SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Amendment No. 1
☒
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:
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 |
Securities registered pursuant to Section 12(g) of the Act: None
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
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 28, 2022, there were 13,866,69113,866,999 shares of Registrant’s class A nonvoting common stock issued and 13,074,27012,836,542 shares of Registrant’s class A nonvoting common stock issued and outstanding; no shares of Registrant’s class B nonvoting common shares outstanding; and 2,068,8572,068,549 shares of Registrant’s class C voting common stock issued and outstanding.
PART I. FINANCIAL INFORMATION | |
PART II. OTHER INFORMATION | |
EXPLANATORY NOTE
Restatement of Consolidated Financial Statements
We have restated our unaudited consolidated financial statements as of September 30, 2022, and for the three months then ended in order to correct certain fair value measurements related to our investment in HIVE Blockchain Technologies, Ltd. (“HIVE”) common share purchase warrants and our investment in HIVE unsecured convertible debentures. For a discussion of the valuation, the adjusted fair value measurement, and the impact of the restatement adjustment on the consolidated financial statements as of September 30, 2022, and for the three months then ended, see Note 1 of Notes to Consolidated Financial Statements included in Part I, Item 1 — Financial Statements.
Internal Control Over Financial Reporting
Management reassessed its evaluation of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2022, and concluded that a deficiency in the design and operating effectiveness of the internal controls represented a material weakness in the internal control over financial reporting and, therefore, the Company did not maintain effective internal control over financial reporting as of September 30, 2022. For a description of the material weakness identified by management and management’s plan to remediate the material weakness, see Part I, Item 4 — Controls and Procedures.
Amended Report
This Amended Quarterly Report on Form 10-Q/A does not reflect events occurring after the original filing date of November 10, 2022, and does not modify or update disclosures in the original filing that may have been affected by subsequent events, except for the effects of the restatement described in Note 1 of Notes to Consolidated Financial Statements included in Part I, Item 1 — Financial Statements. Other disclosures not affected by the restatement are unchanged and reflect the disclosures made at the time of original filing.
This Amended Quarterly Report on Form 10-Q/A reflects amendments to the following items:
● Part I, Item 1 — Financial Statements
● Part I, Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations
● Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk
● Part I, Item 4 — Controls and Procedures
● Part II, Item 6 — Exhibits
The Company's Chief Executive Officer and Chief Financial Officer are providing currently dated certifications in connection with this Amended Quarterly Report on Form 10-Q/A. See Exhibits 31.1 and 32.1.
PART I. FINANCIAL INFORMATION
U.S. GLOBAL INVESTORS, INC.
September 30, 2022 | June 30, 2022 | |||||||
(dollars in thousands) | (unaudited) | |||||||
As Restated | ||||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 23,287 | $ | 22,314 | ||||
Restricted cash | 1,000 | 1,000 | ||||||
Investments in securities at fair value, current | 11,963 | 12,138 | ||||||
Accounts and other receivables | 1,576 | 1,796 | ||||||
Tax receivable | 96 | 384 | ||||||
Prepaid expenses | 312 | 400 | ||||||
Total Current Assets | 38,234 | 38,032 | ||||||
Net Property and Equipment | 1,320 | 1,370 | ||||||
Other Assets | ||||||||
Deferred tax asset | 1,373 | 872 | ||||||
Investments in equity securities at fair value, non-current | 2,243 | 2,162 | ||||||
Investments in available-for-sale debt securities at fair value | 9,866 | 10,625 | ||||||
Investments in held-to-maturity debt securities | 1,000 | 1,000 | ||||||
Other investments | 2,630 | 3,992 | ||||||
Financing lease, right of use assets | 86 | 93 | ||||||
Other assets, non-current | 233 | 216 | ||||||
Total Other Assets | 17,431 | 18,960 | ||||||
Total Assets | $ | 56,985 | $ | 58,362 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 14 | $ | 73 | ||||
Accrued compensation and related costs | 1,925 | 1,864 | ||||||
Dividends payable | 336 | 337 | ||||||
Financing lease liability, short-term | 28 | 27 | ||||||
Other accrued expenses | 1,137 | 1,831 | ||||||
Taxes payable | 157 | - | ||||||
Total Current Liabilities | 3,597 | 4,132 | ||||||
Long-Term Liabilities | ||||||||
Financing lease liability, long-term | 59 | 66 | ||||||
Total Long-Term Liabilities | 59 | 66 | ||||||
Total Liabilities | 3,656 | 4,198 | ||||||
Commitments and Contingencies (Note 13) | ||||||||
Shareholders’ Equity | ||||||||
Common stock (class A) - $0.025 par value; nonvoting; 28,000,000 shares authorized, and 13,866,999 shares issued at September 30, 2022, and June 30, 2022; 12,852,968 and 12,888,950 shares outstanding at September 30, 2022, and June 30, 2022, respectively | 347 | 347 | ||||||
Common stock (class B) - $0.025 par value; nonvoting; 4,500,000 shares authorized; no shares issued | - | - | ||||||
Convertible common stock (class C) - $0.025 par value; voting; 3,500,000 shares authorized; 2,068,549 shares issued and outstanding at September 30, 2022, and June 30, 2022 | 52 | 52 | ||||||
Additional paid-in-capital | 16,440 | 16,438 | ||||||
Treasury stock, class A shares at cost; 1,014,031 shares and 978,049 shares at September 30, 2022, and June 30, 2022, respectively | (2,722 | ) | (2,599 | ) | ||||
Accumulated comprehensive income, net of tax | 3,138 | 3,624 | ||||||
Retained earnings | 36,074 | 36,302 | ||||||
Total Shareholders’ Equity | 53,329 | 54,164 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 56,985 | $ | 58,362 |
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 |
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands, except per share data) | 2022 | 2021 | ||||||
As Restated | ||||||||
Operating Revenues | ||||||||
Advisory fees | $ | 4,377 | $ | 6,470 | ||||
Administrative services fees | 35 | 51 | ||||||
4,412 | 6,521 | |||||||
Operating Expenses | ||||||||
Employee compensation and benefits | 1,175 | 1,924 | ||||||
General and administrative | 1,504 | 1,598 | ||||||
Advertising | 86 | 84 | ||||||
Depreciation | 61 | 48 | ||||||
Interest | 1 | - | ||||||
2,827 | 3,654 | |||||||
Operating Income | 1,585 | 2,867 | ||||||
Other Income (Loss) | ||||||||
Investment loss | (1,460 | ) | (34 | ) | ||||
Income from equity method investments | - | 15 | ||||||
Other income | 61 | 56 | ||||||
(1,399 | ) | 37 | ||||||
Income Before Income Taxes | 186 | 2,904 | ||||||
Provision for Income Taxes | ||||||||
Tax expense | 79 | 514 | ||||||
Net Income | $ | 107 | $ | 2,390 | ||||
Basic Net Income per Share | $ | 0.01 | $ | 0.16 | ||||
Diluted Net Income per Share | $ | 0.01 | $ | 0.16 | ||||
Basic weighted average number of common shares outstanding | 14,948,688 | 15,030,115 | ||||||
Diluted weighted average number of common shares outstanding | 14,949,275 | 15,031,199 |
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 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2022 | 2021 | ||||||
As Restated | ||||||||
Net Income | $ | 107 | $ | 2,390 | ||||
Other Comprehensive Income (Loss), Net of Tax: | ||||||||
Unrealized losses on available-for-sale securities arising during period | (115 | ) | (147 | ) | ||||
Less: reclassification adjustment for gains included in net income | (371 | ) | (476 | ) | ||||
Net change from available-for-sale securities, net of tax | (486 | ) | (623 | ) | ||||
Foreign currency translation adjustment | - | (12 | ) | |||||
Other Comprehensive Loss | (486 | ) | (635 | ) | ||||
Comprehensive Income (Loss) | $ | (379 | ) | $ | 1,755 |
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 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY (UNAUDITED)
Common | Common | Accumulated | ||||||||||||||||||||||||||||||||||||||
Stock | Common | Stock | Common | Additional | Treasury | Other | ||||||||||||||||||||||||||||||||||
(class A) | Stock | (class C) | Stock | Paid-in | Stock | Treasury | Comprehensive | Retained | ||||||||||||||||||||||||||||||||
(dollars in thousands) | Shares | (class A) | Shares | (class C) | Capital | Shares | Stock | Income (Loss) | Earnings | Total | ||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 13,866,999 | $ | 347 | 2,068,549 | $ | 52 | $ | 16,438 | 978,049 | $ | (2,599 | ) | $ | 3,624 | $ | 36,302 | $ | 54,164 | ||||||||||||||||||||||
Purchases of shares of Common Stock (class A) | - | - | - | - | - | 39,965 | (133 | ) | - | - | (133 | ) | ||||||||||||||||||||||||||||
Issuance of stock under ESPP of shares of Common Stock (class A) | - | - | - | - | 3 | (3,983 | ) | 10 | - | - | 13 | |||||||||||||||||||||||||||||
Share-based compensation, adjustment for forfeitures, net of tax | - | - | - | - | (1 | ) | - | - | - | - | (1 | ) | ||||||||||||||||||||||||||||
Dividends declared | - | - | - | - | - | - | - | - | (335 | ) | (335 | ) | ||||||||||||||||||||||||||||
Other comprehensive loss, net of tax, as restated | - | - | - | - | - | - | - | (486 | ) | - | (486 | ) | ||||||||||||||||||||||||||||
Net income, as restated | - | - | - | - | - | - | - | - | 107 | 107 | ||||||||||||||||||||||||||||||
Balance at September 30, 2022 (As Restated) | 13,866,999 | $ | 347 | 2,068,549 | $ | 52 | $ | 16,440 | 1,014,031 | $ | (2,722 | ) | $ | 3,138 | $ | 36,074 | $ | 53,329 |
Common | Common | Accumulated | ||||||||||||||||||||||||||||||||||||||
Stock | Common | Stock | Common | Additional | Treasury | Other | ||||||||||||||||||||||||||||||||||
(class A) | Stock | (class C) | Stock | Paid-in | Stock | Treasury | Comprehensive | Retained | ||||||||||||||||||||||||||||||||
(dollars in thousands) | Shares | (class A) | Shares | (class C) | Capital | Shares | Stock | Income (Loss) | Earnings | Total | ||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 13,866,913 | $ | 347 | 2,068,635 | $ | 52 | $ | 15,677 | 898,953 | $ | (2,172 | ) | $ | 6,587 | $ | 33,833 | $ | 54,324 | ||||||||||||||||||||||
Purchases of shares of Common Stock (class A) | - | - | - | - | - | 13,647 | (82 | ) | - | - | (82 | ) | ||||||||||||||||||||||||||||
Issuance of stock under ESPP of shares of Common Stock (class A) | - | - | - | - | 8 | (2,228 | ) | 6 | - | - | 14 | |||||||||||||||||||||||||||||
Share-based compensation, net of tax | - | - | - | - | 388 | - | - | - | - | 388 | ||||||||||||||||||||||||||||||
Dividends declared | - | - | - | - | - | - | - | - | (338 | ) | (338 | ) | ||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | - | - | - | (635 | ) | - | (635 | ) | ||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | - | 2,390 | 2,390 | ||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 13,866,913 | $ | 347 | 2,068,635 | $ | 52 | $ | 16,073 | 910,372 | $ | (2,248 | ) | $ | 5,952 | $ | 35,885 | $ | 56,061 |
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 |
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) | 2022 | 2021 | ||||||
As Restated | ||||||||
Cash Flows from Operating Activities: | ||||||||
Net Income | $ | 107 | $ | 2,390 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, amortization and accretion | (77 | ) | (129 | ) | ||||
Net recognized loss on disposal of fixed assets | 3 | - | ||||||
Net realized gains on securities | (469 | ) | (2,411 | ) | ||||
Unrealized losses on securities | 1,930 | 2,796 | ||||||
Net income from equity method investment | - | (15 | ) | |||||
Provision for deferred taxes | (371 | ) | (905 | ) | ||||
Stock-based compensation expense | - | 388 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts and other receivables | 508 | 1,438 | ||||||
Prepaid expenses and other assets | 78 | (11 | ) | |||||
Accounts payable and accrued expenses | (534 | ) | (1,139 | ) | ||||
Total adjustments | 1,068 | 12 | ||||||
Net cash provided by operating activities | 1,175 | 2,402 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchase of property and equipment | (14 | ) | (33 | ) | ||||
Purchase of other investments | (477 | ) | - | |||||
Proceeds on sale of equity securities at fair value, non-current | - | 2,494 | ||||||
Proceeds from principal paydowns of available-for-sale debt securities at fair value | 750 | 750 | ||||||
Return of capital on other investments | 2 | - | ||||||
Net cash provided by investing activities | 261 | 3,211 | ||||||
Cash Flows from Financing Activities: | ||||||||
Principal payments on financing lease | (7 | ) | - | |||||
Issuance of common stock | 13 | 14 | ||||||
Repurchases of common stock | (133 | ) | (82 | ) | ||||
Dividends paid | (336 | ) | (226 | ) | ||||
Net cash used in financing activities | (463 | ) | (294 | ) | ||||
Net increase in cash, cash equivalents, and restricted cash | 973 | 5,319 | ||||||
Beginning cash, cash equivalents, and restricted cash | 23,314 | 15,436 | ||||||
Ending cash, cash equivalents, and restricted cash | $ | 24,287 | $ | 20,755 | ||||
Supplemental Disclosures of Non-Cash Investing and Financing Activities | ||||||||
Dividends declared but not paid | $ | 336 | $ | 338 | ||||
Unsettled sales of non-current investments | $ | - | $ | 291 | ||||
Unsettled class A common stock repurchases | $ | 10 | $ | - | ||||
Supplemental Disclosures of Cash Flow Information | ||||||||
Cash paid for income taxes | $ | - | $ | 1,926 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of September 30, 2022, and for the three months then ended have been restated to reflect corrections of misstatements related to our corporate investments in HIVE Blockchain Technologies ("HIVE"). In addition to the changes listed below, various footnotes reflect the effects of this restatement, including but not limited to, Note 3, Investments, Note 9, Earnings Per Share, Note 11, Accumulated Other Comprehensive Income (Loss), and Note 12, Financial Information by Business Segment.
An error was detected in the fair value calculations performed by a third party for the investment in HIVE common share purchase warrants and the investment in HIVE unsecured convertible debentures. Specifically, related to the common share purchase warrants, the valuation model was not appropriately adjusted after a share consolidation by the issuer in May 2022. As a result, the fair value of the common share purchase warrants was corrected at September 30, 2022. The effect was as follows:
Three Months Ended | ||||
and as of | ||||
(dollars in thousands, except per share data) | September 30, 2022 | |||
(Overstatement)/Understatement | ||||
Deferred tax asset | $ | 449 | ||
Investments in equity securities at fair value, non-current | $ | (2,140 | ) | |
Total Shareholders’ Equity | $ | (1,691 | ) | |
Investment Loss | $ | (13 | ) | |
Tax Expense | $ | (2 | ) | |
Net Income | $ | (11 | ) | |
Earnings Per Share | $ | - |
The error related to the investment in HIVE unsecured convertible debentures was related to an additional principal payment being included within the binomial lattice valuation model. As a result, the fair value of the HIVE unsecured convertible debentures was corrected at September 30, 2022. The effect was as follows:
Three Months Ended | ||||
and as of | ||||
(dollars in thousands) | September 30, 2022 | |||
(Overstatement)/Understatement | ||||
Deferred tax asset | $ | 173 | ||
Investments in available-for-sale debt securities at fair value | $ | (820 | ) | |
Total Shareholders’ Equity | $ | (647 | ) | |
Other Comprehensive Loss | $ | 5 |
The following tables set forth the impact of the restatement on the Company's consolidated financial statements as of and for the three months ended September 30, 2022.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 2022 | ||||||||||||
As | ||||||||||||
Previously | Restatement | As | ||||||||||
(dollars in thousands) | Reported | Adjustments | Restated | |||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | 23,287 | $ | - | $ | 23,287 | ||||||
Restricted cash | 1,000 | - | 1,000 | |||||||||
Investments in securities at fair value, current | 11,963 | - | 11,963 | |||||||||
Accounts and other receivables | 1,576 | - | 1,576 | |||||||||
Tax receivable | 96 | - | 96 | |||||||||
Prepaid expenses | 312 | - | 312 | |||||||||
Total Current Assets | 38,234 | - | 38,234 | |||||||||
Net Property and Equipment | 1,320 | - | 1,320 | |||||||||
Other Assets | ||||||||||||
Deferred tax asset | 751 | 622 | 1,373 | |||||||||
Investments in equity securities at fair value, non-current | 4,383 | (2,140 | ) | 2,243 | ||||||||
Investments in available-for-sale debt securities at fair value | 10,686 | (820 | ) | 9,866 | ||||||||
Investments in held-to-maturity debt securities | 1,000 | - | 1,000 | |||||||||
Other investments | 2,630 | - | 2,630 | |||||||||
Financing lease, right of use assets | 86 | - | 86 | |||||||||
Other assets, non-current | 233 | - | 233 | |||||||||
Total Other Assets | 19,769 | (2,338 | ) | 17,431 | ||||||||
Total Assets | $ | 59,323 | $ | (2,338 | ) | $ | 56,985 | |||||
Liabilities and Shareholders’ Equity | ||||||||||||
Current Liabilities | ||||||||||||
Accounts payable | $ | 14 | $ | - | $ | 14 | ||||||
Accrued compensation and related costs | 1,925 | - | 1,925 | |||||||||
Dividends payable | 336 | - | 336 | |||||||||
Financing lease liability, short-term | 28 | - | 28 | |||||||||
Other accrued expenses | 1,137 | - | 1,137 | |||||||||
Taxes payable | 157 | - | 157 | |||||||||
Total Current Liabilities | 3,597 | - | 3,597 | |||||||||
Long-Term Liabilities | ||||||||||||
Financing lease liability, long-term | 59 | - | 59 | |||||||||
Total Long-Term Liabilities | 59 | - | 59 | |||||||||
Total Liabilities | 3,656 | - | 3,656 | |||||||||
Commitments and Contingencies (Note 13) | ||||||||||||
Shareholders’ Equity | ||||||||||||
Common stock (class A) - $0.025 par value; nonvoting; 28,000,000 shares authorized, and 13,866,999 shares issued at September 30, 2022, and June 30, 2022; 12,852,968 and 12,888,950 shares outstanding at September 30, 2022, and June 30, 2022, respectively | 347 | - | 347 | |||||||||
Common stock (class B) - $0.025 par value; nonvoting; 4,500,000 shares authorized; no shares issued | - | - | - | |||||||||
Convertible common stock (class C) - $0.025 par value; voting; 3,500,000 shares authorized; 2,068,549 shares issued and outstanding at September 30, 2022, and June 30, 2022 | 52 | - | 52 | |||||||||
Additional paid-in-capital | 16,440 | - | 16,440 | |||||||||
Treasury stock, class A shares at cost; 1,014,031 shares and 978,049 shares at September 30, 2022, and June 30, 2022, respectively | (2,722 | ) | - | (2,722 | ) | |||||||
Accumulated comprehensive income, net of tax | 3,785 | (647 | ) | 3,138 | ||||||||
Retained earnings | 37,765 | (1,691 | ) | 36,074 | ||||||||
Total Shareholders’ Equity | 55,667 | (2,338 | ) | 53,329 | ||||||||
Total Liabilities and Shareholders’ Equity | $ | 59,323 | $ | (2,338 | ) | $ | 56,985 |
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data) | Three Months Ended September 30, 2022 | |||||||||||
As | ||||||||||||
Previously | Restatement | As | ||||||||||
Reported | Adjustments | Restated | ||||||||||
Operating Revenues | ||||||||||||
Advisory fees | $ | 4,377 | $ | - | $ | 4,377 | ||||||
Administrative services fees | 35 | - | 35 | |||||||||
4,412 | - | 4,412 | ||||||||||
Operating Expenses | ||||||||||||
Employee compensation and benefits | 1,175 | - | 1,175 | |||||||||
General and administrative | 1,504 | - | 1,504 | |||||||||
Advertising | 86 | - | 86 | |||||||||
Depreciation | 61 | - | 61 | |||||||||
Interest | 1 | - | 1 | |||||||||
2,827 | - | 2,827 | ||||||||||
Operating Income | 1,585 | - | 1,585 | |||||||||
Other Income (Loss) | ||||||||||||
Investment loss | (1,447 | ) | (13 | ) | (1,460 | ) | ||||||
Income from equity method investments | - | - | - | |||||||||
Other income | 61 | - | 61 | |||||||||
(1,386 | ) | (13 | ) | (1,399 | ) | |||||||
Income Before Income Taxes | 199 | (13 | ) | 186 | ||||||||
Provision for Income Taxes | ||||||||||||
Tax expense | 81 | (2 | ) | 79 | ||||||||
Net Income | $ | 118 | $ | (11 | ) | $ | 107 | |||||
Basic Net Income per Share | $ | 0.01 | $ | - | $ | 0.01 | ||||||
Diluted Net Income per Share | $ | 0.01 | $ | - | $ | 0.01 | ||||||
Basic weighted average number of common shares outstanding | 14,948,688 | 14,948,688 | ||||||||||
Diluted weighted average number of common shares outstanding | 14,949,275 | 14,949,275 |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended September 30, 2022 | ||||||||||||
As | ||||||||||||
Previously | Restatement | As | ||||||||||
(dollars in thousands) | Reported | Adjustments | Restated | |||||||||
Net Income | $ | 118 | $ | (11 | ) | $ | 107 | |||||
Other Comprehensive Income (Loss), Net of Tax: | ||||||||||||
Unrealized losses on available-for-sale securities arising during period | (120 | ) | 5 | (115 | ) | |||||||
Less: reclassification adjustment for gains included in net income | (371 | ) | - | (371 | ) | |||||||
Net change from available-for-sale securities, net of tax | (491 | ) | 5 | (486 | ) | |||||||
Foreign currency translation adjustment | - | - | - | |||||||||
Other Comprehensive Loss | (491 | ) | 5 | (486 | ) | |||||||
Comprehensive Income (Loss) | $ | (373 | ) | $ | (6 | ) | $ | (379 | ) |
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Common | Common | Other | ||||||||||||||||||||||||||||||||||||||
Stock | Common | Stock | Common | Additional | Treasury | Comprehensive | ||||||||||||||||||||||||||||||||||
(class A) | Stock | (class C) | Stock | Paid-in | Stock | Treasury | Income | Retained | ||||||||||||||||||||||||||||||||
Shares | (class A) | Shares | (class C) | Capital | Shares | Stock | (Loss) | Earnings | Total | |||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
As Previously Reported: | ||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 13,866,999 | $ | 347 | 2,068,549 | $ | 52 | $ | 16,438 | 978,049 | $ | (2,599 | ) | $ | 4,276 | $ | 37,982 | $ | 56,496 | ||||||||||||||||||||||
Purchases of shares of Common Stock (class A) | - | - | - | - | - | 39,965 | (133 | ) | - | - | (133 | ) | ||||||||||||||||||||||||||||
Issuance of stock under ESPP of shares of Common Stock (class A) | - | - | - | - | 3 | (3,983 | ) | 10 | - | - | 13 | |||||||||||||||||||||||||||||
Share-based compensation, adjustment for forfeitures, net of tax | - | - | - | - | (1 | ) | - | - | - | - | (1 | ) | ||||||||||||||||||||||||||||
Dividends declared | - | - | - | - | - | - | - | - | (335 | ) | (335 | ) | ||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | - | - | - | (491 | ) | - | (491 | ) | ||||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | 118 | 118 | ||||||||||||||||||||||||||||||
Balance at September 30, 2022 | 13,866,999 | $ | 347 | 2,068,549 | $ | 52 | $ | 16,440 | 1,014,031 | $ | (2,722 | ) | $ | 3,785 | $ | 37,765 | $ | 55,667 | ||||||||||||||||||||||
Restatement Adjustments: | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | - | - | - | 5 | - | 5 | ||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | - | (11 | ) | (11 | ) | ||||||||||||||||||||||||||||
As Restated: | ||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 (As Previously Reported) | 13,866,999 | $ | 347 | 2,068,549 | $ | 52 | $ | 16,438 | 978,049 | $ | (2,599 | ) | $ | 4,276 | $ | 37,982 | $ | 56,496 | ||||||||||||||||||||||
Restatement adjustments | - | - | - | - | - | - | - | (652 | ) | (1,680 | ) | (2,332 | ) | |||||||||||||||||||||||||||
Balance at June 30, 2022 (As Restated) | 13,866,999 | $ | 347 | 2,068,549 | $ | 52 | $ | 16,438 | 978,049 | $ | (2,599 | ) | $ | 3,624 | $ | 36,302 | $ | 54,164 | ||||||||||||||||||||||
Purchases of shares of Common Stock (class A) | - | - | - | - | - | 39,965 | (133 | ) | - | - | (133 | ) | ||||||||||||||||||||||||||||
Issuance of stock under ESPP of shares of Common Stock (class A) | - | - | - | - | 3 | (3,983 | ) | 10 | - | - | 13 | |||||||||||||||||||||||||||||
Share-based compensation, adjustment for forfeitures, net of tax | - | - | - | - | (1 | ) | - | - | - | - | (1 | ) | ||||||||||||||||||||||||||||
Dividends declared | - | - | - | - | - | - | - | - | (335 | ) | (335 | ) | ||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | - | - | - | (486 | ) | - | (486 | ) | ||||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | 107 | 107 | ||||||||||||||||||||||||||||||
Balance at September 30, 2022 | 13,866,999 | $ | 347 | 2,068,549 | $ | 52 | $ | 16,440 | 1,014,031 | $ | (2,722 | ) | $ | 3,138 | $ | 36,074 | $ | 53,329 |
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30, 2022 | ||||||||||||
As | ||||||||||||
Previously | Restatement | As | ||||||||||
(dollars in thousands) | Reported | Adjustments | Restated | |||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net Income | $ | 118 | $ | (11 | ) | $ | 107 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation, amortization and accretion | (77 | ) | - | (77 | ) | |||||||
Net recognized loss on disposal of fixed assets | 3 | - | 3 | |||||||||
Net realized gains on securities | (469 | ) | - | (469 | ) | |||||||
Unrealized losses on securities | 1,917 | 13 | 1,930 | |||||||||
Net income from equity method investment | - | - | - | |||||||||
Provision for deferred taxes | (369 | ) | (2 | ) | (371 | ) | ||||||
Stock-based compensation expense | - | - | - | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts and other receivables | 508 | - | 508 | |||||||||
Prepaid expenses and other assets | 78 | - | 78 | |||||||||
Accounts payable and accrued expenses | (534 | ) | - | (534 | ) | |||||||
Total adjustments | 1,057 | 11 | 1,068 | |||||||||
Net cash provided by operating activities | 1,175 | - | 1,175 | |||||||||
Cash Flows from Investing Activities: | ||||||||||||
Purchase of property and equipment | (14 | ) | - | (14 | ) | |||||||
Purchase of other investments | (477 | ) | - | (477 | ) | |||||||
Proceeds on sale of equity securities at fair value, non-current | - | - | - | |||||||||
Proceeds from principal paydowns of available-for-sale debt securities at fair value | 750 | - | 750 | |||||||||
Return of capital on other investments | 2 | - | 2 | |||||||||
Net cash provided by investing activities | 261 | - | 261 | |||||||||
Cash Flows from Financing Activities: | ||||||||||||
Principal payments on financing lease | (7 | ) | - | (7 | ) | |||||||
Issuance of common stock | 13 | - | 13 | |||||||||
Repurchases of common stock | (133 | ) | - | (133 | ) | |||||||
Dividends paid | (336 | ) | - | (336 | ) | |||||||
Net cash used in financing activities | (463 | ) | - | (463 | ) | |||||||
Net increase in cash, cash equivalents, and restricted cash | 973 | - | 973 | |||||||||
Beginning cash, cash equivalents, and restricted cash | 23,314 | - | 23,314 | |||||||||
Ending cash, cash equivalents, and restricted cash | $ | 24,287 | $ | - | $ | 24,287 | ||||||
Supplemental Disclosures of Non-Cash Investing and Financing Activities | ||||||||||||
Dividends declared but not paid | $ | 336 | $ | - | $ | 336 | ||||||
Unsettled sales of non-current investments | $ | - | $ | - | $ | - | ||||||
Unsettled class A common stock repurchases | $ | 10 | $ | - | $ | 10 | ||||||
Supplemental Disclosures of Cash Flow Information | ||||||||||||
Cash paid for income taxes | $ | - | $ | - | $ | - |
NOTE 1.2. 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-K10-K/A-2 for the fiscal year ended June 30, 2017, 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.
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 23 and 3.4. 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 34 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 is not deemed to be the primary beneficiary because it does not have the obligation to absorb a majority of the expected losses or the right to receive the majority of the residual returns. 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$12.6 million at December 31, 2017,September 30, 2022, and $11.3$12.8 million at June 30, 2017.
The Company holds a variable interestcarrying amount of assets and liabilities recognized in a fund advised by Galileo, but this fund does not qualifythe Consolidated Balance Sheets related to the Company's interests in these non-consolidated VIEs were as a VIE. follows:
Carrying Value and Maximum Exposure to Loss | ||||||||
(dollars in thousands) | September 30, 2022 | June 30, 2022 | ||||||
Investments in securities at fair value, current | $ | 11,963 | $ | 12,138 | ||||
Investments in equity securities at fair value, non-current | 608 | 623 | ||||||
Other receivables | 11 | 21 | ||||||
Total VIE assets, maximum exposure to loss | 12,582 | 12,782 | ||||||
Other accrued expenses | - | 110 | ||||||
Total carrying amount | $ | 12,582 | $ | 12,672 |
Since the fundCompany is not a VIE, the primary beneficiary of the above funds it advises, the Company evaluated if it should consolidate the fund 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.
During the three months ended September 30, 2021, the Company held a variable interest in a fund organized as a limited partnership, but this entity did not qualify as a VIE. Since it was not a VIE, the Company evaluated if it should consolidate it 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 did not have control of the fundentity and, therefore, does not consolidate the fund.it. However, the Company owns approximately 30 percent of the fund, and iswas considered to have the ability to exercise significant influence. Thus, the investment ishad been accounted for under the equity method of accounting. During fiscal 2022, this entity was dissolved. See further information about this investment in Note 2.3.
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, 2022, are not necessarily indicative of the results to be expectedthe Company may expect 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.
Recent Accounting Pronouncements
In MarchJune 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and disclosed. ASU 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this guidance on July 1, 2017, without a material impact to the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12,Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted. The standard became effective for the Company on July 1, 2021. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements or disclosures.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). The FASB issued ASU 2022-03 (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 will be effective for fiscal years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
NOTE 2.3. INVESTMENTS
As of December 31, 2017,September 30, 2022, the Company held investments with acarried at fair value on a recurring basis of approximately $29.8$24.1 million and a cost basis of approximately $12.6$28.4 million. The fair value of these investments is approximately 66.142.2 percent of the Company’s total assets.assets at September 30, 2022. In addition, the Company held other investments of $2.1approximately $2.6 million accountedand held-to-maturity debt investments of $1.0 million.
The cost basis of investments is adjusted for underamortization of premium or accretion of discount on debt securities held or the cost methodrecharacterization of accounting and an investment of approximately $3.3 million accounted for under the equity method of accounting.
Concentrations of Credit Risk
A significant influence and which do not have readily determinable fair values. These investments are accounted for under the cost method of accounting and evaluated periodically for impairment.
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 |
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
Fair Value Measurement and Disclosures
The inputs used to measure fair value and requires companies to disclose the fair value of theirfor measuring 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.
Level 1 – Valuations based onInputs represent unadjusted quoted prices in active markets for identical assets exchanged in active markets.
Level 2 – Inputs include directly or liabilities at the reporting date. Since valuations are based onindirectly observable inputs (other than Level 1 inputs) such as quoted prices that are readily and regularly availablefor similar assets exchanged in an active market, value of these products does not entail a significant degree of judgment.
Level 3 – Inputs include unobservable inputs used in the measurement of assets. The Company is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets and significantit may be unable to corroborate 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.
The Company has established a Proprietary Valuation Committee (the “Committee”) to administer and oversee the Company’s valuation policies and procedures, which are approved by the Board of Directors, and to perform a periodic review of valuations provided by independent pricing services.
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
For common share purchase warrants not traded on an exchange, the estimated fair value is determined using the Black-Scholes option-pricing model. This sophisticated model utilizes a number of assumptions in arriving at its results, including the estimated life, the risk-free interest rate, and historical volatility of the underlying common stock. The Company may bechange the assumption of the risk-free interest rate and utilize the yield curve for instruments with similar characteristics, such as credit ratings and jurisdiction, or change the expected volatility. The effects of changing any of the assumptions or factors employed by the Black-Scholes model may result in a significantly different valuation.
Certain convertible debt securities not traded on an exchange are valued by an independent pricing service using an evaluated quotea binomial lattice model based on factors such factors as institutional-size trading in similar groups of securities, yield, quality, maturity, coupon rate, type of issuance, and individual trading characteristics of the underlying common shares and other market data. As partThe model utilizes a number of assumptions in arriving at its independent price verification process,results. The effects of changing any of the Company periodically reviewsassumptions or factors utilized in the binomial lattice model, including expected volatility, credit adjusted discount rates, and discounts for lack of marketability, may result in a significantly different valuation for the securities.
For other securities included in the fair value provided byhierarchy with unobservable inputs, 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 Company 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 their fair value as determined by 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 considerCommittee considers 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 teamCommittee reviews inputs and assumptions and reports material items to the boardBoard of directors.
The following tables summarize the major categories of investments with fair values adjusted on a recurring basis as of September 30, 2022, and June 30, 2022, and other investments with fair values adjusted on a nonrecurring basis, with fair values shown according to the fair value hierarchy.
September 30, 2022 (As Restated) | ||||||||||||||||
Significant | Significant | |||||||||||||||
Quoted | Other | Unobservable | ||||||||||||||
Prices | Inputs | Inputs | ||||||||||||||
(dollars in thousands) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Investments carried at fair value on a recurring basis: | ||||||||||||||||
Investments in equity securities: | ||||||||||||||||
Equities - International | $ | 1,100 | $ | - | $ | 535 | $ | 1,635 | ||||||||
Mutual funds - Fixed income | 11,963 | - | - | 11,963 | ||||||||||||
Mutual funds - Global equity | 608 | - | - | 608 | ||||||||||||
Total investments in equity securities: | $ | 13,671 | $ | - | $ | 535 | $ | 14,206 | ||||||||
Investments in debt securities: | ||||||||||||||||
Available-for-sale - Convertible debentures | - | - | 9,866 | 9,866 | ||||||||||||
Total investments carried at fair value on a recurring basis: | $ | 13,671 | $ | - | $ | 10,401 | $ | 24,072 | ||||||||
Investments carried at fair value on a nonrecurring basis: | ||||||||||||||||
Other investments (1) | $ | - | $ | - | $ | 1,436 | $ | 1,436 |
1. | Other investments include equity securities without readily determinable fair values that were adjusted as a result of the measurement alternative on dates during the three months ended September 30, 2022. These securities are classified as level 3 due to the infrequency of the observable price changes and/or restrictions on the shares. |
June 30, 2022 | ||||||||||||||||
Significant | Significant | |||||||||||||||
Quoted | Other | Unobservable | ||||||||||||||
Prices | Inputs | Inputs | ||||||||||||||
(dollars in thousands) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Investments carried at fair value on a recurring basis: | ||||||||||||||||
Investments in equity securities: | ||||||||||||||||
Equities - International | $ | 1,024 | $ | - | $ | 515 | $ | 1,539 | ||||||||
Mutual funds - Fixed income | 12,138 | - | - | 12,138 | ||||||||||||
Mutual funds - Global equity | 623 | - | - | 623 | ||||||||||||
Total investments in equity securities: | $ | 13,785 | $ | - | $ | 515 | $ | 14,300 | ||||||||
Investments in debt securities: | ||||||||||||||||
Available-for-sale - Convertible debentures | - | - | 10,625 | 10,625 | ||||||||||||
Total investments carried at fair value on a recurring basis: | $ | 13,785 | $ | - | $ | 11,140 | $ | 24,925 | ||||||||
Investments carried at fair value on a nonrecurring basis: | ||||||||||||||||
Other investments (1) | $ | - | $ | - | $ | 781 | $ | 781 |
1. | Other investments include equity securities without readily determinable fair values that were adjusted as a result of the measurement alternative on dates during the fiscal year ended June 30, 2022. These securities are classified as level 3 due to the infrequency of the observable price changes and/or restrictions on the shares. |
The following presents fair value measurements,securities classified as of December 31, 2017,Level 3 and June 30, 2017, for the major categories of U.S. Global’s investments measuredcarried 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 |
The following table is a reconciliation of investments recorded at fair value for which unobservable inputs (Level 3) were used in determining fair value during the three months ended September 30, 2022.
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
September 30, 2022 (As Restated) | ||||||||
Investments in | Investments in | |||||||
(dollars in thousands) | equity securities | debt securities | ||||||
Beginning Balance | $ | 515 | $ | 10,625 | ||||
Principal repayments | - | (750 | ) | |||||
Amortization of day one premium | - | (71 | ) | |||||
Accretion of bifurcation discount | - | 209 | ||||||
Total unrealized gains or losses included in: | ||||||||
Investment Income (Loss) | 20 | 469 | ||||||
Other Comprehensive Income (Loss) | - | (616 | ) | |||||
Ending Balance | $ | 535 | $ | 9,866 |
During the third quarter of fiscal year 2021, the Company purchased convertible securities of HIVE, a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland, Sweden, and Sweden,Canada, for $15.0 million. The convertible securities are comprised of 8.0% interest-bearing unsecured convertible debentures, payable in quarterly installments with a final maturity in January 2026, and 5 million common share purchase warrants in the capital of HIVE. Under the original terms, the principal amount of each debenture was convertible into common shares in the capital of HIVE at a costconversion rate of $2.4 million. The shares held by$2.34, and each whole warrant, expiring in January 2024, entitled the Company are restricted for resale until mid-March 2018 and are also subject to Canadian insider regulations. The original restriction onacquire one common share at a price of $3.00 (Canadian). Under 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 million at December 31, 2017, based oncurrent terms, which reflect a reverse stock split, the quoted market price adjusted for the restriction on resale andprincipal amount of each debenture is classified as Level 2convertible into common shares in the fair value hierarchy.capital of HIVE at a conversion rate of $11.70, and each five whole warrants entitles the Company to acquire one common share at a price of $15.00 (Canadian). The remaining principal amount was $9.8 million as of September 30, 2022. Cryptocurrency markets and related stockssecurities 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 of the investments included on the balance sheet, unrealized gain recognized in investment income (loss), and unrealized gain (loss) recognized in other comprehensive income. A unit trust investment fund managed by Galileo, described below under Investment Classified as Equity Method, also holds common shares of HIVE.income (loss). The Company had a directinvestments did not represent ownership ofin HIVE of approximately 3.3 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, 2022, or June 30, 2022. The securities are subject to Canadian securities regulations. Frank Holmes isserves on the non-executiveboard as executive chairman of HIVE and held shares and options at September 30, 2022. Effective August 31, 2018, Mr. Holmes was named Interim CEO and Interim Executive Chairman of HIVE. Effective December 31, 2017.22, 2020, Mr. Holmes became the Executive Chairman of HIVE.
The Company recorded the warrants at the estimated fair value of $5.9 million on purchase date. The debentures were recorded at the estimated fair value of $16.0 million on purchase date, and an unrealized gain of $6.9 million was recognized in other comprehensive income (loss), which will be realized in investment income (loss) ratably using the effective interest method until maturity, conversion, or other disposition. During the three months ended September 30, 2022, $469,000 was realized in investment income (loss). During the three months ended September 30, 2021, $602,000 was realized in investment income (loss). The fair value of the warrants and debentures was $535,000 and $9.9 million, respectively, at September 30, 2022, and $515,000 and $10.6 million, respectively, at June 30, 2022.
The Company currently considers the fair value measurements of HIVE convertible securities to contain Level 3 inputs. The following is quantitative information as of September 30, 2022, with respect to the securities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3).
September 30, 2022 (As Restated) | |||||||||||
(dollars in thousands) | Fair Value | Principal Valuation Techniques | Unobservable Inputs | ||||||||
Investments in equity securities: | |||||||||||
Common share purchase warrants | $ | 535 | Option pricing model | ||||||||
Volatility | 92.1 | % | |||||||||
Investments in debt securities: | |||||||||||
Available-for-sale - Convertible debentures | $ | 9,866 | Binomial lattice model | ||||||||
Volatility | 94.2 | % | |||||||||
Credit Adjusted Discount Rate | 5.5 | % |
During the fiscal year ended June 30, 2022, the Company sold its investment in Thunderbird Entertainment Group Inc. (“Thunderbird”), a company headquartered and traded in Canada. During the three months ended September 30, 2021, the Company sold approximately 779,000 shares and realized gains on the sales in the amount of $1.8 million. The Company did not have ownership of Thunderbird as of September 30, 2022. Frank Holmes served on the board of this company as a director from June 2014 to March 2021.
Equity Investments at Fair Value
Investments in equity securities with readily determinable fair values are carried at fair value, and changes in unrealized gains or losses are reported in current period earnings.
The following details the components of the Company’s equity investments carried at fair value as of September 30, 2022, and June 30, 2022.
September 30, 2022 (As Restated) | ||||||||||||
(dollars in thousands) | Cost | Unrealized Gains (Losses) | Fair Value | |||||||||
Equity securities at fair value | ||||||||||||
Equities - International | $ | 6,680 | $ | (5,045 | ) | $ | 1,635 | |||||
Equities - Domestic | 45 | (45 | ) | - | ||||||||
Mutual funds - Fixed income | 12,313 | (350 | ) | 11,963 | ||||||||
Mutual funds - Global equity | 929 | (321 | ) | 608 | ||||||||
Total equity securities at fair value | $ | 19,967 | $ | (5,761 | ) | $ | 14,206 |
June 30, 2022 | ||||||||||||
(dollars in thousands) | Cost | Unrealized Gains (Losses) | Fair Value | |||||||||
Equity securities at fair value | ||||||||||||
Equities - International | $ | 6,680 | $ | (5,141 | ) | $ | 1,539 | |||||
Equities - Domestic | 45 | (45 | ) | - | ||||||||
Mutual funds - Fixed income | 12,313 | (175 | ) | 12,138 | ||||||||
Mutual funds - Global equity | 929 | (306 | ) | 623 | ||||||||
Total equity securities at fair value | $ | 19,967 | $ | (5,667 | ) | $ | 14,300 |
Debt Investments
Investments in debt securities are classified on the acquisition dates and at each balance sheet date. Securities classified as held-to-maturity are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. Debt securities classified as trading are acquired with the intent to sell in the near term and are carried at fair value with changes reported in earnings. All other debt securities are classified as available-for-sale and are carried at fair value.
Investment gains and losses on available-for-sale debt securities are recorded when the securities are sold, as determined on a specific identification basis, and recognized in current period earnings. Changes in unrealized gains on available-for-sale debt securities are reported net of tax in accumulated other comprehensive income (loss). For debt securities in an unrealized loss position, a loss in earnings is recognized for the excess of amortized cost over fair value if the Company intends to sell before the price recovers. Otherwise, the Company evaluates as of the balance sheet date whether the unrealized losses are attributable to credit losses or other factors. The severity of the decline in value, creditworthiness of the issuer and other relevant factors are considered. The portion of unrealized loss the Company believes is related to a credit loss is recognized earnings, and the portion of unrealized loss the Company believes is not related to a credit loss is recognized in other comprehensive income.
The following details the components of the Company’s available-for-sale debt investments as of September 30, 2022, and June 30, 2022.
September 30, 2022 (As Restated) | ||||||||||||||||
(dollars in thousands) | Amortized Cost | Gross Unrealized Gains in Other Comprehensive Income (Loss) | Gross Unrealized Losses in Investment Loss | Fair Value | ||||||||||||
Available-for-sale - Convertible debentures(1) | $ | 8,433 | $ | 3,972 | $ | (2,539 | ) | $ | 9,866 |
June 30, 2022 | ||||||||||||||||
(dollars in thousands) | Amortized Cost | Gross Unrealized Gains in Other Comprehensive Income (Loss) | Gross Unrealized Losses in Investment Loss | Fair Value | ||||||||||||
Available-for-sale - Convertible debentures(1) | $ | 8,576 | $ | 4,588 | $ | (2,539 | ) | $ | 10,625 |
1. | Changes in unrealized gains and losses are included in the statement of comprehensive income (loss), except for embedded derivatives. Changes in unrealized gains and losses for embedded derivatives are included in investment income (loss) in the statement of operations. |
The following details the components of the Company’s held-to-maturity debt investments as of September 30, 2022, and June 30, 2022.
September 30, 2022 | ||||||||||||||||
(dollars in thousands) | Amortized Cost | Gross Unrecognized Holding Gains | Gross Unrecognized Holding Losses | Fair Value | ||||||||||||
Held-to-maturity - Debentures(1) | $ | 1,000 | $ | - | $ | (202 | ) | $ | 798 |
June 30, 2022 | ||||||||||||||||
(dollars in thousands) | Amortized Cost | Gross Unrecognized Holding Gains | Gross Unrecognized Holding Losses | Fair Value | ||||||||||||
Held-to-maturity - Debentures(1) | $ | 1,000 | $ | - | $ | (133 | ) | $ | 867 |
1. | Held-to-maturity debt investments are carried at amortized cost, and the fair value is classified as Level 2 according to the fair value hierarchy. |
At September 30, 2022, and June 30, 2022, the Company held $1.0 million in one security classified as held-to-maturity. The security had an estimated fair value that was lower than the carrying value by $202,000 at September 30, 2022, and $133,000 at June 30, 2022. We have evaluated the unrealized loss on the security at September 30, 2022, and determined it to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuer to meet their obligations. The security has been in a loss position for less than 12 months.
The following summarizes the net carrying amount and estimated fair value of debt securities at September 30, 2022, by contractual maturity dates. Actual maturities may differ from final contractual maturities due to principal repayment installments or prepayment rights held by issuers.
September 30, 2022 (As Restated) | ||||||||
Available-for-sale | Held-to-maturity | |||||||
debt securities | debt securities | |||||||
Convertible | Due after one year | |||||||
(dollars in thousands) | debentures(1) | through five years | ||||||
Net Carrying Amount | $ | 8,433 | $ | 1,000 | ||||
Fair Value | $ | 9,866 | $ | 798 |
1. | Principal payments of $750,000 are due quarterly with a final maturity date in January 2026. |
Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are reported at fair value, and changes in fair value are recorded through earnings within investment income (loss). The host contract continues to be accounted for in accordance with the appropriate accounting standard. The embedded derivative and the related host contract represent one legal contract and are combined on the Consolidated Balance Sheets and the preceding tables. The Company held one financial instrument containing an embedded derivative, which represents an investment in HIVE, at September 30, 2022, and June 30, 2022.
The following table summarizes the fair values of embedded derivatives on the Consolidated Balance Sheet, categorized by risk exposure, at September 30, 2022, and June 30, 2022.
September 30, 2022 | June 30, 2022 | |||||||
Other Assets | Other Assets | |||||||
Investments in | Investments in | |||||||
available-for-sale | available-for-sale | |||||||
(dollars in thousands) | debt securities | debt securities | ||||||
Embedded Derivatives: | ||||||||
Equity price risk exposure | $ | 3 | $ | 3 |
The following table presents the effect of embedded derivatives on the Consolidated Statements of Operations, categorized by risk exposure, for the three months ended September 30, 2022, and 2021.
Three Months Ended | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
Other Income (Loss) | Other Income (Loss) | |||||||
(dollars in thousands) | Investment Loss | Investment Loss | ||||||
Embedded Derivatives: | ||||||||
Equity price risk exposure | $ | - | $ | (438 | ) |
Other Investments
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. For these securities, the Company generally elects to value using the measurement alternative, under which such securities are measured at cost, less impairment, if any. If the Company identifies observable price changes for identical or similar securities of the same issuer, the equity security is measured at fair value as of the date the observable transaction occurred, with such changes recorded in investment income (loss).
The carrying value of equity securities without readily determinable fair values was approximately $4.0 million as of June 30, 2022. The following table presents the carrying value of equity securities without readily determinable fair values held as of September 30, 2022, and 2021, that are measured under the measurement alternative and the related adjustments recorded during the periods presented for those securities with observable price changes or impairments. These securities are included in the nonrecurring fair value hierarchy tables when applicable price changes are observable, or when impairments occur.
Three Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2022 | 2021 | ||||||
Other Investments | ||||||||
Carrying value | $ | 2,630 | $ | 3,453 | ||||
Upward carrying value changes | $ | - | $ | - | ||||
Downward carrying value changes/impairment | $ | (1,839 | ) | $ | - |
The period-end carrying values reflect cumulative purchases and sales in addition to upward and downward carrying value changes. The cumulative amount of upward adjustments to all equity securities without readily determinable fair values total $2.5 million since their respective acquisitions through September 30, 2022. The cumulative amount of impairments and other downward adjustments, which include return of capital distributions and observable price changes, to all equity securities without readily determinable fair values total $3.3 million since their respective acquisitions through September 30, 2022.
The Company has available-for-sale investmentsan investment in corporate debt securities maturingThe Sonar Company (“Sonar”), a company headquartered in 2024 which were valuedthe United States, at $1.7 milliona cost of $175,000. The investment had a carrying value of approximately $362,000 at September 30, 2022, and at June 30, 2022. Roy D. Terracina, Director and Vice Chairman of the Board of Directors for U.S. Global, has served as the CEO of Sonar since July 2021, and the Company’s ownership of Sonar was approximately 2.8 percent as of December 31, 2017, based on the mean between the last reported bid/ask quotation and were classifiedSeptember 30, 2022.
Investments Classified as Level 2. As 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.
The Company had an equity method investment in an affiliated offshore fund, classified as trading,Galileo New Economy Fund LP through its dissolution date, which invested in companies in the energy and natural resources sectors. The fair value of this investment was estimated based on the net asset value per share at $415,000 as of June 30, 2017. This offshore fund liquidatedoccurred during the currentthird quarter of fiscal year, with partial liquidation proceeds received in2022. The Company owned approximately 22 percent of the quarter ended September 30, 2017,LP prior to dissolution, and final proceeds received during the quarter ended December 31, 2017.
Investment Income (Loss)
Investment income statement information on the Galileo Partners Fund since(loss) from the Company’s investments includes:
● | realized gains and losses on sales of securities; | |
● | realized gains and losses on principal payment proceeds; | |
● | unrealized gains and losses on securities at fair value; | |
● | impairments and observable price changes on equity investments without readily determinable fair values; | |
● | dividend and interest income; and | |
● | realized foreign currency gains and losses. |
The following summarizes investment is as follows:
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 |
Three Months Ended | |||||||
September 30, | |||||||
(dollars in thousands) | 2022 | 2021 | |||||
As Restated | |||||||
Investment loss | |||||||
Realized gains on equity securities | $ | - | $ | 1,809 | |||
Realized gains on debt securities | 469 | 602 | |||||
Unrealized losses on equity securities | (1,930 | ) | (2,358 | ) | |||
Unrealized losses on embedded derivatives | - | (438 | ) | ||||
Dividend and interest income | 418 | 497 | |||||
Realized foreign currency losses | (417 | ) | (146 | ) | |||
Total Investment Loss | $ | (1,460 | ) | $ | (34 | ) |
For the three months ended September 30, 2022, realized gains on principal payment proceeds in the Galileo Partners Fund. See Note 12, Subsequent Event, for further information.amount of $469,000 was released from other comprehensive income (loss). For the three months ended September 30, 2021, realized gains on principal payment proceeds in the amount of $602,000 was released from other comprehensive income (loss).
The following table presents unrealized gains and losses recognized during the three months ended September 30, 2022, and 2021, on equity investments still held at each respective date.
Three Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2022 | 2021 | ||||||
As Restated | ||||||||
Net gains (losses) recognized during the period on equity securities | $ | (1,930 | ) | $ | (549 | ) | ||
Less: Net gains (losses) recognized during the period on equity securities sold during the period | - | 1,809 | ||||||
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date (1) | $ | (1,930 | ) | $ | (2,358 | ) |
1. | Includes $1.8 million for the three months ended September 30, 2022, of net losses as a result of the measurement alternative. There were no net gains (losses) as a result of the measurement alternative for the three months ended September 30, 2021. |
Investment income (loss) 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.
NOTE 3.4. INVESTMENT MANAGEMENT AND OTHER FEES
The following table presents operating revenues disaggregated by performance obligation.
Three Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2022 | 2021 | ||||||
ETF advisory fees | $ | 3,913 | $ | 5,316 | ||||
USGIF advisory fees | 610 | 966 | ||||||
USGIF performance fees earned (paid) | (146 | ) | 188 | |||||
Total Advisory Fees | 4,377 | 6,470 | ||||||
USGIF administrative services fees | 35 | 51 | ||||||
Total Operating Revenue | $ | 4,412 | $ | 6,521 |
The Company serves as investment advisor to three U.S.-based exchange-traded funds (ETFs): U.S. Global Jets ETF (ticker JETS), U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU), and U.S. Global Sea to Sky Cargo ETF (ticker SEA). The Company receives a unitary management fee of 0.60 percent of average net assets of the ETFs, and has agreed to bear all expenses of the ETFs, except the U.S. Global Sea to Sky Cargo ETF. The Company has agreed to contractually limit the expenses of the U.S. Global Sea to Sky Cargo ETF through April 2023. The Company also serves as investment advisor to one European-based ETF, the U.S. Global Jets UCITS ETF. The Company receives a unitary management fee of 0.65 percent of average net assets and has agreed to bear all expenses of the ETF.
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 and the Global Luxury Goods Fund through April 2018. 2023. 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 were $220,000 for the three and six months ended December 31, 2017, were $102,000 and $334,000, respectively,September 30, 2022, compared with $313,000 and $546,000, respectively,$158,000, for the corresponding periodsperiod in the prior fiscal year. Management cannot predict the impact of future waivers due to the number of variables and the range of potential outcomes.
The Company receives administrative service fees from USGIF based on an annual rate of 0.05 percent 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.
As of December 31, 2017,September 30, 2022, the Company had just over $1.0$1.4 million in receivables from fund clients, of which $381,000$144,000 was from USGIF $605,000and $1.2 million was from Galileothe ETFs. As of June 30, 2022, the Company had $1.6 million in receivables from fund clients, of which $188,000 was from USGIF and $63,000$1.4 million was from ETFs.
NOTE 4. NOTES RECEIVABLE5. RESTRICTED AND UNRESTRICTED CASH
The Company maintains its cash deposits with established commercial banks. At times, balances may exceed federally insured limits. We have not experienced any losses in such accounts and do not believe that we are exposed to any significant credit risk associated with our cash deposits. Restricted cash represents cash invested in a 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, 2022 | June 30, 2022 | ||||||
Cash and cash equivalents | $ | 23,287 | $ | 22,314 | ||||
Restricted cash | 1,000 | 1,000 | ||||||
Total cash, cash equivalents, and restricted cash | $ | 24,287 | $ | 23,314 |
NOTE 6. LEASES
The Company has investedlease agreements for office equipment that expire in notes 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 penaltyfiscal year 2026. Lease expense totaled $23,000 for the amount of lost interest. The balance of this note was approximately $2.0 million at December 31, 2017,three months ended September 30, 2022, and June$39,000 for the three months ended September 30, 2017.
The following table presents the components of December 31, 2017,lease expense included in general and administrative expense on the Consolidated Statements of Operations.
Three Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2022 | 2021 | ||||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | $ | 7 | $ | - | ||||
Interest on lease liabilities | 1 | - | ||||||
Total finance lease cost | 8 | - | ||||||
Operating lease cost | - | 13 | ||||||
Short-term lease cost | 15 | 26 | ||||||
Total lease cost | $ | 23 | $ | 39 |
Supplemental information related to the Company's leases follows.
Three Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2022 | 2021 | ||||||
Operating cash flows from operating leases included in lease liabilities | $ | - | $ | 13 | ||||
Lease liabilities obtained from new ROU assets - operating | $ | - | $ | - | ||||
Operating cash flows from financing leases included in lease liabilities | $ | 1 | $ | - | ||||
Financing cash flows from financing leases included in lease liabilities | $ | 7 | $ | - | ||||
Lease liabilities obtained from new ROU assets - financing | $ | - | $ | - |
Additional qualitative information concerning the Company’s leases follows.
September 30, 2022 | June 30, 2022 | |||||||
Weighted-average remaining lease term - financing leases (years) | 3.00 | 3.25 | ||||||
Weighted-average discount rate - financing leases | 4.75 | % | 4.75 | % |
The following table presents the maturities of lease liabilities as of September 30, 2022.
(dollars in thousands) | ||||
Fiscal Year | Finance Leases | |||
2023 (excluding the three months ended September 30, 2022) | $ | 23 | ||
2024 | 31 | |||
2025 | 31 | |||
2026 | 8 | |||
2027 | - | |||
Total lease payments | 93 | |||
Less imputed interest | (6 | ) | ||
Total | $ | 87 |
The Company is the lessor of certain areas of its owned office building under operating leases expiring in various months through fiscal year 2025. At the commencement of an operating 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 was $34,000 and $26,000, for the three months ended September 30, 2022, and 2021, respectively. The cost of obtaining lessor contracts, which is included in other assets on the Consolidated Balance Sheets, was $8,000 and $9,000 at September 30, 2022, and June 30, 2022, respectively.
The following is a summary analysis of annual undiscounted cash flows to be received on leases as of September 30, 2022.
(dollars in thousands) | ||||
Fiscal Year | Operating Leases | |||
2023 (excluding the three months ended September 30, 2022) | $ | 53 | ||
2024 | 42 | |||
2025 | 36 | |||
2026 | - | |||
2027 | - | |||
Thereafter | - | |||
Total lease payments | $ | 131 |
The Company may terminate the building leases with one hundred eighty days written notice if it sells the property. If the Company has no borrowingsterminates the lease, the Company will pay the tenant a termination fee of the lesser of six months of the base monthly rent or long-term liabilities except for deferred taxes.the base monthly rent times the number of months remaining in the initial term.
NOTE 7. BORROWINGS
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, 2023, and the Company intends to renew annually. The credit facility is collateralized by approximately $1 million at December 31, 2017, shown asSeptember 30, 2022, included in restricted cash on the balance sheet, held in deposit in a money market account at the financial institution that provided the credit facility. As of December 31, 2017,September 30, 2022, the credit facility remains unutilized by the Company.
NOTE 6. STOCKHOLDERS’8. STOCKHOLDERS’ EQUITY
Payment of cash dividends is within the discretion of the Company’s boardBoard of directorsDirectors and is dependent on earnings, operations, capital requirements, general financial condition of the Company, and general business conditions. AThe dividend rate per share was $0.0050 per month for July 2021 through September 2021, and $0.0075 per month for October 2021 through September 2022.
In September 2022, the Board authorized the continuance of the monthly dividend of $0.0025$0.0075 per share was paid for July from October through December 2017 and is authorized through March 2018, 2022, 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$5.0 million of its outstanding common shares, as market and business conditions warrant, on the open market in compliance with Rule 10b-1810b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934 through 1934. The repurchase program has been in place since December 31, 2013. In 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.year. The total amountCompany announced on February 25, 2022, that the Board of shares that may be repurchased in calendar year 2018 underDirectors of the renewedCompany approved an increase to the limit of its annual share buyback program isfrom $2.75 million to $5.0 million. 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, 2022, and 2021, the Company repurchased 36,74839,965 and 45,94713,647 class A shares using cash of $117,000$133,000 and $131,000,$82,000, 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.
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. ThereAt September 30, 2022, there were 2,000229,000 options outstanding and exercisable at December 31, 2017,under the 1989 Plan at a weighted average exercise price of $12.31.$6.05, and 2,000 options outstanding and exercisable under the 1997 Plan at a weighted average exercise price of $2.74. At September 30, 2021, there were 231,000 options outstanding and exercisable under the 1989 Plan at a weighted average exercise price of $6.05, and 2,000 options outstanding and exercisable under the 1997 Plan at a weighted average exercise price of $2.74. There were no options granted or exercised for the three months ended September 30, 2022, or2021. There were 2,000 options 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, 2022. For the three months ended September 30, 2021, $388,000 was recognized as compensation expense. As of December 31, 2017, and 2016,September 30, 2022, there was no unrecognized share-based compensation cost related to share-based compensationawards granted under the plansplans. As of September 30, 2021, there was $345,000 unrecognized share-based compensation cost related to be recognized overshare-based awards granted under the remainder of their respective vesting periods.plans.
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:EPS.
Three Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands, except per share data) | 2022 | 2021 | ||||||
As Restated | ||||||||
Net Income | $ | 107 | $ | 2,390 | ||||
Weighted average number of outstanding shares | ||||||||
Basic | 14,948,688 | 15,030,115 | ||||||
Effect of dilutive securities | ||||||||
Stock options | 587 | 1,084 | ||||||
Diluted | 14,949,275 | 15,031,199 | ||||||
Earnings Per Share | ||||||||
Basic Net Income per Share | $ | 0.01 | $ | 0.16 | ||||
Diluted Net Income per Share | $ | 0.01 | $ | 0.16 |
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 | $ | - |
The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period.period, as their inclusion would be anti-dilutive. For the three and six months ended December 31, 2017, and 2016, 2,000September 30, 2022, employee stock options for 229,000 were excluded from diluted EPS.
During the three and months ended December 31, 2017,September 30, 2022, and 2016,2021, 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 filefiles a separate tax returnsreturn 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.
Income tax expense for the Act”) was enacted on December 22, 2017. The Act reducesquarter is based upon the 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,estimated annual ordinary income in each jurisdiction in which the Company revised its estimated annualoperates. The tax effects of discrete items are recognized in the tax provision in the period they occur in accordance with U.S. GAAP. Due to various factors, such as the item’s significance in relation to total ordinary income and the rate of tax, discrete items in any quarter can materially impact the reported effective rate to reflect a change in its U.S. federal statutory rate from 34 percent to 21 percent.tax rate. The rate change is effective on January 1, 2018; therefore, the Company’s blended U.S. statutory tax rate for the fiscal yearthree months ended JuneSeptember 30, 2018, is approximately 28 percent.
For U.S. federal income tax purposes at December 31, 2017,September 30, 2022, the Company has charitable contribution carryovers totaling approximately $155,000, with $68,000 expiring in fiscal year 2018, $34,000 expiring in fiscal year 2019, $19,000 expiring in fiscal year 2020, $5,000 expiring in fiscal year 2021, $21,000 expiring in fiscal year 2022, and $8,000 expiring in fiscal year 2023. The Company hasno U.S. federal net operating loss carryovers of $4.9 million with $2.0 million expiring in fiscal year 2035, $2.7 million expiring in fiscal year 2036, and $161,000 expiring in fiscal year 2038.no capital loss carryovers. For Canadian income tax purposes, GalileoUSCAN has $15,000 net operating loss carryovers of $68,000 expiring in fiscal 2036. If certain changes in the Company’s ownership should occur, there could be an annual limitation on the amount of net operatingand no capital loss carryovers that could be utilized.
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, and JuneSeptember 30, 2017,2022, a valuation allowance of $1.2 million and $3.3 million, respectively,$4,000 was included
NOTE 9.11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents 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 |
(dollars in thousands) | Unrealized gains (losses) on available-for-sale investments | Foreign currency translation adjustment (1) | Total | |||||||||
Three Months Ended September 30, 2022 (As Restated) | ||||||||||||
Balance at June 30, 2022 | $ | 3,624 | $ | - | $ | 3,624 | ||||||
Other comprehensive loss before reclassifications | (146 | ) | - | (146 | ) | |||||||
Tax effect | 31 | - | 31 | |||||||||
Amount reclassified from AOCI | (469 | ) | - | (469 | ) | |||||||
Tax effect | 98 | - | 98 | |||||||||
Net other comprehensive loss | (486 | ) | - | (486 | ) | |||||||
Balance at September 30, 2022 (As Restated) | $ | 3,138 | $ | - | $ | 3,138 | ||||||
Three Months Ended September 30, 2021 | ||||||||||||
Balance at June 30, 2021 | $ | 6,564 | $ | 23 | $ | 6,587 | ||||||
Other comprehensive loss before reclassifications | (186 | ) | (12 | ) | (198 | ) | ||||||
Tax effect | 39 | - | 39 | |||||||||
Amount reclassified from AOCI | (602 | ) | - | (602 | ) | |||||||
Tax effect | 126 | - | 126 | |||||||||
Net other comprehensive loss | (623 | ) | (12 | ) | (635 | ) | ||||||
Balance at September 30, 2021 | $ | 5,941 | $ | 11 | $ | 5,952 |
1. | Amounts |
NOTE 10.12. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company operates principally in threetwo 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 gross identifiable assets, 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 | Corporate Investments | Consolidated | |||||||||
Three Months Ended September 30, 2022 (As Restated) | ||||||||||||
Net operating revenues | $ | 4,412 | $ | - | $ | 4,412 | ||||||
Investment loss | $ | - | $ | (1,460 | ) | $ | (1,460 | ) | ||||
Other income | $ | 61 | $ | - | $ | 61 | ||||||
Income (loss) before income taxes | $ | 1,661 | $ | (1,475 | ) | $ | 186 | |||||
Depreciation | $ | 61 | $ | - | $ | 61 | ||||||
Gross identifiable assets at September 30, 2022 | $ | 23,607 | $ | 32,005 | $ | 55,612 | ||||||
Deferred tax asset | $ | 1,373 | ||||||||||
Consolidated total assets at September 30, 2022 | $ | 56,985 | ||||||||||
Three Months Ended September 30, 2021 | ||||||||||||
Net operating revenues | $ | 6,521 | $ | - | $ | 6,521 | ||||||
Investment loss | $ | - | $ | (34 | ) | $ | (34 | ) | ||||
Income from equity method investments | $ | - | $ | 15 | $ | 15 | ||||||
Other income | $ | 56 | $ | - | $ | 56 | ||||||
Income (loss) before income taxes | $ | 3,113 | $ | (209 | ) | $ | 2,904 | |||||
Depreciation | $ | 48 | $ | - | $ | 48 | ||||||
Gross identifiable assets at September 30, 2021 | $ | 21,204 | $ | 40,713 | $ | 61,917 |
Net operating revenues from investment management services includes operating revenues from USGIF of $1.0 million and $2.1 million, respectively, for the three and six months ended December 31, 2017,$499,000 and $1.2 million and $2.8 million, respectively, for the three and six months ended December 31, 2016.September 30, 2022, and 2021, respectively. Net operating revenues from investment management services also include operating revenues from ETF clients of $184,000$3.9 million and $369,000, respectively,$5.3 million for the three and six months ended December 31, 2017,September 30, 2022, and $76,000 and $142,000, respectively, for the three and six months ended December 31, 2016.2021, 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$0.0075 per share through March 2018, December 2022, 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 January October to March 2018 December 2022 is approximately $114,000.
The COVID-19 pandemic and the resulting actions to control or slow the spread have affected global and domestic economies and financial markets, and in Note 2, the future it or other epidemics, pandemics or outbreaks may adversely affect the Company's results of operations, cash flows and financial position. The Company owned approximately 30 percentcannot reasonably estimate the future impact of Galileo Partners Fund at December 31, 2017. This investment is accounted for underthese events, given the equity method of accounting. Effective January 31, 2018, a portionuncertainty over the duration and severity of the investment in the fund was redeemed (sold) for proceeds of approximately $1.5 million. As the Company had recorded its proportional shares of the fund’s net income under the equity method of accounting, the proceeds will reduce the carrying value of the investment. After this transaction, the Company owns approximately 24 percent of the fund. As the Company will continue to have the ability to exercise significant influence, the investment will continue to be accounted for under the equity method of accounting. The results of this transaction will be reflected in the financial statements for the quarter ended March 31, 2018.
ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
U.S. Global Investors, Inc. (the “Company”“Company” or “U.S. Global”“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’sCompany’s control, including: (i) the volatile and competitive nature of the investment management industry, (ii) changes in domestic and foreign economic conditions, including significant economic disruptions from COVID-19 or other epidemics, pandemics or outbreaks and the actions taken in connection therewith, (iii) the effect of government regulation on the Company’sCompany’s business, and (iv) market, credit, and liquidity risks associated with the Company’sCompany’s investment management activities. Due to such risks, uncertainties, and other factors, the Company cautions each person receiving such forward-looking information not to place undue reliance on such statements. All such forward-looking statements are current only as of the date on which such statements were made.
FACTORS AFFECTING OUR BUSINESS
The rapid spread of COVID-19 and actions taken in response had a significant detrimental effect on the global and domestic economies and financial markets. Market declines affect the Company’s assets under management, and thus its revenues and also the valuation of the Company’s corporate investments. Should this emerging macro-economic risk reoccur and continue for an extended period, there could be an adverse material financial impact to the Company’s business and investments, including a material reduction in its results of operations.
COVID-19-related circumstances (e.g., remote work arrangements) did not adversely affect the Company’s ability to maintain operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures.
BUSINESS SEGMENTS
The Company, with principal operations located in San Antonio, Texas, manages threetwo business segments: (1) the Company offers a broad range of investment management products and services to meet the needs of individual and institutional investors;investors, and (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 provides advisory services for three U.S.-based exchange-traded fund (“ETF”) clients and receives monthly advisory fees based on the net asset values of the funds. Information on the U.S.-based ETFs can be found at www.usglobaletfs.com, including the prospectus, performance and holdings. The Company also serves as investment advisor to one European-based ETF and receives a monthly advisory fee based on the net asset value of the fund. The European-based ETF is not available to U.S. investors. The ETFs’ authorized participants are not required to give advance notice prior to redemption of shares in the ETFs, and the ETFs do not charge a redemption fee.
The Company also generates operating revenues from managing and servicing U.S. Global Investors Funds (“USGIF” or the “Funds”) 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.
At December 31, 2017,September 30, 2022, total assets under management, including USGIFETF and ETFUSGIF clients, were $681.2 millionapproximately $2.3 billion versus $683.1 million$4.3 billion at December 31, 2016,September 30, 2021, a decrease of 0.3$2.0 billion, or 45.9 percent. During the sixthree months ended December 31, 2017,September 30, 2022, average assets under management, including ETF and USGIF clients, were $702.4 million$2.9 billion versus $773.9 million$4.0 billion during the sixthree months ended December 31, 2016. Total assets under management as of period-end at December 31, 2017, including USGIF and ETF clients, were $681.2 million versus $711.9 million atSeptember 30, 2021. At June 30, 2017,2022, 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, 2022, and 2016:
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, | ||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||
(dollars in thousands) | Equity | Fixed Income | Total | Equity | Fixed Income | Total | ||||||||||||||||||
Beginning Balance | $ | 286,367 | $ | 71,161 | $ | 357,528 | $ | 433,380 | $ | 75,842 | $ | 509,222 | ||||||||||||
Market depreciation | (19,826 | ) | (758 | ) | (20,584 | ) | (54,585 | ) | (102 | ) | (54,687 | ) | ||||||||||||
Dividends and distributions | - | (129 | ) | (129 | ) | - | (75 | ) | (75 | ) | ||||||||||||||
Net shareholder redemptions | (6,527 | ) | (3,467 | ) | (9,994 | ) | (8,769 | ) | (625 | ) | (9,394 | ) | ||||||||||||
Ending Balance | $ | 260,014 | $ | 66,807 | $ | 326,821 | $ | 370,026 | $ | 75,040 | $ | 445,066 | ||||||||||||
Average investment management fee | 0.86 | % | 0.00 | % | 0.69 | % | 0.96 | % | 0.00 | % | 0.81 | % | ||||||||||||
Average net assets | $ | 282,446 | $ | 69,040 | $ | 351,486 | $ | 399,442 | $ | 74,936 | $ | 474,378 |
As shown above, USGIF period-end assets under management were lower at December 31, 2017,September 30, 2022, compared to December 31, 2016. Also, averageSeptember 30, 2021. Average net assets for the three- and six-month periodsthree months in the current fiscal year were lower than the same periods in the previous fiscal year. Both the threeequity funds and six months ended December 31, 2017,fixed income funds had net market appreciation, primarily in the equity funds, compared todepreciation and net market depreciationshareholder redemptions for the three and six months ended December 31, 2016, also primarily inSeptember 30, 2022, and for the equity funds. A significant portion of the dividends and distributions shown above are reinvested and included in net shareholder purchases (redemptions). The combined amounts for these two lines 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 8069 basis points for the three and six months ended December 31, 2017, respectively,September 30, 2022, and 70 and 7381 basis points for the same periodsperiod in the prior year. The average investment management fee for the equity funds was 10086 basis points for the three and six months ended December 31, 2017, and 94September 30, 2022, and 96 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 pointsminimal 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 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, 2022, the Company held investments with acarried at fair value of approximately $29.8$24.1 million and a cost basis of approximately $12.6$28.4 million. The fair value of these investments is approximately 66.142.2 percent of the Company’s total assets. See Note 2 (Investments) for additional detail regarding investment activities.assets at September 30, 2022. In addition, the Company held other investments of $2.1approximately $2.6 million accounted for under the cost methodand held-to-maturity debt investments of accounting, $3.3 million in investments accounted for under the equity method of accounting, and $2.2 million in notes receivable.
Investments recorded at fair value on a recurring basis were approximately $29.8$24.1 million at December 31, 2017,September 30, 2022, compared to approximately $13.1$24.9 million at June 30, 2017,2022, the Company’s prior fiscal year end, which is an increasea decrease of approximately $16.7 million. This increase is primarily due to unrealized gain on an available-for-sale security acquired during the current period.$853,000. See Note 2 (Investments)3, 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 methodactivities.
RESULTS OF OPERATIONS – Three months ended December 31, 2017,September 30, 2022, and 2016
The Company posted net income attributable to U.S. Global Investors, Inc. of $749,000$107,000 ($0.05 0.01 per share) for the three months ended December 31, 2017,September 30, 2022, compared with net income attributable to U.S. Global Investors, Inc. of $8,000$2.4 million ($0.00 0.16 per share) for the three months ended December 31, 2016, an increaseSeptember 30, 2021, a decrease in net income of approximately $741,000.$2.3 million. The increasechange 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, 2022, decreased $2.1 million, or 21.432.3 percent, compared with the three months ended December 31, 2016.September 30, 2021. This increasedecrease was primarily attributable to the following:
• | Advisory fees |
• | Base management fees decreased $1.8 million. The majority of this decrease was from ETF unitary management fees, which decreased $1.4 million as the result of a decrease in ETF average assets under management, primarily for the |
• | Performance fees for USGIF paid |
Operating Expenses
Total consolidated operating expenses for the three months ended December 31, 2017, increased $266,000,September 30, 2022, decreased $827,000, or 14.222.6 percent, compared with the three months ended December 31, 2016.September 30, 2021. The changedecrease in operating expenses was primarily attributable to an increasea decrease in employee compensation and benefits expenses of $241,000,$749,000, or 26.838.9 percent, primarily dueas a result of a decrease in bonuses in the current period, amortization of employee stock options in the prior period, offset by salary increases for employees. Higher bonuses in the same period last year were related to increased bonusesrealized investment gains, company performance, and an increase in generalfund performance. General and administrative expenses of $51,000,decreased by $94,000, or 5.9 percent, primarily due to increased ETF costslower directors’ fees 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 47.1 percent, primarily due to decreased ETF marketing.
Other Income
Total consolidated other loss for the three months ended September 30, 2022, was $1.4 million, compared to $37,000 of other income for the three months ended December 31, 2017, increased $1.2 million, or 492.4 percent, compared with the three months ended December 31, 2016. The increaseSeptember 30, 2021, a decrease of approximately $1.4 million. This change was primarily due to an investment made in the quarter ended September 30, 2017, in a Galileo fund that is accounted for under the equity method 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.