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Principal payments of $750,000 are due quarterly with a final maturity date in January 2026. 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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2023

 

OR

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

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 June 15, 2023, there were 13,866,999 shares of Registrant’s class A nonvoting common stock issued and 12,509,775 shares of Registrant’s class A nonvoting common stock issued and outstanding; no shares of Registrant’s class B nonvoting common shares outstanding; and 2,068,549 shares of Registrant’s class C voting common stock issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

1

  

  

ITEM 1. FINANCIAL STATEMENTS

1

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

1

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

2

CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

3

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

4

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26

ITEM 4. CONTROLS AND PROCEDURES

27

  

  

PART II. OTHER INFORMATION

28

  

  

ITEM 1A. RISK FACTORS

28

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

28

ITEM 6. EXHIBITS

29

  

  

SIGNATURES

30

 

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

 

  

March 31, 2023

  

June 30, 2022

 

(dollars in thousands)

 

(unaudited)

     

Assets

        

Current Assets

        

Cash and cash equivalents

 $24,947  $22,314 

Restricted cash

  1,000   1,000 

Investments in equity securities at fair value, current

  11,701   12,138 

Accounts and other receivables

  1,327   1,796 

Tax receivable

  99   384 

Prepaid expenses

  566   400 

Total Current Assets

  39,640   38,032 
         

Net Property and Equipment

  1,198   1,370 
         

Other Assets

        

Deferred tax asset

  1,659   872 

Investments in equity securities at fair value, non-current

  1,483   2,162 

Investments in available-for-sale debt securities at fair value

  7,649   10,625 

Investments in held-to-maturity debt securities

  1,000   1,000 

Other investments

  2,827   3,992 

Financing lease, right of use assets

  72   93 

Other assets, non-current

  217   216 

Total Other Assets

  14,907   18,960 

Total Assets

 $55,745  $58,362 

Liabilities and Shareholders’ Equity

        

Current Liabilities

        

Accounts payable

 $133  $73 

Accrued compensation and related costs

  820   1,864 

Dividends payable

  332   337 

Financing lease liability, short-term

  28   27 

Other accrued expenses

  1,369   1,831 

Taxes payable

  96   - 

Total Current Liabilities

  2,778   4,132 
         

Long-Term Liabilities

        

Deferred tax liability

  2   - 

Financing lease liability, long-term

  45   66 

Total Long-Term Liabilities

  47   66 

Total Liabilities

  2,825   4,198 
         

Commitments and Contingencies (Note 12)

          
         

Shareholders’ Equity

        

Common stock (class A) - $0.025 par value; nonvoting; 28,000,000 shares authorized; 13,866,999 shares issued at March 31, 2023, and June 30, 2022; 12,582,905 and 12,888,950 shares outstanding at March 31, 2023, 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 March 31, 2023, and June 30, 2022

  52   52 

Additional paid-in-capital

  16,442   16,438 

Treasury stock, class A shares at cost; 1,284,094 shares and 978,049 shares at March 31, 2023, and June 30, 2022, respectively

  (3,499)  (2,599)

Accumulated other comprehensive income, net of tax

  1,659   3,624 

Retained earnings

  37,919   36,302 

Total Shareholders’ Equity

  52,920   54,164 

Total Liabilities and Shareholders’ Equity

 $55,745  $58,362 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Page 1

 

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

  

Nine Months Ended

  

Three Months Ended

 
  

March 31,

  

March 31,

 

(dollars in thousands, except per share data)

 

2023

  

2022

  

2023

  

2022

 

Operating Revenues

                

Advisory fees

 $11,663  $19,124  $3,591  $6,129 

Administrative services fees

  101   146   33   46 
   11,764   19,270   3,624   6,175 

Operating Expenses

                

Employee compensation and benefits

  3,569   4,973   1,264   1,319 

General and administrative

  4,489   5,504   1,477   2,140 

Advertising

  297   305   91   138 

Depreciation

  183   165   61   61 

Interest

  3   -   1   - 
   8,541   10,947   2,894   3,658 

Operating Income

  3,223   8,323   730   2,517 

Other Income (Loss)

                

Investment income (loss)

  (189)  (1,950)  1,155   (3,495)

Loss from equity method investments

  -   (206)  -   (173)

Other income

  184   174   61   59 
   (5)  (1,982)  1,216   (3,609)

Income (Loss) Before Income Taxes

  3,218   6,341   1,946   (1,092)

Provision for Income Taxes

                

Tax expense (benefit)

  602   1,207   306   (246)

Net Income (Loss)

 $2,616  $5,134  $1,640  $(846)
                 

Basic Net Income (Loss) per share

 $0.18  $0.34  $0.11  $(0.06)

Diluted Net Income (Loss) per share

 $0.18  $0.34  $0.11  $(0.06)
                 

Basic weighted average number of common shares outstanding

  14,862,893   15,020,920   14,747,537   15,010,630 

Diluted weighted average number of common shares outstanding

  14,863,188   15,021,943   14,747,637   15,011,582 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 2

 

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

   

Nine Months Ended

   

Three Months Ended

 
   

March 31,

   

March 31,

 

(dollars in thousands)

 

2023

   

2022

   

2023

   

2022

 

Net Income (Loss)

  $ 2,616     $ 5,134     $ 1,640     $ (846 )

Other Comprehensive Loss

                               

Unrealized gains (losses) on available-for-sale securities arising during period, net of tax

    (939 )     (428 )     80       (141 )

Less: reclassification adjustment for gains included in net income, net of tax

    (1,026 )     (1,339 )     (311 )     (414 )

Net change from available-for-sale securities

    (1,965 )     (1,767 )     (231 )     (555 )

Foreign currency translation adjustment

    -       (13 )     -       (3 )

Less: reclassification adjustment for foreign currency gains included in net income

    -       (10 )     -       (10 )

Net change from foreign currency translations

    -       (23 )     -       (13 )

Other Comprehensive Loss

    (1,965 )     (1,790 )     (231 )     (568 )

Total Comprehensive Income (Loss)

  $ 651     $ 3,344     $ 1,409     $ (1,414 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 3

 

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)

 

   

Common Stock

   

Convertible Common Stock

           

Treasury Stock

   

Accumulated

                 
   

(class A)

   

(class C)

   

Additional

                   

Other

                 

(dollars in thousands,

                                 

Paid-in

                   

Comprehensive

   

Retained

         

except share data)

 

Shares

   

Par Value

   

Shares

   

Par Value

   

Capital

   

Shares

   

Cost

   

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  

Repurchases 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  

Repurchases of shares of Common Stock (class A)

    -       -       -       -       -       87,407       (249 )     -       -       (249 )

Issuance of stock under ESPP of shares of Common Stock (class A)

    -       -       -       -       1       (4,898 )     13       -       -       14  

Dividends declared

    -       -       -       -       -       -       -       -       (335 )     (335 )

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       (1,248 )     -       (1,248 )

Net income

    -       -       -       -       -       -       -       -       869       869  

Balance at December 31, 2022

    13,866,999     $ 347       2,068,549     $ 52     $ 16,441       1,096,540     $ (2,958 )   $ 1,890     $ 36,608     $ 52,380  

Repurchases of shares of Common Stock (class A)

    -       -       -       -       -       193,040       (556 )     -       -       (556 )

Issuance of stock under ESPP of shares of Common Stock (class A)

    -       -       -       -       1       (5,486 )     15       -       -       16  

Dividends declared

    -       -       -       -       -       -       -       -       (329 )     (329 )

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       (231 )     -       (231 )

Net income

    -       -       -       -       -       -       -       -       1,640       1,640  

Balance at March 31, 2023

    13,866,999     $ 347       2,068,549     $ 52     $ 16,442       1,284,094     $ (3,499 )   $ 1,659     $ 37,919     $ 52,920  

 

Page 4

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (CONTINUED) (UNAUDITED)

 

   

Common Stock

   

Convertible Common Stock

           

Treasury Stock

   

Accumulated

                 
   

(class A)

   

(class C)

   

Additional

                   

Other

                 

(dollars in thousands,

                                 

Paid-in

                   

Comprehensive

   

Retained

         

except share data)

 

Shares

   

Par Value

   

Shares

   

Par Value

   

Capital

   

Shares

   

Cost

   

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  

Repurchases 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  

Repurchases of shares of Common Stock (class A)

    -       -       -       -       -       10,457       (54 )     -       -       (54 )

Issuance of stock under ESPP of shares of Common Stock (class A)

    -       -       -       -       7       (2,542 )     5       -       -       12  

Share-based compensation, net of tax

    -       -       -       -       345       -       -       -       -       345  

Dividends declared

    -       -       -       -       -       -       -       -       (338 )     (338 )

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       (587 )     -       (587 )

Net income

    -       -       -       -       -       -       -       -       3,590       3,590  

Balance at December 31, 2021

    13,866,913     $ 347       2,068,635     $ 52     $ 16,425       918,287     $ (2,297 )   $ 5,365     $ 39,137     $ 59,029  

Repurchases of shares of Common Stock (class A)

    -       -       -       -       -       19,487       (97 )     -       -       (97 )

Issuance of stock under ESPP of shares of Common Stock (class A)

    -       -       -       -       7       (2,470 )     6       -       -       13  

Dividends declared

    -       -       -       -       -       -       -       -       (337 )     (337 )

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       (568 )     -       (568 )

Net loss

    -       -       -       -       -       -       -       -       (846 )     (846 )

Balance at March 31, 2022

    13,866,913     $ 347       2,068,635     $ 52     $ 16,432       935,304     $ (2,388 )   $ 4,797     $ 37,954     $ 57,194  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 5

 

 

U.S. GLOBAL INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Nine Months Ended March 31,

 

(dollars in thousands)

 

2023

   

2022

 

Cash Flows from Operating Activities:

               

Net income

  $ 2,616     $ 5,134  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation, amortization and accretion

    (198 )     (333 )

Net recognized loss on disposal of fixed assets

    3       -  

Net realized gains on securities

    (1,286 )     (3,542 )

Unrealized losses on securities

    2,504       6,996  

Investment basis adjustment

    (5 )     -  

Net loss from equity method investment

    -       206  

Foreign currency transaction gain

    -       (10 )

Provision for deferred taxes

    (265 )     (1,823 )

Share-based compensation expense

    -       733  

Changes in operating assets and liabilities:

               

Accounts and other receivables

    754       2,445  

Prepaid expenses and other assets

    (146 )     (206 )

Accounts payable and accrued expenses

    (1,348 )     (452 )

Total adjustments

    13       4,014  

Net cash provided by operating activities

    2,629       9,148  

Cash Flows from Investing Activities:

               

Purchase of property and equipment

    (14 )     (213 )

Purchase of equity securities at fair value, non-current

    -       (123 )

Purchase of other investments

    (663 )     (573 )

Proceeds from sale of equity method investment

    -       85  

Proceeds on sale of equity securities at fair value, current

    350       -  

Proceeds on sale of equity securities at fair value, non-current

    -       2,850  

Proceeds from principal paydowns of available-for-sale debt securities at fair value

    2,250       2,250  

Net cash provided by investing activities

    1,923       4,276  

Cash Flows from Financing Activities:

               

Principal payments on financing lease

    (20 )     -  

Issuance of common stock

    43       39  

Repurchases of common stock

    (938 )     (233 )

Dividends paid

    (1,004 )     (901 )

Net cash used in financing activities

    (1,919 )     (1,095 )

Net increase in cash, cash equivalents, and restricted cash

    2,633       12,329  

Beginning cash, cash equivalents, and restricted cash

    23,314       15,436  

Ending cash, cash equivalents, and restricted cash

  $ 25,947     $ 27,765  
                 

Supplemental Disclosures of Non-Cash Investing and Financing Activities

               

Dividends declared but not paid

  $ 332     $ 338  

Fair value of assets acquired

  $ -     $ 228  

Unsettled purchases of other investments

  $ 186     $ -  
                 

Supplemental Disclosures of Cash Flow Information

               

Cash paid for income taxes

  $ 470     $ 2,126  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 6

 

U.S. GLOBAL INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

NOTE 1. BASIS OF PRESENTATION AND CONSOLIDATION

 

U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) has prepared the consolidated financial statements pursuant to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The financial information included herein reflects all adjustments (consisting solely of normal recurring adjustments), which are, in management’s opinion, necessary for a fair presentation of results for the interim periods presented. The Company has consistently followed the accounting policies set forth in the notes to the consolidated financial statements in the Company’s Form 10-K/A-2 for the fiscal year ended June 30, 2022 ("Form 10-K/A-2").

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, U.S. Global Investors (Bermuda) Limited, U.S. Global Investors (Canada) Limited (“USCAN”), and U.S. Global Indices, LLC.

 

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”). The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. See further information about these funds in Notes 2 and 3. In the ordinary course of business, the Company may choose to waive certain fees or assume operating expenses of the funds it advises for competitive, regulatory or contractual reasons (see Note 3 for information regarding fee waivers). The Company has not provided financial support to any of these entities outside the ordinary course of business. The Company’s risk of loss with respect to these VIEs is limited to the carrying value of its investments in, and fees receivable from, the entities. The Company 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 $12.5 million at March 31, 2023, and $12.8 million at June 30, 2022.

 

The carrying amount of assets and liabilities recognized in the consolidated balance sheets related to the Company's interests in these non-consolidated VIEs were as follows:

 

  

Carrying Value and Maximum Exposure to Loss

 

(dollars in thousands)

 

March 31, 2023

  

June 30, 2022

 

Investments in securities at fair value, current

 $11,701  $12,138 

Investments in equity securities at fair value, non-current

  745   623 

Other receivables

  34   21 

Total VIE assets, maximum exposure to loss

  12,480   12,782 

Other accrued expenses

  -   110 

Total carrying amount

 $12,480  $12,672 

 

Since the Company is not the primary beneficiary of the above funds it advises, the Company evaluated if it should consolidate under the voting interest entity model. Under the voting interest model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50 percent of the outstanding voting shares over an entity. The Company does not have control of any of the above funds it advises; therefore, the Company does not consolidate any of these funds.

 

During the three and nine months ended March 31, 2022, 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 entity and, therefore, does not consolidate it. However, the Company was considered to have the ability to exercise significant influence. Thus, the investment had 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.

 

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 interim periods disclosed herein are not necessarily indicative of the results the Company may expect for the fiscal year ending June 30, 2023 (“fiscal 2023”).

 

The unaudited interim financial information in these consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s annual report on Form 10-K/A-2; interim disclosures generally do not repeat those in the annual statements.

 

Use of Estimates

 

Preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Actual results may materially differ from those estimates.

 

 

Page 7

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, and has subsequently issued several amendments (collectively, “ASU 2016-13”). ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. ASU 2016-13 will be effective for smaller reporting companies, including U.S. Global, for fiscal years beginning after December 15, 2022. Earlier application is permitted only for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating if this guidance will have a material effect to its 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 new guidance and does not expect the adoption of the new standard to have a material impact on its consolidated financial statements.

 

 

NOTE 2. INVESTMENTS

 

As of March 31, 2023, the Company held investments carried at fair value on a recurring basis of $20.8 million and a cost basis of $27.6 million. The fair value of these investments is approximately 37.4 percent of the Company’s total assets at March 31, 2023. In addition, the Company held other investments of approximately $2.8 million and held-to-maturity debt investments of $1.0 million.

 

The cost basis of investments is adjusted for amortization of premium or accretion of discount on debt securities held or the recharacterization of distributions from investments in partnerships.

 

Concentrations of Credit Risk

 

A significant portion of the Company’s investments carried at fair value on a recurring basis is investments in USGIF, which were $12.4 million and $12.8 million as of March 31, 2023, and June 30, 2022, respectively, and investments in HIVE Blockchain Technologies Ltd. (“HIVE”), which were warrants and convertible debentures valued at $7.9 million at March 31, 2023, and $11.1 million at June 30, 2022. For these investments, the maximum amount of loss due to credit risk the Company could incur is the fair value of the financial instruments.

 

Fair Value Hierarchy

 

Fair value is defined 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. The valuation techniques described below maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value.

 

The inputs used for measuring financial instruments at fair value are summarized in the three broad levels listed below:

 

Level 1 – Inputs represent unadjusted quoted prices for identical assets exchanged in active markets.

 

Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets exchanged in active or inactive markets; quoted prices for identical assets exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets, such as interest rates and yield curves; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

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 it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets.

 

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 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.

 

Page 8

 

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.

 

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 change 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 valuation firm using a binomial lattice model based on factors such as yield, quality, maturity, coupon rate, type of issuance, individual trading characteristics of the underlying common shares and other market data. The model utilizes a number of assumptions in arriving at its results. The effects of changing any of the assumptions 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 hierarchy with unobservable inputs, the Committee 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 Committee 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 Committee.

 

The following tables summarize the major categories of investments with fair values adjusted on a recurring basis as of March 31, 2023, 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.

 

  

March 31, 2023

 
      

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

 $516  $-  $222  $738 

Mutual funds - Fixed income

  11,701   -   -   11,701 

Mutual funds - Global equity

  745   -   -   745 

Total investments in equity securities:

 $12,962  $-  $222  $13,184 

Investments in debt securities:

                

Available-for-sale - Convertible debentures

  -   -   7,649   7,649 

Total investments carried at fair value on a recurring basis:

 $12,962  $-  $7,871  $20,833 

Investments carried at fair value on a nonrecurring basis:

                

Other investments (1)

 $-  $-  $1,634  $1,634 

 

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 nine months ended March 31, 2023. These securities are classified as level 3 due to the infrequency of the observable price changes and/or restrictions on the shares.

 

Page 9

 
  

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 securities classified as Level 3 and carried at fair value on a recurring basis in the preceding tables are investments in HIVE Blockchain Technologies Ltd. (“HIVE”), which were warrants and convertible debentures valued at $7.9 million at March 31, 2023, and $11.1 million at June 30, 2022. The Company utilizes an independent third-party to estimate the fair values of the investments in HIVE.

 

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 nine months ended March 31, 2023.

 

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis

 

  

Nine Months Ended March 31, 2023

 
  

Investments in

  

Investments in

 

(dollars in thousands)

 

equity securities

  

debt securities

 

Beginning Balance

 $515  $10,625 

Principal repayments

  -   (2,250)

Amortization of day one premium

  -   (196)

Accretion of bifurcation discount

  -   577 

Total unrealized gains or losses included in:

        

Investment Income (Loss)

  (293)  1,381 

Other Comprehensive Loss

  -   (2,488)

Ending Balance

 $222  $7,649 

 

During January 2021, the Company purchased convertible securities of HIVE, a company that is headquartered in Canada with cryptocurrency mining facilities in Iceland, Sweden, and 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 conversion rate of $2.34, and each whole warrant, expiring in January 2024, entitled the Company to acquire one common share at a price of $3.00 (Canadian). Under the current terms, which reflect a reverse stock split, the principal amount of each debenture is convertible into common shares in the 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 $8.3 million as of March 31, 2023. Cryptocurrency markets and related securities 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 value of the investments included on the consolidated balance sheets, unrealized gain (loss) recognized in investment income (loss), and unrealized gain (loss) recognized in other comprehensive income (loss). The investments did not represent ownership in HIVE as of March 31, 2023, or June 30, 2022. The securities are subject to Canadian securities regulations. Frank Holmes serves on the board as executive chairman of HIVE and held shares and options at March 31, 2023. From August 2018 through January 2023, Mr. Holmes was Interim CEO. Effective December 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 the 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 and nine months ended March 31, 2023, $394,000 and $1.3 million, respectively, was realized in investment income (loss). During the three and nine months ended March 31, 2022, $524,000 and $1.7 million, respectively, was realized in investment income (loss). The fair value of the warrants and debentures was $222,000 and $7.6 million, respectively, at March 31, 2023, and $515,000 and $10.6 million, respectively, at June 30, 2022.

 

Page 10

 

The Company currently considers the fair value measurements of HIVE convertible securities to contain Level 3 inputs. The following is quantitative information as of March 31, 2023, with respect to the securities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3).

 

  

March 31, 2023

 

(dollars in thousands)

 

Fair Value

 

Principal Valuation Techniques

 

Unobservable Inputs

 

Investments in equity securities:

           

Common share purchase warrants

 $222 

Option pricing model

 

Volatility

  101.5%
            

Investments in debt securities:

           

Available-for-sale - Convertible debentures

 $7,649 

Binomial lattice model

 

Volatility

  99.8%
       

Credit Adjusted Discount Rate

  15.0%

 

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 nine months ended March 31, 2022, the Company realized gains on sales of this investment in the amount of $1.9 million. 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 the current period's earnings.

 

The following details the components of the Company’s equity investments carried at fair value as of March 31, 2023, and June 30, 2022.

 

  

March 31, 2023

 

(dollars in thousands)

 

Cost

  

Unrealized Gains (Losses)

  

Fair Value

 

Equity securities at fair value

            

Equities - International

 $6,679  $(5,941) $738 

Equities - Domestic

  45   (45)  - 

Mutual funds - Fixed income

  11,948   (247)  11,701 

Mutual funds - Global equity

  929   (184)  745 

Total equity securities at fair value

 $19,601  $(6,417) $13,184 

 

  

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.

 

Page 11

 

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 (loss).

 

The following details the components of the Company’s available-for-sale debt investments as of March 31, 2023, and June 30, 2022.

 

  

March 31, 2023

 

(dollars in thousands)

 

Amortized Cost

  

Gross Unrealized Gains in Other Comprehensive Income (Loss)

  

Gross Unrealized Losses in Investment Income (Loss)

  

Fair Value

 

Available-for-sale - Convertible debentures (1)

 $8,006  $2,100  $(2,457) $7,649 

 

  

June 30, 2022

 

(dollars in thousands)

 

Amortized Cost

  

Gross Unrealized Gains in Other Comprehensive Income (Loss)

  

Gross Unrealized Losses in Investment Income (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 consolidated statements 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 consolidated statements of operations.

 

The following details the components of the Company’s held-to-maturity debt investments as of March 31, 2023, and June 30, 2022.

 

  

March 31, 2023

 

(dollars in thousands)

 

Amortized Cost

  

Gross Unrecognized Holding Gains

  

Gross Unrecognized Holding Losses

  

Fair Value

 

Held-to-maturity - Debentures (1)

 $1,000  $-  $(245) $755 

 

  

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 March 31, 2023, 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 $245,000 at March 31, 2023, and $133,000 at  June 30, 2022. We have evaluated the unrealized loss on the security at March 31, 2023, 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 following summarizes the net carrying amount and estimated fair value of debt securities at March 31, 2023, by contractual maturity dates. Actual maturities may differ from final contractual maturities due to principal repayment installments or prepayment rights held by issuers.

 

  

March 31, 2023

 
  

Available-for-sale

  

Held-to-maturity

 
  

debt securities

  

debt securities

 
  

Convertible

  

Due after one year

 

(dollars in thousands)

 

debentures (1)

  

through five years

 

Amortized Cost

 $8,006  $1,000 

Fair Value

 $7,649  $755 

 

1.

Principal payments of $750,000 are due quarterly with a final maturity date in January 2026.

 

Page 12

 

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 March 31, 2023, and June 30, 2022.

 

The following table summarizes the fair values of embedded derivatives on the consolidated balance sheets, categorized by risk exposure, at March 31, 2023, and June 30, 2022.

 

  

March 31, 2023

  

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

 $85  $3 

 

The following table presents the effect of embedded derivatives on the consolidated statements of operations, categorized by risk exposure, for the three and nine months ended March 31, 2023, and 2022.

 

  Nine Months Ended  Three Months Ended 
  March 31,  March 31, 
  

2023

  

2022

  

2023