U S Global Investors Inc: Form 10-Q for the period ended Sep 30, 2024

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 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 Company's business activities are affected by many factors, including, without limitation, market volatility, investor sentiment, general economic and business conditions, interest rate movements, taxes, inflation, labor costs, competitive conditions, and industry regulation, many of which are beyond the control of the Company's management. Further, the business and regulatory environments in which the Company operates remain complex, uncertain, and subject to change. We expect that regulatory requirements and developments will cause us to incur additional administrative and compliance costs. 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, 2024.

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 (http://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 (http://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, 2024, total assets under management, including ETF and USGIF clients, were approximately $1.5 billion compared to $1.8 billion at September 30, 2023, a decrease of $208.9 million. During the three months ended September 30, 2024, average assets under management, including ETF and USGIF clients, were $1.5 billion, compared to $2.1 billion during the three months ended September 30, 2023. At June 30, 2024, the Company’s prior fiscal year end, total assets under management, including ETF and USGIF clients, were approximately $1.6 billion, and decreased $18.6 million during the three months ended September 30, 2024.

The following tables summarize the changes in assets under management for USGIF for the three months ended September 30, 2024, and 2023.

(dollars in thousands)

As shown above, USGIF period-end assets under management were higher at September 30, 2024, compared to September 30, 2023, while average net assets were lower during the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The higher average net assets in the comparative period included net assets of equity funds prior to their liquidation during the three months ended September 30, 2023.

USGIF period-end assets under management increased during the three months ended September 30, 2024, compared to a decrease during the three months ended September 30, 2023. The increase during the three months ended September 30, 2024, was primarily due to market appreciation. The decrease during the three months ended September 30, 2023, was primarily due to market depreciation and net redemptions, primarily driven by equity fund liquidations.

The average annualized investment management fee rate (total advisory fees, excluding performance fees, as a percentage of average assets under management) was 62 basis points for the three months ended September 30, 2024, and 64 basis points for the three months ended September 30, 2023. The average investment management fee for the equity funds was 77 basis points for the three months ended September 30, 2024, and 80 basis points for the three months ended September 30, 2023. 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.

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, 2024, the Company held investments carried at fair value on a recurring basis of $14.9 million and a cost basis of $17.5 million. The fair value of these investments is approximately 29.2 percent of the Company’s total assets at September 30, 2024. In addition, the Company held other investments of approximately $1.7 million and held-to-maturity debt investments, net of allowance for credit losses, of $891,000.

Investments recorded at fair value on a recurring basis were approximately $14.9 million at September 30, 2024, compared to approximately $15.5 million at June 30, 2024, the Company’s prior fiscal year end, which is a decrease of approximately $599,000. See Note 2, Investments, in the Notes to 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, 2024, and 2023

The Company recorded net income of $315,000 ($0.02 per share) for the three months ended September 30, 2024, compared to a net loss of $176,000 ($(0.01) per share) for the three months ended September 30, 2023, a change of approximately $491,000. The change is primarily due to net investment income in the current period versus net investment loss in the comparative period, offset by a decrease in operating revenues in the current period as compared to the same period in the prior year, as discussed further below.

Operating Revenues

Total consolidated operating revenues for the three months ended September 30, 2024, decreased $1.0 million, or 31.2 percent, compared with the three months ended September 30, 2023. This decrease was primarily attributable to the following:

• Advisory fees decreased by $1.0 million, or 31.5 percent, primarily as a result of lower average assets under management in the ETFs and a decrease in base management fees earned. Advisory fees are comprised of two components: base management fees and performance fees.
• Base management fees decreased $1.0 million. The majority of this decrease was from ETF unitary management fees, which decreased $945,000 as the result of a decrease in ETF average assets under management, primarily for the Jets ETF.
• Performance fee adjustments for USGIF in the current period resulted in fees paid of $103,000 compared to $112,000 in the corresponding period in the prior year, a change of $9,000. The USGIF performance fee, which applies to the equity funds only, is a fulcrum fee that is adjusted upwards or downwards by 0.25 percent when there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months. This performance adjustment began to be phased out during the fourth quarter of fiscal 2024 and will cease during the fourth quarter of fiscal 2025. During the phase-out period, the adjustment for the performance fee can only be adjusted downward.

Operating Expenses

Total consolidated operating expenses for the three months ended September 30, 2024, decreased $202,000, or 6.9 percent, compared with the three months ended September 30, 2023. The decrease in operating expenses was primarily attributable to a decrease in employee compensation and benefits of $193,000, or 15.1 percent. The decrease in employee compensation and benefits is primarily due to decreases in bonuses, somewhat offset by an increase in salaries for new employees. Higher bonuses in the same period last year were related to company performance and fund performance.

Other Income (Loss)

Total consolidated other income for the three months ended September 30, 2024, was $995,000, compared to a loss of $456,000 for the three months ended September 30, 2023, a change of approximately $1.5 million. This change was primarily due to the following factors:

• Net investment income was $917,000 for the three months ended September 30, 2024, compared to net investment loss of $513,000 for the same quarter in the prior year, a change of $1.4 million. This change is primarily due to net realized and unrealized gains on equity securities of $33,000 in the current period compared to net realized and unrealized losses on equity securities of $1.3 million in the comparative period, a favorable change of $1.3 million, comprised of the following:
• Net unrealized gains on equity securities were $33,000 in the current period compared to net unrealized losses on equity securities of $443,000 in the comparative period, a favorable change of $476,000.
• There were no realized gains or losses on equity securities in the current period, whereas the comparative period had net realized losses on equity securities of $818,000. The three months ended September 30, 2023, included realized losses for impairments of $775,000 for equity investments accounted for under the investment alternative.

Provision for Income Taxes

A tax expense of $121,000 was recorded for the three months ended September 30, 2024, compared to a tax benefit of $65,000 for the same period in 2023, reflecting a change of $186,000. The change was mainly due to net investment income in the current period versus a net investment loss in the prior year, partially offset by an operating loss in the current period compared to operating income in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2024, the Company had net working capital (current assets minus current liabilities) of approximately $38.2 million, an increase of $73,000, or 0.2 percent, since June 30, 2024, and a current ratio (current assets divided by current liabilities) of 21.0 to 1. With approximately $27.3 million in cash and cash equivalents, a decrease of $63,000, or 0.2 percent since June 30, 2024, and $11.2 million in securities carried at fair value on a recurring basis, excluding convertible securities, which together comprise approximately 75.4 percent of total assets, the Company has adequate liquidity to meet its current obligations.

The decrease in cash was primarily due to repurchases of the Company's common stock of $530,000 and dividends paid of $308,000; offset by proceeds from principal paydowns of $750,000 and net cash provided by operating activities of $16,000. Consolidated shareholders’ equity at September 30, 2024, was $48.4 million, a decrease of $639,000, or 1.3 percent since June 30, 2024. The decrease was primarily due to repurchases of the Company's common stock of $525,000 including excise tax, dividends declared of $304,000, and other comprehensive loss of $142,000; offset by net income of $315,000, for the three months ended September 30, 2024.

The Company also has access to a $1.0 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 expires on May 31, 2026, and the Company intends to renew it biennially. The credit facility is collateralized by approximately $1.0 million, included in restricted cash on the Consolidated Balance Sheets, held in deposit in a money market account at the financial institution that provided the credit facility. As of September 30, 2024, 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 2025. The advisory agreement for the U.S.-based ETFs has been renewed through July 2025.

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, 2024, but may be suspended or discontinued. Cash and securities recorded at fair value on a recurring basis, excluding convertible securities, of approximately $38.5 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.

CRITICAL ACCOUNTING ESTIMATES

For a discussion of other critical accounting policies that the Company follows, please refer to Item 7 in the Annual Report on Form 10-K for the year ended June 30, 2024.

COVID-19 had an adverse effect on global and domestic financial markets, and a similar global event 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 the Russia-Ukraine and Israel-Palestine conflicts; adverse market conditions, including cryptocurrency market disruptions; 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 portion of assets under management 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. This performance adjustment began to be phased out during the fourth quarter of fiscal 2024 and will cease during the fourth quarter of fiscal 2025. During the phase-out period, the adjustment for the performance fee can only be adjusted downward.

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, 2024, and 2023, the Company realized a decrease in its USGIF base advisory fee of $103,000 and $112,000, respectively, due to these performance adjustments.

Corporate Investments

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

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

Equity price risk

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

The following table summarizes the Company’s equity price risks in securities recorded at fair value on a recurring basis as of September 30, 2024, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.

(dollars in thousands)

1. Changes in unrealized gains and losses on embedded derivatives and trading 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.

The embedded derivatives subject to equity price risk shown in the above table are related to investments in convertible debentures of HIVE Digital Technologies Ltd. (“HIVE”). HIVE is discussed in more detail in Note 2, Investments, in the notes to 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 Consolidated Balance Sheets and unrealized gain (loss) recognized in net investment income (loss).

Interest rate risk

Interest rate fluctuations present a market risk to the Company’s consolidated financial position due to its investments in debt securities. These securities are sensitive to changes in interest rates, typically decreasing in value when rates rise and increasing when rates fall. Such fluctuations can materially impact the Company’s debt securities included on the Consolidated Balance Sheets, as well as the unrealized gains (losses) and interest income recognized in net investment income (loss). Additionally, changes in interest rates can significantly affect the interest income earned from the Company’s cash and cash equivalents, also recognized in net investment income (loss).

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 have an impact on their valuation and thus the revenue received by the Company.

Indirect exposure to cryptocurrencies risk

Cryptocurrencies (also referred to as “virtual currencies” and “digital currencies”) are digital assets that are designed to act as a medium of exchange. Although the Company has no current intention of directly investing in cryptocurrencies, the Company has indirect exposure to cryptocurrencies by investing in securities of issuers with exposure to the cryptocurrency industry. Cryptocurrencies (some of the most well-known include Bitcoin and Ethereum) are not backed by any government, corporation, or other identified body. Trading markets for cryptocurrencies are often unregulated and may be more exposed to operational or technical issues as well as the potential for fraud or manipulation than established, regulated exchanges for securities, derivatives and traditional currencies.

Cryptocurrencies have been subject to significant fluctuations in value. The value of a cryptocurrency may significantly fluctuate precipitously (including declining to zero) and unpredictably for a variety of reasons, including, but not limited to: investor perceptions and expectations; regulatory changes; general economic conditions; adoption and use in the retail and commercial marketplace; public opinion regarding the environmental impact of the creation (“minting” or “mining”) of cryptocurrency; confidence in, and the maintenance and development of, its network and open-source software protocols such as blockchain for ensuring the integrity of cryptocurrency transactional data; and general risks tied to the use of information technologies, including cybersecurity risks.

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2024, 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 September 30, 2024, 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).

The material weakness in internal controls over financial reporting that was disclosed in our annual report on Form 10-K as of and for the year ended June 30, 2024, was also present as of September 30, 2024. Notwithstanding the material weakness, we believe that the 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.

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, 2024, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, 2024. There have been no material changes since the fiscal year end to the risk factors listed therein.