UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period endedOR
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________.Commission File Number 0-13928
U.S. GLOBAL INVESTORS, INC. |
(Exact name of registrant as specified in its charter) |
Texas | 74-1598370 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
7900 Callaghan Road San Antonio, Texas | 78229 (Zip Code) |
(Address of principal executive offices) |
(210) 308-1234
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Class A common stock, $0.025 par value per share | GROW | NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer | Smaller reporting company ☒ | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No ☒On January 29, 2018,October 25, 2019, there were 13,866,69113,866,811 shares of Registrant’s class A nonvoting common stock issued and 13,074,27013,061,666 shares of Registrant’s class A nonvoting common stock issued and outstanding; no shares of Registrant’s class B nonvoting common shares outstanding; and 2,068,8572,068,737 shares of Registrant’s class C voting common stock issued and outstanding.
PART I. FINANCIAL INFORMATION | 1 |
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PART II. OTHER INFORMATION | 25 |
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27 |
PART I. FINANCIAL INFORMATION
| Assets | December 31, 2017 | June 30, 2017 | ||||||
| (dollars in thousands) | (UNAUDITED) | |||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 2,977 | $ | 3,958 | ||||
| Restricted cash | 1,000 | 1,000 | ||||||
| Investment securities - trading, at fair value | 7,433 | 9,720 | ||||||
| Accounts and other receivables | 1,177 | 520 | ||||||
| Note receivable | 1,977 | 1,952 | ||||||
| Prepaid expenses | 399 | 315 | ||||||
| Total Current Assets | 14,963 | 17,465 | ||||||
| Net Property and Equipment | 2,092 | 2,212 | ||||||
| Other Assets | ||||||||
| Investment securities - available-for-sale, at fair value | 22,372 | 3,401 | ||||||
| Other investments | 2,109 | 2,130 | ||||||
| Equity method investment | 3,252 | - | ||||||
| Note receivable, long term | 234 | 234 | ||||||
| Other assets, long term | 53 | 78 | ||||||
| Total Other Assets | 28,020 | 5,843 | ||||||
| Total Assets | $ | 45,075 | $ | 25,520 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 198 | $ | 118 | ||||
| Accrued compensation and related costs | 425 | 390 | ||||||
| Dividends payable | 114 | 114 | ||||||
| Other accrued expenses | 827 | 544 | ||||||
| Total Current Liabilities | 1,564 | 1,166 | ||||||
| Long-Term Liabilities | ||||||||
| Deferred tax liability | 3,923 | - | ||||||
| Total Long-Term Liabilities | 3,923 | - | ||||||
| Total Liabilities | 5,487 | 1,166 | ||||||
| Commitments and Contingencies (Note 11) | ||||||||
| Shareholders’ Equity | ||||||||
| Common stock (class A) - $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,866,691 shares and 13,866,601 shares at December 31, 2017, and June 30, 2017, respectively | 347 | 347 | ||||||
| Common stock (class B) - $0.025 par value; nonvoting; authorized, 4,500,000 shares; no shares issued | - | - | ||||||
| Convertible common stock (class C) - $0.025 par value; voting; authorized, 3,500,000 shares; issued, 2,068,857 shares and 2,068,947 shares at December 31, 2017, and June 30, 2017, respectively | 52 | 52 | ||||||
| Additional paid-in-capital | 15,647 | 15,646 | ||||||
| Treasury stock, class A shares at cost; 790,421 and 751,303 shares at December 31, 2017, and June 30, 2017, respectively | (1,876 | ) | (1,760 | ) | ||||
| Accumulated other comprehensive income, net of tax | 13,703 | 264 | ||||||
| Retained earnings | 11,112 | 9,321 | ||||||
| Total U.S. Global Investors Inc. Shareholders’ Equity | 38,985 | 23,870 | ||||||
| Non-Controlling Interest in Subsidiary | 603 | 484 | ||||||
| Total Shareholders’ Equity | 39,588 | 24,354 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 45,075 | $ | 25,520 | ||||
Assets | September 30, 2019 | June 30, 2019 | ||||||
(dollars in thousands) | (unaudited) | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 2,618 | $ | 2,949 | ||||
Restricted cash | 1,025 | 1,025 | ||||||
Investments in securities at fair value | 7,525 | 8,021 | ||||||
Accounts and other receivables | 626 | 501 | ||||||
Note receivable | - | 199 | ||||||
Prepaid expenses | 267 | 344 | ||||||
Total Current Assets | 12,061 | 13,039 | ||||||
Net Property and Equipment | 1,692 | 1,746 | ||||||
Other Assets | ||||||||
Deferred tax asset, long-term | 91 | - | ||||||
Investments in securities at fair value, non-current | 4,100 | 7,166 | ||||||
Other investments | 1,396 | 1,404 | ||||||
Equity method investments | 279 | 309 | ||||||
Right of use assets | 346 | - | ||||||
Other assets, non-current | 72 | 72 | ||||||
Total Other Assets | 6,284 | 8,951 | ||||||
Total Assets | $ | 20,037 | $ | 23,736 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 137 | $ | 166 | ||||
Accrued compensation and related costs | 304 | 395 | ||||||
Dividends payable | 113 | 113 | ||||||
Lease liability, short-term | 102 | - | ||||||
Other accrued expenses | 702 | 750 | ||||||
Total Current Liabilities | 1,358 | 1,424 | ||||||
Long-Term Liabilities | ||||||||
Deferred tax liability | - | 133 | ||||||
Lease liability, long-term | 247 | - | ||||||
Total Long-Term Liabilities | 247 | 133 | ||||||
Total Liabilities | 1,605 | 1,557 | ||||||
Commitments and Contingencies (Note 13) | ||||||||
Shareholders’ Equity | ||||||||
Common stock (class A) - $0.025 par value; nonvoting; authorized, 28,000,000 shares; issued, 13,866,811 shares and 13,866,751 shares at September 30, 2019, and June 30, 2019, respectively | 347 | 347 | ||||||
Common stock (class B) - $0.025 par value; nonvoting; authorized, 4,500,000 shares; no shares issued | - | - | ||||||
Convertible common stock (class C) - $0.025 par value; voting; authorized, 3,500,000 shares; issued, 2,068,737 shares and 2,068,797 shares at September 30, 2019, and June 30, 2019, respectively | 52 | 52 | ||||||
Additional paid-in-capital | 15,645 | 15,646 | ||||||
Treasury stock, class A shares at cost; 805,145 shares and 804,959 shares at September 30, 2019, and June 30, 2019, respectively | (1,888 | ) | (1,888 | ) | ||||
Accumulated other comprehensive income (loss), net of tax | (219 | ) | (206 | ) | ||||
Retained earnings | 4,080 | 7,761 | ||||||
Total U.S. Global Investors Inc. Shareholders’ Equity | 18,017 | 21,712 | ||||||
Non-Controlling Interest in Subsidiary | 415 | 467 | ||||||
Total Shareholders’ Equity | 18,432 | 22,179 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 20,037 | $ | 23,736 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| Six Months Ended December 31, | Three Months Ended December 31, | |||||||||||||||
| (dollars in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Operating Revenues | ||||||||||||||||
| Advisory fees | $ | 3,362 | $ | 3,460 | $ | 1,929 | $ | 1,569 | ||||||||
| Administrative services fees | 121 | 163 | 64 | 73 | ||||||||||||
| 3,483 | 3,623 | 1,993 | 1,642 | |||||||||||||
| Operating Expenses | ||||||||||||||||
| Employee compensation and benefits | 2,041 | 1,886 | 1,140 | 899 | ||||||||||||
| General and administrative | 1,862 | 1,733 | 914 | 863 | ||||||||||||
| Advertising | 86 | 80 | 27 | 51 | ||||||||||||
| Depreciation and amortization | 122 | 127 | 61 | 63 | ||||||||||||
| 4,111 | 3,826 | 2,142 | 1,876 | |||||||||||||
| Operating Loss | (628 | ) | (203 | ) | (149 | ) | (234 | ) | ||||||||
| Other Income | ||||||||||||||||
| Investment income | 452 | 502 | 243 | 249 | ||||||||||||
| Income from equity method investment | 2,731 | - | 1,218 | - | ||||||||||||
| Other income | 17 | - | 14 | - | ||||||||||||
| 3,200 | 502 | 1,475 | 249 | |||||||||||||
| Income Before Income Taxes | 2,572 | 299 | 1,326 | 15 | ||||||||||||
| Provision for Income Taxes | ||||||||||||||||
| Tax expense (benefit) | 452 | 10 | 442 | (10 | ) | |||||||||||
| Net Income | 2,120 | 289 | 884 | 25 | ||||||||||||
| Less: Net Income Attributable to Non-Controlling Interest | 101 | 18 | 135 | 17 | ||||||||||||
| Net Income Attributable to U.S. Global Investors, Inc. | $ | 2,019 | $ | 271 | $ | 749 | $ | 8 | ||||||||
| Earnings Per Share Attributable to U.S. Global Investors, Inc. | ||||||||||||||||
| Basic | $ | 0.13 | $ | 0.02 | $ | 0.05 | $ | - | ||||||||
| Diluted | $ | 0.13 | $ | 0.02 | $ | 0.05 | $ | - | ||||||||
| Basic weighted average number of common shares outstanding | 15,171,620 | 15,229,845 | 15,160,589 | 15,218,734 | ||||||||||||
| Diluted weighted average number of common shares outstanding | 15,171,620 | 15,229,845 | 15,160,589 | 15,218,734 | ||||||||||||
Three Months Ended September 30, | ||||||||
(dollars in thousands, except per share data) | 2019 | 2018 | ||||||
Operating Revenues | ||||||||
Advisory fees | $ | 860 | $ | 1,170 | ||||
Administrative services fees | 44 | 53 | ||||||
| 904 | 1,223 | |||||||
Operating Expenses | ||||||||
Employee compensation and benefits | 740 | 798 | ||||||
General and administrative | 903 | 1,010 | ||||||
Advertising | 23 | 40 | ||||||
Depreciation and amortization | 53 | 58 | ||||||
| 1,719 | 1,906 | |||||||
Operating Loss | (815 | ) | (683 | ) | ||||
Other Income (Loss) | ||||||||
Investment loss | (3,020 | ) | (907 | ) | ||||
Loss from equity method investments | (27 | ) | (7 | ) | ||||
Other income | 23 | 9 | ||||||
| (3,024 | ) | (905 | ) | |||||
Loss Before Income Taxes | (3,839 | ) | (1,588 | ) | ||||
Provision for Income Taxes | ||||||||
Tax benefit | (224 | ) | (356 | ) | ||||
Net Loss | (3,615 | ) | (1,232 | ) | ||||
Less: Net Loss Attributable to Non-Controlling Interest | (48 | ) | (83 | ) | ||||
Net Loss Attributable to U.S. Global Investors, Inc. | $ | (3,567 | ) | $ | (1,149 | ) | ||
Earnings Per Share Attributable to U.S. Global Investors, Inc. | ||||||||
Basic | $ | (0.24 | ) | $ | (0.08 | ) | ||
Diluted | $ | (0.24 | ) | $ | (0.08 | ) | ||
Basic weighted average number of common shares outstanding | 15,130,235 | 15,144,884 | ||||||
Diluted weighted average number of common shares outstanding | 15,130,235 | 15,144,884 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| Six months ended December 31, | Three Months Ended December 31, | |||||||||||||||
| (dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net Income Attributable to U.S. Global Investors, Inc. | $ | 2,019 | $ | 271 | $ | 749 | $ | 8 | ||||||||
| Other Comprehensive Income (Loss), Net of Tax: | ||||||||||||||||
| Unrealized gains (losses) on available-for-sale securities arising during period | 13,417 | 369 | 4,277 | (308 | ) | |||||||||||
| Less: reclassification adjustment for gains/losses included in net income | (31 | ) | (15 | ) | (24 | ) | (31 | ) | ||||||||
| Net change from available-for-sale investments, net of tax | 13,386 | 354 | 4,253 | (339 | ) | |||||||||||
| Foreign currency translation adjustment | 71 | (54 | ) | 17 | (39 | ) | ||||||||||
| Other Comprehensive Income (Loss) | 13,457 | 300 | 4,270 | (378 | ) | |||||||||||
| Comprehensive Income (Loss) | 15,476 | 571 | 5,019 | (370 | ) | |||||||||||
| Less: Comprehensive Income (Loss) Attributable to Non-Controlling Interest | 18 | (19 | ) | - | (14 | ) | ||||||||||
| Comprehensive Income (Loss) Attributable to U.S. Global Investors, Inc. | $ | 15,458 | $ | 590 | $ | 5,019 | $ | (356 | ) | |||||||
Three Months Ended September 30, | ||||||||
(dollars in thousands) | 2019 | 2018 | ||||||
Net Loss Attributable to U.S. Global Investors, Inc. | $ | (3,567 | ) | $ | (1,149 | ) | ||
Other Comprehensive Income (Loss), Net of Tax: | ||||||||
Foreign currency translation adjustment | (17 | ) | 27 | |||||
Comprehensive Loss | (3,584 | ) | (1,122 | ) | ||||
Less: Comprehensive Income (Loss) Attributable to Non-Controlling Interest | (4 | ) | 8 | |||||
Comprehensive Loss Attributable to U.S. Global Investors, Inc. | $ | (3,580 | ) | $ | (1,130 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| Six Months Ended December 31, | ||||||||
| (dollars in thousands) | 2017 | 2016 | ||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | 2,120 | $ | 289 | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 122 | 127 | ||||||
| Net recognized (gain) loss on securities | 675 | (15 | ) | |||||
| Net income from equity method investment | (2,731 | ) | - | |||||
| Provision for deferred taxes | 417 | - | ||||||
| Stock bonuses | 14 | 3 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts and notes receivable | (678 | ) | 122 | |||||
| Prepaid and other assets | (58 | ) | (109 | ) | ||||
| Trading securities | 1,551 | 425 | ||||||
| Accounts payable and accrued expenses | 391 | (124 | ) | |||||
| Total adjustments | (297 | ) | 429 | |||||
| Net cash provided by operating activities | 1,823 | 718 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of equity method investment | (501 | ) | - | |||||
| Purchase of available-for-sale securities | (2,420 | ) | (457 | ) | ||||
| Purchase of other investments | - | (776 | ) | |||||
| Proceeds on sale of available-for-sale securities | 401 | 649 | ||||||
| Return of capital on investment | 22 | 29 | ||||||
| Net cash used in investing activities | (2,498 | ) | (555 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Issuance of common stock | 3 | 3 | ||||||
| Repurchases of common stock | (131 | ) | (80 | ) | ||||
| Dividends paid | (227 | ) | (228 | ) | ||||
| Net cash used in financing activities | (355 | ) | (305 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | 49 | (50 | ) | |||||
| Net decrease in cash and cash equivalents | (981 | ) | (192 | ) | ||||
| Beginning cash and cash equivalents | 3,958 | 3,993 | ||||||
| Ending cash and cash equivalents | $ | 2,977 | $ | 3,801 | ||||
| Supplemental Disclosures of Cash Flow Information | ||||||||
| Cash paid for income taxes | $ | - | $ | 12 | ||||
(dollars in thousands) | Common | Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Non- Controlling Interest | Total | ||||||||||||||||||||||||
Balance at June 30, 2019 (13,866,751 shares of class A; 2,068,797 shares of class C) | $ | 347 | $ | 52 | $ | 15,646 | $ | (1,888 | ) | $ | (206 | ) | $ | 7,761 | $ | 467 | $ | 22,179 | ||||||||||||||
Purchases of 1,400 shares of Common Stock (class A) | - | - | - | (3 | ) | - | - | - | (3 | ) | ||||||||||||||||||||||
Issuance of stock under ESPP of 314 shares of Common Stock (class A) | - | - | - | 1 | - | - | - | 1 | ||||||||||||||||||||||||
Conversion of 60 shares of class C common stock for class A common stock | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Dividends declared | - | - | - | - | - | (114 | ) | - | (114 | ) | ||||||||||||||||||||||
Stock bonuses | - | - | (1 | ) | 2 | - | - | - | 1 | |||||||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | (13 | ) | - | (4 | ) | (17 | ) | |||||||||||||||||||||
Net loss | - | - | - | - | - | (3,567 | ) | (48 | ) | (3,615 | ) | |||||||||||||||||||||
Balance at September 30, 2019 (13,866,811 shares of class A; 2,068,737 shares of class C) | $ | 347 | $ | 52 | $ | 15,645 | $ | (1,888 | ) | $ | (219 | ) | $ | 4,080 | $ | 415 | $ | 18,432 | ||||||||||||||
(dollars in thousands) | Common Stock (class A) | Common Stock (class C) | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Non- Controlling Interest | Total | ||||||||||||||||||||||||
Balance at June 30, 2018 (13,866,691 shares of class A; 2,068,857 shares of class C) | $ | 347 | $ | 52 | $ | 15,650 | $ | (1,878 | ) | $ | 1,858 | $ | 9,513 | $ | 518 | $ | 26,060 | |||||||||||||||
Reclassification pursuant to adoption of ASU 2016-01, net of tax of $1,049 | - | - | - | - | (2,089 | ) | 2,089 | - | - | |||||||||||||||||||||||
Balance at July 1, 2018 | 347 | 52 | 15,650 | (1,878 | ) | (231 | ) | 11,602 | 518 | 26,060 | ||||||||||||||||||||||
Purchases of 1,000 shares of Common Stock (class A) | - | - | - | (2 | ) | - | - | - | (2 | ) | ||||||||||||||||||||||
Issuance of stock under ESPP of 628 shares of Common Stock (class A) | - | - | - | 2 | - | - | - | 2 | ||||||||||||||||||||||||
Dividends declared | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Stock bonuses | - | - | (1 | ) | 2 | - | - | - | 1 | |||||||||||||||||||||||
Stock-based compensation expense | - | - | 2 | - | - | - | - | 2 | ||||||||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 19 | - | 8 | 27 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | (1,149 | ) | (83 | ) | (1,232 | ) | |||||||||||||||||||||
Balance at September 30, 2018 (13,866,691 shares of class A; 2,268,857 shares of class C) | $ | 347 | $ | 52 | $ | 15,651 | $ | (1,876 | ) | $ | (212 | ) | $ | 10,453 | $ | 443 | $ | 24,858 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30, | ||||||||
(dollars in thousands) | 2019 | 2018 | ||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (3,615 | ) | $ | (1,232 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 53 | 58 | ||||||
Net recognized loss on securities | - | 29 | ||||||
Net loss from equity method investment | 27 | 7 | ||||||
Provision for deferred taxes | (224 | ) | (361 | ) | ||||
Stock bonuses | 1 | 1 | ||||||
Stock-based compensation expense | - | 2 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable and notes receivable | 73 | 612 | ||||||
Prepaid expenses and other assets | (270 | ) | 50 | |||||
Investment securities | 3,562 | 951 | ||||||
Accounts payable and accrued expenses | 185 | (406 | ) | |||||
Total adjustments | 3,407 | 943 | ||||||
Net cash used in operating activities | (208 | ) | (289 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Return of capital on investments | 8 | 10 | ||||||
Net cash provided by investing activities | 8 | 10 | ||||||
Cash Flows from Financing Activities: | ||||||||
Issuance of common stock | 1 | 2 | ||||||
Repurchases of common stock | (3 | ) | (2 | ) | ||||
Dividends paid | (113 | ) | (114 | ) | ||||
Net cash used in financing activities | (115 | ) | (114 | ) | ||||
Effects of foreign currency translation | (16 | ) | 25 | |||||
Net decrease in cash, cash equivalents, and restricted cash | (331 | ) | (368 | ) | ||||
Beginning cash, cash equivalents, and restricted cash | 3,974 | 7,364 | ||||||
Ending cash, cash equivalents, and restricted cash | $ | 3,643 | $ | 6,996 | ||||
Supplemental Disclosures of Cash Flow Information | ||||||||
Cash paid for income taxes | $ | - | $ | 119 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1. BASIS OF PRESENTATION
U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has prepared the consolidated financial statements pursuant to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The financial information included herein reflects all adjustments (consisting solely of normal recurring adjustments), which are, in management’s opinion, necessary for a fair presentation of results for the interim periods presented. The Company has consistently followed the accounting policies set forth in the notes to the consolidated financial statements in the Company’s Form 10-K for the fiscal year ended June 30, 2017,2019, except for the adoption of new accounting pronouncements discussed below.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, U.S. Global Brokerage, Inc., U.S. Global Investors (Bermuda) Limited, U.S. Global Investors (Canada) Limited (“USCAN”), and U.S. Global Indices, LLC, and its 65 percent interest in Galileo Global Equity Advisors Inc. (“Galileo”). U.S. Global Brokerage, Inc. ceased operations in December 2015.
Galileo is consolidated with the operations of the Company. The non-controlling interest in this subsidiary is included in “Non-Controlling Interest in Subsidiary” in the equity section of the Consolidated Balance Sheets. Frank Holmes, CEO, and Susan McGee, President and General Counsel,Lisa Callicotte, CFO, serve as directors of Galileo.
There are two primary consolidation models in U.S. GAAP, the variable interest entity (“VIE”) and voting interest entity models. The Company’s evaluation for consolidation includes whether entities in which it has an interest or from which it receives fees are VIEs and whether the Company is the primary beneficiary of any VIEs identified in its analysis. A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the group of holders of the equity investment at risk lack certain characteristics of a controlling financial interest. The primary beneficiary is the entity that has the obligation to absorb a majority of the expected losses or the right to receive the majority of the residual returns and consolidates the VIE on the basis of having a controlling financial interest.
The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain funds it advises, specifically, certain funds in U.S. Global Investors Funds (“USGIF” or the “Funds”) and one of the offshore funds.. The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. See further information about these funds in Notes 2 and 3. In the ordinary course of business, the Company may choose to waive certain fees or assume operating expenses of the funds it advises for competitive, regulatory or contractual reasons (see Note 3 for information regarding fee waivers). The Company has not provided financial support to any of these entities outside the ordinary course of business. The Company’s risk of loss with respect to these VIEs is limited to the carrying value of its investments in, and fees receivable from, the entities. The Company does not consolidate these VIEs because it is not the primary beneficiary. The Company’s total exposure to unconsolidated VIEs, consisting of the carrying value of investment securities and receivables for fees, was $8.9$8.3 million at December 31, 2017,September 30, 2019, and $11.3$8.8 million at June 30, 2017.
Since the Company is not the primary beneficiary of the above funds it advises, the Company evaluated if it should consolidate under the voting interest entity model. Under the voting interest model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50 percent of the outstanding voting shares over an entity. The Company does not have control of any of the above funds it advises; therefore, the Company does not consolidate any of these funds.
The Company currently holds a variable interest in a fund organized as a limited partnership advised by Galileo, and during fiscal years 2019 held a variable interest in another fund advised by Galileo, but this fund doesthese entities do not qualify as a VIE.VIEs. Since the fund isthey are not a VIE,VIEs, the Company evaluated if it should consolidate the fundthem under the voting interest entity model. Under the voting interest model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50 percent of the outstanding voting shares over an entity. The Company does not have control of the fundentities and, therefore, does not consolidate the fund.them. However, the Company owns approximately 30 percent of the fund, and iswas considered to have the ability to exercise significant influence. Thus, the investment isinvestments have been accounted for under the equity method of accounting. See further information about this investmentthese investments in Note 2.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes. Certain quarterly amounts may not add to the year-to-date amount due to rounding. The results of operations for the sixthree months ended December 31, 2017,September 30, 2019, are not necessarily indicative of the results to be expected for the entire year.
The unaudited interim financial information in these condensed financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s annual report.
Accounting Pronouncements Adopted During the Period
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU, and has subsequently issued several amendments (collectively, “ASU 2016-02”)., which replaces existing lease accounting guidance. ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet by recording a lease asset and a lease liability. The new standard also requires enhanced disclosure surrounding the amount, timing and uncertainty of cash flows arising from leasing agreements. The new guidance will beis effective for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. EarlyThe Company elected the transition method at the adoption is permitted.date of July 1, 2019, whereby it initially applied the new standard at the adoption date, versus at the beginning of the earliest period presented. Upon adoption, the Company elected the package of transition practical expedients which would allow the Company to carry forward prior conclusions related to: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for existing leases. Additionally, the Company elected the practical expedient to not separate lease components from nonlease components for all except real estate leases. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the Consolidated Balance Sheets and will recognize related lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. The Company’s current leases are primarily for equipment and for office space for the Canadian subsidiary. The Company does not expect that adoption will have a material impact on its consolidated statements of operations because its leases are currently classified as operating leases, which under the guidance will continue to be recognized as expense on a straight-line basis. The adoption, however, will resultresulted in a gross up in total assets and total liabilities on the Company’s Consolidated Balance Sheets. Upon adoption on July 1, 2019, the Company's total assets and total liabilities increased by less than $400,000.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allows entities the option to reclassify tax effects resulting from recording the effects of the Tax Cuts and Jobs Act enacted in December 2017 from accumulated other comprehensive income to retained earnings. The guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. An entity that adopts the guidance in an annual or interim period after the period of enactment will be able to choose whether to apply the amendments retrospectively to each period in which the effect of the Act is recognized or to apply the amendments in the period of adoption. The Company adopted this standard on July 1, 2019, with no impact on its consolidated balance sheets.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, (“ASUand has subsequently issued several amendments (collectively, “ASU 2016-13”). ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. ASU 2016-13 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those years. Earlier application is permitted only for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In August 2016,April 2019, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Cash Payments (“Hedging, and Topic 825, Financial Instruments (“ASU 2016-15”2019-04”). ASU 2016-15 may change how2019-04 clarifies areas of guidance related to the recently issued standards on credit losses (Topic 326), derivatives and hedging (Topic 815), and recognition and measurement of financial instruments (Topic 825). The standard follows the effective dates of the previously issued ASUs, unless an entity classifies certain cash receiptshas already early adopted the previous ASUs, in which case the effective date will vary according to each specific ASU adoption. The new guidance in ASU 2019-04 on recognizing and cash payments on its statement of cash flows to reduce existing diversity in practice. The guidance will generally be applied retrospectively andmeasuring financial instruments is effective for public businessall entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted, and the Company is in the process of determining whether the standard will be early adopted. The Company is currently evaluating the potential impact of this standard but does not currently expect the adoption to have a material impact on the consolidated statements of cash flows.
Significant Accounting Policies
As a result of the adoptions of accounting pronouncements during the current period that affected leases, the following accounting policies have been updated. For a complete listing of the Company's significant accounting policies, please refer to the Annual Report on Form 10-K for the year ended June 30, 2019.
Leases. The Company and its subsidiaries lease equipment and office space under various leasing arrangements. Leases may be classified as either financing leases or operating leases, as appropriate. The Company determines if a contract is a lease or contains a lease at inception. The Company accounts for its office facility leases as operating leases, which may include escalation clauses. The Company accounts for lease and nonlease components as a single component for its leases, except for real estate leases. The Company elected the short-term lease exception for leases with an initial term of 12 months or less. Consequently, such leases are not recorded on the Consolidated Balance Sheets. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain they will be exercised or not, respectively.
Fixed lease payments are included in right of use (“ROU”) assets and lease liabilities within other assets and liabilities, respectively, on the Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date using the Company’s incremental borrowing rate as the discount rate. Fixed lease payments made over the lease term are recorded as lease expense on a straight-line basis. Variable lease payments based on usage, changes in an index or market rate are expensed as incurred.
Upon adoption of ASU 2016-02, for existing leases, the Company elected to determine the discount rate based on the remaining lease term as of July 1, 2019. For new leases, the discount rates are based on the entire noncancelable lease term.
The Company is the lessor of certain areas of its owned office building under operating leases expiring in various years through 2022. The Company determines if a contract is a lease or contains a lease at inception. The Company elected not to separate lease and related non-lease components and account for the combined component as an operating lease.
NOTE 2. INVESTMENTS
As of December 31, 2017,September 30, 2019, the Company held investments with ain securities at fair value oftotaling approximately $29.8$11.6 million andwith a cost basis of approximately $12.6$14.1 million. The fair value of these investments is approximately 66.158.0 percent of the Company’s total assets.assets at September 30, 2019. In addition, the Company held other investments of $2.1approximately $1.4 million accounted for under the cost method of accounting and an investmentinvestments of approximately $3.3 million$279,000 accounted for under the equity method of accounting.
The Company’s equity investments with readily determinable fair values are classified as tradingsecurities at fair value, and changes in unrealized gains or losses are reflected as current assets on the Consolidated Balance Sheets at their fair value. Unrealized holding gains and losses on trading securities are included in earnings in the Consolidated Statements of Operations.
Other investments consist of equity investments in entities over which the Company is unable to exercise significant influence and which do not have readily determinable fair values. These investmentsFor these securities, the Company generally elects to value using the measurement alternative, under which such securities are accountedmeasured at cost, less impairment, plus or minus observable price changes for under the cost method of accounting and evaluated periodically for impairment.
The cost the Company’s interest and ability to hold the security for a period of time sufficient for an anticipated recovery in value, and the financial condition and specific events related to the issuer. When an impairment of a security is determined to be other than temporary, the impairment is recognized as a loss in the Company’s earnings.
The following details the components of the Company’s investments recorded at fair value as of December 31, 2017,September 30, 2019, and June 30, 2017.
| December 31, 2017 | ||||||||||||||||
| (dollars in thousands) | Cost | Gains | (Losses) | Fair Value | ||||||||||||
Trading securities1 | ||||||||||||||||
| Mutual funds - Fixed income | $ | 7,035 | $ | 26 | $ | - | $ | 7,061 | ||||||||
| Mutual funds - Domestic equity | 535 | - | (163 | ) | 372 | |||||||||||
| Other | 45 | - | (45 | ) | - | |||||||||||
| Offshore fund | - | - | - | - | ||||||||||||
| Total trading securities | 7,615 | 26 | (208 | ) | 7,433 | |||||||||||
Available-for-sale securities2 | ||||||||||||||||
| Common stock - Domestic | - | - | - | - | ||||||||||||
| Common stock - International | 2,554 | 16,704 | - | 19,258 | ||||||||||||
Corporate debt3 | 1,071 | 632 | - | 1,703 | ||||||||||||
| Mutual funds - Fixed income | 1,000 | - | (5 | ) | 995 | |||||||||||
| Mutual funds - Domestic equity | 394 | 22 | - | 416 | ||||||||||||
| Other | - | - | - | - | ||||||||||||
Total available-for-sale securities4 | 5,019 | 17,358 | (5 | ) | 22,372 | |||||||||||
| Total securities at fair value | $ | 12,634 | $ | 17,384 | $ | (213 | ) | $ | 29,805 | |||||||
| June 30, 2017 | ||||||||||||||||
| (dollars in thousands) | Cost | Gains | (Losses) | Fair Value | ||||||||||||
Trading securities1 | ||||||||||||||||
| Mutual funds - Fixed income | $ | 8,884 | $ | 50 | $ | (7 | ) | $ | 8,927 | |||||||
| Mutual funds - Domestic equity | 535 | - | (157 | ) | 378 | |||||||||||
| Other | 45 | - | (45 | ) | - | |||||||||||
| Offshore fund | 1,184 | - | (769 | ) | 415 | |||||||||||
| Total trading securities | 10,648 | 50 | (978 | ) | 9,720 | |||||||||||
Available-for-sale securities2 | ||||||||||||||||
| Common stock - Domestic | 109 | 4 | - | 113 | ||||||||||||
| Common stock - International | 191 | 12 | - | 203 | ||||||||||||
Corporate debt3 | 1,042 | 427 | - | 1,469 | ||||||||||||
| Mutual funds - Fixed income | 1,148 | 1 | (5 | ) | 1,144 | |||||||||||
| Mutual funds - Domestic equity | 394 | 12 | - | 406 | ||||||||||||
| Other | 56 | 10 | - | 66 | ||||||||||||
Total available-for-sale securities4 | 2,940 | 466 | (5 | ) | 3,401 | |||||||||||
| Total securities at fair value | $ | 13,588 | $ | 516 | $ | (983 | ) | $ | 13,121 | |||||||
Included in the above table was $8.3 million and | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment Income (Loss)
Investment income (loss) from the Company’s investments wereincludes:
• | realized gains and losses on sales of securities; |
• | unrealized gains and losses on securities at fair value; |
• | realized foreign currency gains and losses; |
• | other-than-temporary impairments on available-for-sale debt securities; |
• | impairments and observable price changes on equity investments without readily determinable fair values; and |
• | dividend and interest income. |
The following summarizes investment income (loss) reflected in earnings:
Three Months Ended | ||||||||
(dollars in thousands) | September 30, | |||||||
Investment Loss | 2019 | 2018 | ||||||
Unrealized losses on fair valued securities | $ | (3,062 | ) | $ | (951 | ) | ||
Realized gains (losses) on sales of fair valued securities | - | - | ||||||
Realized foreign currency gains | 4 | 2 | ||||||
Impairments in equity investments without readily determinable fair values | - | (29 | ) | |||||
Dividend and interest income | 38 | 71 | ||||||
Total Investment Loss | $ | (3,020 | ) | $ | (907 | ) | ||
The three months ended September 30, 2019, included in the Consolidated Balance Sheets and the table above as “trading securities” and “available-for-sale securities.”
Investment income can be volatile and varies depending on market fluctuations, the Company’s ability to participate in investment opportunities, and timing of transactions. The Company expects that gains and losses will continue to fluctuate in the future.
| Six Months Ended | Three Months Ended | |||||||||||||||
| (dollars in thousands) | December 31, | December 31, | ||||||||||||||
| Investment Income | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Realized gains on sales of available-for-sale securities | $ | 31 | $ | 31 | $ | 24 | $ | 31 | ||||||||
| Realized losses on sales of trading securities | (736 | ) | - | (82 | ) | - | ||||||||||
| Unrealized gains (losses) on trading securities | 746 | (26 | ) | 60 | (125 | ) | ||||||||||
| Realized foreign currency gains (losses) | (19 | ) | (5 | ) | 3 | (7 | ) | |||||||||
| Other-than-temporary declines in available-for-sale securities | - | (16 | ) | - | - | |||||||||||
| Dividend and interest income | 430 | 518 | 238 | 350 | ||||||||||||
| Total Investment Income | $ | 452 | $ | 502 | $ | 243 | $ | 249 | ||||||||
| December 31, 2017 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Gross Unrealized | Gross Unrealized | Gross Unrealized | ||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||||||
| Common stock - Domestic | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Common stock - International | - | - | - | - | - | - | ||||||||||||||||||
| Corporate debt | - | - | - | - | - | - | ||||||||||||||||||
| Mutual funds - Fixed income | 995 | (5 | ) | - | - | 995 | (5 | ) | ||||||||||||||||
| Mutual funds - Domestic equity | - | - | - | - | - | - | ||||||||||||||||||
| Other | - | - | - | - | - | - | ||||||||||||||||||
| Total available-for-sale securities | $ | 995 | $ | (5 | ) | $ | - | $ | - | $ | 995 | $ | (5 | ) | ||||||||||
| June 30, 2017 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Gross Unrealized | Gross Unrealized | Gross Unrealized | ||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||||||
| Common stock - Domestic | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Common stock - International | - | - | - | - | - | - | ||||||||||||||||||
| Corporate debt | - | - | - | - | - | - | ||||||||||||||||||
| Mutual funds - Fixed income | - | - | 95 | (5 | ) | 95 | (5 | ) | ||||||||||||||||
| Mutual funds - Domestic equity | - | - | - | - | - | - | ||||||||||||||||||
| Other | - | - | - | - | - | - | ||||||||||||||||||
| Total available-for-sale securities | $ | - | $ | - | $ | 95 | $ | (5 | ) | $ | 95 | $ | (5 | ) | ||||||||||
Fair Value Hierarchy
ASC 820, Fair Value Measurement and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., Levels 1, 2, and 3 inputs, as defined below). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities at the reporting date. Since valuations are based on quoted prices that are readily and regularly available in an active market, value of these products does not entail a significant degree of judgment.
Level 2 – Valuations based on quoted prices in markets for which not all significant inputs are observable, directly or indirectly. Corporate debt securities valued in accordance with the evaluated price supplied by an independent service are categorized as Level 2 in the hierarchy. Other securities categorized as Level 2 include securities valued at the mean between the last reported bid and ask quotation and securities valued with an adjustment to the quoted price due to restrictions.
Level 3 – Valuations based on inputs that are unobservable and significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with the investing in those securities. Because of the inherent uncertainties of valuation, the values reflected may materially differ from the values received upon actual sale of those investments.
For actively traded securities, the Company values investments using the closing price of the securities on the exchange or market on which the securities principally trade. If the security is not traded on the last business day of the quarter, it is generally valued at the mean between the last bid and ask quotation. The fair value of a security that has a restriction is based on the quoted price for an otherwise identical unrestricted instrument that trades in a public market, adjusted for the estimated effect of the restriction. Mutual funds, which include open- and closed-end funds exchange-traded funds, and offshoreexchange-traded funds, are valued at net asset value or closing price, as applicable. Certain corporate debt securities not traded on an exchange may be valued by an independent pricing service using an evaluated quote based on such factors as institutional-size trading in similar groups of securities, yield, quality, maturity, coupon rate, type of issuance and individual trading characteristics and other market data. As part of its independent price verification process, a portfolio management team, which includes representatives from the Companyinvestment and accounting departments, periodically reviews the fair value provided by the pricing service using information such as transactions in these investments, broker quotes, market transactions in comparable investments, general market conditions and the issuer’s financial condition. Certain debt securities may be valued based on review of similarly structured issuances in similar jurisdictions, when possible, or based on other traded debt securities issued by the issuer. The Companyportfolio management team also takes into consideration numerous other factors that could affect valuation such as overall market conditions, liquidity of the security and bond structure. Securities for which market quotations are not readily available are valued at theirFor other securities included in the fair value as determined byhierarchy with unobservable inputs, the portfolio management team. The portfolio management team includes representatives from the investment, accounting and legal/compliance departments. The portfolio management team meets periodically to considerconsiders a number of factors in determining a security’s fair value, including the security’s trading volume, market values of similar class issuances, investment personnel’s judgment regarding the market experience of the issuer, financial status of the issuer, the issuer’s management, and back testing, as appropriate. The fair values may differ from what may have been used had a broader market for these securities existed. The portfolio management team reviews inputs and assumptions and reports material items to the boardBoard of directors.
The following presents fair value measurements, as of December 31, 2017,September 30, 2019, and June 30, 2017,2019, for the major categories of U.S. Global’s investments measured at fair value on a recurring basis:
| December 31, 2017 | ||||||||||||||||
| Quoted Prices | Significant Other Inputs | Significant Unobservable Inputs | ||||||||||||||
| (dollars in thousands) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
| Trading securities | ||||||||||||||||
| Mutual funds - Fixed income | $ | 7,061 | $ | - | $ | - | $ | 7,061 | ||||||||
| Mutual funds - Domestic equity | 372 | - | - | 372 | ||||||||||||
| Other | - | - | - | - | ||||||||||||
Offshore fund investment measured at net asset value1 | - | |||||||||||||||
| Total trading securities | 7,433 | - | - | 7,433 | ||||||||||||
| Available-for-sale securities | ||||||||||||||||
| Common stock - Domestic | - | - | - | - | ||||||||||||
| Common stock - International | 158 | 19,100 | - | 19,258 | ||||||||||||
| Corporate debt | - | 1,703 | - | 1,703 | ||||||||||||
| Mutual funds - Fixed income | 995 | - | - | 995 | ||||||||||||
| Mutual funds - Domestic equity | 416 | - | - | 416 | ||||||||||||
| Other | - | - | - | - | ||||||||||||
| Total available-for-sale securities | 1,569 | 20,803 | - | 22,372 | ||||||||||||
| Total securities at fair value | $ | 9,002 | $ | 20,803 | $ | - | $ | 29,805 | ||||||||
| June 30, 2017 | ||||||||||||||||
| Quoted Prices | Significant Other Inputs | Significant Unobservable Inputs | ||||||||||||||
| (dollars in thousands) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
| Trading securities | ||||||||||||||||
| Mutual funds - Fixed income | $ | 8,927 | $ | - | $ | - | $ | 8,927 | ||||||||
| Mutual funds - Domestic equity | 378 | - | - | 378 | ||||||||||||
| Other | - | - | - | - | ||||||||||||
Offshore fund investment measured at net asset value1 | 415 | |||||||||||||||
| Total trading securities | 9,305 | - | - | 9,720 | ||||||||||||
| Available-for-sale securities | ||||||||||||||||
| Common stock - Domestic | 113 | - | - | 113 | ||||||||||||
| Common stock - International | 203 | - | - | 203 | ||||||||||||
| Corporate debt | 1,469 | - | - | 1,469 | ||||||||||||
| Mutual funds - Fixed income | 1,144 | - | - | 1,144 | ||||||||||||
| Mutual funds - Domestic equity | 406 | - | - | 406 | ||||||||||||
| Other | 66 | - | - | 66 | ||||||||||||
| Total available-for-sale securities | 3,401 | - | - | 3,401 | ||||||||||||
| Total securities at fair value | $ | 12,706 | $ | - | $ | - | $ | 13,121 | ||||||||
September 30, 2019 | ||||||||||||||||
Significant | Significant | |||||||||||||||
Quoted Prices | Other Inputs | Unobservable Inputs | ||||||||||||||
(dollars in thousands) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Securities at fair value | ||||||||||||||||
Common stock - International | $ | 2,633 | $ | 733 | $ | - | $ | 3,366 | ||||||||
Common stock - Domestic | - | - | - | - | ||||||||||||
Mutual funds - Fixed income | 7,525 | - | - | 7,525 | ||||||||||||
Mutual funds - Domestic equity | 734 | - | - | 734 | ||||||||||||
Total securities at fair value | $ | 10,892 | $ | 733 | $ | - | $ | 11,625 | ||||||||
June 30, 2019 | ||||||||||||||||
Significant | Significant | |||||||||||||||
Quoted Prices | Other Inputs | Unobservable Inputs | ||||||||||||||
(dollars in thousands) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Securities at fair value | ||||||||||||||||
Common stock - International | $ | 5,599 | $ | 832 | $ | - | $ | 6,431 | ||||||||
Common stock - Domestic | - | - | - | - | ||||||||||||
Mutual funds - Fixed income | 8,021 | - | - | 8,021 | ||||||||||||
Mutual funds - Domestic equity | 735 | - | - | 735 | ||||||||||||
Total securities at fair value | $ | 14,355 | $ | 832 | $ | - | $ | 15,187 | ||||||||
As of December 31, 2017, approximatelySeptember 30, percent of the Company’s financial assets measured at fair value were classified as Level 1 and 70 percent of the Company’s financial assets measured at fair value were classified as Level 2. As of June 30, 2017, 1002019, 94 percent of the Company’s financial assets were classified in the fair value hierarchy as Level 1. The Company recognizes transfers between levels at1 and 6 percent as Level 2. As of June 30, 2019, 95 percent of the end of each quarter.
The Company investedhas an investment in 10 million common shares of HIVE Blockchain Technologies Ltd. (“HIVE”), a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland and Sweden, at a cost of $2.4 million. The shares held by the Company are restricted for resale until mid-March 2018 and are also subject to Canadian insidersecurities regulations. The original restriction on the shares until January 2018 was extended to mid-March 2018 to facilitate additional share offerings by HIVE. The investment classified as available-for-sale, was valued at approximately $19.1$1.8 million at December 31, 2017, based on the quoted market price adjusted for the restriction on resaleSeptember 30, 2019, and is classified as Level 2 in the fair value hierarchy.$3.6 million at June 30, 2019. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. Cryptocurrency mining is considered an early stage high-risk industry, and the nature of mining is expected to evolve. There is potential forhas been significant volatility in the market price of HIVE, which couldhas materially impactimpacted the investment’s value included on the balance sheet and unrealized gain (loss) recognized in comprehensiveinvestment income. A unit trust investment fund managed by Galileo, described below under Investment Classified as Equity Method, also holds common shares of HIVE. The Company had aCompany’s direct ownership of HIVE ofwas approximately 3.33.1 percent as of December 31, 2017, and a combined direct and indirect ownership of HIVE of approximately 4.0 percent as of December 31, 2017.September 30, 2019. Frank Holmes isserves on the board as non-executive chairman of HIVE and held shares and options at DecemberSeptember 30, 2019. Effective August 31, 2017.
The Company has available-for-sale investmentsan investment in corporate debt securities maturingThunderbird Entertainment Group Inc. (“Thunderbird”), a company headquartered and traded in 2024Canada, which werewas valued at approximately $1.1 million at September 30, 2019, of which $368,000 was classified as Level 1 and $705,000 was classified as Level 2 in the fair value hierarchy. The investment was valued at approximately $1.1 million at June 30, 2019, of which $377,000 was classified as Level 1 and $675,000 was classified as Level 2 in the fair value hierarchy. The portion of the investment classified in Level 2 is restricted for resale due to escrow provisions; its valuation is based on the quoted market price adjusted for the restriction on resale. Shares will be released from escrow in October 2019 and April 2020. The shares are subject to Canadian securities regulations. The Company’s ownership of Thunderbird was approximately 2.5 percent as of September 30, 2019. Frank Holmes serves on the board of this company as a director and held options at September 30, 2019.
The Company has an investment in GoldSpot Discoveries Corp. (“GoldSpot”), a technology company headquartered and traded in Canada which leverages machine learning in natural resource exploration. The investment was valued at approximately $467,000 at September 30, 2019, of which $439,000 was classified as Level 1 and $28,000 was classified as Level 2 in the fair value hierarchy. The investment was valued at approximately $1.7 million at June 30, 2019, of which $1.6 million was classified as Level 1 and $157,000 was classified as Level 2 in the fair value hierarchy. The portion of the investment classified in Level 2 is restricted for resale due to escrow and regulatory provisions; its valuation is based on the quoted market price adjusted for the restriction on resale. Shares will be released from escrow in February 2020 and August 2020. The shares are subject to Canadian securities regulations. The Company’s ownership of GoldSpot was approximately 7.5 percent as of September 30, 2019. Frank Holmes serves on the board of this company as independent chairman and held common stock and options at September 30, 2019.
Other Investments
The carrying value of equity securities without readily determinable fair values was approximately $1.4 million as of December 31, 2017, based onSeptember 30, 2019, and June 30, 2019.
The carrying value of equity securities without readily determinable fair values has been adjusted as follows:
Three Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2019 | 2018 | ||||||
Carrying amount, beginning of period | $ | 1,404 | $ | 2,207 | ||||
Adjustments: | ||||||||
Impairments | - | (29 | ) | |||||
Other downward adjustments | (8 | ) | (10 | ) | ||||
Carrying amount, end of period | $ | 1,396 | $ | 2,168 | ||||
Cumulative impairment adjustments to all equity securities without readily determinable fair values total $251,000 since their respective acquisitions through September 30, 2019. The cumulative amount of other downward adjustments, which primarily consist of return of capital distributions, is $661,000, which includes $8,000 for the mean between the last reported bid/ask quotation and werethree months ended September 30, 2019. The cumulative amount of upward adjustments is $617,000 through September 30, 2019.
InvestmentsClassified as Equity Method
Investments classified as Level 2. Asequity method consist of June 30, 2017, these securities were valued at $1.5 million based on a quoted price on the reporting date and were classified as Level 1.
During fiscal year with partial liquidation proceeds received in the quarter ended September 30, 2017, and final proceeds received during the quarter ended December 31, 2017.
As noted above, the Galileo Technology and Blockchain Fund reorganized into a limited partnership effective November 30, 2018. The investment portfolio and unitholders’ interests of December 31, 2017.
| Galileo Partners Fund | ||||
| Summary Financial Information | ||||
| For the Period from August 31, 2017 (investment) to December 31, 2017 | ||||
| (dollars in thousands) | ||||
| Realized gains on sales of investments | $ | 1,921 | ||
| Unrealized gains on investments | 9,612 | |||
| Fund fees and expenses, including performance fees | (2,810 | ) | ||
| Net income of fund | $ | 8,723 | ||
| Company's share of income from equity method investment | $ | 2,731 | ||
NOTE 3.3. INVESTMENT MANAGEMENT AND OTHER FEES
The following table presents operating revenues disaggregated by performance obligation:
Three Months Ended September 30, | ||||||||
(dollars in thousands) | 2019 | 2018 | ||||||
USGIF advisory fees | $ | 836 | $ | 911 | ||||
USGIF performance fees paid | (197 | ) | (86 | ) | ||||
ETF advisory fees | 121 | 166 | ||||||
USGIF administrative services fees | 44 | 53 | ||||||
Subtotal investment management services fees | 804 | 1,044 | ||||||
Galileo advisory fees | 100 | 179 | ||||||
Galileo performance fees | - | - | ||||||
Subtotal investment management services fees - Canada | 100 | 179 | ||||||
Total Operating Revenue | $ | 904 | $ | 1,223 | ||||
The Company serves as investment adviser to USGIF and receives a fee based on a specified percentage of netaverage assets under management. The Company recorded base advisory fees from USGIF totaling $1.2 million and $2.3 million, respectively, for the three and six months ended December 31, 2017, compared with $1.2 million and $2.6 million, respectively, for the corresponding periods in the prior fiscal year.
The Company has agreed to contractually limit the expenses of the Near-Term Tax Free Fund through April 2018.2020. The Company has voluntarily waived or reduced its fees and/or agreed to pay expenses on the remaining USGIF funds. These caps will continue on a voluntary basis at the Company’s discretion. The aggregate fees waived and expenses borne by the Company for USGIF for the three and six months ended December 31, 2017,September 30, 2019, were $102,000 and $334,000, respectively,$144,000 compared with $313,000 and $546,000, respectively,$165,000 for the corresponding periodsperiod in the prior fiscal year. Management cannot predict the impact of future waivers due the number of variables and the range of potential outcomes.
The Company receives administrative service fees from USGIF based on the average daily net assets at an annual rate 0.05 percent per investor class and 0.04 percent per institutional class of each fund.
The Company also serves as investment advisor to two exchange-traded funds (ETFs). The: U.S. Global Jets ETF commenced operations in April 2015,(ticker JETS) and U.S. Global GO GOLD and Precious Metal Miners ETF commenced operations in June 2017.(ticker GOAU). The Company receives a unitary management fee of 0.60 percent of average net assets and has agreed to bear all expenses of the ETFs. The Company recorded ETF advisory fees totaling $184,000 and $369,000, respectively, for the three and six months ended December 31, 2017, compared with $76,000 and $142,000, respectively, for the corresponding periods in the prior fiscal year.
Galileo provides advisory services for clients in Canada and receives advisory fees based on the net asset values of the clients. Galileo recorded advisory fees from these clients totaling $287,000 and $505,000, respectively, for the three and six months ended December 31, 2017, compared with $303,000 and $603,000, respectively, for the corresponding periods in the prior fiscal year. Galileo may also receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks. Galileo recordedPerformance fees are recognized when it is determined that they are no longer probable of significant reversal. Prior to November 2018, performance fees of $464,000 from these clients for three and six months ended December 31, 2017. The majority of the performance fees recorded in the current period arewere typically recognized on an annual performance fees calculatedbasis at calendar year-end. Galileo recorded noDue to changes in funds managed and new agreements in the second quarter of fiscal year 2019, these fees are recognized on a quarterly basis. The receipt of performance fees forin the three and six months ended December 31, 2016.future is uncertain as the fees are dependent upon many factors, including market conditions. Galileo may, at its discretion, waive and absorb some of its clients’ operating expenses. The amount of fund expenses waived and absorbed was $9,000$40,000 and $33,000$116,000 for the three and months ended December 31, 2017,September 30, 2019, and $9,000 and $21,000 for the three and months ended December 31, 2016,2018, respectively. On September 29, 2017, Galileo launched its first ETF, U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOGO), on the Toronto Stock Exchange.
As of December 31, 2017,September 30, 2019, the Company had just over $1.0 million$418,000 in receivables from fund clients, of which $381,000$226,000 was from USGIF, $605,000$151,000 from Galileo clients and $63,000$41,000 from ETFs.
NOTE 4. NOTES RECEIVABLE
Restricted cash represents cash invested in notesa money market account as collateral for credit facilities that is not available for general corporate use. A reconciliation of cash, cash equivalents, and restricted cash reported from the consolidated balance sheets to the statements of cash flows is shown below:
(dollars in thousands) | September 30, 2019 | June 30, 2019 | ||||||
Cash and cash equivalents | $ | 2,618 | $ | 2,949 | ||||
Restricted cash | 1,025 | 1,025 | ||||||
Total cash, cash equivalents, and restricted cash | $ | 3,643 | $ | 3,974 | ||||
NOTE 5. NOTES RECEIVABLE
Previously, the Company held a note receivable consisting of two promissory notes. One note with a principal amount of $2 million was entered into with an unrelated third party in June 2016 with a one-year maturity. As allowed by the agreement, in June 2017, the initial maturity was extended one-year to June 2018, and the Company received a $50,000 extension fee and all interest to date. The fee, which is included in Notes Receivable on the balance sheet, is amortized to interest income using the interest method over the remaining term of the note. The note bears interest at 12 percent, with 10 percent payable monthly and 2 percent payable at maturity. In case of prepayment, there would be a penalty for the amount of lost interest. The balance of this note was approximately $2.0 million at December 31, 2017, and June 30, 2017.
NOTE 6. LEASES
The Company consideredhas leases for office equipment that expire between fiscal years 2020 and 2024 and for office facilities and other real estate in Canada that expire between fiscal years 2021 and 2023. Lease expense totaled $69,000 and $77,000 for the credit quality of the other partiesthree months ended September 30, 2019, and determined that no allowance for credit losses is necessary.
The components of lease expense included in general and administrative expense on the Consolidated Statements of Operations and qualitative information concerning the company’s operating leases were as follows:
Three Months Ended | ||||
September 30, | ||||
(dollars in thousands) | 2019 | |||
Operating lease cost | $ | 44 | ||
Short-term lease cost | 25 | |||
Total lease cost | $ | 69 | ||
Cash paid for amounts included in measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | 33 | ||
Right-of-use assets obtained in exchanged for: | ||||
Net operating lease liabilities | $ | 375 | ||
Weighted-average remaining lease term (in years) | 3.38 | |||
Weighted-average discount rate | 4.11 | % | ||
Maturities of lease liabilities as of September 30, 2019, are as follows:
(dollars in thousands) | ||||
Fiscal Year | Operating Leases | |||
2020 (excluding the three months ended September 30, 2019) | $ | 85 | ||
2021 | 115 | |||
2022 | 106 | |||
2023 | 64 | |||
2024 | 5 | |||
Total lease payments | 375 | |||
Less imputed interest | (26 | ) | ||
Total | $ | 349 | ||
The Company is the lessor of certain areas of its owned office building under operating leases expiring in various years through 2022. At the commencement of an operation lease, no income is recognized; subsequently, lease payments received are recognized on a straight-line basis. Lease income included in other income on the Consolidated Statements of Operations for the three months ending September 30, 2019, was $17,000.
A summary analysis of annual undiscounted cash flows to be received on leases as of September 30, 2019, is as follows:
(dollars in thousands) | ||||
Fiscal Year | Operating Leases | |||
2020 (excluding the three months ended September 30, 2019) | $ | 37 | ||
2021 | 49 | |||
2022 | 32 | |||
Total lease payments | $ | 118 | ||
The Company may terminate the building leases with one hundred eighty days written notice if it sells the property. If the Company terminates the lease, the Company will pay the tenant a termination fee of the lesser of six months of the base monthly rent or the base monthly rent times the number of months remaining in the initial term.
As of December 31, 2017,September 30, 2019, the Company has no borrowings or long-term liabilities except for deferred taxes.
The Company has access to a $1 million credit facility 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, 2018,2020, and the Company intends to renew annually. The credit facility is collateralized by $1 million at December 31, 2017,September 30, 2019, shown as 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 December 31, 2017,September 30, 2019, the credit facility remains unutilized by the Company.
NOTE 6.8. STOCKHOLDERS’ EQUITY
Payment of cash dividends is within the discretion of the Company’s board of directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions. A monthly dividend of $0.0025 per share was paid during fiscal year 2019 and for July 2019 through December 2017September 2019 and is authorized through March 2018,December 2019, at which time it will be considered for continuation by the Board.
The Board of Directors approvedCompany has a share repurchase program, on December 7, 2012,approved by the Board of Directors, authorizing the Company to annually purchase up to $2.75 million of its outstanding common shares, as market and business conditions warrant, on the open market in compliance with Rule 10b-18 of the Securities Exchange Act of 1934 through December 31, 2013. In2019. The repurchase program has been in place since December 2013, December 2014, December 2015, December 2016,2012, and December 2017, the Board of Directors has annually renewed the repurchase program foreach calendar years 2014, 2015, 2016, 2017, and 2018, respectively. The total amount of shares that may be repurchased in calendar year 2018 under the renewed program is $2.75 million.year. The acquired shares may be used for corporate purposes, including shares issued to employees in the Company’s stock-based compensation programs. For the three and six months ended December 31, 2017,September 30, 2019, and 2018, the Company repurchased 36,7481,400 and 45,9471,000 class A shares using cash of $117,000$3,000 and $131,000,$2,000, respectively. For the three and six months ended December 31, 2016, the Company repurchased 32,605 and 47,552 class A shares using cash of $50,000 and $80,000, respectively.
Stock compensation plans
The Company’s stock option plans provide for the granting of class A shares as either incentive or nonqualified stock options to employees and non-employee directors. Options are subject to terms and conditions determined by the Compensation Committee of the Board of Directors. There were 2,0004,000 options outstanding and exercisable at December 31, 2017,September 30, 2019, at a weighted average exercise price of $12.31.$7.53. There were no options granted, exercised, or forfeited for the sixthree months ended December 31, 2017.
Stock-based compensation expense is recorded formeasured at the grant date based on the fair value of the award, and the cost of stock options.is recognized as expense ratably over the award’s vesting period. There was no stock-based compensation expense for the three and six months ended December 31, 2017, and 2016.September 30, 2019. Stock-based compensation expense was $2,000 for the three months ended September 30, 2018. As of December 31, 2017,September 30, 2019, and 2016,2018, there was no unrecognized share-based compensation cost related to share-based compensationawards granted under the plans to be recognized over the remainder of their respective vesting periods.
NOTE 7.9. EARNINGS PER SHARE
The basic earnings per share (“EPS”) calculation excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of EPS that could occur if options to issue common stock were exercised.
The following table sets forth the computation for basic and diluted EPS:
| Six Months Ended December 31, | Three Months Ended December 31, | |||||||||||||||
| (dollars in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net Income | $ | 2,120 | $ | 289 | $ | 884 | $ | 25 | ||||||||
| Less: Net Income Attributable to Non-Controlling Interest | 101 | 18 | 135 | 17 | ||||||||||||
| Net Income Attributable to U.S. Global Investors, Inc. | $ | 2,019 | $ | 271 | $ | 749 | $ | 8 | ||||||||
| Weighted average number of outstanding shares | ||||||||||||||||
| Basic | 15,171,620 | 15,229,845 | 15,160,589 | 15,218,734 | ||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Employee stock options | - | - | - | - | ||||||||||||
| Diluted | 15,171,620 | 15,229,845 | 15,160,589 | 15,218,734 | ||||||||||||
| Earnings Per Share Attributable to U.S. Global Investors, Inc. | ||||||||||||||||
| Basic | $ | 0.13 | $ | 0.02 | $ | 0.05 | $ | - | ||||||||
| Diluted | $ | 0.13 | $ | 0.02 | $ | 0.05 | $ | - | ||||||||
Three Months Ended September 30, | ||||||||
(dollars in thousands, except per share data) | 2019 | 2018 | ||||||
Net Loss | $ | (3,615 | ) | $ | (1,232 | ) | ||
Less: Net Loss Attributable to Non-Controlling Interest | (48 | ) | (83 | ) | ||||
Net Loss Attributable to U.S. Global Investors, Inc. | $ | (3,567 | ) | $ | (1,149 | ) | ||
Weighted average number of outstanding shares | ||||||||
Basic | 15,130,235 | 15,144,884 | ||||||
Effect of dilutive securities | ||||||||
Employee stock options | - | - | ||||||
Diluted | 15,130,235 | 15,144,884 | ||||||
Earnings Per Share Attributable to U.S. Global Investors, Inc. | ||||||||
Basic | $ | (0.24 | ) | $ | (0.08 | ) | ||
Diluted | $ | (0.24 | ) | $ | (0.08 | ) | ||
The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the three and six months ended December 31, 2017,September 30, 2019, and 2016, 2,0002018, employee stock options for 4,000 were excluded from diluted EPS.
During the three and months ended December 31, 2017,September 30, 2019, and 2016,2018, the Company repurchased class A shares on the open market. Upon repurchase, these shares are classified as treasury shares and are deducted from outstanding shares in the earnings per share calculation.
NOTE 8.10. INCOME TAXES
The Company and its non-Canadian subsidiaries file a consolidated U.S. federal income tax return. USCAN and Galileo file separate tax returns in Canada. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes resulting from the use of the liability method of accounting for income taxes.
For U.S. federal corporate tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. In the second quarter, the Company revised its estimated annual effective rate to reflect a change in its U.S. federal statutory rate from 34 percent to 21 percent. The rate change is effective on January 1, 2018; therefore, the Company’s blended U.S. statutory tax rate for the fiscal year ended June 30, 2018, is approximately 28 percent.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. At December 31, 2017,September 30, 2019, and June 30, 2017,2019, a valuation allowance of $1.2$2.8 million and $3.3$2.1 million, respectively, was included
NOTE 9.11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presentstables present the change in accumulated other comprehensive income (loss) (“AOCI”) by component:
| (dollars in thousands) | Unrealized gains (losses) on available-for-sale investments 1 | Foreign currency adjustment | Total | |||||||||
| Six months ended December 31, 2017 | ||||||||||||
| Balance at June 30, 2017 | $ | 461 | $ | (197 | ) | $ | 264 | |||||
| Other comprehensive income before reclassifications | 16,923 | 53 | 16,976 | |||||||||
| Tax effect | (3,506 | ) | - | (3,506 | ) | |||||||
| Amount reclassified from AOCI | (31 | ) | - | (31 | ) | |||||||
| Tax effect | - | - | - | |||||||||
| Net other comprehensive income for six months ended December 31, 2017 | 13,386 | 53 | 13,439 | |||||||||
| Balance at December 31, 2017 | $ | 13,847 | $ | (144 | ) | $ | 13,703 | |||||
| Three Months Ended December 31, 2017 | ||||||||||||
| Balance at September 30, 2017 | $ | 9,594 | $ | (161 | ) | $ | 9,433 | |||||
| Other comprehensive income before reclassifications | 7,783 | 17 | 7,800 | |||||||||
| Tax effect | (3,506 | ) | - | (3,506 | ) | |||||||
| Amount reclassified from AOCI | (24 | ) | - | (24 | ) | |||||||
| Tax effect | - | - | - | |||||||||
| Net other comprehensive income for quarter | 4,253 | 17 | 4,270 | |||||||||
| Balance at December 31, 2017 | $ | 13,847 | $ | (144 | ) | $ | 13,703 | |||||
| (dollars in thousands) | Unrealized gains (losses) on available-for-sale investments 1 | Foreign currency adjustment | Total | |||||||||
| Six months ended December 31, 2016 | ||||||||||||
| Balance at June 30, 2016 | $ | 45 | $ | (194 | ) | $ | (149 | ) | ||||
| Other comprehensive income (loss) before reclassifications | 369 | (35 | ) | 334 | ||||||||
| Tax effect | - | - | - | |||||||||
| Amount reclassified from AOCI | (15 | ) | - | (15 | ) | |||||||
| Tax effect | - | - | - | |||||||||
| Net other comprehensive income (loss) for six months ended December 31, 2016 | 354 | (35 | ) | 319 | ||||||||
| Balance at December 31, 2016 | $ | 399 | $ | (229 | ) | $ | 170 | |||||
| Three Months Ended December 31, 2016 | ||||||||||||
| Balance at September 30, 2016 | $ | 738 | $ | (204 | ) | $ | 534 | |||||
| Other comprehensive income (loss) before reclassifications | (308 | ) | (25 | ) | (333 | ) | ||||||
| Tax effect | - | - | - | |||||||||
| Amount reclassified from AOCI | (31 | ) | - | (31 | ) | |||||||
| Tax effect | - | - | - | |||||||||
| Net other comprehensive income (loss) for quarter | (339 | ) | (25 | ) | (364 | ) | ||||||
| Balance at December 31, 2016 | $ | 399 | $ | (229 | ) | $ | 170 | |||||
Three Months Ended September 30, | ||||||||
(dollars in thousands) | 2019 | 2018 | ||||||
Beginning Balance | $ | (206 | ) | $ | 1,858 | |||
Foreign currency translation adjustment, net of tax 1 | (13 | ) | 19 | |||||
Reclassification as a result of adoption of accounting guidance 2 | - | (2,089 | ) | |||||
Ending Balance | $ | (219 | ) | $ | (212 | ) | ||
1. | Amounts |
2. | Effective July 1, 2018, upon the adoption of ASU 2016-01, the Company no longer has an available-for-sale |
NOTE 10.12. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company operates principally in three business segments: providing investment management services to USGIF, offshore clients and ETF clients; investment management services in Canada; and investing for its own account in an effort to add growth and value to its cash position. The following schedule details total revenues and income by business segment:
| (dollars in thousands) | Investment Management Services | Investment Management Services - Canada | Corporate Investments | Consolidated | ||||||||||||
| Six months ended December 31, 2017 | ||||||||||||||||
| Net operating revenues | $ | 2,514 | $ | 969 | $ | - | $ | 3,483 | ||||||||
| Net other income | $ | 7 | $ | 10 | $ | 3,183 | $ | 3,200 | ||||||||
| Income (loss) before income taxes | $ | (915 | ) | $ | 305 | $ | 3,182 | $ | 2,572 | |||||||
| Depreciation and amortization | $ | 116 | $ | 6 | $ | - | $ | 122 | ||||||||
| Capital expenditures | $ | - | $ | - | $ | - | $ | - | ||||||||
| Gross identifiable assets at December 31, 2017 | $ | 8,702 | $ | 2,137 | $ | 34,236 | $ | 45,075 | ||||||||
| Deferred tax asset | $ | - | ||||||||||||||
| Consolidated total assets at December 31, 2017 | $ | 45,075 | ||||||||||||||
| Six months ended December 31, 2016 | ||||||||||||||||
| Net operating revenues | $ | 3,020 | $ | 603 | $ | - | $ | 3,623 | ||||||||
| Net other income | $ | - | $ | - | $ | 502 | $ | 502 | ||||||||
| Income (loss) before income taxes | $ | (223 | ) | $ | 30 | $ | 492 | $ | 299 | |||||||
| Depreciation and amortization | $ | 119 | $ | 8 | $ | - | $ | 127 | ||||||||
| Capital expenditures | $ | - | $ | - | $ | - | $ | - | ||||||||
| Three months ended December 31, 2017 | ||||||||||||||||
| Net operating revenues | $ | 1,242 | $ | 751 | $ | - | $ | 1,993 | ||||||||
| Net other income | $ | 5 | $ | 10 | $ | 1,460 | $ | 1,475 | ||||||||
| Income (loss) before income taxes | $ | (515 | ) | $ | 381 | $ | 1,460 | $ | 1,326 | |||||||
| Depreciation and amortization | $ | 58 | $ | 3 | $ | - | $ | 61 | ||||||||
| Capital expenditures | $ | - | $ | - | $ | - | $ | - | ||||||||
| Three months ended December 31, 2016 | ||||||||||||||||
| Net operating revenues | $ | 1,339 | $ | 303 | $ | - | $ | 1,642 | ||||||||
| Net other income | $ | - | $ | - | $ | 249 | $ | 249 | ||||||||
| Income (loss) before income taxes | $ | (275 | ) | $ | 33 | $ | 257 | $ | 15 | |||||||
| Depreciation and amortization | $ | 59 | $ | 4 | $ | - | $ | 63 | ||||||||
| Capital expenditures | $ | - | $ | - | $ | - | $ | - | ||||||||
(dollars in thousands) | Investment Management Services | Investment Management Services - Canada | Corporate Investments | Consolidated | ||||||||||||
Three months ended September 30, 2019 | ||||||||||||||||
Net operating revenues | $ | 804 | $ | 100 | $ | - | $ | 904 | ||||||||
Investment income (loss) | $ | - | $ | 10 | $ | (3,030 | ) | $ | (3,020 | ) | ||||||
Loss from equity method investments | $ | - | $ | - | $ | (27 | ) | $ | (27 | ) | ||||||
Other income | $ | 21 | $ | 2 | $ | - | $ | 23 | ||||||||
Loss before income taxes | $ | (587 | ) | $ | (136 | ) | $ | (3,116 | ) | $ | (3,839 | ) | ||||
Depreciation and amortization | $ | 48 | $ | 2 | $ | 3 | $ | 53 | ||||||||
Gross identifiable assets at September 30, 2019 | $ | 4,690 | $ | 1,695 | $ | 13,561 | $ | 19,946 | ||||||||
Deferred tax asset | $ | 91 | ||||||||||||||
Consolidated total assets at September 30, 2019 | $ | 20,037 | ||||||||||||||
Three months ended September 30, 2018 | ||||||||||||||||
Net operating revenues | $ | 1,044 | $ | 179 | $ | - | $ | 1,223 | ||||||||
Investment loss | $ | - | $ | (6 | ) | $ | (901 | ) | $ | (907 | ) | |||||
Loss from equity method investments | $ | - | $ | - | $ | (7 | ) | $ | (7 | ) | ||||||
Other income | $ | 5 | $ | 4 | $ | - | $ | 9 | ||||||||
Loss before income taxes | $ | (405 | ) | $ | (237 | ) | $ | (946 | ) | $ | (1,588 | ) | ||||
Depreciation and amortization | $ | 56 | $ | 2 | $ | - | $ | 58 | ||||||||
Net operating revenues from investment management services includes operating revenues from USGIF of $1.0 million$683,000 and $2.1 million, respectively,$878,000 for the three and six months ended December 31, 2017,September 30, 2019, and $1.2 million and $2.8 million, respectively, for the three and six months ended December 31, 2016.2018, respectively. Net operating revenues from investment management services also include operating revenues from ETF clients of $184,000$121,000 and $369,000, respectively,$166,000 for the three and six months ended December 31, 2017,September 30, 2019, and $76,000 and $142,000, respectively, for the three and six months ended December 31, 2016.
Net operating revenues from investment management services in Canada includes revenues from Galileo funds of $747,000$100,000 and $961,000, respectively,$177,000 for the three and six months ended December 31, 2017,September 30, 2019, and $223,000 and $448,000, respectively, for the three and six months ended December 31, 2016, and from other significant advisory clients2018, respectively.
NOTE 11.13. CONTINGENCIES AND COMMITMENTS
The Company continuously reviews all investor, employee and vendor complaints, and pending or threatened litigation. The likelihood that a loss contingency exists is evaluated through consultation with legal counsel, and a loss contingency is recorded if probable and reasonably estimable.
During the normal course of business, the Company may be subject to claims, legal proceedings, and other contingencies. These matters are subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably. The Company establishes accruals for matters for which the outcome is probable and can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial statements of the Company.
The Board has authorized a monthly dividend of $0.0025 per share through March 2018,December 2019, at which time it will be considered for continuation by the Board. Payment of cash dividends is within the discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions. The total amount of cash dividends expected to be paid to class A and class C shareholders from JanuaryOctober to March 2018December 2019 is approximately $114,000.
U.S. Global Investors, Inc. (the “Company” or “U.S. Global”)has made forward-looking statements concerning the Company’sCompany’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, (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.
BUSINESS SEGMENTS
The Company, with principal operations located in San Antonio, Texas, manages three business segments: (1) the Company offers a broad range of investment management products and services to meet the needs of individual and institutional investors; (2) the Company, through its Canadian subsidiary, owns a 65 percent controlling interest in Galileo Global Equity Advisors Inc. (“Galileo”), which offers investment management products and services in Canada; and (3) the Company invests for its own account in an effort to add growth and value to its cash position. Although the Company usually generates the majority of its revenues from its investment advisory segments, the Company holds a significant amount of its total assets in investments. The following is a brief discussion of the Company’s three business segments.
Investment Management Services
The Company generates operating revenues from managing and servicing U.S. Global Investors Funds (“USGIF” or the “Funds”) and other advisory clients.. 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, and other advisory clients, 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 exchange-traded fund (“ETF”) clients and receives monthly advisory fees based on the net asset values of the funds. Information on the ETFs can be found at www.usglobaletfs.com, including the prospectus, performance and holdings. 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 December 31, 2017,September 30, 2019, total assets under management, including USGIF and ETF clients, were $681.2$498.0 million versus $683.1$559.2 million at December 31, 2016,September 30, 2018, a decrease of 0.310.9 percent. During the sixthree months ended December 31, 2017,September 30, 2019, average assets under management were $702.4$513.8 million versus $773.9$579.3 million during the sixthree months ended December 31, 2016.September 30, 2018. Total assets under management as of period-end at December 31, 2017,September 30, 2019, including USGIF and ETF clients, were $681.2$498.0 million versus $711.9$510.1 million at June 30, 2017,2019, the Company’s prior fiscal year end.
The following tables summarize the changes in assets under management for USGIF for the three and six months ended December 31, 2017,September 30, 2019, and 2016:2018:
Changes in Assets Under Management | ||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||
(dollars in thousands) | Equity | Fixed Income | Total | |||||||||
Beginning Balance | $ | 334,684 | $ | 90,921 | $ | 425,605 | ||||||
Market appreciation | 5,411 | 397 | 5,808 | |||||||||
Dividends and distributions | - | (308 | ) | (308 | ) | |||||||
Net shareholder redemptions | (15,451 | ) | (610 | ) | (16,061 | ) | ||||||
Ending Balance | $ | 324,644 | $ | 90,400 | $ | 415,044 | ||||||
Average investment management fee | 0.97 | % | 0.00 | % | 0.76 | % | ||||||
Average net assets | $ | 343,475 | $ | 90,358 | $ | 433,833 | ||||||
| Changes in Assets Under Management | ||||||||||||||||||||||||
| Six Months Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||
| (dollars in thousands) | Equity | Fixed Income | Total | Equity | Fixed Income | Total | ||||||||||||||||||
| Beginning Balance | $ | 442,916 | $ | 136,500 | $ | 579,416 | $ | 525,778 | $ | 177,242 | $ | 703,020 | ||||||||||||
| Market appreciation (depreciation) | 36,345 | 22 | 36,367 | (45,536 | ) | (1,947 | ) | (47,483 | ) | |||||||||||||||
| Dividends and distributions | (34,479 | ) | (660 | ) | (35,139 | ) | (7,723 | ) | (898 | ) | (8,621 | ) | ||||||||||||
| Net shareholder purchases (redemptions) | 2,660 | (17,315 | ) | (14,655 | ) | (22,508 | ) | (22,302 | ) | (44,810 | ) | |||||||||||||
| Ending Balance | $ | 447,442 | $ | 118,547 | $ | 565,989 | $ | 450,011 | $ | 152,095 | $ | 602,106 | ||||||||||||
| Average investment management fee | 1.00 | % | 0.08 | % | 0.80 | % | 0.96 | % | 0.00 | % | 0.73 | % | ||||||||||||
| Average net assets | $ | 450,124 | $ | 129,908 | $ | 580,032 | $ | 536,384 | $ | 174,116 | $ | 710,500 | ||||||||||||
| Changes in Assets Under Management | ||||||||||||||||||||||||
| Three Months Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||
| (dollars in thousands) | Equity | Fixed Income | Total | Equity | Fixed Income | Total | ||||||||||||||||||
| Beginning Balance | $ | 460,960 | $ | 129,571 | $ | 590,531 | $ | 578,588 | $ | 181,217 | $ | 759,805 | ||||||||||||
| Market appreciation (depreciation) | 8,284 | 1,582 | 9,866 | (96,256 | ) | (1,773 | ) | (98,029 | ) | |||||||||||||||
| Dividends and distributions | (34,480 | ) | (357 | ) | (34,837 | ) | (7,722 | ) | (459 | ) | (8,181 | ) | ||||||||||||
| Net shareholder purchases (redemptions) | 12,678 | (12,249 | ) | 429 | (24,599 | ) | (26,890 | ) | (51,489 | ) | ||||||||||||||
| Ending Balance | $ | 447,442 | $ | 118,547 | $ | 565,989 | $ | 450,011 | $ | 152,095 | $ | 602,106 | ||||||||||||
| Average investment management fee | 1.00 | % | 0.17 | % | 0.82 | % | 0.94 | % | 0.00 | % | 0.70 | % | ||||||||||||
| Average net assets | $ | 445,890 | $ | 125,819 | $ | 571,709 | $ | 492,403 | $ | 167,635 | $ | 660,038 | ||||||||||||
Changes in Assets Under Management | ||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||
(dollars in thousands) | Equity | Fixed Income | Total | |||||||||
Beginning Balance | $ | 389,442 | $ | 106,231 | $ | 495,673 | ||||||
Market appreciation (depreciation) | (29,374 | ) | 160 | (29,214 | ) | |||||||
Dividends and distributions | - | (302 | ) | (302 | ) | |||||||
Net shareholder redemptions | (12,718 | ) | (5,446 | ) | (18,164 | ) | ||||||
Ending Balance | $ | 347,350 | $ | 100,643 | $ | 447,993 | ||||||
Average investment management fee | 0.98 | % | 0.00 | % | 0.77 | % | ||||||
Average net assets | $ | 366,078 | $ | 103,579 | $ | 469,657 | ||||||
As shown above, USGIF period-end assets under management were lower at December 31, 2017,September 30, 2019, compared to December 31, 2016.September 30, 2018. Also, average net assets for the three- and six-month periodsthree-month period in the current fiscal year were lower than the same periodsperiod in the previous fiscal year. Both theThe three and six months ended December 31, 2017,September 30, 2019, had net market appreciation, primarily in the equitygold funds, compared to net market depreciation for the three and six months ended December 31, 2016, alsoSeptember 30, 2018, primarily in the natural resources and international equity funds. A significant portion of the dividends and distributions shown above are reinvested and included inThere were net shareholder purchases (redemptions). The combined amounts for these two linesredemptions for all periods shown, were negative, thus contributing to the decline in net assets.
The average annualized investment management fee rate (total advisory fees, excluding performance fees, as a percentage of average assets under management) was 82 and 8076 basis points for the three and six months ended December 31, 2017, respectively,September 30, 2019, and 70 and 7377 basis points for the same periodsperiod in the prior year. The average investment management fee for the equity funds was 10097 basis points for the three and six months ended December 31, 2017,September 30, 2019, and 94 and 9698 basis points for the same periodsperiod 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 17 and 8 basis points for the three and six months ended December 31, 2017, respectively, compared to nil for the three and six months ended December 31, 2016.
Investment Management Services - Canada
The Company owns a 65 percent controlling interest in the Canadian asset management firm Galileo. 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 funds’ asset levels, thereby affecting income and results of operations.
On September 29, 2017, Galileo launched its first ETF, U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOGO), on the Toronto Stock Exchange.
Galileo also started accepting purchases in the Galileo Partners Fund, a unit trust investment fund, in June 2017 and launched the Galileo Technology and Blockchain Fund, also a unit trust investment fund, in November 2017. The Galileo Technology and Blockchain Fund reorganized into a limited partnership in November 2018, named the Galileo Technology and Blockchain LP, and the portfolio assets and unitholders interests of the Galileo Technology and Blockchain Fund and the Galileo Partners Fund were transferred into the limited partnership and the funds terminated.
At September 30, 2019, total Galileo assets under management were $21.4 million versus $41.3 million at September 30, 2018, a decrease of 48.2 percent. During the three months ended September 30, 2019, average assets under management were $27.0 million versus $44.3 million during the three months ended September 30, 2018. Total assets under management at September 30, 2019, were $21.4 million versus $30.0 million at June 30, 2019, the Company’s prior fiscal year end.
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 December 31, 2017,September 30, 2019, the Company held investments with a fair value of approximately $29.8$11.6 million and a cost basis of approximately $12.6$14.1 million. The fair value of these investments is approximately 66.158.0 percent of the Company’s total assets. See Note 2 (Investments) for additional detail regarding investment activities. In addition, the Company held other investments which do not have readily determinable fair values of $2.1approximately $1.4 million accounted for under the cost method of accounting, $3.3 millionand $279,000 in investments accounted for under the equity method of accounting, and $2.2 million in notes receivable.accounting.
Investments recorded at fair value were approximately $29.8$11.6 million at December 31, 2017,September 30, 2019, compared to approximately $13.1$15.2 million at June 30, 2017,2019, the Company’s prior fiscal year end, which is an increasea decrease of approximately $16.7$3.6 million. This increase is primarily due to unrealized gain on an available-for-sale security acquired during the current period. See Note 2, (Investments)Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, for further information. In addition, aninformation regarding investment was made in the current period in a Galileo fund that is accounted for under the equity method of accounting and was valued at approximately $3.3 million at December 31, 2017.
RESULTS OF OPERATIONS – Three months ended December 31, 2017,September 30, 2019, and 2016
The Company posted a net incomeloss attributable to U.S. Global Investors, Inc. of $749,000$3.6 million ($0.050.24 per share)share loss) for the three months ended December 31, 2017,September 30, 2019, compared with a net incomeloss attributable to U.S. Global Investors, Inc. of $8,000$1.1 million ($0.000.08 per share)share loss) for the three months ended December 31, 2016,September 30, 2018, an increase in net incomeloss of approximately $741,000.$2.4 million. The increase in loss is primarily due to income from an equity method investment.
Operating Revenues
Total consolidated operating revenues for the three months ended December 31, 2017, increased $351,000,September 30, 2019, decreased $319,000, or 21.426.1 percent, compared with the three months ended December 31, 2016.September 30, 2018. This increasedecrease was primarily attributable to the following:
• | Advisory fees |
• | Base management fees |
• | Performance fees for USGIF paid out in the current period were |
• | There were no performance fees for Galileo clients received in the current period |
• | Administrative services fee revenue decreased by $9,000, or |
Operating Expenses
Total consolidated operating expenses for the three months ended December 31, 2017, increased $266,000,September 30, 2019, decreased $187,000, or 14.29.8 percent, compared with the three months ended December 31, 2016.September 30, 2018. The change in operating expenses was primarily attributable to an increasea decrease in general and administrative expenses of $107,000, or 10.6 percent, primarily due to decreased fund expenses, and a decrease in employee compensation and benefits expenses of $241,000,$58,000, or 26.8 percent, primarily due to increased bonuses and an increase in general and administrative expenses of $51,000, or 5.9 percent, primarily due to increased ETF costs and increased costs by Galileo related to new fund startup costs. This increase was somewhat offset by a decrease in advertising expenses of $24,000, or 47.17.3 percent, primarily due to decreased ETF marketing.
Other Income
Total consolidated other incomeloss for the three months ended December 31, 2017,September 30, 2019, increased $1.2$2.1 million, or 492.4234.1 percent, compared with the three months ended December 31, 2016.September 30, 2018. The increase in loss was primarily due to an investment made in the following factors:
• | Investment loss was $3.0 million for the three months ended September 30, 2019, compared to an investment loss of $907,000 for the three months ended September 30, 2018, a negative change of approximately $2.1 million. There were unrealized losses of $3.1 million in the current period. The same quarter in the prior year had unrealized losses of $951,000 and a $29,000 impairment loss. The majority of the unrealized loss in the current period was related to technology and 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 this security and other investments in Note 2, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. |
• | There was a $27,000 loss from equity method investments for the three months ended September 30, 2019, compared to a $7,000 loss for the three months ended September 30, 2018, a negative change of $20,000. The equity method investment held during the three months ended September 30, 2019, is a different entity than the investment held during the same period in the prior fiscal year. However, both investments, in Galileo offerings, were concentrated in technology and cryptocurrency mining stocks. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There is potential for continued significant volatility in the valuation of the equity method investment currently held, and thus the portion of the entity’s net income or loss that is included in the Company’s earnings. See further discussion on these equity method investments in Note 2, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. |
Provision for Income Taxes
A tax benefit of $224,000 was recorded for the three months ended September 30, 2017, in2019, compared to a Galileo fund that is accounted for under the equity methodtax benefit of accounting. Under the equity method of accounting, the Company’s share of the fund’s net income, which primarily consists of realized and unrealized gains and losses on investments offset by fund expenses, is recognized in the Company’s earnings. The Galileo fund’s investments are concentrated in a cryptocurrency mining stock. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. Cryptocurrency mining is considered an early stage high-risk industry, and the nature of mining is expected to evolve. There is potential for significant volatility in the valuation of the fund’s investments, and thus the fund’s net income that is included in the Company’s earnings. See further discussion in Note 2, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. In addition, the Company redeemed a portion of its investment in the fund after December 31, 2017. See further discussion in Note 12, Subsequent Event, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2017,September 30, 2019, the Company had net working capital (current assets minus current liabilities) of approximately $13.4$10.7 million and a current ratio (current assets divided by current liabilities) of 9.68.9 to 1. With approximately $3.0$2.6 million in cash and cash equivalents and approximately $10.7$10.9 million in unrestricted marketable securities at fair value, the Company has adequate liquidity to meet its current obligations. Total U.S. Global Investors, Inc. shareholders’ equity is approximately $39.0$18.0 million, with cash, cash
As of December 31, 2017,September 30, 2019, the Company has no borrowings or long-term liabilities except for deferred taxes.leases. The Company’s primary commitment going forward is for operating expenses. The Company also has access to a $1 million credit facility 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 3, 2018,31, 2020, and the Company intends to renew annually. The credit facility is collateralized by $1 million at December 31, 2017,September 30, 2019, held in deposit in a money market account at the financial institution that provided the credit facility. As of December 31, 2017,September 30, 2019, the credit facility remains unutilized by the Company.
The investment advisory and administrative services contracts between the Company and USGIF have been renewed through September 2018,2020, and management anticipates that the contracts will be renewed. The investment advisory contractcontracts between the Company and U.S. Global Jets ETF expiresthe ETFs expire in April 2018,September 2020, and management anticipates that the contractcontracts will be renewed. The investment advisory contract between the Company and U.S. Global GO GOLD and Precious Metal Miners ETF is in its initial two-year term and will not expire until June 2019. Galileo’s investment management agreement with the Canadian registered mutual funds may be terminated each September 30 with a 180-day prior notice of unitholders’ resolution. Galileo’s advisory agreements with other advisory clients can be terminated upon 30-day written notice. The Company’s two offshore clients have completed their respective liquidations, and no fees will be received in the future.
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, 2018,2019, but may be suspended or discontinued at any time. Cash and unrestricted marketable securities of approximately $13.7$13.5 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 the notes to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2017.
Investment Management and Administrative Services Fees
Revenues are generally based upon a percentage of the market value 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 and six months ended December 31, 2017,September 30, 2019, and 2018, the Company realized a decrease in its USGIF base advisory fee of $192,000$197,000 and $308,000,$86,000, respectively, due to these performance adjustments. For the three and six months ended December 31, 2016, the Company realized a (decrease) increase in its USGIF base advisory fee of ($9,000) and $30,000, respectively, due to these performance adjustments.
Galileo may receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks. Galileo recorded performance fees of $464,000 from these clients for three and six months ended December 31, 2017. The majority of the performance fees recorded in the current period are annual performance fees calculated at calendar year-end. Galileo recorded no performance fees from these clients for the three and six months ended December 31, 2016.
Corporate Investments
The Company’s Consolidated Balance Sheets includes assets whose fair value is subject to market risks. Due to the Company’s investments in securities recorded at fair value, price fluctuations represent a market risk factor affecting the Company’s consolidated financial position. The carrying values of investments subject to 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 market value.
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.
The table below summarizes the Company’s price risks in securities recorded at fair value as of December 31, 2017,September 30, 2019, and shows the effects of a hypothetical 25 percent increase and a 25 percent decrease in market prices.
| (dollars in thousands) | Fair Value at December 31, 2017 | Hypothetical Percentage Change | Estimated Fair Value After Hypothetical Price Change | Increase (Decrease) in Shareholders’ Equity, Net of Tax | |||||||||
| Trading securities ¹ | $ | 7,433 | 25% increase | $ | 9,291 | $ | 1,858 | ||||||
| 25% decrease | $ | 5,575 | $ | (1,858 | ) | ||||||||
| Available-for-sale securities ² | $ | 22,372 | 25% increase | $ | 27,965 | $ | 4,584 | ||||||
| 25% decrease | $ | 16,779 | $ | (4,584 | ) | ||||||||
(dollars in thousands) | Fair Value at September 30, 2019 | Hypothetical Percentage Change | Estimated Fair Value After Hypothetical Price Change | ||||||
Securities at fair value ¹ | $ | 11,625 | 25% increase | $ | 14,531 | ||||
25% decrease | $ | 8,719 | |||||||
1 | Unrealized and realized gains and losses on |
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.
A substantialsignificant portion of the available-for-sale securities recorded at fair value in the above table is an investment in HIVE Blockchain Technologies Ltd. (“HIVE”), which was valued at $19.1approximately $1.8 million at December 31, 2017.September 30, 2019. HIVE is discussed in more detail in Note 2, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. HIVE is a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland and Sweden,Sweden. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. Cryptocurrency mining is still considered an early stage high-risk industry, and the nature of mining is expected to evolve. There is potential for significant continued 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 comprehensiveinvestment income.
In addition to the Company’s investments in securities recorded at fair value discussedshown in the table above, the Company also has an equity method investment in the amountGalileo Technology and Blockchain LP valued at approximately $279,000 as of $3.3 million at December 31, 2017.September 30, 2019. As discussed further in Note 2, Investments, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, this equity method investment is in the Galileo Partners Fund,Technology and Blockchain LP, a Canadian unit trust investment fundlimited partnership managed by Galileo. This fundGalileo, has ainvestments concentrated investment in HIVE, which is also held bytechnology and cryptocurrency mining stocks. As noted above, exposure to the Company as described above. This concentrationcryptocurrency industry may result in volatility in the valuation of the Galileo Partners Fund.this investment. Under the equity method, the Company’s proportional share of the fund’sLP’s net income or loss, which primarily consists of realized and unrealized gains and losses on investments offset by fund expenses, is recognized in the Company’s earnings. Due to the concentrated nature of the fund’s investments, theThe potential significant volatility in HIVE’sthe valuation of the LP’s investments could cause the fund’sits net income or loss to vary significantly from period to period, which in turn would be reflected in the Company’s earnings. Subsequent to December 31, 2017, the Company redeemed a portion of its investment in the Galileo Partners Fund. See Note 12, Subsequent Event, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, for further information.
Foreign currency risk
The Company’s subsidiary Galileo conducts its business in Canada. Galileo’s foreign currency financial statements are translated into U.S. dollars in the financial statement consolidation process. Adverse changes in foreign currency exchange rates would lower the carrying value of Galileo’s assets and reduce its results in the consolidated U.S. financial statements. For the three and six months ended December 31, 2017,September 30, 2019, Galileo represented 37.7 percent and 27.811.1 percent of net operating revenues and 28.7 percent and 11.93.5 percent of consolidated incomeloss before income taxes, and at December 31, 2017,September 30, 2019, represented 4.78.5 percent of total assets (see Note 10,12, Financial Information by Business Segment, to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q). Certain corporate investments, including the Company’s equity method investment, are held in foreign currencies, primarily Canadian. Adverse changes in foreign currency exchange rates would also lower the value of those 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.
An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2017,September 30, 2019, 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 effective as of December 31, 2017.
There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2017,September 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
For a discussion of other risk factors which could affect the Company, included inplease refer to Item 1A, “Risk Factors” in the Annual Report on Form 10-K for the year ended June 30, 2017.
Issuer Purchases of Equity Securities
| (dollars in thousands, except price data) | ||||||||||||||||||||
| Period | Total Number of Shares Purchased 1 | Total Amount Purchased | Average Price Paid Per Share 2 | Total Number of Shares Purchased as Part of Publicly Announced Plan 3 | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan | |||||||||||||||
| 10-01-17 to 10-31-17 | 10,000 | $ | 23 | $ | 2.29 | 10,000 | $ | 2,679 | ||||||||||||
| 11-01-17 to 11-31-17 | 19,748 | 64 | 3.26 | 19,748 | 2,615 | |||||||||||||||
| 12-01-17 to 12-31-17 | 7,000 | 30 | 4.29 | 7,000 | 2,585 | |||||||||||||||
| Total | 36,748 | $ | 117 | $ | 3.19 | 36,748 | ||||||||||||||
| (dollars in thousands, except price data) | |||||||||||||||||||||
| Period | Total Number of Shares Purchased 1 | Total Amount Purchased | Average Price Paid Per Share 2 | Total Number of Shares Purchased as Part of Publicly Announced Plan 3 | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan | ||||||||||||||||
| 07-01-19 to 07-31-19 | 400 | $ | 1 | $ | 1.64 | 400 | $ | 2,740 | |||||||||||||
| 08-01-19 to 08-31-19 | - | - | $ | - | - | $ | 2,740 | ||||||||||||||
| 09-01-19 to 09-30-19 | 1,000 | 2 | $ | 1.90 | 1,000 | $ | 2,738 | ||||||||||||||
Total | 1,400 | $ | 3 | $ | 1.83 | 1,400 | |||||||||||||||
2 | The average price paid per share of stock repurchased under the stock repurchase program includes the commissions paid to brokers. |
3 | The repurchase plan was approved on December 7, 2012, |
1. Exhibits – | |
31 | |
32 | |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
U.S. GLOBAL INVESTORS, INC. | |||
DATED: | November 7, 2019 | BY: /s/ Frank E. Holmes | |
Frank E. Holmes | |||
Chief Executive Officer | |||
DATED: | November 7, 2019 | BY: /s/ Lisa C. Callicotte | |
Lisa C. Callicotte | |||
Chief Financial Officer | |||