U.S. Global Investors, Inc. Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2022. The source filing is an annual report rather than a 2021 fourth-quarter filing; quarterly information is referenced only where disclosed.
Business context
U.S. Global Investors is a registered investment adviser operating through two segments: Investment Management Services and Corporate Investments. Revenue is primarily generated from advisory and administrative fees based on assets under management (AUM), while corporate investment results can materially affect earnings. The company manages mutual funds and ETFs focused on airlines, cargo, gold, natural resources, emerging markets, international equities and fixed income.
Total AUM was $2.9 billion at June 30, 2022, down from $4.2 billion at June 30, 2021. Average AUM for fiscal 2022 increased 17.7% to $3.9 billion, primarily reflecting the prior-year growth of the U.S. Global Jets ETF before the June 2022 market decline.
Financial performance and key metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Operating revenue | $24.7 million | $21.7 million | +14.1% |
| Operating income | $11.1 million | $8.2 million | +36.1% |
| Operating margin | 45.0% | 37.7% | +7.3 percentage points |
| Investment income (loss) | $(4.0) million | $28.3 million | $(32.4) million |
| Income before taxes | $7.1 million | $37.4 million | $(30.3) million |
| Net income | $5.5 million | $32.0 million | $(26.5 million) |
| Net margin | 22.3% | 147.6% | Lower |
| Diluted EPS | $0.37 | $2.12 | $(1.75) |
| Net cash from operating activities | $10.5 million | $4.8 million | +$5.8 million |
ETF advisory fees increased 22.4% to $21.0 million and represented 84.8% of operating revenue. U.S. Global Investors Funds advisory fees declined 17.5% to $3.6 million, while administrative services fees declined 9.6% to $189,000. Operating expenses were broadly stable at $13.6 million; lower employee compensation was largely offset by higher general and administrative and advertising costs.
The earnings decline was driven principally by a reversal in corporate investment results. The company recorded a $4.0 million investment loss in fiscal 2022 versus $28.3 million of investment income in fiscal 2021. Fiscal 2021 included a $15.0 million realized gain on the sale of HIVE common shares and substantial unrealized gains; fiscal 2022 included unrealized equity losses of $7.2 million and embedded-derivative losses of $2.5 million.
Liquidity, capital resources and balance sheet
- Cash and cash equivalents were $22.3 million, with total cash, cash equivalents and restricted cash of $23.3 million.
- Net working capital was approximately $33.9 million; the current ratio was 9.2 to 1.
- Total assets were $60.7 million and shareholders’ equity was $56.5 million, up 4.0% from the prior year.
- Total liabilities were $4.2 million. The company had no drawn borrowings at year-end.
- A $1.0 million credit facility was available, fully collateralized by restricted cash, and remained unused. The facility expires May 31, 2023, and management intends to renew it annually.
- Cash provided by operations was $10.5 million. Investing activities used $1.0 million, while financing activities used $1.6 million, including $1.2 million of dividends paid and $452,000 of share repurchases.
- Investments carried at fair value totaled $27.9 million, including approximately $14.1 million of HIVE-related warrants and convertible debentures and $12.8 million invested in funds advised by the company.
Material changes versus the prior comparable period
- Operating revenue grew despite a year-end AUM decline, reflecting higher average ETF assets and the addition of the European Jets UCITS ETF and Sea to Sky Cargo ETF.
- Operating income improved because revenue growth exceeded the modest increase in operating expenses.
- Net income fell sharply because corporate investment results changed from substantial gains to a loss. The prior year also benefited from a $444,000 gain from PPP loan forgiveness.
- Year-end AUM declined 31.2%, primarily from market depreciation in ETFs, especially the Jets ETF. The Jets ETF represented approximately 86% of average AUM and 82% of operating revenue in fiscal 2022.
- HIVE-related investments declined in fair value from $25.1 million to $14.1 million. The company received $3.0 million of principal paydowns from HIVE convertible debentures.
- Accumulated other comprehensive income declined from $6.6 million to $4.3 million, primarily due to losses and reclassifications on available-for-sale securities.
- The company increased its annual share repurchase authorization from $2.75 million to $5.0 million. Approximately $4.7 million remained available at June 30, 2022.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management expects investment gains and losses to remain volatile and believes existing cash, investments and financing capacity will fund foreseeable operating needs.
- Market declines, inflation, rising interest rates, the Russia-Ukraine conflict, supply-chain disruption, COVID-19 and adverse foreign exchange movements may reduce AUM, advisory revenue, cash flow and investment values.
- Revenue is highly concentrated in the Jets ETF. A significant decline in its market value or investor redemptions could materially reduce revenue and profitability.
- Corporate investments are concentrated in volatile securities, particularly HIVE-related cryptocurrency investments. HIVE holdings use Level 3 valuation techniques with significant unobservable inputs, including volatility assumptions.
- Advisory and administrative agreements are generally subject to annual renewal and may be terminated on relatively short notice. Loss or nonrenewal of key client agreements would materially affect results.
- The company is subject to extensive investment-adviser and investment-company regulation, potential litigation, regulatory investigations, cybersecurity threats and reliance on key personnel and third-party service providers.
- Frank Holmes beneficially owned 99.81% of the voting Class C shares, while publicly traded Class A shares are nonvoting. This ownership structure limits other shareholders’ influence over corporate matters.
- The company reported no material legal proceedings and no accrued contingencies at June 30, 2022.
- Management concluded that a material weakness related to review of tax-related journal entries, identified during fiscal 2022, was remediated as of June 30, 2022. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor was not engaged to provide an internal-control attestation.
- The Board authorized monthly dividends of $0.0075 per share through September 2022, totaling approximately $337,000. Future dividends remain discretionary.
Most important facts for investors to verify
- Whether the sharp decline in year-end AUM and continued concentration in the Jets ETF persist in subsequent reporting periods.
- The fair value, principal repayments, valuation assumptions and related-party disclosures for HIVE investments.
- The sustainability of operating revenue growth after accounting for market conditions, fee waivers and performance fees.
- Whether investment gains and losses continue to create substantial volatility in net income and book value.
- Renewal status of USGIF, Jets ETF, GO GOLD and Sea to Sky advisory agreements and the expense-cap commitments extending through April 2023.
- Continuation and funding capacity of the monthly dividend and the expanded share repurchase program.
- Execution and continued effectiveness of the remediation addressing the tax-related internal-control material weakness.