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Basic weighted average number of common shares outstanding |
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Diluted weighted average number of common shares outstanding |
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The accompanying notes are an integral part of these consolidated financial statements.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
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Nine Months Ended March 31, |
Three Months Ended March 31, |
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(dollars in thousands) |
2022 |
2021 |
2022 |
2021 |
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Net Income (Loss) |
$ | $ | $ | ( |
) | $ | ||||||||||
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Other Comprehensive Income (Loss), Net of Tax: |
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Unrealized gains (losses) on available-for-sale securities arising during period |
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Less: reclassification adjustment for gains included in net income |
( |
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Net change from available-for-sale securities, net of tax |
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Foreign currency translation adjustment |
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Less: reclassification adjustment for foreign currency gains included in net income |
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Net change from foreign currency translations |
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Other Comprehensive Income (Loss) |
( |
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Comprehensive Income (Loss) |
$ | $ | $ | ( |
) | $ | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
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(dollars in thousands) |
Common Stock (class A) Shares |
Common Stock (class A) |
Common Stock (class C) Shares |
Common Stock (class C) |
Additional Paid-in Capital |
Treasury Stock Shares |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Retained Earnings |
Total |
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Balance at June 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||||
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Purchases of shares of Common Stock (class A) |
- | - | - | - | - | ( |
) | - | - | ( |
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Issuance of stock under ESPP of shares of Common Stock (class A) |
- | - | - | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||
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Share-based compensation, net of tax |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Dividends declared |
- | - | - | - | - | - | - | - | ( |
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Other comprehensive loss, net of tax |
- | - | - | - | - | - | - | ( |
) | - | ( |
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Net income |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Balance at September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||||
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Purchases of shares of Common Stock (class A) |
- | - | - | - | - | ( |
) | - | - | ( |
) | |||||||||||||||||||||||||||||
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Issuance of stock under ESPP of shares of Common Stock (class A) |
- | - | - | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||
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Share-based compensation, net of tax |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Dividends declared |
- | - | - | - | - | - | - | - | ( |
) | ( |
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Other comprehensive loss, net of tax |
- | - | - | - | - | - | - | ( |
) | - | ( |
) | ||||||||||||||||||||||||||||
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Net income |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Balance at December 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||||
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Purchases of shares of Common Stock (class A) |
- | - | - | - | - | ( |
) | - | - | ( |
) | |||||||||||||||||||||||||||||
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Issuance of stock under ESPP of shares of Common Stock (class A) |
- | - | - | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||
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Dividends declared |
- | - | - | - | - | - | - | - | ( |
) | ( |
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Other comprehensive loss, net of tax |
- | - | - | - | - | - | - | ( |
) | - | ( |
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Net income |
- | - | - | - | - | - | - | - | ( |
) | ( |
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Balance at March 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||||
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(dollars in thousands) |
Common Stock (class A) Shares |
Common Stock (class A) |
Common Stock (class C) Shares |
Common Stock (class C) |
Additional Paid-in Capital |
Treasury Stock Shares |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Retained Earnings |
Total |
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Balance at June 30, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||
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Purchases of shares of Common Stock (class A) |
- | - | - | - | - | ( |
) | - | - | ( |
) | |||||||||||||||||||||||||||||
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Issuance of stock under ESPP of shares of Common Stock (class A) |
- | - | - | - | - | ( |
) | - | - | |||||||||||||||||||||||||||||||
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Dividends declared |
- | - | - | - | - | - | - | - | ( |
) | ( |
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Stock bonuses |
- | - | - | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||
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Other comprehensive income, net of tax |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Net income |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Balance at September 30, 2020 |
$ | $ | $ | $ | ( |
) | $ | - | $ | $ | ||||||||||||||||||||||||||||||
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Purchases of shares of Common Stock (class A) |
- | - | - | - | - | ( |
) | - | - | ( |
) | |||||||||||||||||||||||||||||
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Issuance of stock under ESPP of shares of Common Stock (class A) |
- | - | - | - | ( |
) | - | - | - | |||||||||||||||||||||||||||||||
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Dividends declared |
- | - | - | - | - | - | - | - | ( |
) | ( |
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Stock bonuses |
- | - | - | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||
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Other comprehensive income, net of tax |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Net income |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Balance at December 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||||
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Purchases of shares of Common Stock (class A) |
- | - | - | - | - | ( |
) | - | - | ( |
) | |||||||||||||||||||||||||||||
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Issuance of stock under ESPP of shares of Common Stock (class A) |
- | - | - | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||
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Dividends declared |
- | - | - | - | - | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||
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Other comprehensive income, net of tax |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Net income |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
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Balance at March 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
U.S. GLOBAL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Nine Months Ended March 31, |
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(dollars in thousands) |
2022 |
2021 |
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Cash Flows from Operating Activities: |
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Net income |
$ | $ | ||||||
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation, amortization and accretion |
( |
) | ( |
) | ||||
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Net recognized loss on disposal of fixed assets |
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Net realized gains on securities |
( |
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Unrealized (gains) losses on securities |
( |
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Investment basis adjustment |
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Net (income) loss from equity method investment |
( |
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Foreign currency transaction gain |
( |
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Provision for deferred taxes |
( |
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Stock bonuses |
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Stock-based compensation expense |
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PPP loan forgiveness |
( |
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Changes in operating assets and liabilities: |
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Accounts and other receivables |
( |
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Prepaid expenses and other assets |
( |
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Accounts payable and accrued expenses |
( |
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Total adjustments |
( |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities: |
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Purchase of property and equipment |
( |
) | ( |
) | ||||
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Purchase of equity securities at fair value, non-current |
( |
) | ( |
) | ||||
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Purchase of other investments |
( |
) | ( |
) | ||||
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Purchase of held-to-maturity debt securities |
( |
) | ||||||
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Purchase of available-for-sale debt securities at fair value |
( |
) | ||||||
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Proceeds from sale of equity method investment |
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Proceeds on sale of equity securities at fair value, non-current |
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Proceeds from principal paydowns of available-for-sale debt securities at fair value |
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Net cash provided by investing activities |
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Cash Flows from Financing Activities: |
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Issuance of common stock |
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Repurchases of common stock |
( |
) | ( |
) | ||||
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Dividends paid |
( |
) | ( |
) | ||||
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Net cash used in financing activities |
( |
) | ( |
) | ||||
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Net increase in cash, cash equivalents, and restricted cash |
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Beginning cash, cash equivalents, and restricted cash |
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Ending cash, cash equivalents, and restricted cash |
$ | $ | ||||||
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Supplemental Disclosures of Non-Cash Investing and Financing Activities |
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Dividends declared but not paid |
$ | $ | ||||||
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Fair value of assets acquired |
$ | $ | ||||||
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Supplemental Disclosures of Cash Flow Information |
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Cash paid for income taxes |
$ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
U.S. GLOBAL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has prepared the consolidated financial statements pursuant to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The financial information included herein reflects all adjustments (consisting solely of normal recurring adjustments), which are, in management’s opinion, necessary for a fair presentation of results for the interim periods presented. The Company has consistently followed the accounting policies set forth in the notes to the consolidated financial statements in the Company’s Form 10-K for the fiscal year ended June 30, 2021.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, U.S. Global Investors (Bermuda) Limited, U.S. Global Investors (Canada) Limited (“USCAN”), and U.S. Global Indices, LLC.
The novel coronavirus 19 (“COVID-19”) pandemic presents ongoing significant economic and societal disruption and market volatility, which have known and yet to be seen impacts to the Company’s business and operating environment driven by significant volatility in the financial markets. There are no reliable estimates of how long the pandemic will last, how many people are likely to be affected by it, or its impact on the overall economy.
To limit the spread of COVID-19, governments took various actions including the issuance of stay-at-home orders and social distancing guidelines, which caused some businesses to suspend operations, disrupted the global supply chain, and created a reduction in demand for many products. This negatively affected global financial markets. Assets under management (“AUM”) are the primary source of the Company’s revenues. Revenues and net income are significantly affected by investment performance and the total value and composition of AUM. These factors, in turn, are largely determined by overall investment market performance and investor activity.
Should the negative effect on global financial markets reoccur and continue for an extended period, there could be an adverse material financial impact on the Company’s results of operations, cash flows and financial position resulting from reduced revenues earned on AUM and returns on corporate investments. At this time, the Company cannot reasonably estimate the future impact, given the uncertainty over the duration and severity of the economic crisis.
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 lack 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 U.S. Global Investors Funds (“USGIF” or the “Funds”). The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. See further information about these funds in Notes 2 and 3. 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 3 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 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 $
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 three and nine months ended March 31, 2021, and 2022, 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, does not consolidate it. However, the Company was considered to have the ability to exercise significant influence. Thus, the investment had been accounted for under the equity method of accounting. As of March 31, 2022, this entity was dissolved. See further information about this investment in Note 2.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes. Certain quarterly amounts may not add to the year-to-date amount due to rounding. The results of operations for the nine months ended March 31, 2022, are not necessarily indicative of the results the Company may expect for the fiscal year ending June 30, 2022 (“fiscal 2022”), particularly in light of COVID-19 and its effects on the U.S. and global economies.
The unaudited interim financial information in these condensed financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s annual report; interim disclosures generally do not repeat those in the annual statements.
Recent Accounting Pronouncements
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.
NOTE 2. INVESTMENTS
As of March 31, 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.
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 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 tables summarize the major categories of investments with fair values adjusted on a recurring basis as of March 31, 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.
|
March 31, 2022 |
||||||||||||||||
|
Quoted Prices |
Significant Other Inputs |
Significant Unobservable 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 during the nine months ended March 31, 2022. These securities are classified as level 3 due to the infrequency of the observable price changes and/or restrictions on the shares.
|
June 30, 2021 |
||||||||||||||||
|
Quoted Prices |
Significant Other Inputs |
Significant Unobservable 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.
A significant portion of the securities recorded at fair value on a recurring basis in the preceding tables is in investments in HIVE Blockchain Technologies Ltd. (“HIVE”), which consist of warrants and convertible debentures with a combined value of $
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 nine months ended March 31, 2022.
|
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis |
||||||||
|
March 31, 2022 |
||||||||
|
(dollars in thousands) |
Investments in equity securities |
Investments in debt securities |
||||||
|
Beginning Balance |
$ | $ | ||||||
|
Principal repayments |
( |
) | ||||||
|
Amortization of Premium |
( |
) | ||||||
|
Accretion of Discount |
||||||||
|
Total gains or losses (realized/unrealized) included in: |
||||||||
|
Investment Income (Loss) |
( |
) | ( |
) | ||||
|
Other Comprehensive Income (Loss) |
( |
) | ||||||
|
Ending Balance |
$ | $ | ||||||
During the third quarter of fiscal year 2021, the Company purchased convertible securities of HIVE, a company that is headquartered and traded 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 fair value measurements of HIVE convertible securities to contain Level 3 inputs. The following is quantitative information as of March 31, 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).
|
March 31, 2022 |
|||||||||||
|
(dollars in thousands) |
Fair Value |
Principal Valuation Techniques |
Unobservable Inputs |
||||||||
|
Investments in equity securities: |
|||||||||||
|
Common share purchase warrants |
$ | |
|||||||||
| |
% | ||||||||||
|
Investments in debt securities: |
|||||||||||
|
Available-for-sale - Convertible debentures |
$ | |
|||||||||
| |
% | ||||||||||
| |
% | ||||||||||
The Company had an investment in Thunderbird Entertainment Group Inc. (“Thunderbird”), a company headquartered and traded in Canada, which was valued at approximately $
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 March 31, 2022, and June 30, 2021.
|
March 31, 2022 |
||||||||||||
|
(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 |
$ | $ | $ | |||||||||
Included in the above table was $
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 on available-for-sale debt securities 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 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 as of March 31, 2022, and June 30, 2021.
|
March 31, 2022 |
||||||||||||||||
|
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains in Other Comprehensive Income |
Gross Unrealized Losses in Earnings |
Fair Value |
||||||||||||
|
Available-for-sale - Convertible debentures1 |
$ | $ | $ | ( |
) | $ | ||||||||||
|
June 30, 2021 |
||||||||||||||||
|
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains in Other Comprehensive Income |
Gross Unrealized Losses in Earnings |
Fair Value |
||||||||||||
|
Available-for-sale - Convertible debentures1 |
$ | $ | $ | $ | ||||||||||||
| 1. | |
The following details the components of the Company’s held-to-maturity debt investments as of March 31, 2022, and June 30, 2021.
|
March 31, 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. | |
The following summarizes the net carrying amount and estimated fair value of debt securities at March 31, 2022, by contractual maturity dates. Actual maturities may differ from final contractual maturities due to principal repayment installments or prepayment rights held by issuers.
|
March 31, 2022 |
||||||||
|
Available-for-sale debt securities |
Held-to-maturity debt securities |
|||||||
|
(dollars in thousands) |
Convertible debentures (1) |
Due after one year through five years |
||||||
|
Net Carrying Amount |
$ | $ | ||||||
|
Fair Value |
$ | $ | ||||||
1. Principal payments are due quarterly with a final maturity date in January 2026.
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 preceding tables. The Company held one financial instrument containing an embedded derivative, which represents an investment in HIVE, at March 31, 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 March 31, 2022, and June 30, 2021.
|
March 31, 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 following table presents the effect of embedded derivatives on the Consolidated Statements of Operations, categorized by risk exposure, for the three and nine months ended March 31, 2022, and 2021.
|
Nine Months Ended March 31, 2022 |
Nine Months Ended March 31, 2021 |
Three Months Ended March 31, 2022 |
Three Months Ended March 31, 2021 |
|||||||||||||
|
Other Income (Loss) |
Other Income (Loss) |
Other Income (Loss) |
Other Income (Loss) |
|||||||||||||
|
(dollars in thousands) |
Investment Income (Loss) |
Investment Income (Loss) |
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 March 31, 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.
|
Nine Months Ended |
Three Months Ended |
|||||||||||||||
|
March 31, |
March 31, |
|||||||||||||||
|
(dollars in thousands) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
|
Other Investments |
||||||||||||||||
|
Carrying value |
$ | $ | $ | $ | ||||||||||||
|
Upward carrying value changes |
||||||||||||||||
|
Downward carrying value changes/impairment |
( |
) | ( |
) | ||||||||||||
The carrying value of equity securities without readily determinable fair values was approximately $
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 during the fiscal year 2021, and through its dissolution date, which occurred during the third quarter of fiscal 2022. The Company owned approximately
Investment Income (Loss)
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 securities at fair value; |
|
|
● |
impairments and observable price changes on equity investments without readily determinable fair values; |
|
|
● |
dividend and interest income; and |
|
|
● |
realized foreign currency gains and losses. |
The following summarizes investment income (loss) reflected in earnings for the periods presented.
|
Nine Months Ended |
Three Months Ended |
|||||||||||||||
|
(dollars in thousands) |
March 31, |
March 31, |
||||||||||||||
|
Investment Income (Loss) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
|
Realized gains (losses) on equity securities |
$ | $ | $ | ( |
) | $ | ||||||||||
|
Realized gains (losses) on debt securities |
||||||||||||||||
|
Unrealized gains (losses) on equity securities |
( |
) | ( |
) | ||||||||||||
|
Unrealized gains (losses) on embedded derivatives |
( |
) | ( |
) | ||||||||||||
|
Dividend and interest income |
||||||||||||||||
|
Realized foreign currency gains (losses) |
( |
) | ( |
) | ||||||||||||
|
Total Investment Income (Loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
For the three and nine months ended March 31, 2022, realized gains on principal payment proceeds in the amount of $
The following table presents unrealized gains and losses recognized on equity investments held as of the end of each three and nine months ended March 31, 2022, and 2021.
|
Nine Months Ended |
Three Months Ended |
|||||||||||||||
|
March 31, |
March 31, |
|||||||||||||||
|
(dollars in thousands) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
|
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.
Investment income (loss) can be volatile and varies depending on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions. The Company expects that gains and losses will continue to fluctuate in the future.
NOTE 3. INVESTMENT MANAGEMENT AND OTHER FEES
The following table presents operating revenues disaggregated by performance obligation.
|
Nine Months Ended March 31, |
Three Months Ended March 31, |
|||||||||||||||
|
(dollars in thousands) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
|
ETF advisory fees |
$ | $ | $ | $ | ||||||||||||
|
USGIF advisory fees |
||||||||||||||||
|
USGIF performance fees earned (paid) |
( |
) | ||||||||||||||
|
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 average 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 March 31, 2022, the Company had $
NOTE 4. 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. A reconciliation of cash, cash equivalents, and restricted cash reported from the consolidated balance sheets to the statements of cash flows is shown below.
|
(dollars in thousands) |
March 31, 2022 |
June 30, 2021 |
||||||
|
Cash and cash equivalents |
$ | $ | ||||||
|
Restricted cash |
||||||||
|
Total cash, cash equivalents, and restricted cash |
$ | $ | ||||||
NOTE 5. LEASES
The Company has lease agreements on a continuing operations basis for office equipment that expire in fiscal year 2022. Lease expense totaled $
The following table presents the components of lease expense included in general and administrative expense on the Consolidated Statements of Operations and additional qualitative information concerning the Company’s operating leases.
|
Nine Months Ending |
Three Months Ending |
|||||||||||||||
|
March 31, |
March 31, |
|||||||||||||||
|
(dollars in thousands) |
2022 |
2021 |
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 |
$ | $ | $ | $ | ||||||||||||
|
Weighted-average remaining lease term (in years) |
||||||||||||||||
|
Weighted-average discount rate |
% | % | ||||||||||||||
The following table presents the maturities of lease liabilities from continuing operations as of March 31, 2022.
|
(dollars in thousands) |
||||
|
Fiscal Year |
Operating Leases |
|||
|
2022 (excluding the nine months ended March 31, 2022) |
$ | |||
|
Total lease payments |
||||
|
Less imputed interest |
||||
|
Total |
$ | |||
The following is a summary analysis of annual undiscounted cash flows to be received on leases as of March 31, 2022.
|
(dollars in thousands) |
||||
|
Fiscal Year |
Operating Leases |
|||
|
2022 (excluding the nine months ended March 31, 2022) |
$ | |||
|
2023 |
||||
|
2024 |
||||
|
2025 |
||||
|
Thereafter |
- | |||
|
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 6. BORROWINGS
The Company has access to a $
Effective April 12, 2020, the Company was approved for a loan of approximately $
NOTE 7. STOCKHOLDERS’ EQUITY
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. The dividend rate per share was $
In March 2022, the Board authorized the continuance of the monthly dividend of $
The Company has a share repurchase program, approved by the Board of Directors, authorizing the Company to annually purchase up to $
The Company’s stock option plans provide for the granting of class A shares as either incentive or nonqualified stock options to employees and non-employee directors. Options are subject to terms and conditions determined by the Compensation Committee of the Board of Directors. At March 31, 2022, there were
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. For the nine months ended March 31, 2022, $
NOTE 8. EARNINGS PER SHARE
The basic earnings per share (“EPS”) calculation excludes dilution and is computed by dividing net income 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 following table sets forth the computation for basic and diluted EPS.
|
Nine Months Ended March 31, |
Three Months Ended March 31, |
|||||||||||||||
|
(dollars in thousands, except per share data) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
|
Net Income (Loss) |
$ | $ | $ | ( |
) | $ | ||||||||||
|
Weighted average number of outstanding shares |
||||||||||||||||
|
Basic |
||||||||||||||||
|
Effect of dilutive securities |
||||||||||||||||
|
Stock options |
||||||||||||||||
|
Diluted |
||||||||||||||||
|
Earnings Per Share |
||||||||||||||||
|
Basic Net Income (Loss) per share |
$ | $ | $ | ( |
) | $ | ||||||||||
|
Diluted Net Income (Loss) per share |
$ | $ | $ | ( |
) | $ | ||||||||||
The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period, as their inclusion would be anti-dilutive. For the three and nine months ended March 31, 2022, employee stock options for
During the three and nine months ended March 31, 2022, and 2021, the Company repurchased class A shares on the open market. Upon repurchase, these shares are classified as treasury shares and are deducted from outstanding shares in the earnings per share calculation.
NOTE 9. 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.
For U.S. federal income tax purposes at March 31, 2022, the Company has no U.S. federal net operating loss carryovers and
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
NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the change in accumulated other comprehensive income (loss) (“AOCI”) by component.
|
(dollars in thousands) |
Unrealized gains (losses) on available-for-sale investments |
Foreign currency translation adjustment 1 |
Total |
|||||||||
|
Nine Months Ended March 31, 2022 |
||||||||||||
|
Balance at June 30, 2021 |
$ | $ | $ | |||||||||
|
Other comprehensive loss before reclassifications |
( |
) | ( |
) | ( |
) | ||||||
|
Tax effect |
||||||||||||
|
Amount reclassified from AOCI |
( |
) | ( |
) | ( |
) | ||||||
|
Tax effect |
||||||||||||
|
Net other comprehensive loss |
( |
) | ( |
) | ( |
) | ||||||
|
Balance at March 31, 2022 |
$ | $ | $ | |||||||||
|
Nine Months Ended March 31, 2021 |
||||||||||||
|
Balance at June 30, 2020 |
$ | $ | ( |
) | $ | ( |
) | |||||
|
Other comprehensive income before reclassifications |
||||||||||||
|
Tax effect |
( |
) | ( |
) | ||||||||
|
Amount reclassified from AOCI |
( |
) | ( |
) | ||||||||
|
Tax effect |
||||||||||||
|
Net other comprehensive income |
||||||||||||
|
Balance at March 31, 2021 |
$ | $ | $ | |||||||||
1.
NOTE 11. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company operates principally in
|
(dollars in thousands) |
Investment Management Services |
Corporate Investments |
Consolidated |
|||||||||
|
Nine months ended March 31, 2022 |
||||||||||||
|
Net operating revenues |
$ | $ | $ | |||||||||
|
Investment loss |
$ | $ | ( |
) | $ | ( |
) | |||||
|
Loss from equity method investments |
$ | $ | ( |
) | $ | ( |
) | |||||
|
Other income |
$ | $ | $ | |||||||||
|
Income (loss) before income taxes |
$ | $ | ( |
) | $ | |||||||
|
Depreciation and amortization |
$ | $ | $ | |||||||||
|
Gross identifiable assets at March 31, 2022 |
$ | $ | $ | |||||||||
|
Nine months ended March 31, 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 March 31, 2021 |
$ | $ | $ | |||||||||
|
Three months ended March 31, 2022 |
||||||||||||
|
Net operating revenues |
$ | $ | $ | |||||||||
|
Investment loss |
$ | $ | ( |
) | $ | ( |
) | |||||
|
Loss from equity method investments |
$ | $ | ( |
) | $ | ( |
) | |||||
|
Other income |
$ | $ | $ | |||||||||
|
Income (loss) before income taxes |
$ | $ | ( |
) | $ | ( |
) | |||||
|
Depreciation and amortization |
$ | $ | $ | |||||||||
|
Three months ended March 31, 2021 |
||||||||||||
|
Net operating revenues |
$ | $ | $ | |||||||||
|
Investment income |
$ | $ | $ | |||||||||
|
Loss from equity method investments |
$ | $ | ( |
) | $ | ( |
) | |||||
|
Other income |
$ | $ | $ | |||||||||
|
Income before income taxes |
$ | $ | $ | |||||||||
|
Depreciation and amortization |
$ | $ | $ | |||||||||
Net operating revenues from investment management services includes operating revenues from USGIF of $
NOTE 12. CONTINGENCIES AND COMMITMENTS
The Company continuously reviews 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 Board has authorized a monthly dividend of $
The COVID-19 pandemic and the resulting actions to control or slow the spread had an adverse effect on global and domestic economies and financial markets. The Company continues to monitor the impact of COVID-19, but at the date of this report cannot determine the full impact this virus may have on the financial markets and economy in the future. Should this emerging macro-economic risk reoccur and continue for an extended period, there could be an adverse material financial impact to our business and investments, including a material reduction in our results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has made forward-looking statements concerning the Company’s performance, financial condition, and operations in this report. The Company from time to time may also make forward-looking statements in its public filings and press releases. Such forward-looking statements are subject to various known and unknown risks and uncertainties and do not guarantee future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Company’s control, including: (i) the volatile and competitive nature of the investment management industry, (ii) changes in domestic and foreign economic conditions, including significant economic disruptions from COVID-19 or other epidemics, pandemics or outbreaks and the actions taken in connection therewith, (iii) the effect of government regulation on the Company’s business, and (iv) market, credit, and liquidity risks associated with the Company’s investment management activities. Due to such risks, uncertainties, and other factors, the Company cautions each person receiving such forward-looking information not to place undue reliance on such statements. All such forward-looking statements are current only as of the date on which such statements were made.
FACTORS AFFECTING OUR BUSINESS
The rapid spread of COVID-19 and actions taken in response had a significant detrimental effect on 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. Should this emerging macro-economic risk reoccur 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) did not adversely affect the Company’s ability to maintain operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures.
BUSINESS SEGMENTS
The Company, with principal operations located in San Antonio, Texas, manages two business segments: (1) the Company offers a broad range of investment management products and services to meet the needs of individual and institutional investors, and (2) the Company invests for its own account in an effort to add growth and value to its cash position.
The following is a brief discussion of the Company’s business segments.
Investment Management Services
The Company provides advisory services for three U.S.-based exchange-traded fund (“ETF”) clients and receives monthly advisory fees based on the net asset values of the funds. Information on the U.S.-based ETFs can be found at www.usglobaletfs.com, including the prospectus, performance and holdings. The Company also serves as investment advisor to one European-based ETF and receives a monthly advisory fee based on the net asset value of the fund. The European-based ETF is not available to U.S. investors. 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 Company generates operating revenues from managing and servicing U.S. Global Investors Funds (“USGIF” or the “Funds”). 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 asset levels of the Funds, 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.
At March 31, 2022, total assets under management, including ETF and USGIF clients, were approximately $4.1 billion versus $4.6 billion at March 31, 2021, a decrease of $537.0 million, or 11.7 percent. During the nine months ended March 31, 2022, average assets under management, including ETF and USGIF clients, were $4.0 billion versus $3.0 billion during the nine months ended March 31, 2021. At June 30, 2021, the Company’s prior fiscal year end, total assets under management, including ETF and USGIF clients, were approximately $4.2 billion, and has decreased $161.8 million, or 3.8 percent, during the nine months ended March 31, 2022.
The following tables summarize the changes in assets under management for USGIF for the three and nine months ended March 31, 2022, and 2021.
|
Changes in Assets Under Management |
||||||||||||||||||||||||
|
Three Months Ended March 31, |
||||||||||||||||||||||||
|
2022 |
2021 |
|||||||||||||||||||||||
|
(dollars in thousands) |
Equity |
Fixed Income |
Total |
Equity |
Fixed Income |
Total |
||||||||||||||||||
|
Beginning Balance |
$ | 388,834 | $ | 73,392 | $ | 462,226 | $ | 427,794 | $ | 82,024 | $ | 509,818 | ||||||||||||
|
Market appreciation (depreciation) |
14,385 | (1,633 | ) | 12,752 | (24,074 | ) | (234 | ) | (24,308 | ) | ||||||||||||||
|
Dividends and distributions |
- | (56 | ) | (56 | ) | - | (98 | ) | (98 | ) | ||||||||||||||
|
Net shareholder redemptions |
(13,109 | ) | (3,639 | ) | (16,748 | ) | (2,116 | ) | (2,255 | ) | (4,371 | ) | ||||||||||||
|
Ending Balance |
$ | 390,110 | $ | 68,064 | $ | 458,174 | $ | 401,604 | $ | 79,437 | $ | 481,041 | ||||||||||||
|
Average investment management fee |
0.94 | % | 0.00 | % | 0.79 | % | 0.95 | % | 0.00 | % | 0.79 | % | ||||||||||||
|
Average net assets |
$ | 377,400 | $ | 70,638 | $ | 448,038 | $ | 417,345 | $ | 81,905 | $ | 499,250 | ||||||||||||
|
Changes in Assets Under Management |
||||||||||||||||||||||||
|
Nine Months Ended March 31, |
||||||||||||||||||||||||
|
2022 |
2021 |
|||||||||||||||||||||||
|
(dollars in thousands) |
Equity |
Fixed Income |
Total |
Equity |
Fixed Income |
Total |
||||||||||||||||||
|
Beginning Balance |
$ | 433,380 | $ | 75,842 | $ | 509,222 | $ | 343,214 | $ | 82,683 | $ | 425,897 | ||||||||||||
|
Market appreciation (depreciation) |
(11,610 | ) | (1,828 | ) | (13,438 | ) | 66,319 | 120 | 66,439 | |||||||||||||||
|
Dividends and distributions |
(61,309 | ) | (225 | ) | (61,534 | ) | (16,243 | ) | (316 | ) | (16,559 | ) | ||||||||||||
|
Net shareholder purchases (redemptions) |
29,649 | (5,725 | ) | 23,924 | 8,314 | (3,050 | ) | 5,264 | ||||||||||||||||
|
Ending Balance |
$ | 390,110 | $ | 68,064 | $ | 458,174 | $ | 401,604 | $ | 79,437 | $ | 481,041 | ||||||||||||
|
Average investment management fee |
0.94 | % | 0.00 | % | 0.79 | % | 0.92 | % | 0.00 | % | 0.76 | % | ||||||||||||
|
Average net assets |
$ | 391,976 | $ | 73,194 | $ | 465,170 | $ | 402,921 | $ | 83,881 | $ | 486,802 | ||||||||||||
As shown above, USGIF period-end assets under management were lower at March 31, 2022, compared to March 31, 2021. Average net assets for the three and nine months in the current fiscal year were lower than the same periods in the previous fiscal year. The equity funds had net market appreciation for the three months ended March 31, 2022, and net market depreciation for the three months ended March 31, 2021. The fixed income funds had net market depreciation for the three months ended March 31, 2022, and 2021. Both the equity funds and fixed income funds had net market depreciation for the nine months ended March 31, 2022, and net market appreciation for the nine months ended March 31, 2021. In total, there were net shareholder redemptions for the three months ended March 31, 2022, and 2021. There were net shareholder purchases for the equity funds, and net shareholder redemptions for the fixed income funds for the nine months ended March 31, 2022, and 2021.
The average annualized investment management fee rate (total advisory fees, excluding performance fees, as a percentage of average assets under management) was 79 basis points for the nine months ended March 31, 2022, and 76 basis points for the same period in the prior year. The average investment management fee for the equity funds was 94 basis points for the nine months ended March 31, 2022, and 92 basis points for the same period in the prior year. The Company has agreed to contractually or voluntarily limit the expenses of the Funds. Therefore, the Company waived or reduced its fees and/or agreed to pay expenses of the Funds. Due to fee waivers, the average investment management fee for the fixed income funds was minimal for both periods.
Investment Activities
Management believes it can more effectively manage the Company’s cash position by broadening the types of investments used in cash management and continues to believe that such activities are in the best interest of the Company. 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. This source of revenue does not remain consistent and is dependent on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions.
As of March 31, 2022, the Company held investments carried at fair value of $25.2 million and a cost basis of $22.4 million. The fair value of these investments is approximately 40.3 percent of the Company’s total assets at March 31, 2022. In addition, the Company held other investments of approximately $4.2 million and held-to-maturity debt investments of $1.0 million.
Investments recorded at fair value on a recurring basis were approximately $25.2 million at March 31, 2022, compared to approximately $35.3 million at June 30, 2021, the Company’s prior fiscal year end, which is a decrease of approximately $10.1 million. See Note 2, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, for further information regarding investment activities.
RESULTS OF OPERATIONS – Three months ended March 31, 2022, and 2021
The Company posted a net loss of $846,000 ($0.06 per share) for the three months ended March 31, 2022, compared with net income of $8.6 million ($0.57 per share) for the three months ended March 31, 2021, a decrease in net income of approximately $9.5 million. The change is primarily due to a decrease in unrealized investment gain (loss) on corporate investments in the current quarter compared to the same quarter last year, as discussed further below.
Operating Revenues
Total consolidated operating revenues for the three months ended March 31, 2022, decreased $180,000, or 2.8 percent, compared with the three months ended March 31, 2021. This decrease was primarily attributable to the following:
• Advisory fees decreased by $175,000, or 2.8 percent, primarily as a result of lower average assets under management USGIF and a decrease in base management fees received, and a change from performance fees earned to performance fees paid. Advisory fees are comprised of two components: base management fees and performance fees.
• Base management fees increased $101,000. The majority of this increase was from ETF unitary management fees, which increased $202,000 as the result of an increase in ETF average assets under management, primarily for the Jets ETF, and the addition of the Jets ETF UCITS product in Europe and the Sea to Sky Cargo ETF. This increase was offset by a decrease in USGIF management fees, which decreased $101,000 as the result of a decrease in USGIF average assets under management.
• Performance fees for USGIF paid in the current quarter were $120,000 compared to $156,000 earned in the corresponding quarter in the prior year, an unfavorable change of $276,000. The performance fee, which applies to the USGIF 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.
Operating Expenses
Total consolidated operating expenses for the three months ended March 31, 2022, increased $595,000, or 19.4 percent, compared with the three months ended March 31, 2021. The increase in operating expenses was primarily attributable to an increase in general and administrative expenses of $612,000, or 40.1 percent, compared to prior quarter, primarily due to increased fund expenses and higher consulting and professional fees, somewhat offset by a decrease in employee compensation of $123,000, or 8.5 percent. Advertising costs increased $94,000 primarily due to the launch of two new ETF products.
Other Income (Loss)
Total consolidated other loss for the three months ended March 31, 2022, was $3.6 million, compared to other income of $8.4 million for the three months ended March 31, 2021, an unfavorable change of approximately $12.0 million, or 143.0 percent. This change was primarily due to the following factors:
• Investment loss was $3.5 million for the three months ended March 31, 2022, compared to investment income of $8.4 million for the three months ended March 31, 2021, a change of approximately $11.9 million. This was primarily due to unrealized losses of $4.5 million in the current quarter. The same quarter in the prior year had unrealized gains of $7.1 million and realized gains on sales of securities of $563,000. This change was somewhat offset by an increase in dividends and interest income of $235,000.
• There was $173,000 in losses from equity method investments for the three months ended March 31, 2022, compared to $64,000 in losses for the three months ended March 31, 2021, an increase of $109,000. The Company’s equity method investment was dissolved as of March 31, 2022.
• There was $59,000 in other income for the three months ended March 31, 2022, compared to $33,000 in other income for the three months ended March 31, 2021, an increase of $26,000. The increase was primarily due to consulting fees earned in the amount of $30,000 from HIVE Blockchain Technologies Ltd. (“HIVE”) for the three months ended March 31, 2022. There were no consulting fees earned from HIVE for the three months ended March 31, 2021. Frank Holmes serves on the board as executive chairman of HIVE and held shares and options at March 31, 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 benefit of $246,000 was recorded for the three months ended March 31, 2022, compared to tax expense of $3.1 million for the three months ended March 31, 2021. The tax benefit in the current quarter was primarily the result of unrealized losses on corporate investments. The tax expense in the same quarter in the prior year was primarily the result of realized gains on sales of securities and an increase in valuation of certain investments, which increased the related deferred tax liability.
RESULTS OF OPERATIONS – Nine months ended March 31, 2022, and 2021
The Company posted net income of $5.1 million ($0.34 per share) for the nine months ended March 31, 2022, compared with net income of $27.2 million ($1.81 per share) for the nine months ended March 31, 2021, a decrease in net income of approximately $22.1 million. The change is primarily due to a decrease in realized and unrealized investment gains in the current period compared to the same period last year, offset by an increase in operating income compared to the same period last year, as discussed further below.
Operating Revenues
Total consolidated operating revenues for the nine months ended March 31, 2022, increased $4.9 million, or 34.6 percent, compared with the nine months ended March 31, 2021. This increase was primarily attributable to the following:
• Advisory fees increased by $5.0 million, or 35.0 percent, primarily as a result of higher average assets under management in the ETFs and an increase in base management fees received. Advisory fees are comprised of two components: base management fees and performance fees.
• Base management fees increased $5.0 million. The majority of this increase was from ETF unitary management fees, which increased $5.0 million as the result of an increase in ETF average assets under management, primarily for the Jets ETF.
• Performance fees for USGIF earned in the current period were $209,000 compared to $280,000 in the corresponding period in the prior year, a decrease of $71,000. The performance fee, which applies to the USGIF 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.
Operating Expenses
Total consolidated operating expenses for the nine months ended March 31, 2022, increased $930,000, or 9.3 percent, compared with the nine months ended March 31, 2021. The increase in operating expenses was primarily attributable to an increase in general and administrative expenses of $1.4 million, or 35.4 percent, primarily due to higher consulting and professional fees, increased fund expenses, and higher directors’ fees and expenses, primarily due to amortization of stock options. This is offset by a decrease in employee compensation of $669,000, or 11.9 percent, primarily as a result of a decrease in bonuses, somewhat offset by amortization of employee stock options. Bonuses in same period last year related to realized investment gains and positive company and fund performance.
Other Income (Loss)
Total consolidated other loss for the nine months ended March 31, 2022, was $2.0 million, compared to $31.1 million in income for the nine months ended March 31, 2021, a change of approximately $33.1 million, or 106.4 percent. This change was primarily due to the following factors:
• Investment loss was $2.0 million for the nine months ended March 31, 2022, compared to investment income of $30.1 million for the nine months ended March 31, 2021, a change of approximately $32.1 million. This was primarily due to unrealized losses on equity securities of $4.9 million and realized gains on sales of securities of $1.8 million in the current period, whereas the same period in the prior year had unrealized gains of $13.6 million on equity securities and realized gains on sales of securities of $15.6 million.
• There was $206,000 in losses from equity method investments for the nine months ended March 31, 2022, compared to $420,000 in income for the nine months ended March 31, 2021, a change of $626,000. The Company’s equity method investment was dissolved as of March 31, 2022.
• For the nine months ended March 31, 2021, there was a gain of $444,000, 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 6, Borrowings, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
• There was $174,000 in other income for the nine months ended March 31, 2022, compared to $92,000 in other income for the three months ended March 31, 2021, an increase of $82,000. The increase was primarily due to consulting fees earned in the amount of $90,000 from HIVE Blockchain Technologies Ltd. (“HIVE”) for the nine months ended March 31, 2022. There were no consulting fees earned from HIVE for the nine months ended March 31, 2021. Frank Holmes serves on the board as executive chairman of HIVE and held shares and options at March 31, 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 $1.2 million was recorded for the nine months ended March 31, 2022, compared to tax expense of $8.2 million for the nine months ended March 31, 2021. The tax expense in the current period was primarily the result of operating income, offset by a decrease in valuation of certain investments, which decreased the related deferred tax liability. The tax expense in the same period in the prior year was primarily the result of realized gains on sales of securities and an increase in valuation of certain investments, which increased the related deferred tax liability.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2022, the Company had net working capital (current assets minus current liabilities) of approximately $31.8 million, an increase of $10.2 million, or 47.2 percent, since June 30, 2021, and a current ratio (current assets divided by current liabilities) of 7.6 to 1. With approximately $26.8 million in cash and cash equivalents, an increase of $12.3 million, or 85.4 percent since June 30, 2021, and $7.7 million in securities carried at fair value on a recurring basis, excluding convertible securities, which together comprise approximately 55.2 percent of total assets, the Company has adequate liquidity to meet its current obligations.
The increase in cash, and accordingly, net working capital, was primarily due to net cash provided by operating activities of $9.1 million, proceeds on sales of investments of $2.9 million, and proceeds from principal paydowns of $2.3 million. Consolidated shareholders’ equity at March 31, 2022, was $57.2 million, an increase of $2.9 million, or 5.3 percent since June 30, 2021. The increase was primarily due to net income of $5.1 million for the nine months ended March 31, 2022, offset by a decrease in other comprehensive income (loss) of $1.8 million, and dividends declared of $1.0 million.
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, 2022, 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 March 31, 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.-based ETFs has been renewed through September 2022.
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 and management or the Board may discontinue as deemed necessary. The stock repurchase plan is approved through December 31, 2022, but may be suspended or discontinued at any time. Cash and securities recorded at fair value on a recurring basis, excluding convertible securities, of approximately $34.5 million are available to fund current activities.
Management believes current cash reserves, investments, and financing available will be sufficient to meet foreseeable cash needs for operating activities.
The rapid spread of COVID-19 and actions taken in response had a significant detrimental effect on 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. Should this emerging macro-economic risk reoccur 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.
CRITICAL ACCOUNTING ESTIMATES
For a discussion of other critical accounting policies that the Company follows, please refer to the notes to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effects of the 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 the market value 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 services fees section above. For the three months ended March 31, 2022, the Company realized a decrease of $120,000 in its USGIF base advisory fee, and for the nine months ended March 31, 2022, an increase of $209,000 due to these performance adjustments. For the three and nine months ended March 31, 2021, the Company realized an increase in its USGIF base advisory fee of $156,000 and $280,000, respectively, due to these performance adjustments. Management cannot predict future performance adjustments.
Corporate Investments
The Company’s Consolidated Balance Sheets includes assets whose fair value is subject to market risks. The market risks are primarily associated with equity prices, interest rates, 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 recorded at fair value on a recurring basis as of March 31, 2022, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.
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(dollars in thousands) |
Fair Value at March 31, 2022 |
Hypothetical Percentage Change |
Estimated Fair Value After Hypothetical Price Change |
Estimated Increase (Decrease) in Net Income (Loss) (1) |
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Equity securities at fair value |
$ | 12,478 |
25% increase |
$ | 15,598 | $ | 2,464 | ||||||
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25% decrease |
$ | 9,359 | $ | (2,464 | ) | ||||||||
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Embedded derivatives at fair value 2 |
$ | 492 |
25% increase |
$ | 615 | $ | 97 | ||||||
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25% decrease |
$ | 369 | $ | (97 | ) | ||||||||
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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. |
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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.
The effects of the COVID-19 had an adverse effect on global and domestic financial markets, which may reoccur and continue for an undetermined period. This not only adversely affects 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 $4.8 million at March 31, 2022. Also, the embedded derivatives shown in the above table, which were valued at $492,000 at March 31, 2022, are related to HIVE convertible debentures. HIVE is discussed in more detail in Note 2, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. 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. Interest rates have recently been at historical lows due to, among other things, governmental intervention, including quantitative easing. There may be less governmental intervention in the near future to maintain low interest rates. If so, it could cause an increase in interest rates, which would have a negative impact on the value of debt securities and could negatively affect the value of the Company’s investments in debt securities.
Foreign currency risk
A portion of cash and certain corporate investments are held in foreign currencies, primarily Canadian. 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 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2022, was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of March 31, 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). We believe that the unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q 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 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 is the result of an existing control failing to operate effectively. Specifically, the Company’s control involving the review of tax-related journal entries were not adequately performed. Management is in the process of remediation efforts intended to address the material weakness. The remediation efforts are focused on improving oversight of tax services for the Company. Management, under the supervision of the Audit Committee, has a remediation plan, including a timetable for implementation, and reports regularly to the Audit Committee regarding the status of the implementation activities.
Management identified a deficiency in the design and operating effectiveness of the Company’s internal controls as of March 31, 2021, that represented a material weakness in our internal control over financial reporting. The deficiency is the result of inadequate design and implementation of internal controls to identify complex investments requiring specialized valuation expertise. Specifically, the Company’s controls over valuation procedures did not address valuation methodologies for hybrid financial instruments that led to the restatement of previously issued financial statements. Management has designed and implemented remediation to address the material weakness. The remediation included amending the Company’s valuation procedures to include the use of a binomial lattice model and/or utilizing an independent pricing service to value these types of complex investments. The valuation procedures were reviewed and approved by the Company’s Board of Directors. We concluded that the material weakness was remediated as of December 31, 2021.
There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
For a discussion of risk factors which could affect the Company, please refer to Item 1A, “Risk Factors” in the Annual Report on Form 10-K for the year ended June 30, 2021. There have been no material changes since fiscal year end to the risk factors listed therein.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
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(dollars in thousands, except price data) |
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|
Period |
Total Number of Shares Purchased 1 |
Total Amount Purchased |
Average Price Paid Per Share 2 |
Total Number of Shares Purchased as Part of Publicly Announced Plan 3 |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan |
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| 01-01-22 to 01-31-22 | 2,781 | $ | 13 | $ | 4.77 | 2,781 | $ | 2,737 | |||||||||||||
| 02-01-22 to 02-28-22 | - | - | $ | - | - | $ | 4,987 | ||||||||||||||
| 03-01-22 to 03-31-22 | 16,706 | 84 | $ | 5.04 | 16,706 | $ | 4,903 | ||||||||||||||
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Total |
19,487 | $ | 97 | $ | 5.00 | 19,487 | |||||||||||||||
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.
ITEM 6. EXHIBITS
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1. Exhibits – |
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10.10 |
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31.1 |
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32.1 |
Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act Of 2002), included herein. |
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101.INS |
Inline XBRL Instance Document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
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U.S. GLOBAL INVESTORS, INC. |
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DATED: |
May 9, 2022 |
BY: /s/ Frank E. Holmes |
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Frank E. Holmes |
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Chief Executive Officer |
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DATED: |
May 9, 2022 |
BY: /s/ Lisa C. Callicotte |
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Lisa C. Callicotte |
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Chief Financial Officer |
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Exhibit 31.1 - Rule 13a-14(a) Certifications
(under Section 302 of the Sarbanes-Oxley Act of 2002)
I, Frank E. Holmes, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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:
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(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; |
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(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; |
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(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 |
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(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 registrant’s board of directors (or persons performing the equivalent function):
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(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 |
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(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 9, 2022
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/s/ Frank E. Holmes |
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Frank E. Holmes |
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Chief Executive Officer |
Rule 13a-14(a) Certifications
(under Section 302 of the Sarbanes-Oxley Act of 2002
I, Lisa C. Callicotte, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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:
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(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; |
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(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; |
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(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 |
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(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 registrant’s board of directors (or persons performing the equivalent function):
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(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 |
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(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 9, 2022
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/s/ Lisa C. Callicotte |
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Lisa C. Callicotte |
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Chief Financial Officer |
Exhibit 32.1 — Section 1350 Certifications
(under Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Quarterly Report of U.S. Global Investors, Inc. (the Company) on Form 10-Q for the quarter ended March 31, 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:
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1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: May 9, 2022
/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 Quarterly Report of U.S. Global Investors, Inc. (the Company) on Form 10-Q for the quarter ended March 31, 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:
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1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: May 9, 2022
/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.