NOTE 4. INVESTMENTS

As of June 30, 2020, the Company held investments with a fair value of $11.4 million and a cost basis of $12.9 million. The fair value of these investments is approximately 60.9 percent of the Company’s total assets at June 30, 2020. In addition, the Company held other investments of approximately $1.3 million and investments of $158,000 accounted for under the equity method of accounting.

The Company’s equity investments with readily determinable fair values are classified as securities at fair value, and changes in unrealized gains or losses are reported in current period earnings.

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, plus or minus observable price changes for identical or similar securities of the same issuer with such changes recorded in investment income (loss). The Company considers many factors in determining impairment, including the severity and duration of the decline in value below cost, the Company’s interest and ability to hold the security for a period of time sufficient for an anticipated recovery in value, and the financial condition and specific events related to the issuer. The cost basis of investments may also be adjusted for the recharacterization of distributions from investments in partnerships. See further information about these investments in a separate section of this note.

The following details the components of the Company’s investments recorded at fair value as of June 30, 2020, and 2019.

	June 30, 2020
(dollars in thousands)	Cost		Unrealized Gains (Losses)			Fair Value
Securities at fair value
Common stock - International	$	5,641	$	(1,162	)	$	4,479
Common stock - Domestic		45		(45	)		-
Mutual funds - Fixed income		6,313		9			6,322
Mutual funds - Domestic equity		929		(266	)		663
Total securities at fair value	$	12,928	$	(1,464	)	$	11,464

	June 30, 2019
(dollars in thousands)	Cost		Unrealized Gains (Losses)			Fair Value
Securities at fair value
Common stock - International	$	5,641	$	790		$	6,431
Common stock - Domestic		45		(45	)		-
Mutual funds - Fixed income		8,025		(4	)		8,021
Mutual funds - Domestic equity		929		(194	)		735
Total securities at fair value	$	14,640	$	547		$	15,187

Included in the above table was $7.0 million and $8.8 million as of June 30, 2020, and June 30, 2019, respectively, at fair value invested in USGIF.

Investment Income (Loss)

The following summarizes investment income (loss) reflected in earnings for the periods presented.

(dollars in thousands)	Year Ended June 30,
Investment Income (Loss)	2020			2019
Unrealized losses on fair valued securities	$	(2,011	)	$	(2,406	)
Unrealized gains on equity securities without readily determinable fair values		-			617
Realized gains on sales of fair valued securities		-			23
Realized gain on sale of subsidiary		151			-
Realized foreign currency losses		(232	)		(26	)
Impairments in equity investments that do not have readily determinable fair values		(285	)		(114	)
Dividend and interest income		166			324
Total Investment Income (Loss)	$	(2,211	)	$	(1,582	)

Realized gain from sale of subsidiary shown in the table above is from the sale of Galileo. See Note 2 for further information on this transaction. Realized foreign currency gains (losses) for the year ended June 30, 2020, includes $228,000 in foreign currency losses released from other comprehensive income (loss) upon the sale of Galileo.

The year ended June 30, 2020, included approximately $2.0 million of net unrealized losses recognized on equity securities still held at June 30, 2020.

Investment income (loss) can be volatile and varies depending on market fluctuations. The Company expects that gains and losses will continue to fluctuate in the future.

Fair Value Hierarchy

ASC 820, Fair Value Measurement and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., Levels 1, 2, and 3 inputs, as defined below). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities at the reporting date. Since valuations are based on quoted prices that are readily and regularly available in an active market, value of these products does not entail a significant degree of judgment.

Level 2 – Valuations based on quoted prices in markets for which not all significant inputs are observable, directly or indirectly. Corporate debt securities valued in accordance with the evaluated price supplied by an independent service are categorized as Level 2 in the hierarchy. Other securities categorized as Level 2 included securities valued at the mean between the last reported bid and ask quotation and securities valued with an adjustment to the quoted price due to restrictions.

Level 3 – Valuations based on inputs that are unobservable and significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with the investing in those securities. Because of the inherent uncertainties of valuation, the values reflected may materially differ from the values received upon actual sale of those investments.

For actively traded securities, the Company values investments using the closing price of the securities on the exchange or market on which the securities principally trade. If the security is not traded on the last business day of the quarter, it is generally valued at the mean between the last bid and ask quotation. The fair value of a security that has a restriction is based on the quoted price for an otherwise identical unrestricted instrument that trades in a public market, adjusted for the estimated effect of the restriction. Mutual funds, which include open- and closed-end funds and exchange-traded funds, are valued at net asset value or closing price, as applicable. Certain corporate debt securities not traded on an exchange may be valued by an independent pricing service using an evaluated quote based on such factors as institutional-size trading in similar groups of securities, yield, quality maturity, coupon rate, type of issuance and individual trading characteristics and other market data. As part of its independent price verification process, a portfolio management team, which includes representatives from the investment and accounting departments, periodically reviews the fair value provided by the pricing service using information such as transactions in these investments, broker quotes, market transactions in comparable investments, general market conditions and the issuer’s financial condition. Certain debt securities may be valued based on review of similarly structured issuances in similar jurisdictions, when possible, or based on other traded debt securities issued by the issuer. The portfolio management team also takes into consideration numerous other factors that could affect valuation such as overall market conditions, liquidity of the security and bond structure. For other securities included in the fair value hierarchy with unobservable inputs, the portfolio management team 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 team reviews inputs and assumptions and reports material items to the Board of Directors. Securities which do not have readily determinable fair values are also periodically reviewed by the portfolio management team.

The following presents fair value measurements, as of each balance sheet date, for the major categories of the Company’s investments measured at fair value on a recurring basis:

	June 30, 2020
			Significant		Significant
	Quoted Prices		Other Inputs		Unobservable Inputs
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Securities at fair value
Common stock - International	$	4,447	$	32	$	-	$	4,479
Common stock - Domestic		-		-		-		-
Mutual funds - Fixed income		6,322		-		-		6,322
Mutual funds - Domestic equity		663		-		-		663
Total securities at fair value	$	11,432	$	32	$	-	$	11,464

	June 30, 2019
			Significant		Significant
	Quoted Prices		Other Inputs		Unobservable Inputs
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Securities at fair value
Common stock - International	$	5,599	$	832	$	-	$	6,431
Common stock - Domestic		-		-		-		-
Mutual funds - Fixed income		8,021		-		-		8,021
Mutual funds - Domestic equity		735		-		-		735
Total securities at fair value	$	14,355	$	832	$	-	$	15,187

As of June 30, 2020, approximately 100 percent of the Company’s financial assets were classified in the fair value hierarchy as Level 1. As of June 30, 2019, 95 percent of the Company’s financial assets were classified in the fair value hierarchy as Level 1 and 5 percent as Level 2.

The Company has an investment in 10 million common shares of HIVE Blockchain Technologies Ltd. (“HIVE”), a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland, Sweden, and Canada, at a cost of $2.4 million. The shares are subject to Canadian securities regulations. The investment was valued at approximately $2.4 million and $3.6 million at June 30, 2020, and 2019, respectively, based on the quoted market price and is classified as Level 1 in the fair value hierarchy. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There has been significant volatility in the market price of HIVE, which has materially impacted the investment’s value included on the balance sheet and unrealized gain (loss) recognized in investment income. The Company’s ownership of HIVE was approximately 2.9 percent as of June 30, 2020. Frank Holmes is the non-executive chairman of HIVE and held shares and options at June 30, 2020. Effective August 31, 2018, Mr. Holmes was named Interim Executive Chairman of HIVE while a search for a new CEO is undertaken.

The Company has an investment in Thunderbird Entertainment Group Inc. (“Thunderbird”), a company headquartered and traded in Canada, which was valued at approximately $1.2 million at June 30, 2020 and classified as Level 1 in the fair value hierarchy. This investment was valued at approximately $1.1 million at June 30, 2019, of which $377,000 was classified as Level 1 and $675,000 was classified as Level 2 in the fair value hierarchy. This was previously a private company that underwent a corporate transaction and started trading on an exchange during the quarter ended December 31, 2018. The shares are subject to Canadian securities regulations. The Company’s ownership of Thunderbird was approximately 2.5 percent as of June 30, 2020. Frank Holmes serves on the board of this company as a director and held options at June 30, 2020.

The Company has an investment in GoldSpot Discoveries Corp. (“GoldSpot”), a company headquartered and traded in Canada, which was valued at approximately $806,000 at June 30, 2020, of which $774,000 was classified as Level 1 and $32,000 was classified as Level 2 in the fair value hierarchy. This investment was valued at approximately $1.7 million at June 30, 2019, of which $1.6 million was classified as Level 1 and $157,000 was classified as Level 2 in the fair value hierarchy. The investment was purchased during the quarter ended March 31, 2019, and the shares are subject to Canadian securities regulations. The portion of the investment classified in Level 2 is restricted for resale due to escrow and regulatory provisions; its valuation is based on the quoted market price adjusted for the restriction on resale. Shares remaining in escrow at June 30, 2020, will be released in August 2020. The Company’s ownership of GoldSpot was approximately 7.5 percent as of June 30, 2020. Frank Holmes served on the board of this company as director from February 2019 to June 2020 and as independent chairman from February 2019 to May 2020 and held common stock and options at June 30, 2020.

Other Investments

The carrying value of equity securities without readily determinable fair values was approximately $1.3 million and $1.4 million as of June 30, 2020, and 2019, respectively. The Company has elected to value these investments using the measurement alternative, under which such securities are measured at cost, less impairment, plus or minus observable price changes for identical or similar securities of the same issuer with such changes recorded in investment income (loss).

The carrying value of equity securities without readily determinable fair values has been adjusted as follows during the fiscal years ended June 30, 2020, and 2019:

	Year Ended June 30,
(dollars in thousands)	2020			2019
Carrying amount, beginning of period	$	1,404		$	2,207
Adjustments:
Purchases		125			250
Reclassification to securities at fair value		-			(1,499	)
Impairments		(285	)		(114	)
Other downward adjustments		(124	)		(57	)
Upward adjustments		163			617
Carrying amount, end of period	$	1,283		$	1,404

As discussed above, the Company’s investment in Thunderbird was previously included in other investments but started trading on a stock exchange during the quarter ended December 31, 2018, and thereafter is included in securities at fair value. There were impairment adjustments to one security totaling $285,000 during the year ended June 30, 2020, and $114,000 during the year ended June 30, 2019. Cumulative impairment adjustments to all equity securities without readily determinable fair values total $536,000 since their respective acquisitions through June 30, 2020. The cumulative amount of other downward adjustments, which primarily consist of return of capital distributions, is $777,000, which includes $124,000 for the year ended June 30, 2020, and $57,000 for the year ended June 30, 2019. The cumulative amount of upward adjustments is $780,000, which includes $163,000 for the year ended June 30, 2020, and $617,000 for the year ended June 30, 2019.

Investments Classified as Equity Method

During fiscal year 2018, the Company, through USCAN, invested approximately $401,000 in the Galileo Technology and Blockchain Fund, a Canadian unit trust investment fund managed by Galileo. The fund reorganized in a taxable transaction into a limited partnership effective November 30, 2018, and the fund terminated. See further discussion below. Thus, the Company no longer had an investment in the Galileo Technology and Blockchain Fund after November 2019. During the period of ownership, the Company’s ownership ranged between approximately 20 and 25 percent, and the Company was considered to have the ability to exercise significant influence. Thus, the investment was accounted for under the equity method of accounting. Included in other income (loss) was $50,000 of equity method loss for the Galileo Technology and Blockchain Fund for the year ended June 30, 2019. In addition, approximately $22,000 in foreign currency loss was released from accumulated other comprehensive income (loss) into realized foreign currency loss upon the termination of the fund. Frank Holmes also directly held an investment in the fund. This fund had a concentration in technology and blockchain companies, which resulted in volatility in the fund’s valuation.

As noted above, the Galileo Technology and Blockchain Fund reorganized into a limited partnership effective November 30, 2018. The investment portfolio and unitholders’ interests of the Galileo Technology and Blockchain Fund and the Galileo Partners Fund transferred to the new entity, named Galileo Technology and Blockchain LP. The valuation of the Company’s investment in the Galileo Technology and Blockchain Fund as of November 30, 2018, of approximately $230,000 transferred to the Galileo Technology and Blockchain LP. During the period of ownership, the Company’s ownership has ranged between approximately 16 and 22 percent The Company owns approximately 22 percent of the LP as of June 30, 2020, and the Company is considered to have the ability to exercise significant influence. Thus, the investment is accounted for under the equity method of accounting. Included in other income (loss) for the years ended June 30, 2020, and 2019, is ($142,000) and $73,000, respectively, of equity method income (loss) for this investment. The Company’s investment in the LP was valued at approximately $158,000 at June 30, 2020, and $309,000 at June 30, 2019. Frank Holmes also directly held an investment in the LP as of June 30, 2020. This investment has a concentration in technology and blockchain companies, which may result in volatility in its valuation.