U.S. Global Investors(GROW) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited interim financial information, management's analysis, market risk disclosures, and internal control assessments ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements and accompanying notes, detailing the Company's interim financial position and performance - Financial statements are unaudited and prepared under U.S. GAAP, reflecting normal recurring adjustments[15] - The Company's consolidated financial statements include its wholly-owned subsidiaries[16] CONSOLIDATED BALANCE SHEETS (UNAUDITED) This section provides a snapshot of the company's assets, liabilities, and equity at specific interim dates Consolidated Balance Sheet Highlights (March 31, 2022 vs. June 30, 2021) | Metric | March 31, 2022 (in thousands) | June 30, 2021 (in thousands) | Change (in thousands) | | :---------------------------------------------------- | :---------------------------- | :--------------------------- | :-------------------- | | Total Assets | $62,515 | $62,277 | +$238 | | Total Liabilities | $5,321 | $7,953 | -$2,632 | | Total Shareholders' Equity | $57,194 | $54,324 | +$2,870 | | Cash and cash equivalents | $26,765 | $14,436 | +$12,329 | | Investments in equity securities at fair value, non-current | $6,307 | $11,936 | -$5,629 | | Investments in available-for-sale debt securities at fair value | $12,706 | $17,049 | -$4,343 | | Deferred tax liability | $507 | $2,799 | -$2,292 | CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) This section details the company's revenues, expenses, and net income or loss over specific interim periods Consolidated Statements of Operations (Three Months Ended March 31, 2022 vs. 2021) | Metric | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :---------------------------- | :--------------------------- | :-------------------- | | Operating Revenues | $6,175 | $6,355 | -$180 | | Operating Expenses | $3,658 | $3,063 | +$595 | | Operating Income | $2,517 | $3,292 | -$775 | | Investment income (loss) | $(3,495) | $8,424 | -$11,919 | | Net Income (Loss) | $(846) | $8,607 | -$9,453 | | Basic Net Income (Loss) per share | $(0.06) | $0.57 | -$0.63 | Consolidated Statements of Operations (Nine Months Ended March 31, 2022 vs. 2021) | Metric | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :---------------------------- | :--------------------------- | :-------------------- | | Operating Revenues | $19,270 | $14,321 | +$4,949 | | Operating Expenses | $10,947 | $10,017 | +$930 | | Operating Income | $8,323 | $4,304 | +$4,019 | | Investment income (loss) | $(1,950) | $30,124 | -$32,074 | | Net Income (Loss) | $5,134 | $27,212 | -$22,078 | | Basic Net Income (Loss) per share | $0.34 | $1.81 | -$1.47 | CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME (LOSS) (UNAUDITED) This section presents net income or loss and other comprehensive income or loss, reflecting all non-owner changes in equity Consolidated Statements of Comprehensive Income (Loss) (Three Months Ended March 31, 2022 vs. 2021) | Metric | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :---------------------------- | :--------------------------- | :-------------------- | | Net Income (Loss) | $(846) | $8,607 | -$9,453 | | Other Comprehensive Income (Loss) | $(568) | $11,832 | -$12,400 | | Comprehensive Income (Loss) | $(1,414) | $20,439 | -$21,853 | Consolidated Statements of Comprehensive Income (Loss) (Nine Months Ended March 31, 2022 vs. 2021) | Metric | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :---------------------------- | :--------------------------- | :-------------------- | | Net Income (Loss) | $5,134 | $27,212 | -$22,078 | | Other Comprehensive Income (Loss) | $(1,790) | $11,844 | -$13,634 | | Comprehensive Income (Loss) | $3,344 | $39,056 | -$35,712 | CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) This section outlines changes in shareholders' equity, including net income, dividends, and share repurchases, over the interim period Shareholders' Equity Changes (Nine Months Ended March 31, 2022) | Item | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Balance at June 30, 2021 | $54,324 | | Net income | $5,134 | | Other comprehensive loss, net of tax | $(1,790) | | Dividends declared | $(1,013) | | Purchases of shares of Common Stock (class A) | $(233) | | Issuance of stock under ESPP | $31 | | Share-based compensation, net of tax | $733 | | Balance at March 31, 2022 | $57,194 | CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) This section reports cash inflows and outflows from operating, investing, and financing activities for the interim period Consolidated Statements of Cash Flows (Nine Months Ended March 31, 2022 vs. 2021) | Metric | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | Change (in thousands) | | :---------------------------------------------------- | :---------------------------- | :--------------------------- | :-------------------- | | Net cash provided by operating activities | $9,148 | $1,940 | +$7,208 | | Net cash provided by investing activities | $4,276 | $6,177 | -$1,901 | | Net cash used in financing activities | $(1,095) | $(599) | -$496 | | Net increase in cash, cash equivalents, and restricted cash | $12,329 | $7,518 | +$4,811 | | Ending cash, cash equivalents, and restricted cash | $27,765 | $10,479 | +$17,286 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) This section provides detailed explanations and additional information supporting the consolidated financial statements NOTE 1. BASIS OF PRESENTATION This note describes the accounting principles, consolidation policies, and significant judgments used in preparing the financial statements - The consolidated financial statements are prepared in accordance with U.S. GAAP and SEC rules for interim periods, including all necessary recurring adjustments[15] - The Company consolidates its wholly-owned subsidiaries: U.S. Global Investors (Bermuda) Limited, U.S. Global Investors (Canada) Limited, and U.S. Global Indices, LLC[16] - The COVID-19 pandemic continues to pose significant economic and market volatility risks, which could materially impact the Company's business, operating environment, revenues, and corporate investment returns[17][19] - The Company does not consolidate certain advised funds (VIEs) as it is not deemed the primary beneficiary, limiting its risk of loss to the carrying value of investments and fees receivable ($7.0 million at March 31, 2022)[21] NOTE 2. INVESTMENTS This note details the Company's investment portfolio, fair value measurements, and the impact of investment performance on financial results - As of March 31, 2022, the Company held $25.2 million in investments carried at fair value (40.3% of total assets), plus $4.2 million in other investments and $1.0 million in held-to-maturity debt investments[29] - A significant portion of fair value investments ($17.5 million at March 31, 2022) are in HIVE Blockchain Technologies Ltd. (warrants and convertible debentures), classified as Level 3 due to unobservable inputs and subject to cryptocurrency market volatility[45][47] - The Company's investment income (loss) for the nine months ended March 31, 2022, was a loss of $1.95 million, a significant decrease from a gain of $30.12 million in the prior year, primarily due to unrealized losses on equity securities and embedded derivatives[76] - The equity method investment in Galileo New Economy Fund LP was dissolved as of March 31, 2022, resulting in a loss of $206 thousand for the nine months ended March 31, 2022[74] NOTE 3. INVESTMENT MANAGEMENT AND OTHER FEES This note outlines the Company's operating revenues derived from ETF and USGIF advisory fees and related contractual arrangements Operating Revenues by Performance Obligation (Nine Months Ended March 31, 2022 vs. 2021) | Metric | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :---------------------------- | :--------------------------- | :-------------------- | | ETF advisory fees | $16,140 | $11,107 | +$5,033 | | USGIF advisory fees | $2,775 | $2,781 | -$6 | | USGIF performance fees earned (paid) | $209 | $280 | -$71 | | Total Advisory Fees | $19,124 | $14,168 | +$4,956 | | Total Operating Revenue | $19,270 | $14,321 | +$4,949 | - The Company contractually limits expenses for certain USGIF funds and the U.S. Global Sea to Sky Cargo ETF, and voluntarily waives/reduces fees for other USGIF funds. Aggregate fees waived/expenses borne for USGIF were $465 thousand for the nine months ended March 31, 2022, down from $554 thousand in the prior year[81][83] - Receivables from fund clients totaled $2.0 million at March 31, 2022, with $1.8 million from ETFs and $246 thousand from USGIF[84] NOTE 4. RESTRICTED CASH This note explains the nature and purpose of restricted cash balances, primarily held as collateral for credit facilities - Restricted cash of $1.0 million at March 31, 2022, and June 30, 2021, is held in a money market account as collateral for credit facilities and is not available for general corporate use[85][86] NOTE 5. LEASES This note details the Company's lease arrangements, including lease costs for office equipment and income from acting as a lessor - Total lease cost for office equipment was $130 thousand for the nine months ended March 31, 2022, up from $116 thousand in the prior year[89] - The Company acts as a lessor for parts of its office building, generating lease income of $84 thousand for the nine months ended March 31, 2022, an increase from $69 thousand in the prior year[90] - Future undiscounted cash flows to be received from operating leases total $172 thousand through fiscal year 2025[92] NOTE 6. BORROWINGS This note describes the Company's credit facilities and the status of the Paycheck Protection Program loan - The Company has an unutilized $1.0 million credit facility for working capital, collateralized by $1.0 million in restricted cash, which expires on May 31, 2022, and is intended for annual renewal[93][145] - The Paycheck Protection Program (PPP) loan of $442 thousand, received in April 2020, was fully forgiven during the fiscal year ended June 30, 2021, with no remaining balance[94][95] NOTE 7. STOCKHOLDERS' EQUITY This note provides information on dividends, share repurchase programs, and stock-based compensation impacting shareholders' equity - The monthly dividend rate increased from $0.0025 (July 2020-Jan 2021) to $0.0050 (Feb 2021-Sep 2021) and then to $0.0075 (Oct 2021-Mar 2022), with continuation authorized through June 2022[96][97] - The annual share repurchase program limit was increased from $2.75 million to $5.0 million on February 25, 2022[98] - For the nine months ended March 31, 2022, the Company repurchased 43,591 Class A shares for $233 thousand, compared to 35,996 shares for $189 thousand in the prior year[98] - Stock-based compensation expense recognized for the nine months ended March 31, 2022, was $733 thousand, with no expense in the prior year periods[100] NOTE 8. EARNINGS PER SHARE This note presents the calculation of basic and diluted earnings per share for the interim periods Basic and Diluted EPS (Nine Months Ended March 31, 2022 vs. 2021) | Metric | March 31, 2022 | March 31, 2021 | | :-------------------------------- | :------------- | :------------- | | Net Income (Loss) (in thousands) | $5,134 | $27,212 | | Basic EPS | $0.34 | $1.81 | | Diluted EPS | $0.34 | $1.81 | Basic and Diluted EPS (Three Months Ended March 31, 2022 vs. 2021) | Metric | March 31, 2022 | March 31, 2021 | | :-------------------------------- | :------------- | :------------- | | Net Income (Loss) (in thousands) | $(846) | $8,607 | | Basic EPS | $(0.06) | $0.57 | | Diluted EPS | $(0.06) | $0.57 | - 231 thousand employee stock options were excluded from diluted EPS for the three and nine months ended March 31, 2022, as their exercise prices exceeded the average market price, making them anti-dilutive[104] NOTE 9. INCOME TAXES This note outlines the Company's income tax filing status, deferred tax liabilities, and valuation allowances - The Company and its non-Canadian subsidiaries file a consolidated U.S. federal income tax return, while USCAN files separately in Canada[106] - No U.S. federal net operating loss carryovers or capital loss carryovers for the Company at March 31, 2022[107] - No valuation allowance was provided at March 31, 2022, or June 30, 2021, indicating that deferred tax amounts are expected to be realized[107] NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) This note details changes in accumulated other comprehensive income or loss, primarily from unrealized investment gains and losses Change in Accumulated Other Comprehensive Income (Loss) (Nine Months Ended March 31, 2022 vs. 2021) | Component | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | | :-------------------------------- | :---------------------------- | :--------------------------- | | Balance at June 30, 2021/2020 | $6,587 | $(4) | | Net other comprehensive income (loss) | $(1,790) | $11,844 | | Balance at March 31, 2022/2021 | $4,797 | $11,840 | - The net other comprehensive loss for the nine months ended March 31, 2022, was primarily driven by unrealized losses on available-for-sale investments[109] NOTE 11. FINANCIAL INFORMATION BY BUSINESS SEGMENT This note provides financial data segmented by investment management services and corporate investments, highlighting revenue and asset allocation - The Company operates principally in two business segments: providing investment management services to USGIF and ETF clients; and investing for its own account in an effort to add growth and value to its cash position[110] Segment Performance (Nine Months Ended March 31, 2022 vs. 2021) | Metric (in thousands) | Investment Management Services (2022) | Corporate Investments (2022) | Investment Management Services (2021) | Corporate Investments (2021) | | :-------------------- | :------------------------------------ | :--------------------------- | :------------------------------------ | :--------------------------- | | Net operating revenues | $19,270 | $0 | $14,321 | $0 | | Investment income (loss) | $0 | $(1,950) | $0 | $30,124 | | Income (loss) before income taxes | $8,750 | $(2,409) | $6,842 | $28,542 | | Gross identifiable assets | $27,652 | $34,863 | $11,530 | $55,292 | - ETF unitary management fees increased by $5.0 million for the nine months ended March 31, 2022, primarily from the Jets ETF[139] - USGIF management fees decreased by $101 thousand for the three months ended March 31, 2022, due to lower average assets under management[134] NOTE 12. CONTINGENCIES AND COMMITMENTS This note discloses potential future obligations, including authorized dividends, litigation reviews, and ongoing macroeconomic risks - The Board authorized a monthly dividend of $0.0075 per share through June 2022, with total expected payments of approximately $338 thousand[115] - The Company continuously reviews investor, employee, and vendor complaints and pending litigation, accruing for probable and estimable losses[113][114] - The COVID-19 pandemic continues to pose a macro-economic risk that could materially impact the Company's business and investments[116] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses the Company's financial condition and results of operations for the three and nine months ended March 31, 2022, compared to the prior year periods, highlighting key drivers such as investment performance, assets under management, operating revenues and expenses, and liquidity - Net loss of $846 thousand for the three months ended March 31, 2022, compared to net income of $8.6 million in the prior year, primarily due to a decrease in unrealized investment gains[132] - Net income of $5.1 million for the nine months ended March 31, 2022, down from $27.2 million in the prior year, mainly due to decreased realized and unrealized investment gains[137] - Total assets under management (AUM) decreased by 11.7% to $4.1 billion at March 31, 2022, from $4.6 billion at March 31, 2021[124] - Operating revenues for the nine months ended March 31, 2022, increased by 34.6% to $19.3 million, driven by higher ETF unitary management fees[138][139] - Net working capital increased by $10.2 million (47.2%) to $31.8 million at March 31, 2022, with cash and cash equivalents rising by $12.3 million (85.4%) to $26.8 million[143] - The Company's two business segments are Investment Management Services (USGIF and ETF clients) and Corporate Investments[120] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the Company's exposure to various market risks, including equity price risk, interest rate risk, and foreign currency risk, and discusses how these factors can impact its revenues, operating results, and investment valuations - The Company's revenues are directly affected by fluctuations in financial markets and assets under management, particularly in equity funds with international/natural resource exposure and fixed income funds sensitive to interest rates[153] - Performance fees for USGIF advisory services are adjusted based on fund performance relative to benchmark indices, introducing additional revenue volatility[154][155] - Corporate investments, especially those in the cryptocurrency industry (like HIVE), are subject to considerable equity price volatility, which can materially impact investment values and unrealized gains/losses[156][164] - A hypothetical 25% increase/decrease in equity securities at fair value could result in a $2.46 million increase/decrease in net income (loss) after taxes[160] - Interest rate fluctuations, particularly a potential increase from historical lows, could negatively impact the value of the Company's debt securities[165] - Exposure to foreign currency risk, primarily Canadian, affects the value of cash accounts and corporate investments held in those currencies[166] ITEM 4. CONTROLS AND PROCEDURES This section reports on the effectiveness of the Company's disclosure controls and procedures and internal control over financial reporting, identifying a material weakness related to tax-related journal entries while noting remediation of a prior weakness - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2022, due to a material weakness in internal control over financial reporting[167] - A material weakness was identified as of September 30, 2021, due to inadequate review of tax-related journal entries, with remediation efforts focused on improving oversight of tax services[168] - A prior material weakness (as of March 31, 2021) related to inadequate controls for valuing complex investments (hybrid financial instruments) was remediated as of December 31, 2021, through amended valuation procedures and the use of specialized models/independent pricing services[169] - Despite the material weakness, the unaudited interim consolidated financial statements are believed to fairly present the Company's financial position, results of operations, and cash flows in conformity with U.S. GAAP[167] PART II. OTHER INFORMATION This section includes disclosures on risk factors, equity sales, exhibits, and required signatures ITEM 1A. RISK FACTORS This section refers to the comprehensive discussion of risk factors in the Company's Annual Report on Form 10-K for the year ended June 30, 2021, and states that no material changes have occurred since that fiscal year-end - No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended June 30, 2021[174] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the Company's share repurchase activities for the three months ended March 31, 2022, including the number of shares purchased, the total amount spent, and the remaining authorization under the buyback program Issuer Purchases of Equity Securities (January 1, 2022 - March 31, 2022) | Period | Total Number of Shares Purchased | Total Amount Purchased (in thousands) | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (in thousands) | | :-------------------- | :------------------------------- | :------------------------------------ | :--------------------------- | :--------------------------------------------------------------------------------------- | | 01-01-22 to 01-31-22 | 2,781 | $13 | $4.77 | $2,737 | | 02-01-22 to 02-28-22 | - | $0 | $0 | $4,987 | | 03-01-22 to 03-31-22 | 16,706 | $84 | $5.04 | $4,903 | | Total | 19,487 | $97 | $5.00 | | - The Board of Directors increased the annual share buyback program limit from $2.75 million to $5.0 million on February 25, 2022[175] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including certifications under the Sarbanes-Oxley Act and Inline XBRL documents, providing references to supporting legal and financial disclosures - Includes Rule 13a-14(a) Certifications (Section 302 of Sarbanes-Oxley Act of 2002) and Section 1350 Certifications (Section 906 of Sarbanes-Oxley Act of 2002)[178] - Contains Inline XBRL Instance Document and related taxonomy extension documents for financial data[178] SIGNATURES This section formally attests to the filing of the report pursuant to the Securities Exchange Act of 1934, with signatures from the Chief Executive Officer and Chief Financial Officer - The report is duly signed by Frank E. Holmes, Chief Executive Officer, and Lisa C. Callicotte, Chief Financial Officer, on May 9, 2022[182]