# U S Global Investors Inc: Form 10-Q/A for the period ended Sep 30, 2022

- Company: [U S Global Investors Inc](/companies/grow.md) (CIK 754811)
- Form: 10-Q/A
- Filed: 2023-05-24
- Accepted by EDGAR: May 24, 2023, 16:16 ET
- Period: 2022-09-30
- Accession: 0001437749-23-015720
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/754811/000143774923015720/usglobal20220930b_10qa.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/754811/000143774923015720/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $4.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $1.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $1.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $79.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $107.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 14,949,275 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-07-01 to 2022-09-30 | $1.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-07-01 to 2022-09-30 | $14.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2022-07-01 to 2022-09-30 | $336.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2022-07-01 to 2022-09-30 | $133.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-09-30 | $23.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $38.2m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $57.0m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $3.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $3.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-09-30 | $53.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 17,312 characters.

*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 also 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 September 30, 2022, total assets under management, including ETF and USGIF clients, were approximately $2.3 billion versus $4.3 billion at September 30, 2021, a decrease of $2.0 billion, or 45.9 percent. During the three months ended September 30, 2022, average assets under management, including ETF and USGIF clients, were $2.9 billion versus $4.0 billion during the three months ended September 30, 2021. At June 30, 2022, the Company’s prior fiscal year end, total assets under management, including ETF and USGIF clients, were approximately $2.9 billion, and has decreased $607.5 million, or 20.9 percent, during the three months ended September 30, 2022.

The following tables summarize the changes in assets under management for USGIF for the three months ended September 30, 2022, and 2021.

*(dollars in thousands)*

|  | Changes in Assets Under Management Three Months Ended September 30, 2022 Equity | Fixed Income | Total | 2021 Equity | Fixed Income | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning Balance | $286,367 | $71,161 | $357,528 | $433,380 | $75,842 | $509,222 |
| Market depreciation | (19,826) | (758) | (20,584) | (54,585) | (102) | (54,687) |
| Dividends and distributions | - | (129) | (129) | - | (75) | (75) |
| Net shareholder redemptions | (6,527) | (3,467) | (9,994) | (8,769) | (625) | (9,394) |
| Ending Balance | $260,014 | $66,807 | $326,821 | $370,026 | $75,040 | $445,066 |
| Average investment management fee | 0.86% | 0.00% | 0.69% | 0.96% | 0.00% | 0.81% |
| Average net assets | $282,446 | $69,040 | $351,486 | $399,442 | $74,936 | $474,378 |

As shown above, USGIF period-end assets under management were lower at September 30, 2022, compared to September 30, 2021. Average net assets for the three months in the current fiscal year were lower than the same periods in the previous fiscal year. Both the equity funds and fixed income funds had net market depreciation and net shareholder redemptions for the three months ended September 30, 2022, and for the three months ended September 30, 2021.

The average annualized investment management fee rate (total advisory fees, excluding performance fees, as a percentage of average assets under management) was 69 basis points for the three months ended September 30, 2022, and 81 basis points for the same period in the prior year. The average investment management fee for the equity funds was 86 basis points for the three months ended September 30, 2022, and 96 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 September 30, 2022, the Company held investments carried at fair value of $24.1 million and a cost basis of $28.4 million. The fair value of these investments is approximately 42.2 percent of the Company’s total assets at September 30, 2022. In addition, the Company held other investments of approximately $2.6 million and held-to-maturity debt investments of $1.0 million.

Investments recorded at fair value on a recurring basis were approximately $24.1 million at September 30, 2022, compared to approximately $24.9 million at June 30, 2022, the Company’s prior fiscal year end, which is a decrease of approximately $853,000. See Note 3, 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 September 30, 2022, and 2021**

The Company posted net income of $107,000 ($ 0.01 per share) for the three months ended September 30, 2022, compared with net income of $2.4 million ($ 0.16 per share) for the three months ended September 30, 2021, a decrease in net income of approximately $2.3 million. The change is primarily due to a decrease in operating revenue compared to the same period last year, a decrease in realized investment gains in the current period compared to the same period last year, offset by a decrease in operating expenses compared to the same period last year, as discussed further below.

### Operating Revenues

Total consolidated operating revenues for the three months ended September 30, 2022, decreased $2.1 million, or 32.3 percent, compared with the three months ended September 30, 2021. This decrease was primarily attributable to the following:

- Advisory fees decreased by $2.1 million, or 32.3 percent, primarily as a result of lower average assets under management in the ETFs and a decrease in base management fees received. Advisory fees are comprised of two components: base management fees and performance fees.
- Base management fees decreased $1.8 million. The majority of this decrease was from ETF unitary management fees, which decreased $1.4 million as the result of a decrease in ETF average assets under management, primarily for the Jets ETF.
- Performance fees for USGIF paid in the current period were ($146,000) compared to $188,000 in performance fees received in the corresponding period in the prior year, a change of $334,000. 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, 2022, decreased $827,000, or 22.6 percent, compared with the three months ended September 30, 2021. The decrease in operating expenses was primarily attributable to a decrease in employee compensation of $749,000, or 38.9 percent, primarily as a result of a decrease in bonuses in the current period, amortization of employee stock options in the prior period, offset by salary increases for employees. Higher bonuses in the same period last year were related to realized investment gains, company performance, and fund performance. General and administrative expenses decreased by $94,000, or 5.9 percent, primarily due to lower directors’ fees and expenses, primarily due to amortization of stock options.

### Other Income (Loss)

Total consolidated other loss for the three months ended September 30, 2022, was $1.4 million, compared to $37,000 of other income for the three months ended September 30, 2021, a decrease of approximately $1.4 million. This change was primarily due to the following factors:

- Investment loss was $1.5 million for the three months ended September 30, 2022, compared to $34,000 for the three months ended September 30, 2021, a change of approximately $1.4 million. This was primarily due to no realized gains on sales of securities in the current period, whereas the same period in the prior year had $1.8 million realized gains on sales of securities. This was slightly offset by a decrease in unrealized losses on equity securities in the current period. Unrealized losses on equity securities in the current period were $1.9 million for the three months ended September 30, 2022, compared to $2.4 million for the three months ended September 30, 2021, a change of $428,000.
- There was no income from equity method investments for the three months ended September 30, 2022, compared to $15,000 in income for the three months ended September 30, 2021. The Company’s equity method investment was dissolved during fiscal 2022.

### Provision for Income Taxes

A tax expense of $79,000 was recorded for the three months ended September 30, 2022, compared to tax expense of $514,000 for the three months ended September 30, 2021. The decrease in tax expense was primarily the result of lower operating income in the current period compared to prior period, and realized gains on sales of corporate investments in the prior period. Prior year tax expense was low in comparison to pre-tax income primarily due to net gains on USGI Canada investments, which are taxed at 13.25%, a rate that is lower than the Company’s statutory rate. In the current year, the tax expense percentage is high in comparison to pre-tax income primarily due to discrete foreign currency losses for which the Company cannot claim a tax benefit.

### LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2022, the Company had net working capital (current assets minus current liabilities) of approximately $34.6 million, an increase of $737,000, or 2.2 percent, since June 30, 2022, and a current ratio (current assets divided by current liabilities) of 10.6 to 1. With approximately $23.3 million in cash and cash equivalents, an increase of $1.0 million, or 4.4 percent since June 30, 2022, and $13.7 million in securities carried at fair value on a recurring basis, excluding convertible securities, which together comprise approximately 64.9 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 $1.2 million, proceeds from principal paydowns of $750,000, offset by purchases of investments of $477,000, repurchases of the Company's common stock of $133,000, and dividends paid of $336,000. Consolidated shareholders’ equity at September 30, 2022, was $53.3 million, a decrease of $835,000, or 1.5 percent since June 30, 2022. The decrease was primarily due to other comprehensive loss of $486,000, dividends declared of $335,000, and repurchases of the Company's common stock of $133,000, slightly offset by net income of $107,000 for the three months ended September 30, 2022.

The Company also has access to a $1 million credit facility, which can be utilized for working capital purposes. The credit agreement requires the Company to maintain certain covenants; the Company has been in compliance with these covenants during the current fiscal year. The credit agreement will expire on May 31, 2023, and the Company intends to renew annually. The credit facility is collateralized by approximately $1 million, included in restricted cash on the balance sheet, held in deposit in a money market account at the financial institution that provided the credit facility. As of September 30, 2022, this credit facility remained unutilized by the Company.

Investment advisory contracts pursuant to the Investment Company Act of 1940 and related affiliated contracts in the U.S., by law, may not exceed one year in length and, therefore, must be renewed at least annually after an initial two-year term. The investment advisory and related contracts between the Company and USGIF have been renewed through September 2023. The advisory agreement for the U.S.-based ETFs has been renewed through September 2023.

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 $37.0 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/A-2 for the year ended June 30, 2022.

## Market risk

As filed, 7,332 characters.

COVID-19 had an adverse effect on global and domestic financial markets, which may reoccur and continue for an undetermined period. This may adversely affect assets under management and thus the Company’s revenues and operating results. Market declines also affect the valuation of the Company’s corporate investments, which also adversely affects the Company’s balance sheet and results of operations.

Macroeconomic declines, including inflation; negative political developments, including volatile market conditions due to investor concerns regarding inflation and potential hostilities between Russia and Ukraine; adverse market conditions; and catastrophic events may cause a decline in the Company’s revenue, an increase in the Company’s costs, negatively affect the Company’s operating results, adversely affect the Company’s cash flow, and could result in a decline in the Company’s stock price.

### Investment Management and Administrative Services Fees

Revenues are generally based upon a percentage of assets under management in accordance with contractual agreements. Accordingly, fluctuations in the financial markets have a direct effect on the Company’s operating results. A significant portion of assets under management in equity funds have exposure to international markets and/or natural resource sectors, which may experience volatility. In addition, fluctuations in interest rates may affect the value of assets under management in fixed income funds.

### Performance Fees

USGIF advisory fees are comprised of two components: a base management fee and a performance fee. The performance fee is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months.

As a result, the Company’s revenues are subject to volatility beyond market-based fluctuations discussed in the investment management and administrative services fees section above. For the three months ended September 30, 2022, the Company realized a decrease of ($146,000) in its USGIF base advisory fee, and for the three months ended September 30, 2021, an increase of $188,000 due to these performance adjustments.

### Corporate Investments

The Company’s Consolidated Balance Sheets include substantial amounts of assets whose fair values are subject to market risk. The market risks are primarily associated with equity prices and foreign currency exchange rates. The fair values of corporate investments with exposure to the cryptocurrency industry are subject to considerable volatility.

The Company’s investment activities are reviewed and monitored by Company compliance personnel, and various reports are provided to certain investment advisory clients. Written procedures are in place to manage compliance with the code of ethics and other policies affecting the Company’s investment practices.

### Equity price risk

Due to the Company’s investments in securities carried at fair value, equity price fluctuations represent a market risk factor affecting the Company’s consolidated financial position. The carrying values of investments subject to equity price risks are based on quoted market prices or, if not actively traded, management’s estimate of fair value as of the balance sheet date. Market prices fluctuate, and the amount realized in the subsequent sale of an investment may differ significantly from the reported fair value.

The following table summarizes the Company’s equity price risks in securities recorded at fair value on a recurring basis as of September 30, 2022, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.

*(dollars in thousands)*

|  | Fair Value at September 30, 2022 (As Restated) | Hypothetical Percentage Change | Estimated Fair Value After Hypothetical Price Change | Estimated Increase (Decrease) in Net Income (Loss) (1) |
| --- | ---: | --- | ---: | ---: |
| Equity securities at fair value | $14,206 | 25% increase | $17,758 | $2,806 |
|  |  | 25% decrease | $10,655 | $(2,806) |
| Embedded derivatives at fair value(2) | $3 | 25% increase | $4 | $1 |
|  |  | 25% decrease | $2 | $(1) |

*1. Changes in unrealized gains and losses on embedded derivatives and equity securities at fair value are included in earnings in the Consolidated Statements of Operations. The estimated increase (decrease) is after income taxes at the statutory rate in effect as of the balance sheet date.*

*2. An embedded derivative and its related host contract represent one legal contract and are combined within the investments in available-for-sale debt securities on the Consolidated Balance Sheets.*

The selected hypothetical changes do not reflect what could be considered best- or worst-case scenarios. Results could be significantly different due to both the nature of markets and the concentration of the Company’s investment portfolio.

COVID-19 had an effect on volatility in global and domestic financial markets, which may reoccur and continue for an undetermined period. This may not only adversely affect the Company’s assets under management but also the valuation of the Company’s corporate investments.

A significant portion of the equity securities recorded at fair value in the above table subject to equity price risk are investments in common share purchase warrants of HIVE Blockchain Technologies Ltd. (“HIVE”), which were valued at $535,000 at September 30, 2022. Also, the embedded derivatives shown in the above table, which were valued at $3,000 at September 30, 2022, are related to HIVE convertible debentures. HIVE is discussed in more detail in Note 3, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. HIVE is a company that is headquartered in Canada with cryptocurrency mining facilities in Iceland, Sweden and Canada. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There is potential for significant volatility in the market price of HIVE, which could materially impact the investment’s value included on the balance sheet and unrealized gain (loss) recognized in investment income.

### Interest rate risk

Due to the Company’s investments in debt securities carried at fair value, interest rate fluctuations represent a market risk factor affecting the Company’s consolidated financial position. Debt securities may fluctuate in value due to changes in interest rates. Typically, investments subject to interest rate risk will decrease in value when interest rates rise and increase in value when interest rates decline. Fluctuations in interest rates could materially impact the Company’s investments in debt securities carried at fair value included on the balance sheet and gains (losses) recognized in investment income.

### Foreign currency risk

A portion of cash and certain corporate investments are held in foreign currencies, 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.

## Controls and procedures

As filed, 2,926 characters.

At the time that the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2022, was originally filed on November 10, 2022, an evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2022 (the “Evaluation Date.”) Based on that evaluation, the CEO and CFO concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective as of September 30, 2022.

In connection with the preparation of this Amended Quarterly Report on Form 10-Q/A, a reevaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2022, was conducted under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based on that reevaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2022, due to the existence of the material weakness in internal control over financial reporting described below (which we view as an integral part of our disclosure controls and procedures). Based on the completion of the fair value remeasurements, we believe that the consolidated financial statements included in this Amended Quarterly Report on Form 10-Q/A 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.

The material weakness in internal controls over financial reporting that was disclosed in our annual report on Form 10-K/A-2 as of and for the year ended June 30, 2022, was also present as of September 30, 2022.

Management is in the process of designing a remediation plan intended to address this material weakness, which will include taking steps to enhance its evaluation of the qualifications of third-party specialists, more accurately define the scope of work to be performed by such specialists, and improve the review process for work products prepared by specialists. Management, under the supervision of the Audit Committee, will develop a comprehensive remediation plan, including a detailed plan and timetable for implementation, and will report regularly to the Audit Committee regarding the status of the implementation activities.

Other than as described above, there has been no change in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 270 characters.

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/A-2 for the year ended June 30, 2022. There have been no material changes since fiscal year end to the risk factors listed therein.

Filed May 24, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-015720. Last ingested by Listed: Nov 3, 2026, 19:00 ET. No prices; not investment advice.