U S GLOBAL INVESTORS INC annual report, FY2021

Business Context and Reporting Period

U.S. Global Investors, Inc. is a Texas-based registered investment adviser with two continuing segments: Investment Management Services and Corporate Investments. It advises mutual funds and three ETFs, including the U.S. Global Jets ETF. This filing is a Form 10-K for the fiscal year ended June 30, 2021; the request metadata references “2020 Q4,” which does not match the filing period.

The company sold its 65% interest in Galileo Global Equity Advisors on March 2, 2020. Galileo is presented as discontinued operations, with no discontinued-operations activity in fiscal 2021.

Financial Performance and Key Metrics

Metric	Fiscal 2021	Fiscal 2020	Change
Operating revenue	$21.7 million	$4.5 million	Up 383.8%
Operating income (loss)	$8.2 million	$(2.4) million	Improved
Investment income (loss)	$28.3 million	$(2.2) million	Improved by $30.5 million
Income from continuing operations	$32.0 million	$(4.5) million	Improved by $36.4 million
Net income attributable to U.S. Global	$32.0 million	$(4.7) million	Improved by $36.6 million
Diluted EPS	$2.12	$(0.31)	Improved
Net cash provided by operating activities	$4.8 million	$(2.0) million	Improved by $6.7 million

Advisory fees increased to $21.4 million from $4.3 million. ETF advisory fees rose to $17.1 million from $1.7 million, primarily because of growth in the U.S. Global Jets ETF.
USGIF advisory fees increased 68.1% to $4.3 million. Performance-fee adjustments were positive $482,000 in fiscal 2021 versus negative $525,000 in fiscal 2020.
Operating expenses increased 96.1% to $13.5 million, including employee compensation and benefits of $7.4 million and general and administrative expense of $5.7 million.
Operating margin was approximately 37.7% in fiscal 2021, compared with a negative margin in fiscal 2020. Net margin was approximately 147.6%, reflecting substantial investment gains rather than recurring advisory revenue alone.
Investment income included approximately $9.9 million of net unrealized gains and $17.8 million of realized gains. The sale of HIVE common shares contributed approximately $15.0 million of realized gains.
The company recorded a $444,000 gain from forgiveness of its Paycheck Protection Program loan and accrued interest.
Total assets were $62.3 million at June 30, 2021, compared with $18.8 million a year earlier. Shareholders’ equity increased to $54.3 million from $16.8 million.

Assets Under Management, Liquidity, Debt and Cash Flow

Total period-end assets under management increased 146.8% to $4.23 billion from $1.71 billion. Average AUM increased 379.3% to approximately $3.4 billion.
Jets ETF AUM increased to $3.62 billion from $1.20 billion and represented 82% of average AUM and 76% of operating revenue in fiscal 2021, creating significant concentration risk.
Cash and cash equivalents were $14.4 million, restricted cash was $1.0 million, and total current assets were $26.8 million. Net working capital was approximately $21.6 million, with a current ratio of 5.2 to 1.
The company had total liabilities of $8.0 million and no outstanding balance on its $1.0 million credit facility. The facility was secured by approximately $1.0 million of restricted cash and was scheduled to expire May 31, 2022.
The $442,000 PPP loan was fully forgiven during fiscal 2021.
Cash, cash equivalents and restricted cash increased by $12.5 million to $15.4 million. Operating cash flow was $4.8 million, investing cash flow was $8.7 million, and financing cash flow was negative $941,000.
The company paid $640,000 in dividends and repurchased $314,000 of Class A shares during fiscal 2021.

Material Changes Versus the Prior Comparable Period

Results shifted from a fiscal 2020 loss to significant profitability, driven by both rapid ETF asset growth and large corporate investment gains.
Revenue mix became substantially more concentrated in ETFs and particularly in the Jets ETF. ETF fees represented approximately 79.1% of operating revenue in fiscal 2021, compared with approximately 39.0% in fiscal 2020.
Corporate investment exposure increased materially. Fair-value investments rose to $35.3 million from $11.5 million, including $25.1 million of HIVE warrants and convertible debentures at June 30, 2021.
Available-for-sale debt securities generated $6.6 million of after-tax accumulated other comprehensive income, contributing to accumulated other comprehensive income of $6.6 million at year-end.
The company’s valuation allowance on deferred tax assets was eliminated, while a $2.8 million deferred tax liability was recorded at June 30, 2021.
The company disclosed an immaterial revision to the fiscal 2020 cash-flow presentation. The revision did not affect net income or EPS.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management expects investment income and losses to remain volatile because of market fluctuations and the concentration of corporate investments in cryptocurrency-related securities.
Management stated that current cash reserves, investments and available financing should be sufficient for foreseeable operating needs. No formal revenue or earnings guidance was provided.
The company renewed its USGIF and U.S.-based ETF advisory agreements through September 2022. These contracts are subject to annual renewal and may generally be terminated on 60 days’ notice.
The board authorized monthly dividends of $0.0050 per share through September 2021 and subsequently increased the dividend to $0.0075 per share for October 2021 through March 2022. Future dividends remain discretionary.
COVID-19, market volatility, inflation, interest rates, foreign currency movements and possible resurgences of the pandemic could reduce AUM, revenue and investment valuations. Management could not quantify the long-term impact.
Key risks include dependence on the Jets ETF, investment-performance risk, intense industry competition, regulatory compliance, client-contract renewals, cybersecurity, loss of key personnel and concentration in emerging markets, natural resources and cryptocurrency-related investments.
HIVE-related securities were classified largely as Level 3 assets and valued using option-pricing and binomial-lattice models. Valuation depended on significant unobservable inputs, including volatility assumptions of 88.1% for warrants and 60.1% for convertible debentures.
Frank Holmes, the CEO and Chief Investment Officer, owned 99.80% of the voting Class C shares and served as non-executive chairman or otherwise held governance roles at certain portfolio companies, including HIVE. These relationships create related-party and governance considerations.
Management concluded that disclosure controls and internal control over financial reporting were not effective as of June 30, 2021 because of an unremediated material weakness involving valuation controls for complex hybrid financial instruments. The weakness was connected to a restatement of a previously issued quarterly report.
BDO USA, LLP issued an unqualified opinion on the consolidated financial statements but was not engaged to provide an opinion on internal control over financial reporting.

Most Important Facts for Investors to Verify

Whether the Jets ETF can maintain its exceptional AUM growth and whether revenue concentration remains elevated.
The valuation, liquidity and subsequent performance of the $25.1 million HIVE warrant and convertible-debt position, including the assumptions used for Level 3 measurements.
Whether the material weakness in investment-valuation controls has been fully remediated and whether additional restatements or valuation adjustments could arise.
The recurring earnings power of the advisory business excluding realized and unrealized investment gains, the PPP forgiveness gain and other unusual items.
The renewal status and economics of advisory contracts, fee waivers and expense-reimbursement obligations.
The sustainability of monthly dividends and share repurchases relative to operating cash flow, investment volatility and capital requirements.
Potential effects of COVID-19, market declines, interest-rate changes, cryptocurrency volatility, foreign exchange movements and regulatory developments on AUM and corporate investments.
Related-party transactions and governance implications arising from Mr. Holmes’s control of voting shares and affiliations with investee companies.