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 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
Since the beginning of 2020, the rapid spread of the global COVID-19 outbreak
and actions taken in response have 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. It is early to determine the long-term
impact of current circumstances on the Company's business. Should this emerging
macro-economic risk continue for an extended period, there could be an adverse
material financial impact to the Company's business and investments, including a
material reduction in its results of operations.
COVID-19-related circumstances (e.g., remote work arrangements) have not
adversely affected the Company's ability to maintain operations, including
financial reporting systems, internal controls over financial reporting, and
disclosure controls and procedures.
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 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.
The Company provides advisory services for two 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.
At September 30, 2021, total assets under management, including USGIF and ETF
clients, were approximately $4.3 billion versus $2.2 billion at September 30,
2020, an increase of $2.1 billion, or 89.6 percent. During the three months
ended September 30, 2021, average assets under management, including USGIF and
ETF clients, were $4.0 billion versus $2.0 billion during the three months ended
September 30, 2020. At June 30, 2021, the Company's prior fiscal year end, total
assets under management, including USGIF and ETF clients, were approximately
$4.2 billion, and has increased $25.5 million, or 0.6 percent, during the three
months ended September 30, 2021.
The increase in assets under management as of September 30, 2021, compared to
September 30, 2020, is primarily due to inflows into ETF clients, primarily the
U.S. Global Jets ETF ("Jets ETF"). The Jets ETF invests in airline-related
stocks, including global airline carriers, airport operators and aircraft
manufacturers.
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The following tables summarize the changes in assets under management for USGIF
for the three months ended September 30, 2021, and 2020:
Changes in Assets Under Management
Three Months Ended September 30, 2021
(dollars in thousands) Equity Fixed Income Total
Beginning Balance $ 433,380 $ 75,842 $ 509,222
Market depreciation (54,585 ) (102 ) (54,687 )
Dividends and distributions - (75 ) (75 )
Net shareholder redemptions (8,769 ) (625 ) (9,394 )
Ending Balance $ 370,026 $ 75,040 $ 445,066
Average investment management fee 0.96 % 0.00 % 0.81 %
Average net assets $ 399,442 $ 74,936 $ 474,378
Changes in Assets Under Management
Three Months Ended September 30, 2020
(dollars in thousands) Equity Fixed Income Total
Beginning Balance $ 343,214 $ 82,683 $ 425,897
Market appreciation 53,668 96 53,764
Dividends and distributions - (104 ) (104 )
Net shareholder purchases (redemptions) (7,397 ) 6,698 (699 )
Ending Balance $ 389,485 $ 89,373 $ 478,858
Average investment management fee 0.90 % 0.00 % 0.74 %
Average net assets $ 396,005 $ 85,833 $ 481,838As shown above, USGIF period-end assets under management were lower at September
30, 2021, compared to September 30, 2020. Average net assets in the current
fiscal year were lower than the same period in the previous fiscal year for
fixed income funds and in total, while average net assets for equity funds were
slightly higher than the same period in the prior fiscal year. Both the fixed
income and equity funds had net market depreciation for the three months ended
September 30, 2021, and net market appreciation for the three months ended
September 30, 2020, primarily in the gold and natural resources funds. There
were net shareholder redemptions for both the fixed income and equity funds for
the three months ended September 30, 2021. There were net shareholder
redemptions for the equity funds and net shareholder purchases for the fixed
income funds for the three months ended September 30, 2020.
The average annualized investment management fee rate (total advisory fees,
excluding performance fees, as a percentage of average assets under management)
was 81 basis points for the three months ended September 30, 2021, and 74 basis
points for the same period in the prior year. The average investment management
fee for the equity funds was 96 basis points for the three months ended
September 30, 2021, and 90 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. The decline in the average investment management fee rate
for the equity funds was due to fee waivers. Also due to fee waivers, the
average investment management fee for the fixed income funds was nil 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 September 30, 2021, the Company held investments carried at fair value of
$30.8 million and a cost basis of $22.2 million. The fair value of these
investments is approximately 49.7 percent of the Company's total assets at
September 30, 2021. In addition, the Company held other investments of
approximately $3.5 million, held-to-maturity debt investments of $1.0 million
and investments of $536,000 accounted for under the equity method of accounting.
Investments recorded at fair value were approximately $30.8 million at September
30, 2021, compared to approximately $35.3 million at June 30, 2021, the
Company's prior fiscal year end, which is a decrease of approximately $4.5
million. See Note 2, Investments, to the Consolidated Financial Statements of
this Quarterly Report on Form 10-Q, for further information regarding investment
activities.
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RESULTS OF OPERATIONS - Three months ended September 30, 2021, and 2020
The Company posted net income of $2.4 million ($0.16 per share) for the three
months ended September 30, 2021, compared with net income of $1.9 million ($0.13
per share) for the three months ended September 30, 2020, an increase in net
income of approximately $446,000. The change is primarily due to an increase in
operating income in the current quarter compared to the same quarter last year,
somewhat offset by unrealized investment losses, as discussed further below.
Operating Revenues
Total consolidated operating revenues for the three months ended September 30,
2021, increased $3.3 million, or 101.0 percent, compared with the three months
ended September 30, 2020. This increase was primarily attributable to the
following:
• Advisory fees increased by $3.3 million, or 102.5 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 $3.1 million. The majority of this increase
was from ETF unitary management fees, which increased $3.0 million as the result
of an increase in ETF average assets under management, primarily for the Jets
ETF.
• Performance fees for USGIF received in the current period were $188,000
compared to $9,000 in the corresponding period in the prior year, an increase of
$179,000. 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 September 30,
2021, increased $1.3 million, or 58.3 percent, compared with the three months
ended September 30, 2020. The increase in operating expenses was primarily
attributable to an increase in employee compensation of $962,000, or 100.0
percent, primarily as a result of increased bonuses related to realized
investment gains and positive company and fund performance, and an increase in
general and administrative expenses of $352,000, or 28.3 percent, primarily due
to higher ETF expenses related to the increase in ETF assets and higher
directors' fees and expenses related to bonuses.
Other Income (Loss)
Total consolidated other income (loss) for the three months ended September 30,
2021, was $37,000, compared to $1.0 million for the three months ended September
30, 2020, a negative change of approximately $1.0 million, or 96.4 percent. This
change was primarily due to the following factors:
• Investment loss was $34,000 for the three months ended September 30,
2021, compared to investment income of $998,000 for the three months ended
September 30, 2020, a negative change of approximately $1.0 million. There were
unrealized losses of $2.8 million and realized gains of $1.8 million in the
current period. The same quarter in the prior year had unrealized gains of
$994,000 and no realized gains on sales. The majority of the change in
unrealized gain (loss) was for an investment in an unrealized gain position
being sold, and in cryptocurrency mining equity securities held in corporate
investments. Cryptocurrency markets and related stocks have been, and are
expected to continue to be, volatile. See further discussion of investments in
Note 2, Investments, to the Consolidated Financial Statements of this Quarterly
Report on Form 10-Q.
• There was $56,000 in other income for the three months ended September
30, 2021, compared to $18,000 in other income for the three months ended
September 30, 2020, an increase of $38,000. The increase was primarily due to
consulting fees earned in the amount of $30,000 from HIVE Blockchain
Technologies Ltd. ("HIVE"). There were no consulting fees earned from HIVE for
the three months ended September 30, 2020. Frank Holmes serves on the board as
non-executive chairman of HIVE and held shares and options at September 30,
2021. Effective August 31, 2018, Mr. Holmes was named Interim Executive Chairman
of HIVE.
Provision for Income Taxes
A tax expense of $514,000 was recorded for the three months ended September 30,
2021, compared to tax expense of $30,000 for the three months ended September
30, 2020. The tax expense in the current quarter was primarily the result of an
increase in operating income. The tax expense in the same quarter in the prior
year was primarily the result of an increase in valuation of certain investments
held, which increased the related deferred tax liability.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2021, the Company had net working capital (current assets minus
current liabilities) of approximately $26.7 million, an increase of $5.1
million, or 23.5 percent, since June 30, 2021, and a current ratio (current
assets divided by current liabilities) of 7.5 to 1. With approximately $19.8
million in cash and cash equivalents, an increase of $5.3 million, or 36.8
percent since June 30, 2021, and $7.6 million in securities carried at fair
value, excluding convertible securities and warrants, which together comprise
approximately 44.2 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
proceeds on sales of investments of $2.5 million, proceeds from principal
paydowns of $750,000, and net cash provided by operating activities of $2.4
million. Consolidated shareholders' equity at September 30, 2021, was $56.1
million, an increase of $1.7 million, or 3.2 percent since June 30, 2021. The
increase was primarily due to net income of $2.4 million for the three months
ended September 30, 2021.
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 September 30, 2021, 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, excluding
convertible securities, of approximately $27.3 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 spread of the global COVID-19 outbreak and actions taken in response have
affected the global and domestic economies and financial markets. Market
declines affect the Company's assets under management, and thus its revenues and
also the valuation of the Company's corporate investments. The Company cannot
determine the long-term impact of COVID-19 on the Company's business. Should
this emerging macro-economic risk 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.
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